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
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-6026
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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
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(Address of principal executive offices)
(Zip Code)
(513) 943-7100
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(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
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Total 706,210 704,009
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CASH 5,575 11,286
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ACCOUNTS RECEIVABLE - NET 86,409 88,108
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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
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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
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DEFERRED FEDERAL INCOME TAX 32,197 31,803
----------- -----------
OTHER PAYABLES AND ACCRUALS 50,739 60,409
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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)
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Total 298,123 291,876
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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
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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
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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
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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
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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
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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
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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
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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)
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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
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Net cash provided by (used in) investing activities (4,163) 26,094
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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
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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)
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$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