-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PA7BGvXnF0zFsEYJGREuCVkx5h3a4H12n9e2mpsptP6k/AePVsxjktxYbv8e9CsZ u0RF6FpTWQ0aWf99WC6MnQ== 0000004457-98-000023.txt : 19980630 0000004457-98-000023.hdr.sgml : 19980630 ACCESSION NUMBER: 0000004457-98-000023 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980629 SROS: NASD SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERCO /NV/ CENTRAL INDEX KEY: 0000004457 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-AUTO RENTAL & LEASING (NO DRIVERS) [7510] IRS NUMBER: 880106815 STATE OF INCORPORATION: NV FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-11255 FILM NUMBER: 98657107 BUSINESS ADDRESS: STREET 1: 1325 AIRMOTIVE WY STE 100 CITY: RENO STATE: NV ZIP: 89502 BUSINESS PHONE: 7026886300 MAIL ADDRESS: STREET 1: 1325 AIRMOTIVE WAY STREET 2: SUITE 100 CITY: RENO STATE: NV ZIP: 89502 FORMER COMPANY: FORMER CONFORMED NAME: AMERCO DATE OF NAME CHANGE: 19770926 10-K 1 AMERCO 10-K 03/31/98 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K-Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended March 31, 1998 --------------------------------------------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______________________ to _______________________ Commission Registrant, State of Incorporation I.R.S. Employer File Number Address and Telephone Number Identification No. - ----------- ---------------------------------- ------------------ 0-7862 AMERCO 88-0106815 (A Nevada Corporation) 1325 Airmotive Way, Suite 100 Reno, Nevada 89502-3239 Telephone (702) 688-6300 2-38498 U-Haul International, Inc. 86-0663060 (A Nevada Corporation) 2727 N. Central Avenue Phoenix, Arizona 85004 Telephone (602) 263-6645 Securities registered pursuant to Section 12(b) of the Act: Name of Each Exchange Registrant Title of Class on Which Registered - ---------- -------------- --------------------- AMERCO Series A 8 1/2% New York Stock Exchange Preferred Stock U-Haul International, Inc. None Securities registered pursuant to Section 12(g) of the Act: Registrant Title of Class ---------- -------------- AMERCO Common U-Haul International, Inc. None 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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ---- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] 22,614,087 shares of AMERCO Common Stock, $0.25 par value, were outstanding at June 29, 1998. The aggregate market value of AMERCO Common Stock held by non-affiliates (i.e., stock held by persons other than officers and directors of AMERCO or those persons who are parties to a stockholder agreement relating to 13,975,862 shares of AMERCO Common Stock, was $259,146,750. The aggregate market value was computed using the closing price for the Common Stock trading on Nasdaq on June 22, 1998. 5,385 shares of U-Haul International, Inc. Common Stock, $0.01 par value, were outstanding at June 29, 1998. None of these shares were held by non-affiliates. U-Haul International, Inc. meets the conditions set forth in General Instructions (I)(1)(a) and (b) of Form 10-K and is therefore filing this Form with the reduced disclosure format. Portions of AMERCO's Proxy Statement relating to its Annual Meeting of Stockholders to be held on August 28, 1998, are incorporated by reference in Part III hereof. 2 TABLE OF CONTENTS PAGE NO. PART I ITEM 1. BUSINESS...................................... 3 A. THE COMPANY.............................. 3 B. HISTORY.................................. 3 C. MOVING AND STORAGE OPERATIONS............ 3 D. INSURANCE OPERATIONS..................... 6 ITEM 2. PROPERTIES.................................... 11 ITEM 3. LEGAL PROCEEDINGS............................. 11 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............................. 11 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS............... 12 ITEM 6. SELECTED FINANCIAL DATA....................... 13 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.................................... 15 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.......................................... 26 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE ................................... 26 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTS............................... 26 ITEM 11. EXECUTIVE COMPENSATION........................ 26 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT......................... 26 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................................. 26 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K............. 27 3 PART I ITEM 1. BUSINESS A. THE COMPANY AMERCO, a Nevada corporation (AMERCO or Company), is the holding company for U-Haul International, Inc. (U-Haul), Amerco Real Estate Company (AREC), Republic Western Insurance Company (RWIC) and Oxford Life Insurance Company (Oxford). Throughout this Form 10-K, unless the context otherwise requires, the term "Company" includes all of the Company's subsidiaries. The Company's principal executive offices are located at 1325 Airmotive Way, Suite 100, Reno, Nevada 89502-3239, and the telephone number of the Company is (702) 688-6300. As used in this Form 10-K, all references to a fiscal year refer to the Company's fiscal year ended March 31 of that year. RWIC and Oxford have been consolidated on the basis of calendar years ended December 31. Accordingly, all references to the years 1997, 1996 and 1995 correspond to the Company's fiscal years 1998, 1997 and 1996, respectively. The Company's three primary industry segments are represented by Moving and Storage Operations (U-Haul and AREC), Property and Casualty Insurance (RWIC) and Life Insurance (Oxford). See Note 20 of Notes to Consolidated Financial Statements in Item 8 for financial information regarding the industry segments. Moving and Storage Operations Moving and self-storage operations consist of the rental of trucks, automobile-type trailers and self-storage space to the do- it-yourself mover under the registered tradename U-Haul throughout the United States and Canada. AREC owns approximately 90% of the Company's real estate assets, including the Company's U-Haul Center and Storage locations. Property and Casualty Insurance RWIC originates and reinsures property and casualty-type insurance products for various market participants, including independent third parties, the Company's customers and the Company. Life Insurance Oxford originates and reinsures life, health and annuity-type insurance products and administers the Company's self-insured employee health and dental plans. On November 21, 1997, Oxford purchased all of the issued and outstanding shares of Encore Financial, Inc. and its subsidiaries (Encore). Encore's primary subsidiary is North American Insurance Company (NAI) (domiciled in Wisconsin), its premium volume is primarily derived from the sale of credit life and disability products. NAI's subsidiary, North American Fire & Casualty Insurance Company is a property and casualty company domiciled in Louisiana. On November 24, 1997, Oxford purchased all of the issued and outstanding shares of Safe Mate Life Insurance Company (domiciled in Texas), its premium volume is derived from the sale of credit life and disability products. B. HISTORY The Company was founded in 1945 under the name "U-Haul Trailer Rental Company". From 1945 to 1974, the Company rented trailers and, starting in 1959, trucks on a one-way and In-Town basis through independent dealers. Since 1974, the Company has developed a network of Company-owned rental centers (U-Haul Centers) through which U-Haul rents its trucks and trailers and provides related products and services (e.g., the sale and installation of hitches, as well as the sale of boxes and moving supplies). At March 31, 1998, the Company's distribution network included 1,200 U-Haul Centers and 14,500 independent dealers. C. MOVING AND STORAGE OPERATIONS Business Strategies The Company's present business strategy remains focused on do- it-yourself moving and self-storage customers. The Company believes that customer access, in terms of truck or trailer availability and proximity of rental locations, is critical to its success. Under the U-Haul name, this strategy is to offer, in an integrated manner over an extensive and geographically diverse network of 15,700 Company-owned Centers and independent dealers, a wide range of products and services to do-it-yourself moving and self-storage customers. 4 Moving Operations U-Haul has a variety of product offerings. Rental trucks have been designed with do-it-yourself customers in mind, and may include features such as Low Decks, air conditioning, power steering, automatic transmissions, Gentle-Ride Suspensions, AM/FM cassette stereo systems and over-the-cab storage. Aerodynamically designed U-Haul trailers are suited to the low profile of many newly manufactured automobiles. As of March 31, 1998, the U-Haul rental equipment fleet consisted of 90,000 trucks, 83,000 trailers and 16,000 tow dollies. Additionally, the Company provides support rental items such as furniture pads, hand trucks, Appliance Dollies, Utility Dollies, mirrors, tow bars, tow dollies and bumper hitches. The Company also sells boxes, tape and packaging materials, and rents additional items such as floor polishers and carpet cleaning equipment at its U-Haul Center locations. U-Haul Centers also sell and install hitches and towing systems, and sell propane. U-Haul offers protection packages such as (i) "Safemove", which provides moving customers with a damage waiver, cargo protection and medical and life coverage and (ii) "Safestor", which provides self-storage rental customers with various types of protection for their goods in storage. Independent dealers receive U-Haul equipment on a consignment basis and are paid a commission on gross revenues generated from their rentals. The Company maintains contracts with its independent dealers that typically may be canceled upon 30 days written notice by either party. A high percentage of the Company's rental revenue is derived from do-it-yourself movers. Moving rentals include: (i) In-Town rentals, where the equipment is returned to the originating U-Haul location and (ii) one-way rentals, where the equipment is returned to a U-Haul location in another city. The U-Haul truck and trailer rental business tends to be seasonal, with proportionally more transactions and revenues generated in the spring and summer months than during the balance of the year. The Company designs and manufactures its truck van boxes, trailers and various other support rental equipment items. The Company's equipment is designed to achieve high safety standards, simplicity of operation, reliability, convenience, durability and fuel economy. Truck chassis are manufactured by both foreign and domestic truck manufacturers. These chassis receive certain post- delivery modifications and are joined with van boxes at seven Company-owned manufacturing and assembly facilities in the United States. The Company services and maintains its trucks and trailers through an extensive preventive-maintenance program, generally performed at Company-owned facilities located at or near U-Haul Centers. Major repairs are performed either by the chassis manufacturers' dealers or by Company-owned repair shops, and the Company takes advantage of manufacturers' warranties. Self-Storage Business U-Haul entered the self-storage business in 1974 and since then has increased the rentable square footage of its storage locations through the acquisition of existing facilities and new construction. In addition, the Company has entered into management agreements to manage self-storage properties owned by others. The Company has also entered into a strategic and financial partnership with Private Mini Storage Realty, L.P., a Texas-based operator of 45 self-storage properties. Through over 800 Company-owned or managed storage locations in the United States and Canada, the Company offers for rent more than 26.1 million square feet of self-storage space. The Company's self- storage facility locations range in size up to 149,000 square feet of storage space, with individual storage spaces in sizes from 16 square feet to 400 square feet or larger. The primary market for storage rooms is the storage of household goods. With the addition of over 8,900 storage rooms during fiscal 1998, average occupancy rates were 83.0%, with modest seasonal variation. During fiscal 1998 and fiscal 1997, delinquent rentals as a percentage of total storage rentals were approximately 6% in each year. The Company considers this rate to be satisfactory. 5 Competition The do-it-yourself moving truck and trailer rental market is highly competitive and dominated by national operators in both the In-Town and one-way markets. During the past year, two major competitors combined. Budget Rent-A-Car acquired TRS (Ryder Truck Rentals) as a subsidiary. Management believes that there are two distinct users of rental trucks: commercial users and do-it-yourself users. As noted above, the Company focuses on the do-it-yourself mover. The Company believes that the principal competitive factors are convenience of rental locations, availability of quality rental equipment and price. The self-storage industry is highly competitive. The top three national firms, including the Company, Public Storage and Storage USA, account for only 11% of total industry square footage. Convenience, customer service and price are the key competitive factors. Efficient management of occupancy, delinquency and expenses are the key profitability factors. Employees For the period ended March 31, 1998, the Company's non- seasonal work force consisted of 14,000 employees. Amerco Real Estate Operations AREC has responsibility for actively marketing properties available for sale or lease. AREC is also responsible for managing any environmental risks associated with the Company's real estate. Environmental Matters The environment is protected by many federal, state and local laws. Environmental laws impact the way the Company stores and disposes of various petroleum products (including gasoline, fuel oil and waste oil), tires, batteries and other materials used in the rental, maintenance and manufacturing of its rental fleets. Since fiscal 1990, the Company has incurred environmental-related expenditures of approximately $37.0 million primarily for removal and disposal fees and remediation of over 3,000 underground storage tanks. There are approximately 200 underground storage tanks remaining. The Company has been named as a "potentially responsible party" with respect to disposal of hazardous waste at 16 federal and two state superfund sites located in 14 states. The Company has entered into settlements for 15 of the sites for de minimus amounts. One of these sites has been disputed by the Company with no response for over five years, a second is in dispute over statute of limitations restrictions and a third is too recent to be assessed. A subsidiary of U-Haul owns one property located within two different state hazardous substance sites in the State of Washington. The property is located in Yakima, Washington and is believed to contain elevated levels of pesticide and other contaminants as a result of onsite operations conducted by one or more former owners. The State of Washington has designated the property as a state hazardous substance site known as the "Yakima Valley Spray Site", and has named the subsidiary, U-Haul Co. of Inland Northwest (Inland Northwest) as a "potentially liable party" (PLP) under state law with respect to this site. An enforcement order has been issued to Inland Northwest to conduct a remedial investigation and feasibility study (RI/FS) of the site. While the state has not, as yet, named any other PLPs at this site, several other parties are participating in the RI/FS as the result of litigation brought by Inland Northwest. This RI/FS group retained an environmental consultant to perform the work and the RI/FS consultant costs are being shared with Inland Northwest paying 20% of the costs. The state has accepted the RI, but the FS has not been completed due to the disputes over the determination of cleanup levels for the site. The state has indicated that, because it wants actual remediation to begin at the site in 1998, it plans on issuing an enforcement order to Inland Northwest concerning the conduct of remediation even though the FS has not been completed. No agreement has been negotiated, as of this time, between Inland Northwest and other parties with respect to allocation of costs of remediation or of the state's oversight costs at this site. The process of site assessment and cleanup at the Yakima Valley Spray Site is ongoing and, based upon the information currently available, Inland Northwest is unable to reasonably assess the potential future costs, but the costs could be substantial. 6 In addition, Inland Northwest has been named by the State of Washington as a PLP along with over 100 other PLPs with respect to another state-listed hazardous substance site known as the "Yakima Railroad Area". The Yakima Valley Spray Site is located within the Yakima Railroad Area. Inland Northwest has been notified that the Yakima Railroad Site involves potential groundwater contamination in an area of approximately two square miles. Inland Northwest has contested its designation as a PLP at this site, but, at the date hereof, no formal ruling has been issued in this matter. In February 1992, the State of Washington issued an enforcement order to Inland Northwest and eight other parties requiring an interim remedial action and the provision of bottled water to households that obtain drinking water from wells within the Yakima Railroad Area. Without conceding any liability, Inland Northwest and several of the other PLPs implemented a bottled water program. Over the past five years, Inland Northwest has incurred an average annual expense of $720 for the bottled water program. Utilizing grants of approximately $6.0 million from the Washington Department of Ecology (WDOE), the local governments have expanded the existing municipal water system throughout the Yakima Railroad Area and have connected many of the residences receiving bottled water to the municipal water supply. WDOE has reserved its rights concerning recovery of the funds for the municipal water system expansion. In addition, WDOE is conducting additional investigations of the scope and extent of contamination within the Yakima Railroad Area. One facet of this involves the sampling of all existing monitoring wells within the area, including those at the Yakima Valley Spray Site. WDOE issued an enforcement order to Inland Northwest regarding such additional sampling. The Company expects there will be costs associated with remedial measures to address the regional groundwater contamination issue. The process of site assessment on the Yakima Railroad Area is ongoing and, based upon the information currently available to Inland Northwest, Inland Northwest is unable to reasonably assess the potential investigation and clean-up costs, but the costs could be substantial. Moreover, the investigative and remedial costs incurred by the State can be imposed upon Inland Northwest and any other PLP as a joint and several liability. At the date of this report, other than the imposition of the bottled water program and ordering of site-specific actions at individual properties within the Yakima Railroad Area, there has been no formal indication from the State of Washington of its intentions regarding future cost recoveries at the Yakima Railroad Area. Based upon the information currently available to the Company, compliance with the environmental laws and its share of investigation and cleanup costs of the hazardous waste sites, the Company is not expecting to incur losses with respect to the sites that would have a material adverse effect on the Company's financial position or operating results. D. INSURANCE OPERATIONS Business Strategies RWIC's principal business strategy is to provide specialty personal and commercial insurance and reinsurance products and services. RWIC focuses on selected regional and under-served markets in predominantly non-urban areas. RWIC keeps distribution expenses low by using a network of independent agents and brokers working directly with underwriters in the home office. RWIC also capitalizes on its knowledge of moving and rental markets. This knowledge was gained through its years of insuring U-Haul and its customers. RWIC provides insurance products to rental equipment stores, self-storage facilities and rental vehicle operators. These products include Commercial Multi-Peril lines, Business Owners Programs, Commercial Auto and Umbrella Liability. Oxford's business strategy is long-term capital growth through direct writing of annuity, credit and accident and health products. In the past, Oxford experienced significant growth by selectively reinsuring certain life and annuity products. Currently, Oxford is pursuing a growth strategy of increased direct writing via acquisitions, expanded distribution channels and product enhancement and diversity. The acquisition of North American Insurance Company and Safe Mate Life Insurance Company in 1997 represents a significant movement toward this long-term goal. Through these acquisitions, Oxford obtained significant distribution channels and administrative capabilities. 7 Property and Casualty RWIC's underwriting activities consist of three basic areas: U-Haul and U-Haul-affiliated underwriting, direct underwriting and assumed reinsurance underwriting. U-Haul underwritings include coverage for U-Haul and U-Haul employees and U-Haul-affiliated underwritings consist primarily of coverage for U-Haul customers. For the year ended December 31, 1997, approximately 39.7% of RWIC's written premiums resulted from U-Haul and U-Haul-affiliated underwriting activities. RWIC's direct underwriting is done through company-employed underwriters and selected general agents. The products provided include liability coverage for rental vehicle lessees, storage rental properties and coverage for commercial multiple peril and excess workers' compensation. RWIC's assumed reinsurance underwriting is done via broker markets. RWIC's liability for unpaid losses is based on estimates of the ultimate cost of settling claims reported prior to the end of the accounting period, estimates of reinsurers and estimates of incurred but not reported losses which are based on RWIC's experience and insurance industry historical experience. Unpaid loss adjustment expenses are based on historical ratios of loss adjustment expenses paid to losses paid. The liability for unpaid claims and unpaid claims expenses represents estimates of the amount necessary to settle all claims as of the statement date. Both unreported claims and incurred but not reported claims are included in the liability. RWIC updates the liability estimate as additional facts regarding claim costs become available. These estimates are subject to uncertainty and variation due to numerous factors including, but not limited to, court decisions, economic conditions and public attitudes. In estimating reserves, no attempt is made to isolate inflation from the combined effect of other factors including inflation. Unpaid losses and unpaid loss expenses are not discounted. RWIC's unpaid loss and loss expenses are certified annually by an independent actuarial consulting firm as required by state regulation. Activity in the liability for unpaid claims and claim adjustment expenses is summarized as follows: 1997 1996 1995 --------------------------- (in thousands) Balance at January 1 $ 332,674 341,981 329,741 Less reinsurance recoverable 60,319 73,873 74,663 --------------------------- Net balance at January 1 272,355 268,108 255,078 Incurred related to: Current year 132,291 112,394 114,110 Prior years 23,192 11,527 8,292 --------------------------- Total incurred 155,483 123,921 122,402 Paid related to: Current year 28,972 30,633 22,576 Prior years 89,336 89,041 86,796 --------------------------- Total paid 118,308 119,674 109,372 Net balance at December 31 309,530 272,355 268,108 Plus reinsurance recoverable 75,286 60,319 73,873 --------------------------- Balance at December 31 $ 384,816 332,674 341,981 =========================== As a result of changes in estimates of insured events in prior years, the provision for unpaid loss and loss adjustment expenses (net of reinsurance recoveries of $35.2 million) increased by $23.2 million in 1997 due to higher than anticipated losses and related expenses for claims associated with assumed reinsurance and certain other business written on a direct basis. The table on page 10 illustrates the change in unpaid loss and loss adjustment expenses. The first line shows the reserves as originally reported at the end of the stated year. The second section, reading down, shows the cumulative amounts paid as of the end of successive years with respect to that reserve. The third section, reading down, shows revised estimates of the original recorded reserve as of the end of successive years. The last section compares the latest revised estimated reserve amount to the reserve amount as originally established. This last section is cumulative and should not be summed. 8 The operating results of the property and casualty insurance industry, including RWIC, are subject to significant fluctuations. Factors which may influence this include premium rate competition, catastrophic and unpredictable events (including man-made and natural disasters), general economic and social conditions, interest rates, investment returns, changes in tax laws, regulatory developments and the ability to accurately estimate liabilities for unpaid losses and loss adjustment expenses. Additionally, there may be other unforeseen events that affect the profitability of property and casualty insurance companies. Life Insurance Oxford underwrites life, health and annuity insurance, both as a direct writer and as an assuming reinsurer. Oxford's direct writings principally related to the underwriting of credit life and disability insurance accounted for 18.3% of Oxford's premiums for the year ended December 31, 1997. Oxford's other direct lines are related to group life and disability coverage issued to employees of the Company accounted for 8.8% of Oxford's premiums for the year ended December 31, 1997. In addition, Oxford administers the Company's self-insured group health and dental plans. Oxford's reinsurance assumed lines accounted for 56.2% of premiums for the year ended December 31, 1997, include individual life insurance, annuities, credit life and disability insurance. These reinsurance arrangements are entered into with unaffiliated reinsurers. Prior to 1997, direct premiums included travel accident products reinsured from RWIC. Oxford's subsidiaries, North American Insurance Company and Safe Mate Life Insurance Company, underwrite credit life and disability insurance. Premiums from these subsidiaries are included in Oxford's premiums from the acquisition dates through December 31, 1997 and account for 16.7% of Oxford's premiums. Investments The Company's insurance operations investments must comply with the insurance laws of the State of domicile. These laws prescribe the type, quality and concentration of investments that may be made. Moreover, in order to be considered an acceptable reinsurer by cedents and intermediaries, a reinsurer must offer financial security. The quality and liquidity of invested assets are important considerations in determining such security. The investment philosophies of RWIC and Oxford emphasize protection of principal through the purchase of investment grade fixed-income securities. Approximately 94% of RWIC's and 97% of Oxford's fixed-income securities consist of investment grade securities. The maturity distributions are designed to provide sufficient liquidity to meet future cash needs. Reinsurance The Company's insurance operations assume and cede insurance from and to other insurers and members of various reinsurance pools and associations. Reinsurance arrangements are utilized to provide greater diversification of risk and to minimize exposure on large risks. However, the original insurer retains primary liability to the policyholder should the assuming insurer not be able to meet its obligations under the reinsurance agreements. Regulation The Company's insurance operations are subject to comprehensive regulation throughout the United States. The regulation extends to such matters as licensing companies and agents, restricting the types, quality or quantity of investments, regulating capital and surplus and actuarial reserve maintenance, setting solvency standards, filing of annual and other reports on financial position, and regulating trade practices. State laws also regulate transactions and dividends between an insurance company and its parent or affiliates, and generally require prior approval or notification for any change in control of the insurance subsidiary. In the past few years, the insurance and reinsurance regulatory framework has been subjected to increased scrutiny by the National Association of Insurance Commissioners (the NAIC), state legislatures, insurance regulators and the United States Congress. These regulators are considering increased regulations, with an emphasis on insurance company investment and solvency issues. Legislation has been introduced in Congress that could result in the federal government assuming some role in the regulation of the insurance industry. It is not possible to predict the future impact of changing state and federal regulation on the operations of RWIC and Oxford. RWIC and Oxford have adopted the NAIC minimum risk-based capitalization (RBC) requirements for insurance companies. As of December 31, 1997, RWIC and Oxford are in compliance with these requirements. NAI is also in compliance with the NAIC RBC requirements but triggered a State of Wisconsin RBC Company Action Level Event. Oxford intends to cure the non-compliance by 9 December 31, 1998 through improved operating performance and/or capital restructuring. The Company Action Level Event has no impact on the Company's financial position or results of operations. Competition The highly competitive insurance industry includes a large number of property and casualty insurance companies and life insurance companies. Some of the insurance companies are owned by stockholders and others are owned by policyholders (mutual). Many competitors have been in business for a longer period of time or possess substantially greater financial resources. Competition in the insurance business is based upon price, product design and services rendered to producers and policyholders. 10 Unpaid Loss and Loss Adjustment Expenses
December 31 - --------------------------------------------------------------------------------------------------------------------------- 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 - --------------------------------------------------------------------------------------------------------------------------- (in thousands) Unpaid Loss and Loss Adjustment Expenses: $168,688 199,380 207,939 226,324 236,019 238,762 314,482 329,741 341,981 332,674 384,816 Paid (Cumulative) as of: One year later 49,681 59,111 50,992 55,128 65,532 83,923 70,382 86,796 89,041 89,336 Two years later 91,597 89,850 87,850 97,014 105,432 123,310 115,467 139,247 150,001 Three years later 110,834 114,979 116,043 120,994 126,390 153,030 146,640 173,787 Four years later 129,261 133,466 132,703 133,338 143,433 173,841 166,068 Five years later 142,618 145,864 142,159 144,764 153,730 181,677 Six years later 152,579 153,705 151,227 152,424 160,875 Seven years later 158,531 161,498 158,043 157,979 Eight years later 165,021 167,224 162,038 Nine years later 170,411 170,749 Ten years later 173,978 Reserve Reestimated as of: One year later 187,663 200,888 206,701 229,447 231,779 251,450 321,058 338,033 353,508 354,776 Two years later 190,715 202,687 206,219 221,450 224,783 254,532 323,368 340,732 369,852 Three years later 194,280 203,343 199,925 211,998 223,403 253,844 309,936 349,459 Four years later 195,917 199,304 198,986 207,642 214,854 231,536 317,687 Five years later 195,203 200,050 197,890 200,629 198,320 239,888 Six years later 196,176 198,001 194,601 189,601 210,872 Seven years later 196,770 197,112 189,175 200,556 Eight years later 196,072 195,522 199,075 Nine years later 196,169 204,442 Ten years later 205,135 Cumulative Redundancy (Deficiency) $(36,447) (5,062) 8,864 25,768 25,147 (1,126) (3,205) (19,718) (27,871) (22,102) Retro Premium Recoverable $ (1,168) - 10 - 3,140 2,226 (105) 13,956 13,582 19,880 Reestimated Reserve: Amount (Cumulative) $(37,615) (5,062) 8,874 25,768 28,287 1,100 (3,310) (5,762) (14,289) (2,222)
11 ITEM 2. PROPERTIES The Company and its subsidiaries own property, plant and equipment that are utilized in the manufacture, repair and rental of U-Haul equipment and that provide offices for the Company. Such facilities exist throughout the United States and Canada. The majority of land and buildings used by U-Haul is owned in fee and is substantially unencumbered. U-Haul also manages storage facilities owned by others. In addition, U-Haul owns certain real estate not currently used in its operations. U-Haul operates 1,200 U-Haul Centers (including Company-owned storage locations), manages 145 storage centers and operates 12 manufacturing and assembly facilities. The Company also operates 125 repair facilities located at or near a U-Haul Center. ITEM 3. LEGAL PROCEEDINGS See Note 14 of Notes to Consolidated Financial Statements in Item 8 for disclosure of the action in the Superior Court of the State of Arizona, Maricopa County, entitled Samuel W. Shoen, M.D., et al. v. Edward J. Shoen, ------------------------------------------------- et al., No. CV88-20139, instituted August 2, 1988 and the resulting - ------- bankruptcy proceedings (the "Shoen Litigation"). On September 7, 1995, Paul F. Shoen, major stockholder of the Company and a director, filed a complaint in the Ninth Judicial District Court of the State of Nevada, Douglas County, entitled Paul F. Shoen v. AMERCO, Case ----------------------- No. 95-CV-0227. The complaint, as amended on March 9, 1998, alleges that by failing to reimburse him for expenses, including attorneys' fees and other charges, incurred by him in the Shoen Litigation and the subsequent bankruptcy proceedings, the Company breached his indemnification agreement with the Company. Mr. Shoen alleges that the Company has caused damages of no less than $297,183 as of September 7, 1995, and seeks additional amounts to be alleged at trial. The Company has denied the allegations and believes it has valid defenses against his claims. Paul F. Shoen filed a motion for partial summary judgment on November 15, 1995, and the Company filed an opposition and cross-motion for partial summary judgment on December 11, 1995. This matter was heard on November 12, 1996, and both motions were denied. In the normal course of business, the Company is a defendant in a number of suits and claims. The Company is also a party to several administrative proceedings arising from state and local provisions that regulate the removal and/or clean-up of underground fuel storage tanks. It is the opinion of management that none of the suits, claims or proceedings involving the Company, individually or in the aggregate, are expected to result in a material loss. See "Item 1. Business - Environmental Matters". ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted to a vote of the security holders during the fourth quarter of the fiscal year covered by this report, through the solicitation of proxies or otherwise. 12 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS As of June 26, 1998, there were approximately 4,500 holders of record of the Company's Common Stock. The Company's Common Stock has been traded on Nasdaq National Market (Nasdaq) since November 1994 under the symbol "UHAL". The following table sets forth the high and low closing prices of the common stock of AMERCO trading on Nasdaq for the periods indicated. For the Years Ended March 31, --------------------------------------------- 1998 1997 --------------------------------------------- High Low High Low --------------------------------------------- First quarter 32 23 1/2 28 1/4 19 1/2 Second quarter 31 7/8 26 1/2 41 21 1/2 Third quarter 35 7/8 24 1/2 48 1/2 33 1/2 Fourth quarter 31 24 1/4 38 1/2 24 1/2 The Company has not declared any cash dividends to common stockholders for the two most recent fiscal years. The Company does not have a formal dividend policy. The Company's Board of Directors periodically considers the advisability of declaring and paying dividends in light of existing circumstances. See Note 19 of Notes to Consolidated Financial Statements in Item 8 for a discussion of certain statutory restrictions on the ability of the Company's insurance subsidiaries to pay dividends to the Company. See Note 15 of Notes to Consolidated Financial Statements in Item 8 for a discussion of the Company's non-cash dividends. See Note 6 of Notes to Consolidated Financial Statements in Item 8 for a discussion of changes to common shares outstanding. The common stock of U-Haul is wholly-owned by the Company. As a result, no active trading market exists for the purchase and sale of such common stock. No cash dividends were declared to the Company by U-Haul during the two most recent fiscal years. 13
AMERCO AND CONSOLIDATED SUBSIDIARIES ITEM 6. SELECTED FINANCIAL DATA For the Years Ended March 31, ------------------------------------------------------------------- 1998 1997 1996 1995 1994 ------------------------------------------------------------------- (in thousands, except per share data and ratios) Summary of Operations: Rental and net sales $ 1,195,634 1,146,751 1,107,782 1,067,916 972,930 Premiums and net investment income 214,308 213,024 200,238 177,733 162,151 ---------- --------- --------- --------- --------- 1,409,942 1,359,775 1,308,020 1,245,649 1,135,081 ---------- --------- --------- --------- --------- Operating expenses and cost of sales (4) (9) 991,365 964,300 902,673 785,358 724,082 Benefits, losses and amortization of deferred acquisition costs 208,607 194,768 174,646 159,236 149,686 Depreciation, net (5) 69,655 66,742 83,989 148,018 131,371 ---------- --------- --------- --------- --------- 1,269,627 1,225,810 1,161,308 1,092,612 1,005,139 ---------- --------- --------- --------- --------- Earnings from operations 140,315 133,965 146,712 153,037 129,942 Interest expense, net 64,016 50,437 50,486 59,581 63,440 ---------- --------- --------- --------- --------- Pretax earnings from operations 76,299 83,528 96,226 93,456 66,502 Income tax expense (27,643) (29,344) (35,832) (33,424) (19,853) ---------- --------- --------- --------- --------- Earnings from operations before extraordinary loss on early extinguishment of debt and cumulative effect of change in accounting principle 48,656 54,184 60,394 60,032 46,649 Extraordinary loss on early extinguishment of debt, net (6) (13,672) (2,319) - - (3,370) Cumulative effect of change in accounting principle, net (8) - - - - (3,095) ---------- --------- --------- --------- --------- Net earnings $ 34,984 51,865 60,394 60,032 40,184 ========== ========= ========= ========= ========= Earnings from operations before extraordinary loss on early extinguishment of debt and cumulative effect of change in accounting principle per common share (2) (3) (7) $ 1.28 1.44 1.33 1.23 1.06 Net earnings per common share (2) (3) (7) .66 1.35 1.33 1.23 .89 Weighted average common shares outstanding (2) (7) 21,896,101 25,479,651 35,736,335 38,190,552 38,664,063 Cash dividends declared: Preferred stock 20,766 16,875 12,964 12,964 4,753 Common stock - - - - 3,147 Ratio of earnings to fixed charges (1) 1.56 1.64 1.89 1.87 1.64 14 AMERCO AND CONSOLIDATED SUBSIDIARIES ITEM 6. SELECTED FINANCIAL DATA, continued For the Years Ended March 31, ------------------------------------------------------------------- 1998 1997 1996 1995 1994 ------------------------------------------------------------------- (in thousands) Balance Sheet Data: Total property, plant and equipment, net $ 1,275,756 1,247,066 1,316,715 1,274,246 1,174,236 Total assets 2,913,277 2,718,994 2,823,407 2,605,989 2,344,442 Notes and loans payable 1,025,323 983,550 998,220 881,222 723,764 Stockholders' equity (7) 595,059 602,320 649,548 686,784 651,787 (1) For purposes of computing the ratio of earnings to fixed charges, "earnings" consists of pretax earnings from operations plus total fixed charges excluding interest capitalized during the period and "fixed charges" consists of interest expense, preferred stock dividends, capitalized interest, amortization of debt expense and discounts and one- third of the Company's annual rental expense (which the Company believes is a reasonable approximation of the interest factor of such rentals). (2) Reflects the adoption of Statement of Position 93-6, "Employers' Accounting for Employee Stock Ownership Plans" for the year ended March 31, 1995. (3) Earnings and net earnings per common share were computed after giving effect to the dividends on the Company's Series B floating rate stock for the years ended March 31, 1998 and 1997. (4) Reflects the adoption of Statement of Position 93-7, "Reporting on Advertising Costs" during the year ended March 31, 1996. (5) Reflects the change in estimated residual value during the years ended March 31, 1998 and 1996. (6) See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations". (7) Reflects the acquisition of treasury shares acquired pursuant to the Shoen Litigation as discussed in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Stockholder Litigation". (8) Reflects the adoption of Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits other than Pensions". (9) Reflects the adoption of Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" during the year ended March 31, 1998.
15 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Forward-Looking Statements This report contains forward looking statements. Additional written or oral forward-looking statements may be made by the Company from time to time in filings with the Securities and Exchange Commission or otherwise. Such forward-looking statements are within the meaning of that term in Section 27A of the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended. Such statements may include, but not be limited to, projections of revenues, income or loss, estimates of capital expenditures, plans for future operations, products or services and financing needs or plans, as well as assumptions relating to the foregoing. The words "believe", "expect", "anticipate", "estimate", "project" and similar expressions identify forward looking statements, which speak only as of the date the statement was made. Forward looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified. Future events and actual results could differ materially from those set forth in, contemplated by or underlying the forward looking statements. The following disclosures, as well as other statements in the Company's report and in the Notes to the Company's Consolidated Financial Statements, describe factors, among others, that could contribute to or cause such differences, or that could affect the Company's stock price. General For financial statement preparation, the Company's insurance subsidiaries report on a calendar year basis while the Company reports on a fiscal year basis ending March 31. Accordingly, with respect to the Company's insurance subsidiaries, any reference to the years 1997, 1996 and 1995 correspond to the Company's fiscal years 1998, 1997 and 1996, respectively. There have been no events related to such subsidiaries between January 1 and March 31 of 1998, 1997 or 1996 that would materially affect the Company's consolidated financial position or results of operations as of and for the fiscal years ended March 31, 1998, 1997 and 1996, respectively. Information on industry segments is incorporated by reference to "Item 8. Financial Statements and Supplementary Data - Notes 1, 19 and 20 of Notes to Consolidated Financial Statements". The notes discuss the principles of consolidation, summarized consolidated financial information and industry segment and geographic area data, respectively. In consolidation, all intersegment premiums are eliminated and the benefits, losses and expenses are retained by the insurance companies. Results of Operations Fiscal Year Ended March 31, 1998 Versus Fiscal Year Ended March 31, 1997 Moving and Storage Operations Revenues consist of rental revenues and net sales. Rental revenue increased by $44.9 million, approximately 4.6%, to $1,018.7 million in fiscal 1998. This increase primarily reflects the growth in truck rental revenues which benefited from transactional growth and higher average revenue per transaction. Net sales revenues were $176.9 million in fiscal 1998, which represents an increase of approximately 2.3% as compared to fiscal 1997 net sales of $173.0 million. Revenue growth from the sale of moving support items (i.e. boxes, etc.) and propane resulted in a $5.6 million increase during the current year. Cost of sales was virtually unchanged at $101.6 million in fiscal 1998, as compared to $103.8 million in fiscal 1997. Lower material costs associated with the sale of propane offset increased costs in other areas. 16 Operating expenses increased to $896.0 million during fiscal 1998 from $871.1 million in fiscal 1997, an increase of approximately 2.9%. Increased property values and business activity contributed to a $4.9 million increase in taxes. Lease expense contributed an increase of $3.9 million to reflect new leasing activity within the rental fleet and storage facilities. Increased rental business contributed to a $3.9 million increase in liability insurance. A reduction in expense offsets(credits) caused an increase in operating expenses of $6.1 million. All other operating expenses increased in the aggregate by $6.1 million. Depreciation expense for the year was $69.7 million, as compared to $66.7 million in the prior year. This increase reflects a $6.2 million reduction in gains from the disposition of property, plant and equipment offset by an increase in depreciation expense of buildings and non-rental equipment. Property and Casualty RWIC gross premium writings for the year ended December 31, 1997 were $174.2 million as compared to $167.8 million for 1996. This represents an increase of $6.4 million, or 3.8%. As in prior periods, the rental industry market accounts for a significant share of total premiums, 52.4% and 46.3% for the years ended December 31, 1997 and 1996, respectively. These writings include U-Haul customers, fleetowners and U-Haul as well as other rental industry insureds with similar characteristics. RWIC underwrites professional reinsurance via broker markets and the percentage of total premiums in this area for 1997 remained consistent with 1996 at 29.1% and 29.2%, respectively. RWIC continues its direct multiple peril coverage of various commercial properties and business in 1997 with premiums accounting for 13.3% of the total gross premiums for the year ended December 31, 1997 as compared to 10.7% for 1996. The increase is the result of planned business expansion. Premium writings in selected general agency lines were 5.2% of total gross written premiums for the period ended December 31, 1997 as compared to 13.8% for 1996. This decrease resulted from the cancellation of a general agency agreement in November 1996. Net earned premiums decreased $0.6 million, or 0.4%, to $155.9 million for the year ended December 31, 1997, compared with premiums of $156.5 million for 1996. General agency earnings decreased $3.1 million offset by a $2.5 million increase in direct multiple peril, assumed treaty reinsurance and rental industry segments. The $3.1 million decrease in the general agency lines is attributable to the cancellation of an agency agreement in November 1996. The $2.5 million increase is due to a $1.3 million increase in the assumed treaty reinsurance line attributable to the reporting of unearned premiums from brokers, an increase of $0.6 million due to the expansion of the direct multiple peril line and an increase of $0.6 million in rental industry markets. Net investment income was $31.3 million for the year ended December 31, 1997, an increase of 2.3% over 1996 net investment income of $30.6 million. The increase resulted from enhanced yield provided by an increased investment in preferred stock. Underwriting expenses incurred were $186.5 million for the year ended December 31, 1997, an increase of $17.7 million, or 10.5%, over 1996. Comparable underwriting expenses incurred for the year ended December 31, 1996 were $168.8 million. The increase is attributed to increased losses and loss adjustment expenses incurred and general underwriting expenses offset by a decrease in net commission expense. Losses and loss adjustment expenses incurred increased $31.6 million in the general agency, rental industry and assumed treaty reinsurance lines offset by a decrease in the direct multiple peril markets. Approximately $31.0 million of the losses and loss adjustment expenses incurred increase is attributable to all programs and results from an increase in liabilities for unpaid claims due to estimated future losses on current and prior business, a component of losses and loss adjustment expenses incurred. The liability for unpaid losses is based on the estimated ultimate cost of settling claims reported prior to the end of the accounting period, estimates received from ceding reinsurers and estimates for unreported losses based on the historical experience of RWIC, supplemented by insurance industry historical experience. Unpaid loss adjustment expenses are based on historical ratios of loss adjustment expenses paid to losses paid. Unpaid loss and loss expenses are not discounted. Net commission expense decreased $15.7 million due to the recognition of contingent commissions on reinsurance agreements for the general agency and the assumed reinsurance treaty lines. All other underwriting expenses increased in the aggregate of $1.8 million. 17 RWIC completed the year ended December 31, 1997 with income before tax expense of $0.7 million as compared to $18.3 million for the same period ended December 31, 1996. This represents a decrease of $17.6 million, or 96.2% over 1996. Increased underwriting expenses (including losses and loss adjustment expenses incurred) were the primary cause for the reduction in income before taxes. Life Insurance Premiums from Oxford's reinsurance lines before intercompany eliminations were $16.7 million for the year ended December 31, 1997, a decrease of $3.6 million or 17.7% over 1996 and accounted for 56.2% of Oxford's premiums in 1997. These premiums are primarily from term life insurance and deferred annuity contracts that have matured. Decreases in premiums are primarily due to decreased policyholder renewals on term life insurance and decreased annuitizations on deferred annuity contracts. Premiums from Oxford's direct lines before intercompany eliminations were $8.1 million in 1997, an increase of $0.6 million or 8.0% from the prior year. This increase in direct premium is primarily attributable to an increase in life and disability coverage for the Company's employees. Oxford's direct business related to group life and disability coverage issued to employees of the Company accounted for 8.8% of premiums for the year ended December 31, 1997. Other direct lines, including the credit business, accounted for approximately 18.3% of Oxford's premiums in 1997. Premiums from Oxford's subsidiaries, acquired in November, 1997, were $4.9 million and accounted for 16.7% of premiums. These premiums are primarily related to Medicare supplement and credit life and disability insurance. Net investment income before intercompany eliminations was $17.8 million and $18.8 million for the years ended December 31, 1997 and 1996, respectively. This decrease is due to a decrease in invested assets at the start of the year, which is the result of a $30.0 million cash dividend paid to Oxford's parent on December 31, 1996. Benefits and expenses incurred were $33.1 million for the year ended December 31, 1997, a decrease of 8.3% over 1996. Comparable benefits and expenses incurred for 1996 were $36.1 million. This decrease is primarily due to the deferred annuity contracts that have matured. Benefits and expenses incurred by Oxford's subsidiaries were $3.8 million. Operating profit before tax and intercompany eliminations was $10.6 million for both the years ended December 31, 1997 and December 31, 1996. Included in operating profit for 1997 is more than $1.3 million from Oxford's subsidiaries. Interest Expense Interest expense, net of interest income, increased by $13.6 million to $64.0 million during fiscal 1998, as compared to $50.4 million in fiscal 1997. The increase can be primarily attributed to lower levels of interest income in the current year. Extraordinary Loss on Extinguishment of Debt During the second quarter of fiscal 1998, the Company extinguished $76.0 million of 10.27% interest-bearing notes originally due in fiscal 1999 through fiscal 2002. This resulted in an extraordinary loss of $4.0 million, net of tax of $2.4 million ($0.18 per share). During the third quarter of fiscal 1998, the Company extinguished $255.0 million of 6.43% to 8.13% interest-bearing notes originally due in fiscal 1999 through fiscal 2010. This resulted in an extraordinary loss of $9.7 million, net of tax of $5.6 million ($0.44 per share). Results of Operations - Consolidated Group As a result of the foregoing, pretax earnings of $76.3 million were realized in fiscal 1998, as compared to $83.5 million in the prior year. After providing for income taxes, earnings from operations were $48.7 million in fiscal 1998 as compared to $54.2 million in fiscal 1997. Following deductions for an extraordinary loss from the extinguishment of debt, net earnings for the current year were $35.0 million, as compared to $51.9 million in fiscal 1997. 18 Fiscal Year Ended March 31, 1997 Versus Fiscal Year Ended March 31, 1996 Moving and Storage Operations Revenues consist of rental revenues and net sales. Rental revenue increased by $30.8 million, approximately 3.3%, to $973.8 million in fiscal 1997. The increase in rental revenues resulted from growth in the rental of moving-related equipment and self-storage market, which grew in the aggregate by $40.6 million to $974.5 million, as compared to $933.9 million in fiscal 1996. Truck rental revenues growth was due to improved utilization, an increase in the fleet size and higher average dollars per transaction. Self-storage facilities rental growth was positively impacted by additional rentable square footage and higher management fees derived from storage facilities managed for others. Net sales revenues were $173.0 million in fiscal 1997, an increase of 5.0% as compared to fiscal 1996 net sales of $164.8 million. Revenue growth from the sale of moving support items (i.e. boxes, etc.), propane and hitches resulted in an $8.3 million increase during the year. Cost of sales was $103.8 million in fiscal 1997, a decrease of 0.3% from $104.1 million in fiscal 1996. A contributing factor towards the decrease was a $4.9 million decrease in allowances for inventory shrinkage and other inventory adjustments. Material costs from the sale of propane and hitches increased by $3.7 million reflecting higher sales levels. Operating expenses increased to $871.1 million in fiscal 1997 from $800.3 million during fiscal 1996, an increase of 8.8%. An aggregate increase in personnel, rental equipment maintenance and rental equipment lease expense of $56.8 million contributed to the increase. Increased rental, sales and repair activity increased personnel costs. Expansion of the rental fleet and transactional growth resulted in higher rental equipment maintenance costs. Increased leasing activity resulted in higher lease expense for rental equipment. Advertising expense in fiscal 1997 declined by $7.0 million to $31.9 million from $38.9 million in fiscal 1996. This decrease reflects a one-time expense of $8.6 million recognized in fiscal 1996, due to the adoption of Statement of Position 93-7. The Company had been deferring yellow page directory costs and amortizing the costs over the life of the directory. The Company is currently reviewing its implementation procedures. All other operating expense categories increased in the aggregate by $21.0 million. Depreciation expense in fiscal 1997 declined by $17.3 million to $66.7 million from $84.0 million in the prior year. The decline from the prior year is due to the increase in leasing activity and the sale/leaseback of rental trailers in June 1996 and an increase in net gains from the sale of real property of $10.1 million. Property and Casualty RWIC gross premium writings for the year ended December 31, 1996 were $167.8 million as compared to $174.2 million in 1995. The rental industry market accounts for a significant share of total premiums, 46.3% and 45.2% in 1996 and 1995, respectively. These writings include U-Haul customers, fleetowners and U-Haul as well as other rental industry insureds with similar characteristics. RWIC continues underwriting reinsurance via broker markets. Premiums in this area decreased during 1996 to $49.0 million, or 29.2% of total gross premiums, from comparable 1995 figures of $50.1 million, or 28.7% of total premiums. This decrease can be primarily attributed to inadequate pricing and market conditions. Premium writings in selected general agency lines were 13.1% of total gross written premiums in 1996 as compared to 16.3% in 1995. This decrease resulted from a business decision to withdraw from a regional commercial multiple peril market. RWIC continued its direct multiple peril coverage of various commercial properties and businesses during 1996. These premiums accounted for 10.7% of the total gross written premium during the year ended December 31, 1996 as compared to 9.1% during 1995. Net earned premiums increased $15.7 million, or 11.2%, to $156.5 million for the year ended December 31, 1996, compared with premiums of $140.8 million for the year ended December 31, 1995. The premium increase was primarily due to increased earnings on the rental industry and direct multiple peril markets, offset by decreases in assumed broker market reinsurance and general agency lines. Net investment income was $30.6 million for the year ended December 31, 1996, an increase of 2.3% over 1995 net investment income of $29.9 million. The marginal increase resulted from 19 enhanced yield provided by an increased investment in preferred stock. Underwriting expenses incurred were $168.8 million for the year ended December 31, 1996, an increase of $19.6 million, or 13.1% over 1995. Comparable underwriting expenses incurred for 1995 were $149.2 million. The increase is largely attributable to a $16.6 million increase in commission expense and a $1.5 million increase in losses incurred. Commission expense at December 1995 was reduced by $9.0 million in order to realize a guaranteed margin on a canceled general agency program. Commission expense in 1996 includes a $2.0 million allowance for doubtful accounts as a result of a settlement agreement with the Receiver for American Bonding Company, which provided for the return of $2.3 million of funds held as collateral. An additional increase in commission expense resulted from increased acquisition expenses on broker market reinsurance business. The $1.5 million losses incurred increase consisted of increases in the rental industry liability and broker market reinsurance lines and was offset by a decrease in the general agency lines. All other underwriting expenses increased in the aggregate of $1.5 million. Income before tax expense was $18.3 million for the year ended December 31, 1996, as compared to $21.4 million for the year ended December 31, 1995. This represents a decrease of $3.1 million, or 14.5% over 1995. Increased premium earnings and investment income were offset by a disproportionate increase in underwriting expenses as discussed above. Life Insurance Premiums from Oxford's reinsurance lines before intercompany eliminations were $20.3 million for the year ended December 31, 1996, an increase of $0.9 million or 4.6% over 1995 and accounted for 73.0% of Oxford's premiums in 1996. These premiums are primarily from matured term life insurance and deferred annuity contracts. Increases in premiums are primarily from an increase in annuitizations as a result of the maturing of deferred annuities. Premiums from Oxford's direct lines before intercompany eliminations were $7.5 million in 1996, a decrease of $0.1 million or 1.3% from the prior year. This decrease in direct premium is primarily attributable to the credit life and disability insurance business ($5.2 million in premium). Oxford's direct business related to group life and disability coverage issued to employees of the Company accounted for approximately 7.9% of premiums for the year ended December 31, 1996. Other direct lines, including the credit business, accounted for approximately 19.1% of Oxford's premiums in 1996. Net investment income before intercompany eliminations was $18.8 million and $16.7 million for the years ended December 31, 1996 and 1995, respectively. This increase is due to increasing margins on the interest sensitive business. Gains (losses) on the disposition of investments were $(0.4) million and $4.8 million for 1996 and 1995, respectively. Benefits and expenses incurred were $36.1 million for the year ended December 31, 1996, an increase of 15.7% over 1995. Comparable benefits and expenses incurred for 1995 were $31.2 million. This increase is primarily due to an increase in annuitizations on maturing deferred annuities, partially offset by decreases in death benefits and amortization of deferred acquisition costs. Operating profit before tax and intercompany eliminations decreased by $2.0 million, or approximately 15.9%, in 1996 to $10.6 million, primarily due to the realization of capital gains in 1995. The decrease in operating profit was partially offset by larger margins on Oxford's interest sensitive business in 1996. Interest Expense Interest expense net of interest income decreased by $0.1 million to $50.4 million in fiscal 1997, as compared to $50.5 million in the prior year. Higher average debt levels during fiscal 1997 increased interest expense which were offset by higher interest income from the previous year. 20 Extraordinary Loss on Extinguishment of Debt During the second quarter of fiscal 1997, the Company extinguished debt of approximately $76.3 million by irrevocably placing cash into a trust of U.S. Treasury securities to be used to satisfy scheduled payments of principal and interest. The Company also extinguished $86.2 million of its long-term notes originally due in fiscal 1997 through fiscal 1999. These transactions resulted in an extraordinary loss of $2.3 million, net of tax of $1.4 million ($0.09 per share). Results of Operations - Consolidated Group As a result of the foregoing, pretax earnings from operations of $83.5 million were realized in fiscal 1997, as compared to $96.2 million for fiscal 1996. After providing for income taxes and extraordinary loss on early extinguishment of debt, net of tax; net earnings for fiscal 1997 were $51.9 million, as compared to $60.4 million for the prior year. Quarterly Results The following table presents unaudited quarterly results for the eight quarters in the period beginning April 1, 1996 and ending March 31, 1998. The Company believes that all necessary adjustments have been included in the amounts stated below to present fairly, and in accordance with generally accepted accounting principles, the selected quarterly information when read in conjunction with the consolidated financial statements incorporated herein by reference. The Company's U-Haul moving and storage operations are seasonal and proportionally more of the Company's revenues and net earnings from its U-Haul moving and storage operations are generated in the first and second quarters of each fiscal year (April through September). The operating results for the periods presented are not necessarily indicative of results for any future period (in thousands except share and per share data). Quarter Ended ---------------------------------------------- Jun 30 Sep 30 Dec 31 Mar 31 1997 1997 1997 1998 ---------------------------------------------- Total revenues $ 372,021 416,771 322,543 298,607 Earnings from operations before extraordinary loss on early extinguishment of debt (6) (7) 29,198 39,032 (5,390) (14,184) Net earnings (loss) (3) (6) (7) 29,198 34,894 (15,236) (13,872) Weighted average common shares outstanding (4) 21,879,156 21,890,072 21,901,521 21,913,654 Earnings (loss) from operations before extraordinary loss on early extinguishment of debt per common share (2) (6) (7) 1.09 1.54 (0.49) (0.85) Net earnings (loss) per common share (both basic and diluted) (1) (2) (4) (6) (7) 1.09 1.35 (0.94) (0.84) Quarter Ended ---------------------------------------------- Jun 30 Sep 30 Dec 31 Mar 31 1996 1996 1996 1997 ---------------------------------------------- Total revenues $ 361,053 398,449 316,892 283,381 Earnings from operations before extraordinary loss on early extinguishment of debt (5) 40,005 39,741 (9,538) (16,024) Net earnings (loss) (5) 40,005 37,737 (9,853) (16,024) Weighted average common shares outstanding (4) 32,015,301 27,675,192 20,359,873 21,868,241 Earnings (loss) from operations before extraordinary loss on early extinguishment of debt per common share (1) (2) (4) (5) 1.15 1.29 (0.72) (0.97) Net earnings (loss) per common share (both basic and diluted) (1) (2) (4) (5) 1.15 1.22 (0.74) (0.97) 21 _______________ (1) Net earnings (loss) per common share amounts were computed after giving effect to the dividends on the Company's Preferred Stock. (2) Reflects the adoption of Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" during the fourth quarter of fiscal 1998. (3) Reflects the change in estimated residual value during the fourth quarter of fiscal 1998. (4) Reflects the acquisition of treasury shares acquired pursuant to the Shoen Litigation as discussed in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations-Stockholder Litigation". (5) During second quarter of fiscal 1997, the Company extinguished $76.3 million of debt and $86.2 million of its long-term notes originally due in fiscal 1997 through fiscal 1999. This resulted in an extraordinary loss of $2.3 million, net of tax of $1.4 million ($0.09 per share). (6) During the second quarter of fiscal 1998, the Company extinguished $76.0 million of 10.27% interest-bearing notes originally due in fiscal 1999 through fiscal 2002. This resulted in an extraordinary loss of $4.0 million, net of tax of $2.4 million ($0.18 per share). (7) During the third quarter of fiscal 1998, the Company extinguished $255.0 million of 6.43% to 8.13% interest-bearing notes originally due in fiscal 1999 through fiscal 2010. This resulted in an extraordinary loss of $9.7 million, net of tax of $5.6 million ($0.44 per share). 22 Liquidity and Capital Resources Moving and Storage Operations To meet the needs of its customers, U-Haul must maintain a large inventory of fixed asset rental items. At March 31, 1998, net property, plant and equipment represented approximately 67.7% of total U-Haul assets and approximately 43.8% of consolidated assets. In fiscal 1998, gross capital expenditures for property, plant and equipment were $392.3 million, as compared to $203.9 million in fiscal 1997. These expenditures primarily reflect expansion of the rental truck fleet, purchase of trucks previously leased and real property acquisitions. The capital needs required to fund these acquisitions were funded with internally generated funds from operations, debt and lease financings. Cash flow from operations was $127.8 million in fiscal 1998, as compared to $156.7 million in fiscal 1997 and $146.6 million in fiscal 1996. The decrease results from an increase in receivables, an increase in accounts payable and accrued expenses offset by a decrease in inventories. Property and Casualty Cash flows from operating activities were $23.8 million, $15.0 million and $31.0 million for the years ended December 31, 1997, 1996 and 1995, respectively. The change for 1997 resulted from a decrease in due from affiliates, offset by a decrease in cash due to a decrease in net income, other liabilities and federal tax payable and an increase in accounts receivable. An additional increase in cash resulted from increased loss and expense reserves and a smaller unearned premium decrease than for the year ended December 31, 1996. RWIC's cash and cash equivalents and short-term investment portfolio were $16.3 million and $30.8 million at December 31, 1997 and December 31, 1996, respectively. This level of liquid assets, combined with budgeted cash flow, is adequate to meet periodic needs. The decrease is attributable to a $13.5 million investment in a Texas based self-storage partnership in February 1997. The structure of the long-term portfolio is designed to match future liability cash needs. Capital and operating budgets allow RWIC to schedule cash needs in accordance with investment and underwriting proceeds. RWIC maintains a diversified securities investment portfolio, primarily in bonds at varying maturity levels with 94.0% of the fixed-income securities consisting of investment grade securities. The maturity distribution is designed to provide sufficient liquidity to meet future cash needs. Current liquidity remains strong, with current invested assets equal to 100.7% of total liabilities. Stockholder's equity increased $3.1 million from $192.3 million at December 31, 1996 to $195.4 million at December 31, 1997. RWIC considers current stockholder's equity to be adequate to support future growth and absorb unforeseen risk events. RWIC does not use debt or equity issues to increase capital and therefore has no exposure to capital market conditions. Applicable laws and regulations of the State of Arizona require the Company's insurance subsidiaries to maintain minimum capital determined in accordance with statutory accounting practices. With respect to RWIC, such amount is $1.0 million. In addition, the amount of dividends that can be paid to stockholders by insurance companies domiciled in the State of Arizona is limited. Any dividend in excess of the limit requires prior regulatory approval. Life Insurance Oxford's primary sources of cash are premiums, receipts from interest-sensitive products and investment income. The primary uses of cash are operating costs and benefit payments to policyholders. Matching the investment portfolio to the cash flow demands of the types of insurance being written is an important consideration. Benefit and claim statistics are continually monitored to provide projections of future cash requirements. 23 Cash provided by operating activities was $8.2 million, $16.5 million and $9.0 million for the years ended December 31, 1997, 1996 and 1995, respectively. In 1997, cash flows provided (used) by financing activities were approximately $(9.1) million. During 1996 and 1995, cash flows provided (used) by financing activities were $(10.0) million and $87.9 million, respectively. Cash flows from deferred annuity sales increase investment contract deposits, which are a component of financing activities, as well as the purchase of fixed maturities which are a component of investing activities. In addition to cash flows from operating and financing activities, a substantial amount of liquid funds is available through Oxford's short-term portfolio. At December 31, 1997 and 1996, short-term investments aggregated $12.2 million and $4.5 million, respectively. Management believes that the overall sources of liquidity will continue to meet foreseeable cash needs. Stockholder's equity of Oxford increased to $85.8 million in 1997 from $75.3 million in 1996. During 1997, Oxford did not pay dividends to its parent, during 1996, Oxford paid cash dividends of $33.9 million to its parent. Applicable laws and regulations of the State of Arizona require the Company's insurance subsidiaries to maintain minimum capital and surplus determined in accordance with statutory accounting practices. With respect to Oxford, the amount is $0.4 million. In addition, the amount of dividends that can be paid to shareholders by insurance companies domiciled in the State of Arizona is limited. Any dividend in excess of the limit requires prior regulatory approval. Statutory surplus which can be distributed as dividends without regulatory approval is $4.6 million at December 31, 1997. These restrictions are not expected to have a material adverse effect on the ability of the Company to meet its cash obligations. Consolidated Group During each of the fiscal years ending March 31, 1999, 2000 and 2001, U-Haul estimates gross capital expenditures will average approximately $325 million primarily reflecting rental fleet rotation. This level of capital expenditures, combined with a potential range of $30-$115 million in annual long-term debt maturities, if certain features of debt are exercised during this same period, are expected to create annual average funding needs of approximately $375-$415 million. Management estimates that U-Haul will fund 100% of these requirements with internally generated funds, including proceeds from the disposition of older trucks and other asset sales. Credit Agreements The Company's operations are funded by various credit and financing arrangements, including unsecured long-term borrowings, unsecured medium-term notes and revolving lines of credit with domestic and foreign banks. Principally, to finance its fleet of trucks and trailers, the Company routinely enters into sale and leaseback transactions. As of March 31, 1998, the Company had $1,025.3 million in total notes and loans outstanding and unutilized committed lines of credit of approximately $220.0 million. Certain of the Company's credit agreements contain restrictive financial and other covenants, including, among others, covenants with respect to incurring additional indebtedness, maintaining certain financial ratios and placing certain additional liens on its properties and assets. At March 31, 1998, the Company was in compliance with these covenants. The Company is further restricted in the issuance of certain types of preferred stock. The Company is prohibited from issuing shares of preferred stock that provide for any mandatory redemption, sinking fund payment or mandatory prepayment, or that allow the holders thereof to require the Company or any subsidiary of the Company to repurchase such preferred stock at the option of such holders or upon the occurrence of any event or events without the consent of its lenders. Stockholder Litigation On October 1, 1996, the Company paid the last portion of a total of approximately $448.1 million to the plaintiffs (non- management members of the Shoen family and their affiliates) in full settlement of a long-standing legal dispute involving the Shoen family and related to control of the Company. As a result, the plaintiffs that owned AMERCO stock were required to transfer all of their shares of Common Stock to the Company. The total number of shares transferred was 18,254,976. 24 An issue remains regarding whether or not the plaintiffs are entitled to statutory post-judgment interest at the rate of ten percent (10%) per year from February 21, 1995 (the date the Director-Defendants filed for protection under Chapter 11) until the judgment was satisfied. On July 19, 1996, the bankruptcy court ruled the plaintiffs are entitled to such interest. The Director-Defendants and the Company have appealed the court's decision. The Company has deposited approximately $48.2 million into an escrow account to secure payment of the disputed interest, pending final resolution of this issue (including all appeals by either side). The escrow account is reflected as a component of "Other assets" in the Company's financial statements. If the interest issue is decided adversely to the Company and the Director- Defendants, the amount deposited into the escrow account will be transferred to the plaintiffs. The ultimate outcome of this issue will not have the effect of increasing or decreasing the Company's net earnings, but could reduce stockholders' equity. The Company has deducted for income tax purposes approximately $324.0 million of the payments made to the plaintiffs. While the Company believes that such income tax deductions are appropriate, there can be no assurance that such deductions ultimately will be allowed in full. Other On April 1, 1995, the Company implemented Statement of Position 93 - 7, "Reporting on Advertising Costs", issued by the Accounting Standards Executive Committee in December 1993. This statement of position provides guidance on financial reporting on advertising costs in annual financial statements. Upon implementation, the Company recognized additional advertising expense of $8,647,000 for advertising costs not qualifying as direct-response. The adoption had the effect of reducing net income by $5,474,000 ($0.15 per share) for the year ended March 31, 1996. The Company is currently reviewing its implementation procedures. For the year ended March 31, 1998, the Company implemented Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use", issued by the Accounting Standards Executive Committee in March 1998. This statement of position establishes guidelines for the accounting for the costs of all computer software developed or obtained for internal use, including payroll and other direct costs. For the year ended March 31, 1998, the Company implemented Statement of Financial Standards No. 130, "Reporting Comprehensive Income". Effective for fiscal years beginning after December 15, 1997, this statement establishes standards for reporting and displaying comprehensive income and its components in general- purpose financial statements. The standard requires that comprehensive income and its components be displayed in the financial statements, the items be classified by their nature and display the accumulated balances of other comprehensive income in stockholders' equity separately from retained earnings and additional paid-in-capital. The statement had no effect on the Company's results of operations, financial position, capital resources or liquidity. For the year ended March 31, 1998, the Company implemented Statement of Financial Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information". Effective for financial periods beginning after December 15, 1997, this statement requires public business enterprises to report certain information about their operating segments in a complete set of financial statements to stockholders; to report certain enterprise- wide information about their products and services, their activities in different geographic areas and their reliance on major customers; and to disclose certain segment information in their interim financial statements. The statement had no effect on the Company's results of operations, financial position, capital resources or liquidity. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities". This statement standardizes the accounting for derivative instruments by requiring that an entity recognize those items as assets or liabilities in the statement of financial position and measure them at fair value. It also provides for matching the timing of gain or loss recognition on the hedging instrument with the recognition of (a) the changes in the fair value of hedged asset 25 or liability attributable to the hedged risk or (b) the earnings effect of the hedged forecasted transaction. This statement becomes effective for fiscal periods beginning after June 15, 1999. The Company is evaluating the effect this statement will have on its financial reporting and disclosures and when it will adopt the statement. Other pronouncements issued by the Financial Accounting Standards Board adopted during the year are not material to the consolidated financial statements of the Company. Further, pronouncements with future effective dates are either not applicable or not material to the consolidated financial statements of the Company. Year 2000 Disclosure The Company is and has been working since 1997 to identify and evaluate the changes necessary to its existing computerized business systems to make these systems compliant for Year 2000 processing. The Year 2000 processing problem is caused by currently installed computer systems and software products, including several used by the Company, being coded to accept only two digit entries in the date code field. Beginning in the year 2000, these date code fields will need to accept four digit entries to distinguish 21st century dates from 20th century dates. The Company's date critical functions related to the Year 2000 and beyond, such as rental transaction processing and financial systems may be adversely affected unless these computer systems are or become Year 2000 compliant. The Company has been replacing, upgrading or modifying key financial systems in the normal course of business. The Company is utilizing both internal and external resources to identify, correct, reprogram and test its systems for Year 2000 compliance. In particular, the Company has an outside consulting firm on-site currently making the necessary modifications to existing systems. The Company expects to be fully Year 2000 compliant by March 1999 at an estimated cost of approximately $2.0 million. Although the Company believes it will achieve compliance on a timely basis and does not anticipate incurring material costs beyond the estimated $2.0 million, no assurance can be given that the Company's computer systems will be Year 2000 compliant by March 1999 or otherwise in a timely manner or that the Company will not incur significant additional costs pursuing Year 2000 compliance. If the appropriate modifications are not made, or are not timely, the Year 2000 problem may have a material adverse effect on the Company. Furthermore, even if the Company's systems will be Year 2000 compliant, there can be no assurance the Company will not be adversely affected by the failure of others to become Year 2000 compliant. For example, the Company may be affected by, among other things, the failure of inventory suppliers, credit card processors, security companies, or other vendors and service providers to become Year 2000 compliant. In an effort to evaluate and reduce its exposure in this area, the Company has ongoing communication with its vendors and other service providers about their progress in identifying and addressing problems to ensure that their computer systems will be Year 2000 compliant. However, despite the Company's efforts to date, there can be no assurance that the Year 2000 problem will not have a material adverse effect on the Company in the future. 26 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Report of Independent Accountants and Consolidated Financial Statements of the Company, including the notes to such statements and the related schedules, are set forth on pages 30 through 76 and are hereby incorporated herein. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNT ING AND FINANCIAL DISCLOSURE The Registrants have had no disagreements with their independent accountant in regard to accounting and financial disclosure matters and have not changed their independent accountant during the two most recent fiscal years. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTS Information regarding (i) directors and executive officers of the Company is set forth under the captions "Election of Directors", "Executive Officers of the Company", and "Shoen Litigation" and (ii) compliance with Section 16(a) is set forth under the caption "Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's Proxy Statement relating to the 1998 Annual Meeting of Stockholders (the "1998 Proxy Statement") portions of which are incorporated by reference into this Form 10-K Report, which will be filed with the Securities and Exchange Commission in accordance with Rule 14a-6 promulgated under the Securities Exchange Act of 1934, as amended. With the exception of the foregoing information and other information specifically incorporated by reference into this report, the 1998 Proxy Statement is not being filed as a part hereof. ITEM 11. EXECUTIVE COMPENSATION Information regarding executive compensation is set forth under the caption "Executive Compensation" in the 1998 Proxy Statement, which information is incorporated herein by reference; provided, however, that the "Board Report on Executive Compensation" and the "Performance Graph" contained in the 1998 Proxy Statement are not incorporated by reference herein. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information regarding security ownership of certain beneficial owners and management is set forth under the caption "Security Ownership of Certain Beneficial Owners and Management" in the 1998 Proxy Statement, which information is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information regarding certain relationships and related transactions of management is set forth under the captions "Certain Relationships and Related Transactions" and "Shoen Litigation" in the 1998 Proxy Statement, which information is incorporated herein by reference. 27 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this Report: Page No. ------- 1. Financial Statements Report of Independent Accountants 30 Consolidated Balance Sheets - March 31, 1998 and 1997 31 Consolidated Statements of Earnings - Years ended March 31, 1998, 1997 and 1996 33 Consolidated Statements of Changes in Stockholders' Equity - Years ended March 31, 1998, 1997 and 1996 34 Consolidated Statements of Cash Flows - Years ended March 31, 1998, 1997 and 1996 36 Notes to Consolidated Financial Statements 38 2. Additional Information Summary of Earnings of Independent Trailer Fleets 69 Notes to Summary of Earnings of Independent Trailer Fleets 70 3. Financial Statement Schedules required to be filed by Item 8 and Paragraph (d) of this Item 14 Condensed Financial Information of Registrant -- Schedule I 72 Supplemental Information (For Property-Casualty Insurance Underwriters) -- Schedule V 76 All other schedules are omitted as the required information is not applicable or the information is presented in the financial statements or related notes thereto. (b) No report on Form 8-K has been filed during the last quarter of the period covered by this report. 28 (c) Exhibits Exhibit No. Description ----------- ----------- 2.1 Order Confirming Plan (1) 2.2 Second Amended and Restated Debtor's Plan of Reorganization Proposed by Edward J. Shoen (1) 3.1 Restated Articles of Incorporation (2) 3.2 Restated By-Laws of AMERCO as of August 27, 1996 (3) 4.1 Debt Securities Indenture (1) 4.2 First Supplemental Indenture, Dated as of May 6, 1996 (4) 4.3 Stockholders Rights Plan (5) 4.4 AMERCO Stock Option and Incentive Plan (5) 4.5 AMERCO and Citibank, N.A. Trustee Second Supplemental Indenture Dated as of October 22, 1997 (11) 4.6 Calculation Agency Agreement (11) 4.7 6.65%-AMERCO Series 1997 A Bond Backed Asset Trust Certificates ("Bats") Due October 15, 1999 (11) 10.1* AMERCO Employee Savings, Profit Sharing and Employee Stock Ownership Plan (5) 10.2 U-Haul Dealership Contract (5) 10.3 Share Repurchase and Registration Rights Agreement (5) 10.4 Share Repurchase and Registration Rights Agreement (5) 10.5 ESOP Loan Credit Agreement (6) 10.6 ESOP Loan Agreement (6) 10.7 Trust Agreement for the AMERCO Employee Savings, Profit Sharing and Employee Stock Ownership Plan(6) 10.8 Amended Indemnification Agreement (6) 10.9 Indemnification Trust Agreement (6) 10.10 Promissory Note between SAC Holding Corporation and a subsidiary of AMERCO (12) 10.11 Promissory Notes between Four SAC Self-Storage Corporation and a subsidiary of AMERCO (12) 10.12 Management Agreement between Three SAC Self- Storage Corporation and a subsidiary of AMERCO (12) 10.13 Management Agreement between Four SAC Self- Storage Corporation and a subsidiary of AMERCO (12) 10.14 Agreement, dated October 17, 1995, among AMERCO, Edward J. Shoen, James P. Shoen, Aubrey K. Johnson, John M. Dodds and William E. Carty (8) 10.15 Directors' Release, dated October 17, 1995, executed by Edward J. Shoen, James P. Shoen, Aubrey K. Johnson, John M. Dodds and William E. Carty in favor of AMERCO (8) 10.16 AMERCO Release, dated October 17, 1995, executed by AMERCO in favor of Edward J. Shoen, James P. Shoen, Aubrey K. Johnson, John M. Dodds and William E. Carty (8) 10.17 Settlement Agreement with Paul F. Shoen (9) 10.18 Series B Preferred Stock Purchase Agreement, dated as of August 30, 1996 (3) 10.19 Series B Preferred Stock Amended and Restated Side Agreement, dated as of June 1, 1997 (10) 10.20 Settlement Agreement, dated October 15, 1996 between L.S. Shoen and AMERCO (12) 10.21 Settlement Agreement between AMERCO and Sophia Shoen (10) 12 Statements Re: Computation of Ratios 21 Subsidiaries of AMERCO * Indicates compensatory plan arrangement 29 c. Exhibits, continued 23 Consent of Independent Accountants 27 Financial Data Schedule ________________ (1) Incorporated by reference to the Company's Registration Statement on Form S-3, Registration no. 333-1195. (2) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 1992, file no. 0- 7862. (3) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996, file no. 0-7862. (4) Incorporated by reference to the Company's Current Report on Form 8-K, dated May 6, 1996. (5) Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended March 31, 1993, file no. 0-7862. (6) Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended March 31, 1990, file no. 0-7862. (7) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994, file no. 0- 7862. (8) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995, file no. 0- 7862. (9) Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended March 31, 1995, file no. 0-7862. (10)Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997, file no. 0- 7862. (11)Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 1997, file no. 0- 7862. (12)Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended March 31, 1997, file no. 0-7862. 30 REPORT OF INDEPENDENT ACCOUNTANTS --------------------------------- To the Board of Directors and Stockholders of AMERCO In our opinion, the consolidated financial statements listed in the index appearing under Item 14(a)(1) and (3) on page 27 present fairly, in all material respects, the financial position of AMERCO and its subsidiaries at March 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The Summary of Earnings of Independent Trailer Fleets included on pages 69 through 71 of this Form 10-K is presented for purposes of additional analysis and is not a required part of the basic financial statements. Such information has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole. PRICE WATERHOUSE LLP Phoenix, Arizona June 26, 1998 31 AMERCO AND CONSOLIDATED SUBSIDIARIES Consolidated Balance Sheets March 31, Assets 1998 1997 --------------------- (in thousands) Cash and cash equivalents $ 31,606 41,752 Receivables 317,620 238,523 Inventories 68,887 65,794 Prepaid expenses 21,154 17,264 Investments, fixed maturities 886,873 859,694 Investments, other 164,064 127,306 Deferred policy acquisition costs 44,255 48,598 Other assets 103,062 72,997 --------------------- Property, plant and equipment, at cost: Land 208,028 209,803 Buildings and improvements 838,419 814,744 Furniture and equipment 214,513 199,126 Rental trailers and other rental equipment 158,750 148,807 Rental trucks 939,561 947,911 General rental items 20,475 21,600 --------------------- 2,379,746 2,341,991 Less accumulated depreciation 1,103,990 1,094,925 --------------------- Total property, plant and equipment 1,275,756 1,247,066 --------------------- $ 2,913,277 2,718,994 ===================== The accompanying notes are an integral part of these consolidated financial statements. 32 Liabilities and Stockholders' Equity 1998 1997 --------------------- (in thousands) Liabilities: Accounts payable and accrued expenses $ 144,201 131,099 Notes and loans 1,025,323 983,550 Policy benefits and losses, claims and loss expenses payable 592,642 469,134 Liabilities from premium deposits 425,347 433,397 Cash overdraft 21,414 23,606 Other policyholders' funds and liabilities 34,911 30,966 Deferred income 45,298 35,247 Deferred income taxes 29,082 9,675 --------------------- Stockholders' equity: Serial preferred stock, with or without par value, 50,000,000 shares authorized - Series A preferred stock, with no par value, 6,100,000 shares authorized; 6,100,000 shares issued and outstanding as of March 31, 1998 and 1997 - - Series B preferred stock, with no par value, 100,000 shares authorized; 75,000 and 100,000 shares issued and outstanding as of March 31, 1998 and 1997, respectively - - Serial common stock, with or without par value, 150,000,000 shares authorized - Series A common stock of $0.25 par value, 10,000,000 shares authorized; 5,762,495 shares issued as of March 31, 1998 and 1997 1,441 1,441 Common stock of $0.25 par value, 150,000,000 shares authorized; 36,487,505 issued as of March 31, 1998 and 1997 9,122 9,122 Additional paid-in capital 313,444 337,933 Accumulated other comprehensive income (9,384) (9,722) Retained earnings 658,227 644,009 --------------------- 972,850 982,783 Less: Cost of common shares in treasury, net (19,635,913 shares as of March 31, 1998 and 1997) 359,723 359,723 Unearned employee stock ownership plan shares 18,068 20,740 --------------------- Total stockholders' equity 595,059 602,320 Contingent liabilities and commitments _____________________ $ 2,913,277 2,718,994 ===================== The accompanying notes are an integral part of these consolidated financial statements. 33 AMERCO AND CONSOLIDATED SUBSIDIARIES Consolidated Statements of Earnings Years ended March 31, 1998 1997 1996 -------------------------------------------- (in thousands except share and per share data) Revenues Rental revenue $ 1,018,699 973,783 942,987 Net sales 176,935 172,968 164,795 Premiums 164,613 163,603 154,249 Net investment income 49,695 49,421 45,989 ---------------------------------- Total revenues 1,409,942 1,359,775 1,308,020 Costs and expenses Operating expense 889,737 860,483 798,544 Cost of sales 101,628 103,817 104,129 Benefits and losses 194,413 178,275 157,515 Amortization of deferred acquisition costs 14,194 16,493 17,131 Depreciation, net 69,655 66,742 83,989 ---------------------------------- Total costs and expenses 1,269,627 1,225,810 1,161,308 Earnings from operations 140,315 133,965 146,712 Interest expense, net of interest income of $15,353, $25,604 and $17,071 in 1998, 1997 and 1996, respectively 64,016 50,437 50,486 ---------------------------------- Pretax earnings 76,299 83,528 96,226 Income tax expense (27,643) (29,344) (35,832) ---------------------------------- Earnings from operations before extraordinary loss on early extinguishment of debt 48,656 54,184 60,394 Extraordinary loss on early extinguishment of debt, net (13,672) (2,319) - ---------------------------------- Net earnings $ 34,984 51,865 60,394 ================================== Earnings per common share (both basic and diluted): Earnings from operations before extraordinary loss on early extinguishment of debt $ 1.28 1.44 1.33 Extraordinary loss on early extinguishment of debt, net (0.62) (0.09) - ---------------------------------- Net earnings $ 0.66 1.35 1.33 ================================== Weighted average common shares outstanding 21,896,101 25,479,651 35,736,335 ================================== The accompanying notes are an integral part of these consolidated financial statements. 34
AMERCO AND CONSOLIDATED SUBSIDIARIES Consolidated Statements of Changes in Stockholders' Equity (in thousands) Unearned Accumulated Employee Series A Additional Other Stock Total Common Common Paid-in Comprehensive Retained Treasury Ownership Stockholders' Comprehensive Stock Stock Capital Income Earnings Stock Plan Shares Equity Income ----------------------------------------------------------------------------------------------------- Balance at March 31, 1995 $ 1,441 8,559 165,675 (18,918) 561,589 (10,461) (21,101) 686,784 Leveraged employee stock ownership plan: Issuance of shares 81 81 Purchase of shares (4,576) (4,576) Repayments from loan 2,348 2,348 Preferred stock dividends: Series A ($2.13 per share) (12,964) (12,964) Treasury stock purchase 5,873,140 shares (100,657) (100,657) Comprehensive income: Net income 60,394 60,394 $ 60,394 Other comprehensive income, net of tax: Foreign currency translation 558 558 558 Unrealized gain on investments 17,580 17,580 17,580 ------ Comprehensive income $ 78,532 ------ ----- ------- -------- ------- --------- -------- ------- ====== Balance at March 31, 1996 1,441 8,559 165,756 (780) 609,019 (111,118) (23,329) 649,548 Issuance of common stock 563 73,146 73,709 Issuance of preferred stock 98,546 98,546 Leveraged employee stock ownership plan: Issuance of shares 485 485 Purchase of shares (2) (2) Repayments from loan 2,591 2,591 Preferred stock dividends: Series A ($2.13 per share) (12,964) (12,964) Series B ($39.11 per share) (3,911) (3,911) Treasury stock purchase 12,426,836 shares (248,605) (248,605) Comprehensive income: Net income 51,865 51,865 $ 51,865 Other comprehensive income, net of tax: Foreign currency translation (2,256) (2,256) (2,256) Unrealized loss on investments (6,686) (6,686) (6,686) ------ Comprehensive income $ 42,923 ----- ----- ------- -------- ------- --------- -------- ------- ====== Balance at March 31, 1997 1,441 9,122 337,933 (9,722) 644,009 (359,723) (20,740) 602,320 The accompanying notes are an integral part of these consolidated financial statements.
35
AMERCO AND CONSOLIDATED SUBSIDIARIES Consolidated Statements of Changes in Stockholders' Equity (in thousands) Unearned Accumulated Employee Series A Additional Other Stock Total Common Common Paid-in Comprehensive Retained Treasury Ownership Stockholders' Comprehensive Stock Stock Capital Income Earnings Stock Plan Shares Equity Income ------------------------------------------------------------------------------------------------- Balance at March 31, 1997 1,441 9,122 337,933 (9,722) 644,009 (359,723) (20,740) 602,320 Repurchase of preferred stock (25,000) (25,000) Leveraged employee stock ownership plan: Issuance of shares 511 511 Purchase of shares (5) (5) Repayments from loan 2,677 2,677 Preferred stock dividends: Series A ($2.13 per share) (12,964) (12,964) Series B ($81.04 per share) (7,802) (7,802) Comprehensive income: Net income 34,984 34,984 $ 34,984 Other comprehensive income, net of tax: Foreign currency translation (4,542) (4,542) (4,542) Unrealized gain on investments 4,880 4,880 4,880 ------ Comprehensive income $ 35,322 ----- ----- ------- -------- ------- --------- -------- ------- ====== Balance at March 31, 1998 $ 1,441 9,122 313,444 (9,384) 658,227 (359,723) (18,068) 595,059 ===== ===== ======= ======== ======= ========= ======== ======= The accompanying notes are an integral part of these consolidated financial statements.
36 AMERCO AND CONSOLIDATED SUBSIDIARIES Consolidated Statements of Cash Flows Years ended March 31, 1998 1997 1996 --------------------------- (in thousands) Cash flows from operating activities: Net earnings $ 34,984 51,865 60,394 Depreciation and amortization 113,822 94,364 102,427 Provision for losses on accounts receivable 4,108 3,465 4,492 Net (gain) loss on sale of real and personal property (1,776) (7,979) 2,142 Gain on sale of investments (944) (728) (5,172) Changes in policy liabilities and accruals 37,021 (403) 20,010 Additions to deferred policy acquisition costs (10,010) (13,065) (21,507) Net change in other operating assets and liabilities (17,303) 60,662 24,056 --------------------------- Net cash provided by operating activities 159,902 188,181 186,842 Cash flows from investing activities: Purchases of investments: Property, plant and equipment (392,298) (203,943) (291,057) Fixed maturities (123,832) (189,763) (332,155) Common stock (8,573) - - Preferred stock (4,054) (10,875) - Equity investment (24,500) - - Real estate - - (8,127) Mortgage loans (17,551) (38,339) (10,560) Proceeds from sales of investments: Property, plant and equipment 291,321 240,787 165,490 Fixed maturities 131,334 206,995 190,846 Preferred stock 1,015 59 - Real estate 1,331 934 2,749 Mortgage loans 21,715 38,906 29,447 Changes in other investments (16,699) 5,402 9,169 --------------------------- Net cash provided (used) by investing activities (140,791) 50,163 (244,198) The accompanying notes are an integral part of these consolidated financial statements. 37 AMERCO AND CONSOLIDATED SUBSIDIARIES Consolidated Statements of Cash Flows, continued Years ended March 31, 1998 1997 1996 --------------------------- (in thousands) Cash flows from financing activities: Net change in short-term borrowings 122,500 (347,000) 84,500 Proceeds from notes 300,000 562,300 140,141 Debt issuance costs (2,956) (6,240) (1,663) Leveraged Employee Stock Ownership Plan: Purchase of shares (5) (2) (4,576) Repayments from loan 2,677 2,591 2,348 Principal payments on notes (380,727) (229,970) (107,643) Issuance of preferred stock - 98,546 - Repurchase of preferred stock (25,000) - - Issuance of common stock - 73,709 - Extraordinary loss on early extinguishment of debt, net (13,672) (2,319) - Net change in cash overdraft (2,192) (8,553) 796 Preferred stock dividends paid (20,766) (16,875) (12,964) Treasury stock acquisitions, net - (248,605) (100,657) Deferred tax-treasury stock - (80,997) (34,938) Investment contract deposits 51,943 81,678 163,423 Investment contract withdrawals (61,059) (57,789) (75,529) Escrow deposit - (48,234) - --------------------------- Net cash provided (used) by financing activities (29,257) (227,760) 53,238 --------------------------- Increase (decrease) in cash and cash equivalents (10,146) 10,584 (4,118) Cash and cash equivalents at beginning of year 41,752 31,168 35,286 --------------------------- Cash and cash equivalents at end of year $ 31,606 41,752 31,168 =========================== The accompanying notes are an integral part of these consolidated financial statements. 38 AMERCO AND CONSOLIDATED SUBSIDIARIES Notes to Consolidated Financial Statements 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION AMERCO, a Nevada corporation (the Company), is the holding company for U-Haul International, Inc. (U-Haul), Amerco Real Estate Company (AREC), Republic Western Insurance Company (RWIC) and Oxford Life Insurance Company (Oxford). All references to a fiscal year refer to the Company's fiscal year ended March 31 of that year. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the parent corporation, AMERCO, and its subsidiaries, substantially all of which are wholly-owned. All material intercompany accounts and transactions of AMERCO and its subsidiaries have been eliminated. RWIC and Oxford have been consolidated on the basis of calendar years ended December 31. Accordingly, all references to the years 1997, 1996 and 1995 correspond to the Company's fiscal years 1998, 1997 and 1996, respectively. The operating results and financial position of AMERCO's consolidated insurance operations are determined as of December 31 of each year. There were no effects related to intervening events between January 1 and March 31 of 1998, 1997 or 1996 that would materially affect the consolidated financial position or results of operations for the financial statements presented herein. See Note 19 of Notes to Consolidated Financial Statements for additional information regarding the insurance subsidiaries. DESCRIPTION OF BUSINESS Moving and self-storage operations consist of the rental of trucks, automobile-type trailers and self-storage space to the do-it- yourself mover under the registered tradename U-Haul throughout the United States and Canada. Additionally, the Company sells related products (such as boxes, tape and packaging materials). AREC owns the majority of the Company's real estate assets, including the Company's Center and Storage locations. AREC has responsibility for actively marketing properties available for sale or lease. AREC is also responsible for managing any environmental risks associated with the Company's real estate. RWIC originates and reinsures property and casualty type insurance products for various market participants, including independent third parties, the Company's customers and the Company. RWIC's principal strategy is to capitalize on its knowledge of insurance products aimed at the moving and rental markets. Oxford originates and reinsures life, health and annuity type insurance products and administers the Company's self-insured employee health plan. FOREIGN CURRENCY The consolidated financial statements include the accounts of U- Haul Co. (Canada) Ltd., a subsidiary of the Company. Assets and liabilities, denominated in currencies other than U.S. dollars, are translated to U.S. dollars at the exchange rate as of the balance sheet date. Income and expense amounts are translated at the average exchange rate during the fiscal year. The related translation gains or losses are included in the Statement of Stockholders' Equity. ACCOUNTING ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS The Company considers liquid investments with an original maturity of approximately three months or less to be cash equivalents ($6,568,000 as of March 31, 1998). 39 AMERCO AND CONSOLIDATED SUBSIDIARIES Notes to Consolidated Financial Statements, Continued 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued RECEIVABLES Accounts receivable of RWIC and Oxford include premiums and agents' balances due, net of commissions payable and amounts due from ceding reinsurers. Accounts receivable of RWIC and Oxford are reduced by amounts considered by management to be uncollectible. Accounts receivable of the Company's moving and storage subsidiaries include mortgage and other notes receivable and trade accounts receivable. Accounts receivable are reduced by amounts considered by management to be uncollectible based on historical collection loss experience and a review of the current status of existing receivables by the Company's rental subsidiaries. INVENTORIES Inventories are primarily valued at the lower of cost or market. Cost is determined using the LIFO (last-in, first-out) method. INVESTMENTS Fixed maturities consist of bonds and redeemable preferred stocks which are classified as held-to-maturity or available-for-sale. Fixed maturity investments classified as held-to-maturity are recorded at cost adjusted for the amortization of premiums or accretion of discounts while those classified as available-for-sale are recorded at fair value with unrealized gains or losses reported on a net basis in the Statement of Stockholders' Equity. Gains and losses on the sale of securities classified as available-for-sale are reported as a component of revenues using the specific identification method. The Company does not currently maintain a trading portfolio. Mortgage loans on real estate held by the insurance subsidiaries are carried at unpaid balances, net of allowance for possible losses and any unamortized premium or discount. Real estate is carried at cost less accumulated depreciation. Policy loans are carried at their unpaid balance. Fair values for investments are based on quoted market prices, dealer quotes or discounted cash flows. Short-term investments consist of other securities scheduled to mature within one year of their acquisition date. See Note 4 of Notes to Consolidated Financial Statements. Interest on bonds and mortgage loans is recognized when earned. Dividends on common and redeemable preferred stocks are recognized on ex-dividend dates. Realized gains and losses on the sale of investments are recognized at the trade date and included in revenues using the specific identification method. DEFERRED POLICY ACQUISITION COSTS Commissions and other costs which vary with and are primarily related to the production of new business, have been deferred. These deferred policy acquisition costs are amortized in relation to revenue such that profits are realized as a level percentage of revenue. Property-casualty acquisition costs are amortized over the related contract period which generally does not exceed one year. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are carried at cost and are depreciated on the straight-line and accelerated methods over the estimated useful lives of the assets. Maintenance is charged to operating expenses as incurred, while renewals and betterments are capitalized. Major overhaul costs are amortized over the estimated period benefited. Gains and losses on dispositions are netted against depreciation expense when realized. Interest costs incurred as part of the initial construction of assets are capitalized. Interest expense of $2,210,000, $3,430,000 and $1,807,000 was capitalized in the years ended 1998, 1997 and 1996, respectively. During fiscal 1998, the Company increased the estimated salvage value and useful lives of certain rental equipment. The effect of the change increased net earnings by $9,268,000 ($0.42 per share). Certain recoverable environmental costs related to the removal of underground storage tanks or related contamination are capitalized and depreciated over the estimated useful lives of the properties. The capitalized costs improve the safety or efficiency of the property as compared to when the property was originally acquired or are incurred in preparing the property for sale. 40 AMERCO AND CONSOLIDATED SUBSIDIARIES Notes to Consolidated Financial Statements, Continued 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued At March 31, 1998, the book value of the Company's real estate that is no longer necessary for use in the Company's current operations, and available for sale/lease, was approximately $45,946,000. Such properties available for sale are carried at cost, less accumulated depreciation, which is less than or approximate to fair value. FINANCIAL INSTRUMENTS The Company enters into interest rate swap agreements to reduce its interest rate exposure; the Company does not use the agreements for trading purposes. Amounts to be paid or received under the agreements are accrued. Although the Company is exposed to credit loss for the interest rate differential in the event of nonperformance by the counterparties to the agreements, it does not anticipate nonperformance by the counterparties. The Company has mortgage receivables which potentially expose the Company to credit risk. The portfolio of notes is principally collateralized by mini-warehouse storage facilities and other residential and commercial properties. The Company has not experienced losses related to the notes from individual notes or groups of notes in any particular industry or geographic area. The estimated fair values were determined using the discounted cash flow method, using interest rates currently offered for similar loans to borrowers with similar credit ratings. Fair value summary of mortgage receivables: Book Estimated value fair value -------------------------- (in thousands) March 31, 1998 $ 80,220 82,420 ========================== March 31, 1997 $ 66,484 68,928 ========================== Other financial instruments that are subject to fair value disclosure requirements are carried in the financial statements at amounts that approximate fair value, unless elsewhere disclosed. See below as well as Notes 4 and 5 of Notes to Consolidated Financial Statements. The Company's financial instruments that are exposed to concentrations of credit risk consist primarily of temporary cash investments and trade receivables. The Company places its temporary cash investments with financial institutions and limits the amount of credit exposure to any one financial institution. Concentrations of credit risk with respect to trade receivables are limited due to the large number of customers and their dispersion across many different industries and geographic areas. POLICY BENEFITS AND LOSSES, CLAIMS AND LOSS EXPENSES PAYABLE Liabilities for policy benefits payable on traditional life and certain annuity policies are established in amounts adequate to meet estimated future obligations on policies in force. These liabilities are computed using mortality and withdrawal assumptions which are based upon recognized actuarial tables and contain margins for adverse deviation. At December 31, 1997, interest assumptions used to compute policy benefits payable range from 2.5% to 12.8%. With respect to annuity policies accounted for as investment contracts, the liability for investment contract deposits consists of policy account balances that accrue to the benefit of the policyholders, excluding surrender charges. Fair value of investment contract deposits were $391,732,000 and $399,953,000 at December 31, 1997 and 1996, respectively. Liabilities for accident and health and other policy claims and benefits payable represent estimates of payments to be made on insurance claims for reported losses and estimates of losses incurred but not yet reported. These estimates are based on past claims experience and consider current claim trends as well as social and economic conditions. 41 AMERCO AND CONSOLIDATED SUBSIDIARIES Notes to Consolidated Financial Statements, Continued 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued With respect to property-casualty, the liability for unpaid losses is based on the estimated ultimate cost of settling claims reported prior to the end of the accounting period, estimates received from ceding reinsurers and estimates for unreported losses based on RWIC's historical experience supplemented by insurance industry historical experience. The liability for unpaid loss adjustment expenses is based on historical ratios of loss adjustment expenses paid to losses paid. Amounts recoverable from reinsurers on unpaid losses are estimated in a manner consistent with the claim liability associated with the reinsured policy. Adjustments to the liability for unpaid losses and loss expenses as well as amounts recoverable from reinsurers on unpaid losses are charged or credited to expense in periods in which they are made. RENTAL REVENUE The Company recognizes its share of rental revenue less commission on the accrual basis pursuant to contractual arrangements between AMERCO and its fleet owners, rental dealers and customers. See Note 9 of Notes to Consolidated Financial Statements for further discussion. PREMIUM REVENUE Accident and health, credit life and health and property-casualty gross premiums are earned on a pro rata basis over the term of the related contracts. The portion of premiums not earned at the end of the period is recorded as unearned premiums. Traditional life and annuity premiums are recognized as revenue when due from policyholders. Revenue for annuity policies which are accounted for as investment contracts are included in net investment income as investment margins until the policyholder annuitizes, at which time the policyholders fund balance is recognized as premium. REINSURANCE Reinsurance premiums, commissions and expense reimbursements, related to ceded business, are accounted for on bases consistent with those used in accounting for the original policies issued and the terms of the reinsurance contracts. Premiums ceded to other companies have been reported as a reduction of premium income. Assets and liabilities relating to ceded contracts are reported gross of the effects of reinsurance. See also "Policy Benefits And Losses, Claims and Loss Expenses Payable" above. INCOME TAXES In addition to charging income for taxes paid or payable, the provision for income taxes reflects deferred income taxes resulting from changes in temporary differences between the tax bases of assets and liabilities and their reported amounts in the financial statements. The effect on deferred income taxes of a change in tax rates is recognized in income in the period that includes the enactment date. The Company files a consolidated federal income tax return with its insurance subsidiaries. NEW ACCOUNTING STANDARDS On April 1, 1995, the Company implemented Statement of Position 93-7, "Reporting on Advertising Costs", issued by the Accounting Standards Executive Committee in December 1993. This statement of position provides guidance on financial reporting on advertising costs in annual financial statements. Upon implementation, the Company recognized additional advertising expense of $8,647,000 for advertising costs not qualifying as direct-response. The adoption had the effect of reducing net income by $5,474,000 ($0.15 per share) for the year ended March 31, 1996. The Company is currently reviewing its implementation procedures. For the year ended March 31, 1998, the Company implemented Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use", issued by the Accounting Standards Executive Committee in March 1998. This statement of position establishes guidelines for the accounting for the costs of all computer software developed or obtained for internal use, including payroll and other direct costs. 42 AMERCO AND CONSOLIDATED SUBSIDIARIES Notes to Consolidated Financial Statements, Continued 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued For the year ended March 31, 1998, the Company implemented Statement of Financial Standards No. 130, "Reporting Comprehensive Income". Effective for fiscal years beginning after December 15, 1997, this statement establishes standards for reporting and displaying comprehensive income and its components in general-purpose financial statements. The standard requires that comprehensive income and its components be displayed in the financial statements, the items be classified by their nature and display the accumulated balances of other comprehensive income in stockholders' equity separately from retained earnings and additional paid-in-capital. The statement had no effect on the Company's results of operations, financial position, capital resources or liquidity. For the year ended March 31, 1998, the Company implemented Statement of Financial Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information". Effective for financial periods beginning after December 15, 1997, this statement requires public business enterprises to report certain information about their operating segments in a complete set of financial statements to stockholders; to report certain enterprise-wide information about their products and services, their activities in different geographic areas and their reliance on major customers; and to disclose certain segment information in their interim financial statements. The statement had no effect on the Company's results of operations, financial position, capital resources or liquidity. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities". This statement standardizes the accounting for derivative instruments by requiring that an entity recognize those items as assets or liabilities in the statement of financial position and measure them at fair value. It also provides for matching the timing of gain or loss recognition on the hedging instrument with the recognition of (a) the changes in the fair value of hedged asset or liability attributable to the hedged risk or (b) the earnings effect of the hedged forecasted transaction. This statement becomes effective for fiscal periods beginning after June 15, 1999. The Company is evaluating the effect this statement will have on its financial reporting and disclosures and when it will adopt the statement. Other pronouncements issued by the Financial Accounting Standards Board adopted during the year are not material to the consolidated financial statements of the Company. Further, pronouncements with future effective dates are either not applicable or not material to the consolidated financial statements of the Company. EARNINGS PER SHARE Basic earnings per common share are computed based on the weighted average number of shares outstanding for the year and quarterly periods, excluding shares of the employee stock ownership plan that have not been committed to be released. Preferred dividends include undeclared or unpaid dividends of the Company. Net income is reduced for preferred dividends for the purpose of the calculation. The Company does not have any potential common stock that was not included in the calculation of diluted earnings per share because it is antidilutive in the current period. Accordingly, basic and diluted earnings per share are equal. See Notes 6 and 7 of Notes to Consolidated Financial Statements for further discussion. FINANCIAL STATEMENT PRESENTATION Certain reclassifications have been made to the financial statements for the years ended 1997 and 1996 to conform with the current year's presentation. 43 AMERCO AND CONSOLIDATED SUBSIDIARIES Notes to Consolidated Financial Statements, Continued 2. RECEIVABLES A summary of receivables follows: March 31, -------------------- 1998 1997 -------------------- (in thousands) Trade accounts receivable $ 15,994 15,273 Mortgage and note receivables, net of discount 35,027 39,806 Note receivable and accrued interest from SAC Holding Corporation and its subsidiaries 67,547 46,690 Premiums and agents' balances in course of collection 40,464 28,307 Reinsurance recoverable 120,262 73,069 Accrued investment income 14,853 14,308 Independent dealer receivable 5,131 6,995 Other receivables 20,274 16,457 ------------------- 319,552 240,905 Less allowance for doubtful accounts 1,932 2,382 ------------------- $ 317,620 238,523 =================== During fiscal 1998, a subsidiary of the Company held various senior and junior notes with SAC Holding Corporation and its subsidiaries (SAC Holdings). The voting common stock of SAC Holdings is held by Mark V. Shoen, a major stockholder of the Company. The Company's subsidiary received principal payments of $1,047,000 and interest payments of $6,847,000 from SAC Holdings during fiscal 1998. The note receivable balance outstanding at March 31, 1998 was, in the aggregate, $66,111,000 bearing interest rates ranging from 8.37% to 13.0%. During fiscal 1998, a subsidiary of the Company funded the purchase of properties and construction costs for SAC Holdings of approximately $24,574,000. Three of the properties were purchased from the Company at a purchase price equal to the Company's acquisition cost plus capitalized costs which approximated fair market value. In March 1998, SAC Holdings sold three of the properties to an outside party and reduced the Company's receivable by $2,814,000. The Company currently manages the properties owned by SAC Holdings pursuant to a management agreement, under which the Company receives a management fee equal to 6% of the gross receipts from the properties. The Company received management fees of $1,860,000 during fiscal 1998. The management fee percentage is consistent with the fees received by the Company for other properties managed by the Company. Management believes that the foregoing transactions were consummated on terms equivalent to those that prevail in arm's-length transactions. 3. INVENTORIES A summary of inventory components follows: March 31, -------------------- 1998 1997 -------------------- (in thousands) Truck and trailer parts and accessories $ 41,880 40,938 Hitches and towing components 16,418 14,348 Moving aids and promotional items 10,589 10,508 -------------------- $ 68,887 65,794 ==================== 44 AMERCO AND CONSOLIDATED SUBSIDIARIES Notes to Consolidated Financial Statements, Continued 3. INVENTORIES, continued Certain general and administrative expenses are allocated to ending inventories. Such costs remaining in inventory at fiscal years ended 1998, 1997 and 1996 are estimated at $7,626,000, $7,568,000 and $6,773,000, respectively. For the fiscal years ended March 31, 1998, 1997 and 1996, aggregate general and administrative costs were $526,431,000, $511,473,000 and $439,122,000, respectively. LIFO inventories, which represent approximately 98% of total inventories at March 31, 1998 and 1997, would have been $4,716,000 and $4,611,000 greater at March 31, 1998 and 1997, respectively, if the consolidated group had used the FIFO (first-in, first-out) method. 4. INVESTMENTS Major categories of net investment income consist of the following: Year ended December 31, ---------------------------- 1997 1996 1995 ---------------------------- (in thousands) Fixed maturities $ 63,467 65,680 59,992 Real estate 223 279 727 Policy loans 605 519 554 Mortgage loans 7,187 7,193 7,887 Short-term, amounts held by ceding reinsurers, net and other investments 2,797 1,499 1,601 ---------------------------- Investment income 74,279 75,170 70,761 Less investment expenses 24,584 25,749 24,772 ---------------------------- Net investment income $ 49,695 49,421 45,989 ============================ A comparison of amortized cost to estimated market value for fixed maturities is as follows: December 31, 1997 - ----------------- Par Value Gross Gross Estimated Consolidated or number Amortized unrealized unrealized market Held-to-Maturity of shares cost gains losses value ------------------------------------------------------ (in thousands) U.S. treasury securities and government obligations $ 10,415 $ 10,285 1,283 - 11,568 U.S. government agency mortgage- backed securities $ 40,988 40,772 512 (884) 40,400 Obligations of states and political subdivisions $ 27,395 27,231 1,430 - 28,661 Corporate securities $ 154,893 158,243 4,516 (453) 162,306 Mortgage-backed securities $ 105,915 104,535 1,870 (482) 105,923 Redeemable preferred stocks 2,168 59,685 1,006 (216) 60,475 ---------------------------------------- 400,751 10,617 (2,035) 409,333 ---------------------------------------- 45 AMERCO AND CONSOLIDATED SUBSIDIARIES Notes to Consolidated Financial Statements, Continued 4. INVESTMENTS, continued December 31, 1997 - ----------------- Par Value Gross Gross Estimated Consolidated or number Amortized unrealized unrealized market Available-for-Sale of shares cost gains losses value ------------------------------------------------------ (in thousands) U.S. treasury securities and government obligations $ 18,205 $ 18,329 1,011 (7) 19,333 U.S. government agency mortgage- backed securities $ 36,128 35,570 1,334 (17) 36,887 Obligations of states and political subdivisions $ 11,225 11,624 413 (31) 12,006 Corporate securities $ 305,595 308,408 11,792 (1,136) 319,064 Mortgage-backed securities $ 82,480 81,831 2,520 (65) 84,286 Redeemable preferred stocks 531 13,869 677 - 14,546 ---------------------------------------- 469,631 17,747 (1,256) 486,122 ---------------------------------------- Total $ 870,382 28,364 (3,291) 895,455 ======================================== December 31, 1996 - ----------------- Par Value Gross Gross Estimated Consolidated or number Amortized unrealized unrealized market Held-to-Maturity of shares cost gains losses value ------------------------------------------------------ (in thousands) U.S. treasury securities and government obligations $ 18,680 $ 18,571 1,239 (24) 19,786 U.S. government agency mortgage- backed securities $ 50,465 50,171 528 (1,914) 48,785 Obligations of states and political subdivisions $ 30,135 29,920 1,242 (21) 31,141 Corporate securities $ 170,180 174,469 3,795 (1,782) 176,482 Mortgage-backed securities $ 109,962 108,476 1,565 (1,783) 108,258 Redeemable preferred stocks 929 26,768 421 (257) 26,932 ---------------------------------------- 408,375 8,790 (5,781) 411,384 ---------------------------------------- 46 AMERCO AND CONSOLIDATED SUBSIDIARIES Notes to Consolidated Financial Statements, Continued 4. INVESTMENTS, continued December 31, 1996 - ----------------- Par Value Gross Gross Estimated Consolidated or number Amortized unrealized unrealized market Available-for-Sale of shares cost gains losses value ------------------------------------------------------ (in thousands) U.S. treasury securities and government obligations $ 11,685 $ 11,771 964 - 12,735 U.S. government agency mortgage- backed securities $ 26,085 25,575 331 (119) 25,787 Obligations of states and political subdivisions $ 11,900 12,085 558 (95) 12,548 Corporate securities $ 307,711 311,335 7,359 (2,633) 316,061 Mortgage-backed securities $ 72,371 72,208 1,542 (560) 73,190 Redeemable preferred stocks 436 10,815 202 (19) 10,998 ---------------------------------------- 443,789 10,956 (3,426) 451,319 ---------------------------------------- Total $ 852,164 19,746 (9,207) 862,703 ======================================== Fixed maturities estimated market values are based on publicly quoted market prices at the close of trading on December 31, 1997 or December 31, 1996, as appropriate. The amortized cost and estimated market value of debt securities by contractual maturity are shown below. Expected maturities will differ from contractual maturities as borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. December 31, 1997 - ----------------- Amortized Estimated Consolidated cost market value --------------------------- Held-to-Maturity (in thousands) Due in one year or less $ 14,357 14,457 Due after one year through five years 103,547 107,376 Due after five years through ten years 72,123 74,198 After ten years 5,732 6,504 ------------------------ 195,759 202,535 Mortgage-backed securities 145,307 146,323 Redeemable preferred stock 59,685 60,475 ------------------------ 400,751 409,333 ------------------------ 47 AMERCO AND CONSOLIDATED SUBSIDIARIES Notes to Consolidated Financial Statements, Continued 4. INVESTMENTS, continued December 31, 1997 - ----------------- Amortized Estimated Consolidated cost market value --------------------------- Available-for-sale (in thousands) Due in one year or less 20,100 20,231 Due after one year through five years 120,446 124,020 Due after five years through ten years 140,911 145,618 After ten years 56,904 60,534 ------------------------ 338,361 350,403 Mortgage-backed securities 117,401 121,173 Redeemable preferred stock 13,869 14,546 ------------------------ 469,631 486,122 ------------------------ Total $ 870,382 895,455 ======================== December 31, 1996 - ----------------- Amortized Estimated Consolidated cost market value --------------------------- Held-to-Maturity (in thousands) Due in one year or less $ 20,151 20,454 Due after one year through five years 79,000 80,899 Due after five years through ten years 117,915 119,517 After ten years 5,894 6,539 ------------------------ 222,960 227,409 Mortgage-backed securities 158,647 157,043 Redeemable preferred stock 26,768 26,932 ------------------------ 408,375 411,384 ------------------------ December 31, 1996 - ----------------- Amortized Estimated Consolidated cost market value -------------------------- Available-for-sale (in thousands) Due in one year or less 8,773 8,846 Due after one year through five years 87,678 88,893 Due after five years through ten years 188,378 191,841 After ten years 50,362 51,764 ------------------------ 335,191 341,344 Mortgage-backed securities 97,783 98,977 Redeemable preferred stock 10,815 10,998 ------------------------ 443,789 451,319 ------------------------ Total $ 852,164 862,703 ======================== Proceeds from sales of investments in debt securities during 1997, 1996 and 1995 were $69,252,000, $115,886,000 and $101,565,000, respectively. Gross gains of $1,132,000, $1,518,000 and $4,498,000 and gross losses of $515,000, $654,000 and $419,000 were realized on those sales during 1997, 1996 and 1995, respectively. At December 31, 1997 and 1996 fixed maturities include bonds with an amortized cost of $15,443,000 and $18,728,000, respectively, on deposit with insurance regulatory authorities to meet statutory requirements. 48 AMERCO AND CONSOLIDATED SUBSIDIARIES Notes to Consolidated Financial Statements, Continued 4. INVESTMENTS, continued Investments, other consists of the following: March 31, ------------------ 1998 1997 ------------------ (in thousands) Short-term investments $ 27,267 10,925 Mortgage loans 73,979 79,353 Equity investment 24,500 - Real estate, foreclosed properties 22,497 20,936 U.S. government securities mutual fund 5,883 5,883 Policy loans 8,536 8,627 Other 1,402 1,582 ------------------ $ 164,064 127,306 ================== Short-term investments consist primarily of fixed maturities with a maturity of three months to one year from acquisition date. Mortgage loans, representing first lien mortgages held by the insurance subsidiaries, are carried at unpaid balances, less allowance for possible losses and any unamortized premium or discount. Equity investments and real estate obtained through foreclosures and held for sale is carried at the lower of cost or fair value. U.S. government securities mutual fund is carried at cost which approximates market value. Policy loans are carried at their unpaid balance. At December 31, 1997 and 1996, mortgage loans held as investments with a book value of $73,979,000 and $79,353,000, respectively, were outstanding. The estimated fair value of the mortgage loans at December 31, 1997 and 1996 aggregated $74,240,000 and $84,564,000, respectively. The estimated fair values were determined using the discounted cash flow method, using interest rates currently offered for similar loans to borrowers with similar credit ratings. Investments in mortgage loans, included as a component of investments, are reported net of allowance for possible losses of $507,000 and $800,000 in 1997 and 1996, respectively. In February 1997, the Company, through its insurance subsidiaries, invested in the equity of a limited partnership in a Texas-based self- storage corporation. RWIC invested $13,500,000 in exchange for a 38% limited partnership and Oxford invested $11,000,000 in exchange for a 31% limited partnership. U-Haul is a 50% owner of a corporation which is a general partner in the Texas-based self-storage corporation. The Company has a $10,000,000 note receivable from the corporation. 49 AMERCO AND CONSOLIDATED SUBSIDIARIES Notes to Consolidated Financial Statements, Continued 5. NOTES AND LOANS PAYABLE Notes and loans payable consist of the following: March 31, -------------------- 1998 1997 -------------------- (in thousands) Short-term borrowings, 6.31% interest rate $ 6,500 4,000 Notes payable to banks under revolving lines of credit, unsecured, 5.85% to 5.94% interest rates 180,000 60,000 Medium-term notes payable, unsecured, 6.71% to 8.08% interest rates, due through 2027 362,000 387,000 Notes payable under Bond Backed Asset Trust, unsecured, 6.65% to 7.14% interest rates, due through 2033 300,000 - Notes payable to insurance companies, unsecured, 6.43% to 10.27% interest rates, due through 2006 - 226,500 Notes payable to public, unsecured, 7.85% interest rate, due through 2004 175,000 175,000 Notes payable to banks, unsecured, 4.81% to 7.54% interest rates, due through 2001 - 62,500 Notes and mortgages payable, secured, 7.00% to 10.00% interest rates, due through 2005 1,752 68,471 Other notes payable, unsecured, 9.50% interest rate, due through 2005 71 79 -------------------- $ 1,025,323 983,550 ==================== Notes and mortgages payable are secured by land and buildings at various locations with a net book value of $11,174,000 at March 31, 1998. Revolving credit loans (long-term) are available from participating banks under an agreement which provides for a total credit line of $400,000,000 through the expiration date of the revolving term of June 30, 2002. The Company may elect to borrow under the credit agreement in the form of Eurodollar borrowings, domestic dollar borrowings or issue letters of credit. Depending on the form of borrowing elected, interest will be based on the prime rate, the federal funds effective rate or the interbank offering rate and in addition, margin interest rates will be charged. Loans may also be at a fixed rate based upon the discretion of the borrower and lender. 50 AMERCO AND CONSOLIDATED SUBSIDIARIES Notes to Consolidated Financial Statements, Continued 5. NOTES AND LOANS PAYABLE, continued Facility fees, which are based upon the amount of credit line, aggregated $622,000 and $975,000 for 1998 and 1997, respectively. As of March 31, 1998, loans outstanding under the revolving credit line totaled $180,000,000. Management intends to refinance the borrowings on a long-term basis by either replacing them with long-term obligations, renewing or extending them. Year ended ----------------------------- 1998 1997 1996 ----------------------------- (in thousands) A summary of revolving credit activity follows: Weighted average interest rate during the year 5.95% 5.76% 6.20% at year end 5.90% 5.78% 5.73% Maximum amount outstanding during the year $ 285,000 338,000 343,000 Average amount outstanding during the year $ 203,250 128,000 281,750 A summary of short-term borrowing follows: Weighted average interest rate during the year 6.05% 5.87% 6.26% at year end 6.31% 7.63% 5.93% Maximum amount outstanding during the year $ 57,000 195,000 73,000 Average amount outstanding during the year $ 25,208 56,417 37,583 AMERCO has committed lines of credit with various banks totaling $400,000,000 and uncommitted lines of credit of $87,466,000 at March 31, 1998. The Company has executed interest rate swap agreements (SWAPS) to potentially mitigate the impact of changes in interest rates on its floating rate debt. These agreements effectively change the Company's interest rate exposure on $118,000,000 of floating rate notes to a weighted average fixed rate of 7.87%. The SWAP's mature at the time the related notes mature. Incremental interest expense associated with SWAP activity was $2,687,000, $3,481,000 and $2,959,000 during 1998, 1997 and 1996, respectively. At March 31, 1998, interest rate swap agreements with an aggregate notional amount of $118,000,000 were outstanding. Management estimates that at March 31, 1998 and 1997, the Company would be required to pay $7,000,000 and $5,000,000, respectively, to terminate the agreements. Such amounts were determined from current treasury rates combined with swap spreads on agreements outstanding. During the second quarter of fiscal 1998, the Company extinguished $76,000,000 of 10.27% interest-bearing notes originally due in fiscal 1999 through fiscal 2002. This resulted in an extraordinary loss of $4,044,000, net of tax of $2,371,000 ($0.18 per share). In October 1997, the Company issued $300,000,000 of Bond Backed Asset Trust Certificates (BATs). The net proceeds were used to initially prepay floating rate indebtedness of the Company under revolving credit agreements. Subsequent to the funding of the BATs, the Company extinguished $255,071,000 of 6.43% to 8.13% interest- bearing notes originally due in fiscal 1999 through fiscal 2010. This resulted in an extraordinary loss of $9,628,000, net of tax of $5,645,000 ($0.44 per share). On July 18, 1996, the Company extinguished debt of approximately $76,250,000 by irrevocably placing cash into a trust of U.S. Treasury securities to be used to satisfy scheduled payments of principal and interest. As of March 31, 1998 the remaining amount of debt that is considered extinguished as a result of the defeasance amounted to $14,000,000. 51 AMERCO AND CONSOLIDATED SUBSIDIARIES Notes to Consolidated Financial Statements, Continued 5. NOTES AND LOANS PAYABLE, continued Certain of the Company's credit agreements contain restrictive financial and other covenants, including, among others, covenants with respect to incurring additional indebtedness, maintaining certain financial ratios and placing certain additional liens on its properties and assets. At March 31, 1998, the Company was in compliance with these covenants. The annual maturities of long-term debt for the next five years adjusted for subsequent activity (if the revolving credit lines are outstanding to maturity), are presented in the table below: Year Ended ----------------------------------------------- 1999 2000 2001 2002 2003 ----------------------------------------------- (in thousands) Mortgages $ 110 62 46 37 30 Medium-Term and Other Notes 40,009 30,010 10 77,512 - Revolving Credit - - - - 180,000 ------------------------------------------------ $ 40,119 30,072 56 77,549 180,030 ================================================ Interest paid in cash amounted to $76,035,000, $69,972,000 and $71,561,000 for 1998, 1997 and 1996, respectively. 6. STOCKHOLDERS' EQUITY The authorized capital stock of the Company consists of 150,000,000 shares of Common Stock, 150,000,000 shares of Serial Common Stock and 50,000,000 shares of Serial Preferred Stock. The Board of Directors (the Board) may authorize the Serial Common Stock to be issued in such series and on such terms as the Board shall determine. Serial Preferred Stock issuance may be with or without par value. The Company has 6,100,000 shares of 8.5% cumulative, no par, non- voting Series A (Series A) preferred stock. The Series A is not convertible into, or exchangeable for, shares of any other class or classes of stock of the Company. Dividends are payable quarterly in arrears and have priority as to dividends over the Company's common stock. The Series A is not redeemable prior to December 1, 2000. On or after December 1, 2000, the Company, at its option, may redeem all or part of the Series A, for cash at $25.00 per share plus accrued and unpaid dividends to the redemption date. On August 30, 1996, the Company issued 100,000 shares of its Series B Preferred Stock with no par value for gross proceeds of $100,000,000. Dividends are cumulative with the rate being reset quarterly and have priority as to dividends over the Company's Common Stock. The Series B Preferred Stock, as amended, is convertible under certain circumstances into 4,000,000 shares, subject to the Company's prior right to redeem the Series B Preferred Stock, of AMERCO's Common Stock, $0.25 par value. In January 1998, the Company redeemed 25,000 shares of its Series B Preferred Stock for $25,000,000. On October 14, 1996, the Company paid an additional $15,000,000 to L.S. Shoen in settlement of all outstanding disputes pursuant to a Settlement, Mutual Release of All Claims and Confidentiality Agreement (Settlement Agreement), dated October 15, 1996 with the Company resolving the lawsuit in the District Court of Clark County, Nevada. The settlement resolves a long-standing dispute between the Company and L.S. Shoen regarding L.S. Shoen's entitlement to compensation pursuant to an alleged lifetime employment contract. On December 18, 1996, the Company sold 2,250,000 shares of Common Stock, $0.25 par value, to the public for $35.00 per share, receiving net proceeds of $74,228,000. During the year ended March 31, 1996, pursuant to a judgment in the Shoen Litigation, the Company repurchased 5,828,140 shares of Common Stock in exchange for $39,631,000, funded damages of $87,337,000 and paid statutory post-judgment interest of $6,128,000. 52 AMERCO AND CONSOLIDATED SUBSIDIARIES Notes to Consolidated Financial Statements, Continued 6. STOCKHOLDERS' EQUITY, continued During the year ended March 31, 1997, pursuant to a judgment in the Shoen Litigation, the Company repurchased 12,426,836 shares of Common Stock in exchange for $84,502,000, funded damages of $228,373,000 and paid statutory post-judgment interest of $689,000 and placed funds of $48,234,000 into an escrow account pending the outcome of a dispute involving the entitlement of the plaintiffs to post- bankruptcy petition date interest. The plaintiffs included the father, brothers and sisters of Edward J., Mark V., Paul F. and James P. Shoen who are major stockholders of the Company, and Edward J., Paul F. and James P. Shoen who are directors of the Company. The above treasury share transactions were recorded net of tax of $115,935,000 ($80,997,000 for fiscal 1997 transactions and $34,938,000 for fiscal 1996 transactions). 7. EARNINGS PER SHARE The following table reflects the calculation of the earnings per share (in thousands except per share data): Year ended ----------------------------------- 1998 1997 1996 ----------------------------------- (in thousands except per share data) Earnings from operations before extraordinary loss on early extinguishment of debt $ 48,656 54,184 60,394 Less dividends on preferred shares 20,664 17,456 12,962 ---------------------------------- 27,992 36,728 47,432 Extraordinary loss on early extinguishment of debt, net (13,672) (2,319) - ---------------------------------- Net earnings for per share calculation $ 14,320 34,409 47,432 ================================== Earnings per common share (both basic and diluted): Earnings from operations before extraordinary loss on early extinguishment of debt $ 1.28 1.44 1.33 Extraordinary loss on early extinguishment of debt, net (0.62) (0.09) - ---------------------------------- Net earnings $ 0.66 1.35 1.33 ================================== Weighted average common shares outstanding 21,896,101 25,479,651 35,736,335 ================================== 53 AMERCO AND CONSOLIDATED SUBSIDIARIES Notes to Consolidated Financial Statements, Continued 8. INCOME TAXES The components of the consolidated expense for income taxes applicable to operations are as follows: Year ended ------------------------------- 1998 1997 1996 ------------------------------- (in thousands) Current: Federal $ 2,098 3,404 - State 406 169 637 Deferred: Federal 23,772 24,218 33,790 State 1,367 1,553 1,405 ------------------------------ $ 27,643 29,344 35,832 =============================== Actual tax expense reported on earnings from operations differs from the "expected" tax expense amount (computed by applying the United States federal corporate tax rate of 35% in 1998, 1997 and 1996) as follows: Year ended ------------------------------- 1998 1997 1996 ------------------------------- (in thousands) Computed "expected" tax expense $ 26,705 29,232 33,679 Increases (reductions) in taxes resulting from: Tax-exempt interest income (676) (767) (714) Net reinsurance effect (166) (920) - Canadian subsidiary income tax benefit (524) (645) (1,235) True-up of prior year 950 - 2,112 Federal tax benefit of state and local taxes (620) (602) (714) Other 201 1,324 662 ------------------------------ Actual federal tax expense 25,870 27,622 33,790 State and local income tax expense 1,773 1,722 2,042 ------------------------------ Actual tax expense of operations $ 27,643 29,344 35,832 ============================== 54 AMERCO AND CONSOLIDATED SUBSIDIARIES Notes to Consolidated Financial Statements, Continued 8. INCOME TAXES, continued Deferred tax assets and liabilities are comprised as follows: March 31, ----------------- 1998 1997 ----------------- (in thousands) Deferred tax assets ------------------- Benefit of tax NOL and credit carryforwards $ 139,458 150,633 Accrued liabilities 7,663 14,953 Deferred revenue from sale/leaseback 9,794 10,173 Policy benefits and losses, claims and loss expenses payable, net 17,064 26,137 Other 714 - ----------------- Total deferred tax assets $ 174,693 201,896 ----------------- Deferred tax liabilities ------------------------ Property, plant and equipment $ 188,952 195,080 Deferred acquisition costs 14,823 16,082 Other - 409 ----------------- Total deferred tax liabilities $ 203,775 211,571 ----------------- Net deferred tax liability $ 29,082 9,675 ================= In light of the Company's history of profitable operations, management has concluded that it is more likely than not that the Company will ultimately realize the full benefit of its deferred tax assets. Accordingly, the Company believes that a valuation allowance is not required at March 31, 1998 and 1997. See also Note 14 of Notes to Consolidated Financial Statements. Income taxes paid in cash amounted to $2,758,000, $4,949,000 and $540,000 for 1998, 1997 and 1996, respectively. Under the provisions of the Tax Reform Act of 1984 (the Act), the balance in Oxford's account designated "Policyholders' Surplus Account" is frozen at its December 31, 1983 balance of $19,251,000. Federal income taxes (Phase III) will be payable thereon at applicable current rates if amounts in this account are distributed to the stockholder or to the extent the account exceeds a prescribed maximum. Oxford did not incur a Phase III liability for the years ended December 31, 1997, 1996 and 1995. The Internal Revenue Service has examined AMERCO's income tax returns for the years ended 1994 and 1995. All agreed issues have been provided for in the financial statements. At March 31, 1998 AMERCO and RWIC have non-life net operating loss carryforwards available to offset taxable income in future years of $324,963,000 for tax purposes. These carryforwards expire in 2005 through 2012. AMERCO has alternative minimum tax credit carryforwards of $14,647,000 which do not have an expiration date, but may only be utilized in years in which regular tax exceeds alternative minimum tax. The use of certain carryforwards may be limited or prohibited if a reorganization or other change in corporate ownership were to occur. During 1994, Oxford dividended its investment in RWIC common stock to its parent at its book value. As a result of such dividend, a deferred intercompany gain arose due to the difference between the book value and fair value of such common stock. However, such gain can only be triggered if certain events occur. To date, no events have occurred which would trigger such gain recognition. No deferred taxes have been provided in the accompanying consolidated financial statements as management believes that no events have occurred to trigger such gain. 55 AMERCO AND CONSOLIDATED SUBSIDIARIES Notes to Consolidated Financial Statements, Continued 9. TRANSACTIONS WITH FLEET OWNERS AND OTHER RENTAL EQUIPMENT OWNERS Independent rental equipment owners (fleet owners) own approximately 9% of all U-Haul rental trailers and 0.03% of certain other rental equipment. There are approximately 4,000 fleet owners, including certain officers, directors, employees and stockholders of the Company. All rental equipment is operated under contract with U-Haul whereby U-Haul administers the operations and marketing of such equipment and in return receives a percentage of rental fees paid by customers. Based on the terms of various contracts, rental fees are distributed to the Company (for services as operators), to the fleet owners (including certain subsidiaries and related parties of the Company) and to Rental Dealers (including Company-operated U-Haul Centers). RWIC insures and reinsures certain risks of U-Haul customers and independent fleet owners. Premiums earned on these policies were $49,400,000, $40,800,000 and $43,400,000 during the years ended December 31, 1997, 1996 and 1995, respectively. 10. EMPLOYEE BENEFIT PLANS The Company participates in the AMERCO Employee Savings, Profit Sharing and Employee Stock Ownership Plan (the Plan) which is designed to provide all eligible employees with savings for their retirement and to acquire a proprietary interest in the Company. The Plan has three separate features: a profit sharing feature (the Profit Sharing Plan) under which the Employer may make contributions on behalf of participants; a savings feature (the Savings Plan) which allows participants to defer income under Section 401(k) of the Internal Revenue Code of 1986; and an employee stock ownership feature (the ESOP) under which the Company may make contributions of AMERCO Common Stock or cash to acquire such stock on behalf of participants. Generally, employees of the Company are eligible to participate in the Plan upon completion of a one year service requirement. The Company has arranged financing to fund the ESOP trust (ESOT) and to enable the ESOT to purchase shares. Below is a summary of the financing arrangements. Amount outstanding Financing as of Interest Payments Date March 31, 1998 1998 1997 1996 --------------------------------------------------------------------- (in thousands) December 1989 $ 900 126 162 309 May 1990 351 35 45 59 June 1991 16,817 1,466 1,472 1,131 Shares are released from collateral and allocated to active employees based on the proportion of debt service paid in the plan year. Contributions to the ESOT charged to expense were $3,588,000, $3,570,000 and $2,904,000 for the years ended 1998, 1997 and 1996, respectively. The shares held by ESOP as of March 31 were as follows: Shares issued Shares issued prior to subsequent to December 31, 1992 December 31, 1992 ------------------------------------------ 1998 1997 1998 1997 ------------------------------------------ (in thousands) Allocated shares 1,587 1,487 118 78 Shares committed to be released - - 11 11 Unreleased shares 523 749 697 742 Fair value of unreleased shares $ 5,688 7,574 21,425 18,926 ========================================== 56 AMERCO AND CONSOLIDATED SUBSIDIARIES Notes to Consolidated Financial Statements, Continued 10. EMPLOYEE BENEFIT PLANS, continued For purposes of this schedule, fair value of unreleased shares issued prior to December 31, 1992 is defined as the historical cost of such shares. Fair value of unreleased shares issued subsequent to December 31, 1992 is defined as the March 31 trading value of such shares for 1998 and 1997. Oxford insures various group life and group disability insurance plans covering employees of the consolidated group. Premiums earned were $2,785,000, $2,370,000 and $2,138,000 during the years ended December 31, 1997, 1996 and 1995, respectively, and were eliminated in consolidation. 11. POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS The Company provides medical and life insurance benefits to retired employees and eligible dependents over age 65 if the employee meets specified age and service requirements. The Company uses the accrual method of accounting for postretirement benefits. The Company continues to fund medical and life insurance benefit costs as claims are incurred. The components of net periodic postretirement benefit cost for 1998, 1997 and 1996 are as follows: 1998 1997 1996 ---------------------------- (in thousands) Service cost for benefits earned during the period $ 260 381 346 Interest cost on accumulated postretirement benefit 301 407 422 Other components (239) (58) (81) ---------------------------- Net periodic postretirement benefit cost $ 322 730 687 ============================ The 1998 and 1997 postretirement benefit liability included the following components: 1998 1997 ----------------- (in thousands) Actuarial present value of postretirement benefit obligation: Retirees $ (1,589) (1,360) Eligible active plan participants (381) (344) Other active plan participants (2,769) (2,408) ----------------- Accumulated postretirement benefit obligation (4,739) (4,112) Unrecognized net gain (3,460) (3,838) ----------------- $ (8,199) (7,950) ================= The discount rate assumptions in computing the information above were as follows: 1998 1997 1996 -------------------------- Accumulated postretirement benefit obligation 7.00% 7.50% 7.00% The year-to-year fluctuations in the discount rate assumptions primarily reflect changes in U.S. interest rates. The discount rate represents the expected yield on a portfolio of high-grade (AA-AAA rated or equivalent) fixed-income investments with cash flow streams sufficient to satisfy benefit obligations under the plans when due. The assumed health care cost trend rate used in measuring the accumulated postretirement benefit obligation was 6.75% in 1998, declining annually to an ultimate rate of 4.20% in 2012. 57 AMERCO AND CONSOLIDATED SUBSIDIARIES Notes to Consolidated Financial Statements, Continued 11. POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS, continued If the health care cost trend rate assumptions were increased by 1.0%, the accumulated postretirement benefit obligation as of March 31, 1998 would be increased by approximately $737,000. The effect of this change on the sum of the service cost and interest cost components of net periodic postretirement benefit cost for 1998 would be an increase of approximately $105,000. Postemployment benefits provided by the Company are not material. 12. REINSURANCE The Company's insurance subsidiaries assume and cede reinsurance on both a coinsurance and risk premium basis. RWIC and Oxford obtain reinsurance for that portion of risks exceeding retention limits. The maximum amount of life insurance retained on any one life is $100,000. RWIC also reinsures a wide range of property-casualty risks with third parties and insures general and auto liability, multiple peril and workers' compensation coverage for the consolidated group, independent fleet owners and customers as a direct writer and as a reinsurer through third party companies. To the extent that a reinsurer is unable to meet its obligation under the related reinsurance agreements, the Company would remain liable for the unpaid losses and loss expenses. Pursuant to certain of these agreements, the Company holds letters of credit of $7,900,000 from reinsurers. The Company has issued letters of credit of $2,800,000 in favor of certain ceding companies. RWIC insures and reinsures general liability, auto liability and workers' compensation coverage for member companies of the consolidated group. Premiums earned by RWIC on these policies were $19,800,000, $19,700,000 and $12,700,000 during the years ended December 31, 1997, 1996 and 1995, respectively, and were eliminated in consolidation. RWIC is a reinsurer of municipal bond insurance through an agreement with MBIA, Inc. Premiums generated through this agreement are recognized on a pro rata basis over the contract coverage period. Unearned premiums on this coverage were $5,200,000 and $5,000,000 as of December 31, 1997 and 1996, respectively. RWIC's share of case loss reserves related to this coverage was insignificant at December 31, 1997. RWIC's aggregate exposure for Class 1 municipal bond insurance was $964,700,000 as of December 31, 1997. A summary of reinsurance transactions by business segment follows: Percentage Ceded Assumed of amount Direct to other from other Net assumed to amount companies companies amount net ------------------------------------------------------ (in thousands) Year ended 1997 - --------------- Life insurance in force $ 1,601,840 224,893 2,219,393 3,596,340 62% ============================================ Premiums earned: Life $ 3,527 160 7,034 10,401 68% Accident and health 7,916 1,217 1,930 8,629 22% Annuity 106 - 8,868 8,974 99% Property casualty 103,488 22,387 55,508 136,609 41% -------------------------------------------- Total $ 115,037 23,764 73,340 164,613 ============================================ 58 AMERCO AND CONSOLIDATED SUBSIDIARIES Notes to Consolidated Financial Statements, Continued 12. REINSURANCE, continued Percentage Ceded Assumed of amount Direct to other from other Net assumed to amount companies companies amount net ------------------------------------------------------ (in thousands) Year ended 1996 - --------------- Life insurance in force $ 35,298 463 2,392,339 2,427,174 99% ============================================ Premiums earned: Life $ 1,869 18 8,016 9,867 81% Accident and health 4,740 171 1,469 6,038 24% Annuity 82 - 10,836 10,918 99% Property casualty 108,440 26,148 54,488 136,780 40% -------------------------------------------- Total $ 115,131 26,337 74,809 163,603 ============================================ Percentage Ceded Assumed of amount Direct to other from other Net assumed to amount companies companies amount net ---------------------------------------------------- (in thousands) Year ended 1995 - --------------- Life insurance in force $ 35,257 481 2,586,485 2,621,261 99% ========================================== Premiums earned: Life $ 2,078 17 8,414 10,475 80% Accident and health 4,877 183 2,574 7,268 35% Annuity - - 8,453 8,453 100% Property casualty 91,373 33,031 69,711 128,053 54% ------------------------------------------ Total $ 98,328 33,231 89,152 154,249 ========================================== In connection with Oxford's acquisitions during 1997 as disclosed in Note 19 of Notes to Consolidated Financial Statements, the level of life reinsurance transactions increased as of December 31, 1997. 13. CONTINGENT LIABILITIES AND COMMITMENTS The Company occupies certain facilities and uses certain equipment under operating lease commitments with terms expiring through 2079. Lease expense was $89,879,000, $85,903,000 and $69,097,000 for the years ended 1998, 1997 and 1996, respectively. During the year ended March 31, 1998, a subsidiary of U-Haul entered into twenty-four transactions, and has subsequently entered into two additional transactions, whereby the Company sold rental trucks and subsequently leased back. The Company has guaranteed $95,192,000 of residual values at March 31, 1998 and an additional $3,740,000 subsequent to March 31, 1998 for these assets at the end of the respective lease terms. U-Haul also entered into two transactions, whereby the Company sold computer equipment and subsequently leased back. Certain leases contain renewal and fair market value purchase options as well as mileage and other restrictions similar to covenants disclosed in Note 5 of Notes to Consolidated Financial Statements (Note 5) for notes payable and loan agreements. 59 AMERCO AND CONSOLIDATED SUBSIDIARIES Notes to Consolidated Financial Statements, Continued 13. CONTINGENT LIABILITIES AND COMMITMENTS, continued Following are the lease commitments for leases having terms of more than one year (in thousands): March 31, 1998 --------------------------- Net activity Property, plant Rental subsequent to Year ended and other equipment fleet year end Total ------------------------------------------------------------------------- 1999 $ 5,740 100,200 2,091 108,031 2000 4,437 100,200 2,521 107,158 2001 2,869 94,287 2,521 99,677 2002 1,098 78,603 2,521 82,222 2003 774 64,939 2,521 68,234 Thereafter 8,603 100,705 5,471 114,779 ---------------------------------------------------- $ 23,521 538,934 17,646 580,101 ==================================================== During the year ended March 31, 1998, the Company reduced future lease commitments by $83,713,000 through early termination of certain leases. Residual value guarantees were also reduced by $14,300,000 in connection with the terminations. In December 1996, the Company executed a $100 million Operating Lease Facility (the Facility) with a number of financial institutions. Under the Facility, the lessor acquires land to be developed for storage locations by the Company, as Construction Agent, or acquires existing storage locations with advances of funds (the Advances) made by certain parties to the Facility. The Company will separately lease land and improvements, including completed locations capitalized by the lessor, under the Facility and the respective lease supplements. Funding under the Facility totaled $48,216,000 at March 31, 1998. The Facility contains certain restrictions similar to those contained in Note 5. Upon occurrence of any event of default, the lessor may rescind or terminate any or all leases and, among other things, require the Company to repurchase any or all of the properties. The Facility has a three year term, subject to the Company's option, with the consent of other parties, to renew for successive one year terms. Upon the expiration of the Facility, the Company may either purchase all of the properties based on a purchase price equal to all amounts outstanding under the Advances, including the interest and yield thereon, or remarket all of the properties to a third party purchaser who may become a subsequent lessor to the Company. In the normal course of business, the Company is a defendant in a number of suits and claims. The Company is also a party to several administrative proceedings arising from state and local provisions that regulate the removal and/or cleanup of underground fuel storage tanks. It is the opinion of management that none of such suits, claims or proceedings involving the Company, individually or in the aggregate, are expected to result in a material loss. Also see Notes 12 and 14 of Notes to Consolidated Financial Statements. 14. LEGAL PROCEEDINGS A judgment was entered on February 21, 1995, in the Shoen Litigation against Edward J. Shoen, James P. Shoen, Paul F. Shoen, Aubrey K. Johnson, John M. Dodds and William E. Carty, who are current members of the Board of Directors of the Company. The Company was also a defendant in the action as originally filed, but was dismissed from the action on August 15, 1994. The plaintiffs alleged, among other things, that certain of the individual plaintiffs were wrongfully excluded from sitting on the Company's Board of Directors in 1988 through the sale of Common Stock to certain key employees. That sale allegedly prevented the plaintiffs from gaining a majority position in the Company's Common Stock and control of the Company's Board of Directors. The plaintiffs alleged various breaches of fiduciary duty and other unlawful conduct by the individual defendants and sought equitable relief, compensatory damages, punitive damages and statutory post-judgment interest. 60 AMERCO AND CONSOLIDATED SUBSIDIARIES Notes to Consolidated Financial Statements, Continued 14. LEGAL PROCEEDINGS, continued Based on the plaintiffs' theory of damages, the court ruled that the plaintiffs elected as their remedy in this lawsuit to transfer their shares of stock in the Company to the defendants upon the satisfaction of the judgment. The judgment was entered against the defendants in the amount of approximately $461.8 million plus interest and taxable costs. In addition, on February 21, 1995, judgment was entered against Edward J. Shoen in the amount of $7 million as punitive damages. On March 23, 1995, Edward J. Shoen filed a notice of appeal with respect to the award of punitive damages and the plaintiffs subsequently cross appealed the judge's remittitur of the punitive damages from $70 million to $7 million. Both appeals were denied by the Court of Appeals of the State of Arizona on July 24, 1997 and the Supreme Court of the State of Arizona denied review of the case on March 17, 1998. Edward J. Shoen has informed the Company that he intends to file an appeal with the United States Supreme Court with respect to the award of punitive damages. Pursuant to separate indemnification agreements, the Company agreed to indemnify the defendants to the fullest extent permitted by law or the Company's Articles or By-Laws, for all expenses and damages incurred by the defendants in the proceeding, subject to certain exceptions. On February 21, 1995, Edward J. Shoen, James P. Shoen, Aubrey K. Johnson, John M. Dodds and William E. Carty (the Director-Defendants) filed for protection under Chapter 11 of the federal bankruptcy laws, resulting in the issuance of an order automatically staying the execution of the judgment against those defendants. In late April 1995, the Director-Defendants, in cooperation with the Company, filed plans of reorganization in the United States Bankruptcy Court for the District of Arizona, all of which proposed the same funding and treatment of the plaintiffs' claims resulting from the judgment in the Shoen Litigation. The plans of reorganization, as amended and restated on February 29, 1996, were confirmed by the bankruptcy court on March 15, 1996. The plans, as confirmed, shall collectively be referred to as the "Plan." On October 17, 1995 the Company entered into an agreement (the Agreement) with the Director-Defendants whereby the Company agreed, among other things, to fund the Plan and to release the Director-Defendants from all claims the Company may have against them arising from the Shoen Litigation. In addition, the Director-Defendants agreed, among other things, (i) to release, subject to certain exceptions, the Company from any claim they may have against it pursuant to any indemnification agreements and (ii) to assign all rights they have under the Shoen Litigation to the Company. Pursuant to the Plan, the Company repurchased 18,254,976 shares of the plaintiffs' Common Stock. As a result, the judgment in the Shoen Litigation was satisfied in full. On October 1, 1996, the Director-Defendants emerged from bankruptcy upon the filing of notice with the bankruptcy court that the effective date of the Plan had occurred and that the Plan had been performed and was substantially consummated. As of the date hereof, an issue remains regarding whether or not the plaintiffs are entitled to statutory post-judgment interest at the rate of ten percent (10%) per year from February 21, 1995 (the date the Director-Defendants filed for protection under Chapter 11) until the judgment was satisfied. On July 19, 1996, the bankruptcy court ruled the plaintiffs are entitled to such interest. The Director-Defendants and the Company have appealed the court's decision. The Company has deposited $48,234,000 into an escrow account to secure payment of the disputed interest, pending final resolution of this issue (including all appeals by either side) which has been recorded as an "other asset" in Company's financial statements. If the interest issue is decided adversely to the Company and the Director-Defendants, the amount deposited into the escrow account will be transferred to the plaintiffs. The ultimate outcome of this issue will not have the effect of increasing or decreasing the Company's net earnings, but could reduce stockholders' equity. The Company has deducted for income tax purposes approximately $324.0 million of the payments made to the plaintiffs. While the Company believes that such income tax deductions are appropriate, there can be no assurance that such deductions ultimately will be allowed in full. 61 AMERCO AND CONSOLIDATED SUBSIDIARIES Notes to Consolidated Financial Statements, Continued 15. PREFERRED STOCK PURCHASE RIGHTS In July 1988, the Company's Board of Directors adopted a stockholder-rights plan, and such rights were distributed as a dividend at the rate of one right for each outstanding share of the Company's common stock to the holders of record of common shares on July 29, 1988. As a result of the 400-for-1 common stock split that occurred on October 1, 1990, each outstanding share of common stock currently has one four-hundredth of a right associated with it. When exercisable, each right will entitle its holder to purchase from the Company one one-hundredth of a share of the new Series C Preferred Stock of the Company at a price of $15,000. AMERCO has reserved 5,000 shares of authorized but unissued preferred stock for the Series C Preferred Stock authorized in this stockholder-rights plan. The rights will become exercisable if a person or group of affiliated or associated persons acquire or obtain the right to acquire beneficial ownership of 50% or more of the common stock without approval of a majority of the Board of Directors of the Company. The majority approval must be made by members of the Board who were members as of July 25, 1988 (Disinterested Directors) or subsequent members elected to the Board if such persons are recommended or approved by a majority of the Disinterested Directors. The rights will expire on July 29, 1998 unless earlier redeemed by the Company pursuant to authorization by a majority of the Disinterested Directors. The Board of Directors is evaluating the appropriateness of having an updated shareholder rights plan in place by July 29, 1998. In the event the Company is acquired in a merger or other business combination transaction after the rights become exercisable, provision shall be made so that each holder of a right shall have the right to receive, upon exercise thereof and payment of the exercise price, that number of common shares of such corporation which at the time of such transaction would have a market or book value of two times the exercise price of the right. If the Company is the surviving company, each holder would have the right to receive, upon payment of the exercise price, common shares with a market or book value of two times the exercise price. 16. STOCK OPTION PLAN In October 1992, the stockholders approved a ten year incentive plan entitled the AMERCO Stock Option and Incentive Plan (the Plan) for officers and key employees of the Company. Under the Plan, Incentive Stock Options (ISOs), Non-qualified Stock Options, Stock Appreciation Rights (SAR), Restricted Stock Dividend Equivalents and Performance Shares may be awarded. The aggregate numbers of shares of stock subject to award under the Plan may not exceed 3,000,000. The stock subject to the Plan is AMERCO Common Stock unless prior to the date the first award is made under the Plan, a Committee of at least two Board members determines, in its discretion, to utilize another class of the Company's stock. The Plan provides for the granting of ISOs as defined under the Internal Revenue Code and Non-qualified Stock Options under such terms and conditions as the Committee determines in its discretion. The ISOs may be granted at prices not less than one-hundred percent of the fair market value at the date of grant with a term not exceeding ten years. The Plan provides for the granting of SARs subject to certain conditions and limitations to holders of options under the Plan. SARs permit the optionee to surrender an exercisable option for an amount equal to the excess of the market price of the common stock over the option price when the right is exercised. 62 AMERCO AND CONSOLIDATED SUBSIDIARIES Notes to Consolidated Financial Statements, Continued 16. STOCK OPTION PLAN, continued Under the Restricted Stock feature of the Plan, a specified number of common shares may be granted subject to certain restrictions. Restriction violations during a specified period result in forfeiture of the stock. The Committee may, at its discretion, impose any restrictions on a Restricted Stock award. The Plan authorizes the Committee to grant Dividend Equivalents in connection with options. Dividend Equivalents are rights to receive additional shares of Company stock at the time of exercise of the option to which such Dividend Equivalents apply. Under the Plan, Performance Share units may be granted. Each unit is deemed to be the equivalent of one share of Company stock and such units are credited to a Performance Share account. The value of the units at the time of award or payment is the fair market value of an equivalent number of shares of stock. At the end of the award period, payment may be made subject to certain predetermined criteria and restrictions. To date, no stock options or awards have been granted. 17. RELATED PARTY TRANSACTIONS The Company has related party transactions with certain major stockholders, directors and officers of the consolidated group as disclosed in Notes 2, 6, 9 and 15 of Notes to Consolidated Financial Statements. During the years ended 1998, 1997 and 1996, the Company purchased $2,816,000, $3,281,000 and $3,122,000, respectively, of printing from a company wherein an officer is a major stockholder, director and officer of the Company. During the years ended 1997 and 1996, the Company purchased $11,164,000 and $1,558,000 of computer components from a company wherein a major stockholder was the family trust of a major stockholder, director and officer of the Company, until June 1, 1996. On July 7, 1997, the Company executed an agreement with Sophia Shoen whereby the Company paid $1,250,000 to Sophia Shoen to settle an arbitration proceeding entitled JAMS-ENDISPUTE Link No. 940517195 and -------------- to terminate a Share Repurchase and Registration Right Agreement. Sophia Shoen is a major stockholder of the Company. Pursuant to a Share Repurchase and Registration Rights Agreement, dated as of March 1, 1992, among Paul F. Shoen, Pafran, Inc. and the Company, Paul F. Shoen had the right to require the Company to repurchase, with certain limitations, up to $3,000,000 of Common Stock owned by him. The Paul Shoen Registration Rights Agreement provides that the Company's obligation to repurchase any shares from Paul F. Shoen shall be satisfied if such shares are purchased by the ESOP Trust. Pursuant to the Paul Shoen Registration Rights Agreement, (i) on June 30, 1994, Paul F. Shoen sold 58,825 shares of Common Stock to the ESOP Trust at the then appraised value of $17.00 per share for an aggregate sales price of approximately $1,000,000 and (ii) on January 17, 1995, Paul F. Shoen sold 50,632 shares of Common Stock to the ESOP Trust at the most recent closing price for the Common Stock trading on Nasdaq of $19.75 per share for an aggregate sales price of approximately $1,000,000. In addition, Paul F. Shoen, subject to certain limitations and restrictions, may also elect under the Paul Shoen Registration Rights Agreement to cause the Company to effect a registration under the Securities Act of 1933, as amended, and applicable state securities laws of shares of Common Stock held by him. Paul F. Shoen sold 500,000 shares of Common Stock to the public in March of 1995 pursuant to his registration rights. Paul F. Shoen is a major stockholder and director of the Company. On December 18, 1995, the Company reimbursed Paul F. Shoen $1,500,000 for a payment made to the plaintiffs in partial satisfaction of the judgment in the Shoen Litigation. Management believes that these transactions were consummated on terms equivalent to those that prevail in arm's-length transactions. 63 AMERCO AND CONSOLIDATED SUBSIDIARIES Notes to Consolidated Financial Statements, Continued 18. SUPPLEMENTAL CASH FLOW INFORMATION The (increase) decrease in receivables, inventories and accounts payable and accrued expenses net of other operating and investing activities follows: Year ended --------------------------------------- 1998 1997 1996 --------------------------------------- (in thousands) Receivables $ (35,359) 75,150 (45,734) ======================================= Inventories $ (3,093) (19,903) 4,446 ======================================= Accounts payable and accrued expenses $ 11,123 (20,819) 24,137 ======================================= 19. SUMMARIZED CONSOLIDATED FINANCIAL INFORMATION OF INSURANCE SUBSIDIARIES A summary consolidated balance sheet for RWIC is presented below: December 31, --------------------- 1997 1996 --------------------- (in thousands) Investments - fixed maturities $ 427,304 401,198 Other investments 34,918 13,609 Receivables 140,568 116,373 Deferred policy acquisition costs 7,203 8,622 Due from affiliate 18,377 24,223 Deferred federal income taxes 17,169 16,941 Other assets 8,910 28,721 ------------------- Total assets $ 654,449 609,687 =================== Policy liabilities and accruals $ 389,574 338,047 Unearned premiums 45,753 50,699 Other policyholders' funds and liabilities 23,723 28,592 ------------------- Total liabilities 459,050 417,338 Stockholder's equity 195,399 192,349 ------------------- Total liabilities and stockholder's equity $ 654,449 609,687 =================== 64 AMERCO AND CONSOLIDATED SUBSIDIARIES Notes to Consolidated Financial Statements, Continued 19. SUMMARIZED CONSOLIDATED FINANCIAL INFORMATION OF INSURANCE SUBSIDIARIES, continued A summarized consolidated income statement for RWIC is presented below: Year ended December 31, ----------------------------------- 1997 1996 1995 ----------------------------------- (in thousands) Premiums $ 155,906 156,505 140,752 Net investment income 31,292 30,572 29,906 ----------------------------------- Total revenue 187,198 187,077 170,658 Benefits and losses 170,036 151,258 132,723 Amortization of deferred policy acquisition costs 8,622 9,858 8,973 Other expenses 7,804 7,699 7,526 ----------------------------------- Income from operations 736 18,262 21,436 Federal income tax benefit (expense) 556 (5,502) (6,722) ----------------------------------- Net income $ 1,292 12,760 14,714 =================================== A summary consolidated balance sheet for Oxford is presented below: December 31, --------------------- 1997 1996 --------------------- (in thousands) Investments - fixed maturities $ 459,569 458,496 Other investments 106,649 92,762 Receivables 50,696 13,553 Deferred policy acquisition costs 37,052 39,976 Due (to) from affiliate (238) 149 Other assets 37,390 2,142 ------------------- Total assets $ 691,118 607,078 =================== Policy liabilities and accruals $ 157,315 80,589 Premium deposits 425,347 433,397 Other policyholders' funds and liabilities 11,598 7,931 Deferred federal income taxes 11,062 9,908 ------------------- Total liabilities 605,322 531,825 Stockholder's equity 85,796 75,253 ------------------- Total liabilities and stockholder's equity $ 691,118 607,078 =================== A summarized consolidated income statement for Oxford is presented below: Year ended December 31, ----------------------------------- 1997 1996 1995 ----------------------------------- (in thousands) Premiums $ 29,731 27,832 27,073 Net investment income 17,811 18,793 16,730 ----------------------------------- Total revenue 47,542 46,625 43,803 Benefits and losses 24,377 27,017 24,792 Amortization of deferred policy acquisition costs 5,572 6,635 8,158 Other expenses 6,953 2,399 (1,757) ----------------------------------- Income from operations 10,640 10,574 12,610 Federal income tax expense (3,220) (2,771) (4,233) ----------------------------------- Net income $ 7,420 7,803 8,377 =================================== 65 AMERCO AND CONSOLIDATED SUBSIDIARIES Notes to Consolidated Financial Statements, Continued 19. SUMMARIZED CONSOLIDATED FINANCIAL INFORMATION OF INSURANCE SUBSIDIARIES, continued Applicable laws and regulations of the State of Arizona require maintenance of minimum capital determined in accordance with statutory accounting practices in the amount of $400,000 for Oxford and $1,000,000 for RWIC. In addition, the amount of dividends which can be paid to stockholders by insurance companies domiciled in the State of Arizona is limited. Any dividend in excess of the limit requires prior regulatory approval. Statutory surplus which can be distributed as dividends is $20,270,000 at December 31, 1997. Audited statutory net income for RWIC for the years ended December 31, 1997, 1996 and 1995 was $2,124,000, $16,807,000 and $12,273,000, respectively; audited statutory capital and surplus was $157,027,000 and $161,085,000 at December 31, 1997 and 1996, respectively. Audited statutory net income for Oxford for the years ended December 31, 1997, 1996 and 1995 was $8,278,000, $12,815,000 and $8,912,000, respectively; audited statutory capital and surplus was $57,102,000 and $49,576,000 at December 31, 1997 and 1996, respectively. On November 21, 1997, Oxford purchased all of the issued and outstanding shares of Encore Financial, Inc. and its subsidiaries (Encore) for $11,569,000. Encore's primary subsidiary is North American Insurance Company (NAI). NAI is an insurance company domiciled in Wisconsin whose premium volume is primarily derived from the sale of credit life and disability products. NAI owns all of the issued and outstanding common shares of North American Fire & Casualty Insurance Company, a property and casualty insurance company domiciled in Louisiana. On November 24, 1997, Oxford purchased all of the issued and outstanding shares of Safe Mate Life Insurance Company for $2,243,000, domiciled in Texas, whose premium volume is derived from the sale of credit life and disability products. These purchases greatly increase Oxford's distribution channels and enhance administrative capabilities in these markets. 66 AMERCO AND CONSOLIDATED SUBSIDIARIES Notes to Consolidated Financial Statements, Continued 20. INDUSTRY SEGMENT AND GEOGRAPHIC AREA DATA Industry Segment Data - AMERCO's three industry segments are Moving and Storage Operations, Property and Casualty Insurance and Life Insurance. Moving and Storage Operations is composed of the operations of U-Haul International, Inc., which is engaged in the rental of various kinds of equipment and sales of related products and services and AREC. Property and Casualty Insurance is composed of the operations of Republic Western Insurance Company which operates in various property and casualty lines. Life Insurance is composed of the operations of Oxford Life Insurance Company which operates in various life, accident and health and annuity lines. Information concerning operations by industry segment follows: Moving Property/ Adjustments and Storage Casualty Life and Operations Insurance Insurance Eliminations Consolidated ------------------------------------------------------------ (in thousands) 1998 - ---- Revenues: Outside $1,196,226 167,398 46,318 - 1,409,942 Intersegment - 19,800 1,224 (21,024) - ---------------------------------------------------------- Total revenue $1,196,226 187,198 47,542 (21,024) 1,409,942 Depreciation/ amortization $ 97,764 10,807 5,251 - 113,822 Interest expense net of interest income of $15,353 $ 64,016 - - - 64,016 Pretax earnings $ 64,923 736 10,640 - 76,299 Income tax $ 24,979 (556) 3,220 - 27,643 Extraordinary loss $ 13,672 - - - 13,672 Identifiable assets $1,884,213 654,449 691,118 (316,503) 2,913,277 67 AMERCO AND CONSOLIDATED SUBSIDIARIES Notes to Consolidated Financial Statements, Continued 20. INDUSTRY SEGMENT AND GEOGRAPHIC AREA DATA, continued Moving Property/ Adjustments and Storage Casualty Life and Operations Insurance Insurance Eliminations Consolidated ------------------------------------------------------------ (in thousands) 1997 - ---- Revenues: Outside $1,146,807 167,352 45,616 - 1,359,775 Intersegment - 19,725 1,009 (20,734) - ---------------------------------------------------------- Total revenue $1,146,807 187,077 46,625 (20,734) 1,359,775 Depreciation/ amortization $ 75,607 12,040 6,717 - 94,364 Interest expense net of interest income of $25,604 $ 50,437 - - - 50,437 Pretax earnings $ 54,692 18,262 10,574 - 83,528 Income tax $ 21,071 5,502 2,771 - 29,344 Extraordinary loss $ 2,319 - - - 2,319 Identifiable assets $1,811,145 609,687 607,078 (308,916) 2,718,994 Moving Property/ Adjustments and Storage Casualty Life and Operations Insurance Insurance Eliminations Consolidated ------------------------------------------------------------ (in thousands) 1996 - ---- Revenues: Outside $1,107,135 157,959 42,926 - 1,308,020 Intersegment (231) 12,699 877 (13,345) - ---------------------------------------------------------- Total revenue $1,106,904 170,658 43,803 (13,345) 1,308,020 Depreciation/ amortization $ 83,734 11,176 7,517 - 102,427 Interest expense net of interest income of $17,071 $ 50,486 - - - 50,486 Pretax earnings $ 61,524 21,436 12,610 656 96,226 Income tax $ 24,877 6,722 4,233 - 35,832 Identifiable assets $1,916,533 619,454 614,300 (326,880) 2,823,407 68 AMERCO AND CONSOLIDATED SUBSIDIARIES Notes to Consolidated Financial Statements, Continued 20. INDUSTRY SEGMENT AND GEOGRAPHIC AREA DATA, continued Geographic Area Data - United States Canada Consolidated --------------------------------------- (All amounts are in U.S. $'s) (in thousands) 1998 - ---- Total revenues $ 1,379,183 30,759 1,409,942 Depreciation/amortization $ 111,072 2,750 113,822 Interest expense, net $ 64,295 (279) 64,016 Income tax $ 27,643 - 27,643 Extraordinary loss $ 13,672 - 13,672 Identifiable assets $ 2,863,416 49,861 2,913,277 1997 - ---- Total revenues $ 1,330,955 28,820 1,359,775 Depreciation/amortization $ 91,920 2,444 94,364 Interest expense, net $ 50,548 (111) 50,437 Income tax $ 29,344 - 29,344 Extraordinary loss $ 2,319 - 2,319 Identifiable assets $ 2,674,603 44,391 2,718,994 1996 - ---- Total revenues $ 1,281,047 26,973 1,308,020 Depreciation/amortization $ 100,143 2,284 102,427 Interest expense, net $ 51,339 (853) 50,486 Income tax $ 35,832 - 35,832 Identifiable assets $ 2,777,146 46,261 2,823,407 21. SUBSEQUENT EVENTS On May 5, 1998, the Company declared a cash dividend of $3,241,000 ($.53125 per preferred share) to the Series A preferred stockholders of record as of May 15, 1998. In June 1998, the Company paid a cash dividend of $1,520,000 to the Series B preferred stockholder. See Note 13 of Notes to Consolidated Financial Statements for other subsequent event disclosures. 69
SUMMARY OF EARNINGS OF INDEPENDENT TRAILER FLEETS Additional Information The following Summary of Earnings of Independent Trailer Fleets is presented for purposes of analysis and is not a required part of the basic financial statements. Such information has been subjected to the auditing procedures applied in the audits of the basic financial statements by Price Waterhouse LLP, independent accountants, whose report thereon appears elsewhere herein. Years Ended March 31, -------------------------------------------------------------------- 1998 1997 1996 1995 1994 -------------------------------------------------------------------- (in thousands except earnings per $100 of average investment) Earnings data (Note A): Fleet Owner income: Credited to Fleet Owner gross rental income $ 2,317 3,214 4,181 5,288 6,556 Credited to Distribution, Accident and Canadian Duty Fund (Note D) 27 36 69 66 71 -------- ----- ----- ----- ----- Total Fleet Owner income 2,344 3,250 4,250 5,354 6,627 -------- ----- ----- ----- ----- Fleet Owner operation expenses: Charged to Fleet Owner (Note C) 1,144 1,639 2,182 2,127 2,404 Charged to Distribution, Accident and Canadian Duty Funds (Note D) 98 131 254 234 237 -------- ----- ----- ----- ----- Total Fleet Owner operation expenses 1,242 1,770 2,436 2,361 2,641 -------- ----- ----- ----- ----- Fleet Owner earnings before Distribution, Accident and Canadian Duty Funds credit, depreciation and income taxes 1,102 1,480 1,814 2,993 3,986 Distribution, Accident and Canadian Duty Funds credit (Note D) 70 95 185 168 165 -------- ----- ----- ----- ----- Net Fleet Owner earnings before depreciation and income taxes $ 1,172 1,575 1,999 3,161 4,151 ======== ===== ===== ===== ===== Investment data (Note A): Amount at end of year $ 3,875 5,402 6,871 8,593 10,107 ======== ===== ===== ===== ====== Average amount during year $ 4,639 6,137 7,732 9,351 10,775 ======== ===== ===== ===== ====== Net Fleet Owner earnings before depreciation and income taxes per $100 of average investment (Note B) $ 25.26 25.66 25.85 33.80 38.52 ======== ===== ===== ===== ===== The accompanying notes are an integral part of this Summary of Earnings of Independent Trailer Fleets.
70 NOTES TO SUMMARY OF EARNINGS OF INDEPENDENT TRAILER FLEETS Additional Information (A) The accompanying Summary of Earnings of Independent Trailer Fleets includes the operations of trailers under the brand name of "U-Haul" owned by Independent Fleet Owners. Earnings data represent the aggregate results of operations before depreciation and taxes. Investment data represent the cost of trailers and investments before accumulated depreciation. Fleet Owner income is based on Independent Rental Dealer reports of rentals transacted through the day preceding the last Monday of each month and received by U-Haul International, Inc. by the end of the month and Company- Operated U-Haul Center reports of rentals transacted through the last day of each month. Payments to Fleet Owners for trailers lost or retired from rental service as a result of damage by accident have not been reflected in this summary because such payments do not relate to earnings before depreciation and income taxes but, rather, investment (depreciation). The investment data is based upon the cost of trailers to the Fleet Owners as reflected by sales records of the U-Haul manufacturing facilities. (B) The summary of earnings data stated in terms of amount per $100 of average investment represents the aggregate results of operations (earnings data) divided by the average amount of investment during the periods. The average amount of investment is based upon a simple average of the month-end investment during each period. Average earnings data is not necessarily representative of an individual Fleet Owner's earnings. (C) A summary of operations expenses charged directly to Independent Fleet Owners follows: Year ended March 31, ---------------------------------------- 1998 1997 1996 1995 1994 ---------------------------------------- (in thousands) Licenses $ 285 434 436 503 520 Public liability insurance 156 198 264 320 392 Repairs and maintenance 703 1,007 1,482 1,304 1,492 ---------------------------------------- $ 1,144 1,639 2,182 2,127 2,404 ======================================== (D) The Fleet Owners, Independent Rental Dealers, U-Haul International, Inc. and Subsidiary U-Haul Rental Companies forego normal commissions on a portion of gross rental fees designated for transfer to the Distribution Fee Fund, the Accident Fund and the Canadian Duty Fund. Designated expenses, otherwise chargeable to Fleet Owners, are paid from these Funds to the extent of the financial resources of the Funds. The amounts designated "Distribution, Accident and Canadian Duty Funds credit" in the accompanying summary of earnings represent Operator Contribution expenses borne by the Funds, which exceed Independent Fleetowner commissions foregone. 71 NOTES TO SUMMARY OF EARNINGS OF INDEPENDENT TRAILER FLEETS, continued Additional Information (E) Commissions foregone for transfer to the Distribution, Accident and Canadian Duty Funds (net of fees in excess of expenses incurred) follows: Subsidiary Fleet Owners ------------------------- U-Haul Subsidiary Companies Companies Independent Total -------------------------------------------------- (in thousands) Year ended: March 31, 1998 $ 947 482 28 1,457 March 31, 1997 882 439 36 1,357 March 31, 1996 1,287 624 69 1,980 March 31, 1995 986 465 66 1,517 March 31, 1994 873 399 71 1,343 (F) A summary of Independent Fleet Owner expenses incurred by the Funds follows:
Year ended March 31, ---------------------------------------------- 1998 1997 1996 1995 1994 ---------------------------------------------- (in thousands) Accident repairs $ 1,049 1,111 1,675 1,295 1,085 Less portion allocated to fleets owned by subsidiary companies 951 980 1,421 1,061 848 ------ ----- ----- ----- ----- Total Independent Fleet Owner expenses paid by funds 98 131 254 234 237 Add portion allocated to fleets owned by subsidiary companies 951 980 1,421 1,061 848 Return of investment (accident reimbursement) 408 246 305 222 258 ------ ----- ----- ----- ----- Total expenses incurred by Funds $ 1,457 1,357 1,980 1,517 1,343 ====== ===== ===== ===== =====
72 Schedule I Condensed Financial Information of Registrant AMERCO Balance Sheets March 31, 1998 1997 ---------------------- (in thousands) Assets - ------ Cash $ 1,040 1,388 Investment in subsidiaries 686,331 629,415 Due from unconsolidated subsidiaries 957,084 881,700 Other assets 58,449 56,798 ---------------------- $ 1,702,904 1,569,301 ====================== Liabilities and Stockholders' Equity - ------------------------------------ Liabilities: Notes and loans $ 1,023,571 915,079 Other liabilities 67,458 34,131 ---------------------- Stockholders' equity: Preferred stock - - Common stock 10,563 10,563 Additional paid-in capital 313,444 337,933 Accumulated other comprehensive income (9,384) (9,722) Retained earnings: Beginning of year 644,009 609,019 Net earnings 34,984 51,865 Dividends paid (20,766) (16,875) ---------------------- 658,227 644,009 Less: Cost of common shares in treasury 359,723 359,723 Unearned employee stock ownership plan shares 1,252 2,969 ---------------------- Total stockholders' equity 611,875 620,091 ---------------------- $ 1,702,904 1,569,301 ====================== See accompanying notes to condensed financial information and notes to consolidated financial statements incorporated herein by reference. 73 Schedule I, continued Condensed Financial Information of Registrant AMERCO Statements of Earnings Years Ended March 31, 1998 1997 1996 ------------------------------------ (in thousands except per share data) Revenues - -------- Net interest income from subsidiaries $ 64,751 58,723 63,133 Other revenue - (1) (2) ------------------------------------ Total revenues 64,751 58,722 63,131 ------------------------------------ Expenses - -------- Interest expense 76,969 72,560 62,583 Other expenses 6,040 3,407 13,914 ------------------------------------ Total expenses 83,009 75,967 76,497 ------------------------------------ Operating loss (18,258) (17,245) (13,366) Equity in earnings of unconsolidated subsidiaries 89,339 98,895 107,550 Income tax expense (25,615) (27,466) (33,790) Extraordinary loss on early extinguishment of debt, net (10,482) (2,319) - ------------------------------------ Net earnings $ 34,984 51,865 60,394 ==================================== Earnings from operations before extraordinary loss on early extinguishment of debt $ 1.28 1.44 1.33 Extraordinary loss on early extinguishment of debt, net (0.62) (0.09) - ------------------------------------ Net earnings $ 0.66 1.35 1.33 ==================================== Weighted average common shares outstanding 21,896,101 25,479,651 35,736,335 ==================================== See accompanying notes to condensed financial information and notes to consolidated financial statements incorporated herein by reference. 74 Schedule I, continued Condensed Financial Information of Registrant AMERCO Statements of Cash Flows Years Ended March 31, 1998 1997 1996 ---------------------------------- (in thousands) Cash flows from operating activities: Net earnings $ 34,984 51,865 60,394 Amortization, net 270 1,954 34 Equity in earnings of subsidiaries 56,578 65,392 69,085 Increase (decrease) in amounts due from unconsolidated subsidiaries (74,909) 192,119 3,195 Net change in operating assets and liabilities (69,642) (63,961) (121,490) Other, net 1,074 (8,641) 18,485 ---------------------------------- Net cash provided (used) by operating activities (51,645) 238,728 29,703 ---------------------------------- Cash flows from financing activities: Net change in short term borrowings 122,500 (347,000) 84,500 Proceeds from notes 300,000 562,000 140,000 Leveraged Employee Stock Ownership Plan-repayments from loan 1,717 1,717 1,717 Principal payments on notes (314,008) (229,157) (106,826) Debt issuance costs (2,664) (5,612) (1,027) Issuance of common stock - 73,709 - Issuance (repurchase) of preferred stock (25,000) 98,546 - Preferred stock dividends paid (20,766) (16,875) (12,964) Treasury Stock purchase, net - (248,605) (100,657) Deferred tax-treasury stock - (80,997) (34,938) Escrow deposit - (48,234) - Extraordinary loss on early extinguishment of debt, net (10,482) (2,319) - ---------------------------------- Net cash provided (used) by financing activities 51,297 (242,827) (30,195) ---------------------------------- Increase (decrease) in cash (348) (4,099) (492) Cash and cash equivalents at beginning of year 1,388 5,487 5,979 ---------------------------------- Cash and cash equivalents at end of year $ 1,040 1,388 5,487 ================================== Income taxes paid in cash amounted to $2,588,000, $4,721,000 and $285,000 for 1998, 1997 and 1996, respectively. Interest paid in cash amounted to $72,337,000, $67,492,000 and $67,150,000 for 1998, 1997 and 1996, respectively. See accompanying notes to condensed financial information and notes to consolidated financial statements incorporated herein by reference. 75 Schedule I, continued Condensed Financial Information of Registrant AMERCO Notes to Condensed Financial Information March 31, 1998, 1997 and 1996 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AMERCO, a Nevada corporation, was incorporated in April, 1969, and is the holding company for U-Haul International, Inc., Republic Western Insurance Company, Oxford Life Insurance Company and Amerco Real Estate Company. The financial statements of the Registrant should be read in conjunction with the Consolidated Financial Statements and notes thereto included in this Form 10-K. The Company is included in a consolidated Federal income tax return with all of its U.S. subsidiaries. Accordingly, the provision for income taxes has been calculated for Federal income taxes of the Registrant and subsidiaries included in the consolidated return of the Registrant. State taxes for all subsidiaries are allocated to the respective subsidiaries. The financial statements include only the accounts of the Registrant (a Nevada corporation), which include certain of the corporate operations of AMERCO. The debt and related interest expense of the Registrant have been allocated to the consolidated subsidiaries. The intercompany interest income and expenses are eliminated in the consolidated financial statements. 2. GUARANTEES AMERCO has guaranteed performance of certain long-term leases. See Note 13 of Notes to Consolidated Financial Statements. 3. NOTES AND LOANS PAYABLE Notes and loans payable consist of the following: March 31, -------------------- 1998 1997 -------------------- (in thousands) Medium-term notes payable, unsecured, 6.71% to 8.08% interest rates, due through 2027 $ 362,000 387,000 Notes payable under Bond Backed Asset Trust, unsecured, 6.65% to 7.14% interest rates, due through 2033 300,000 - Notes payable to insurance companies, unsecured, 6.43% to 10.27% interest rates, due through 2006 - 226,500 Notes payable to public, unsecured, 7.85% interest rate, due through 2004 175,000 175,000 Notes payable to banks, unsecured, 4.81% to 7.54% interest rates, due through 2001 - 62,500 Other notes payable, unsecured, 9.50% interest rate, due through 2005 71 79 Notes payable to banks under revolving lines of credit, unsecured, 5.85% to 5.94% interest rates 180,000 60,000 Other short-term promissory notes, 6.31% interest rate 6,500 4,000 -------------------- $ 1,023,571 915,079 ==================== For additional information, see Note 5 of Notes to Consolidated Financial Statements. 76
Schedule V AMERCO AND CONSOLIDATED SUBSIDIARIES Supplemental Information (For Property-Casualty Insurance Underwriters) Years ended December 31, 1997, 1996 and 1995 Reserves Amorti- for Unpaid zation Paid Claims Claims and of Claims Deferred and Claim Adjustment Deferred and Policy Claim Net Net Expenses Incurred Policy Claim Net Affiliation Acqui- Adjust- Discount Earned Invest- Related to Acqui- Adjust- Premiums With sition ment if any, Unearned Premiums ment Current Prior sition ment Written Year Registrant Costs Expenses Deducted Premiums (1) Income Year Year Costs Expenses (2) - ---- ---------- ----- -------- -------- -------- -------- ------ ---- ---- ----- -------- ------- (in thousands) 98 Consolidated property - casualty entity $ 7,203 384,816 N/A 45,753 136,106 31,292 132,291 23,192 8,622 118,308 135,782 97 Consolidated property - casualty entity 8,622 332,674 N/A 50,699 136,780 30,572 112,394 11,527 9,858 119,674 129,034 96 Consolidated property - casualty entity 9,858 341,981 N/A 64,379 128,083 29,906 114,110 8,292 8,973 109,372 125,789 (1) The earned premiums are reported net of intersegment transactions. Earned premiums eliminated in consolidation amount to $19,800,000, $19,725,000 and $12,669,000 for the years ended 1997, 1996 and 1995, respectively. (2) The premiums written are reported net of intersegment transactions. Premiums written eliminated in consolidation amount to $20,287,000, $15,373,000 and $14,206,000 for the years ended 1997, 1996 and 1995, respectively.
77 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. AMERCO By: /S/ EDWARD J. SHOEN -------------------- Edward J. Shoen Chairman of the Board Dated: June 29, 1998 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date /S/ EDWARD J. SHOEN Chairman of the Board June 29, 1998 - ---------------------- (Principal Executive Edward J. Shoen Officer) /S/ GARY B. HORTON Principal Financial June 29, 1998 - ---------------------- and Accounting Officer Gary B. Horton /S/ WILLIAM E. CARTY Director June 29, 1998 - ---------------------- William E. Carty /S/ JAMES P. SHOEN Director June 29, 1998 - ---------------------- James P. Shoen /S/ RICHARD J. HERRERA Director June 29, 1998 - ---------------------- Richard J. Herrera /S/ CHARLES J. BAYER Director June 29, 1998 - ---------------------- Charles J. Bayer EX-12 2 RATIOS AMERCO and Consolidated Subsidiaries Exhibit 12. Statement Re: Computation of Ratios Year end ------------------------------------- 1998 1997 1996 1995 1994 ------------------------------------- Pretax earnings from operations 76.3 83.5 96.2 93.5 66.5 Plus: Interest expense 79.4 76.0 68.3 68.6 69.9 Preferred stock dividends 20.8 16.9 13.0 13.0 4.8 Amortization of debt expense and discounts .3 .1 - - .1 A portion of rental expense (1/3) 30.0 28.6 23.0 22.2 28.1 ------------------------------------- Subtotal (A) 206.8 205.1 200.5 197.3 169.4 ------------------------------------- Divided by: Fixed charges: Interest expense 79.4 76.0 68.3 68.6 69.9 Preferred stock dividends 20.8 16.9 13.0 13.0 4.8 A portion of rental expense (1/3) 30.0 28.6 23.0 22.2 28.1 Interest capitalized during the period 2.2 3.4 1.8 1.7 .6 Amortization of debt expense and discounts .3 .1 - - .1 ------------------------------------- Subtotal (B) 132.7 125.0 106.1 105.5 103.5 ------------------------------------- Ratio of earnings to fixed charges (A)/(B) 1.56 1.64 1.89 1.87 1.64 ===================================== The Company believes that one-third of the Company's annual rental expense is a reasonable approximation of the interest factor of such rentals. EX-21 3 SUBSIDIARIES AMERCO FIRST LEVEL SUBSIDIARY Jurisdiction - ---------------------- ------------ U-HAUL INTERNATIONAL, INC. NV SECOND LEVEL SUBSIDIARIES ------------------------- A & M Associates, Inc. AZ U-Haul Business Consultants, Inc. AZ U-Haul Co. of Alabama, Inc. AL U-Haul Co. of Alaska AK U-Haul Co. of Arizona AZ U-Haul Co. of Arkansas AR U-Haul Co. of California CA U-Haul Co. (Canada) Ltd. Ontario U-Haul Co. of Colorado CO U-Haul Co. of Connecticut CT U-Haul Co. of District of Columbia,Inc. DC U-Haul Co. of Florida FL U-Haul Co. of Georgia GA U-Haul of Hawaii, Inc. HI U-Haul Co. of Idaho, Inc. ID U-Haul Co. of Illinois, Inc. IL U-Haul Co. of Indiana, Inc. IN U-Haul Co. of Inland Northwest WA U-Haul Co. of Iowa, Inc. IA U-Haul Co. of Kansas, Inc. KS U-Haul Co. of Kentucky KY U-Haul Co. of Louisiana LA U-Haul Co. of Maine, Inc. ME U-Haul Co. of Maryland, Inc. MD U-Haul Co. of Massachusetts, Inc. MA U-Haul Co. of Michigan MI U-Haul Co. of Minnesota MN U-Haul Co. of Mississippi MS U-Haul Company of Missouri MO U-Haul Co. of Montana, Inc. MT U-Haul Co. of Nebraska NE U-Haul Co. of Nevada, Inc. NV U-Haul Co. of New Hampshire, Inc. NH U-Haul Co. of New Jersey, Inc. NJ U-Haul Co. of New Mexico, Inc. NM U-Haul Co. of New York, Inc. NY SECOND LEVEL SUBSIDIARIES -U-Haul International, Inc. (Cont'd) -------------------------------------------------------------- Jurisdiction ------------ U-Haul Co. of North Carolina NC U-Haul Co. of North Dakota ND U-Haul Co. of Ohio OH U-Haul Co. of Oklahoma, Inc. OK U-Haul Co. of Oregon OR U-Haul Co. of Pennsylvania PA U-Haul Co. of Rhode Island RI U-Haul Co. of South Carolina, Inc. SC U-Haul Co. of South Dakota, Inc. SD U-Haul Co. of Tennessee TN U-Haul Co. of Texas TX U-Haul Co. of Utah, Inc. UT U-Haul Co. of Vermont, Inc. VT U-Haul Co. of Virginia VA U-Haul Co. of Washington WA U-Haul Co. of West Virginia WV U-Haul Co. of Wisconsin, Inc. WI U-Haul Co. of Wyoming, Inc. WY U-Haul Leasing & Sales Co. NV U-Haul Self-Storage Corporation NV FIRST LEVEL SUBSIDIARY Jurisdiction - ---------------------- ------------ AMERCO REAL ESTATE COMPANY NV SECOND LEVEL SUBSIDIARIES ------------------------- Amerco Real Estate Company of Alabama, Inc. AL Amerco Real Estate Company of Texas, Inc. TX One PAC Company NV Two PAC Company NV Three PAC Company NV Four PAC Company NV Five PAC Company NV Six PAC Company NV Seven PAC Company NV Eight PAC Company NV Nine PAC Company NV Ten PAC Company NV Eleven PAC Company NV Twelve PAC Company NV Nationwide Commerical Co. AZ THIRD LEVEL SUBSIDIARIES ------------------------ Gibraltar Storage Corporation AL Yonkers Property Corporation NY FIRST LEVEL SUBSIDIARY Jurisdiction - ---------------------- ------------ OXFORD LIFE INSURANCE COMPANY AZ SECOND LEVEL SUBSIDIARIES ------------------------- Safe Mate Life Insurance Company TX Encore Financial, Inc. WI THIRD LEVEL SUBSIDIARY ------------------------ Encore Agency, Inc. LA FOURTH LEVEL SUBSIDIARIES ------------------------- Community Health Inc. WI Community Health Parnters Inc. IL THIRD LEVEL SUBSIDIARY ---------------------- North American Insurance Company WI FOURTH LEVEL SUBSIDIARY ----------------------- North American Fire and Casualty Insurance Company LA FIRST LEVEL SUBSIDIARY Jurisdiction - ---------------------- ------------ REPUBLIC WESTERN INSURANCE COMPANY AZ SECOND LEVEL SUBSIDIARIES ------------------------- Republic Claims Service Co. AZ Republic Western Syndicate, Inc. NY RWIC Investments, Inc. AZ THIRD LEVEL SUBSIDIARIES ------------------------ Republic Western Specialty Underwriters, Inc. AZ Republic Western Insurance Services AZ FIRST LEVEL SUBSIDIARIES Jurisdiction - ------------------------ ------------ Japal, Inc. NV M.V.S., Inc. NV Pafran, Inc. NV Sophmar, Inc. NV EJOS, Inc. AZ Picacho Peak Investments Co. NV EX-23 4 CONSENT OF INDEP ACCOUNTS EXHIBIT 23 CONSENT OF INDEPENDENT ACCOUNTANTS ---------------------------------- We hereby consent to the incorporation by reference in the Prospectus constituting part of the Registration Statements on Form S-3 (Nos. 333-10119, 333-01195 and 33-57917) and Form S-2 (No. 33-56571) of AMERCO of our report dated June 26, 1998 appearing on page 30 of this Form 10-K. PRICE WATERHOUSE LLP Phoenix, Arizona June 26, 1998 EX-27 5 FDS
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-K MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS MAR-31-1998 MAR-31-1998 31,606 0 317,620 0 68,887 0 2,379,746 1,103,990 2,913,277 0 1,025,323 0 0 10,563 584,496 2,913,277 176,935 1,409,942 101,628 1,148,538 0 4,108 79,369 76,299 27,643 48,656 0 (13,672) 0 34,984 .66 .66 THE VALUE FOR RECEIVABLES REPRESENTS THEIR AMOUNT NET OF THEIR ALLOWANCES. AN UNCLASSIFIED BALANCE SHEET EXISTS IN THE REGISTRANT'S FINANCIAL STATEMENTS.
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