1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 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, Ste. 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 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 [ ]. 22,614,087 shares of AMERCO Common Stock, $0.25 par value were outstanding at November 9, 1998. 5,385 shares of U-Haul International, Inc. Common Stock, $0.01 par value, were outstanding at November 9, 1998. U-Haul International, Inc. meets the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q and is therefore filing this form with the reduced disclosure format.
2 TABLE OF CONTENTS PART I. FINANCIAL INFORMATION Item 1. Financial Statements. a) Consolidated Balance Sheets as of September 30, 1998, March 31, 1998 and September 30, 1997.................. 4 b) Consolidated Statements of Earnings for the Six months ended September 30, 1998 and 1997............... 6 c) Consolidated Statements of Changes in Stockholders' Equity for the Six months ended September 30, 1998 and 1997............................................... 7 d) Consolidated Statements of Earnings for the Quarters ended September 30, 1998 and 1997............. 8 e) Consolidated Statements of Cash Flows for the Six months ended September 30, 1998 and 1997............... 9 f) Notes to Consolidated Financial Statements - September 30, 1998, March 31, 1998 and September 30, 1997..................................... 10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........................ 19 PART II. OTHER INFORMATION Item 1. Legal Proceedings.......................................... 27 Item 4. Submission Of Matters To A Vote Of Security Holders........ 27 Item 6. Exhibits and Reports on Form 8-K........................... 28
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4 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. AMERCO AND CONSOLIDATED SUBSIDIARIES Consolidated Balance Sheets September 30, March 31, September 30, ASSETS 1998 1998 1997 ---------------------------------------- (unaudited) (audited) (unaudited) (in thousands) Cash and cash equivalents $ 14,150 31,606 33,831 Receivables 308,267 317,620 249,992 Inventories 75,236 68,887 72,273 Prepaid expenses 18,017 21,154 16,069 Investments, fixed maturities 902,354 886,873 856,383 Investments, other 152,953 164,064 149,757 Deferred policy acquisition costs 53,248 44,255 47,505 Other assets 103,171 103,062 71,948 ------------------------------------- Property, plant and equipment, at cost: Land 206,640 208,028 209,944 Buildings and improvements 841,063 838,419 822,767 Furniture and equipment 224,221 214,513 205,045 Rental trailers and other rental equipment 184,443 179,225 181,337 Rental trucks 963,413 939,561 1,053,326 ------------------------------------- 2,419,780 2,379,746 2,472,419 Less accumulated depreciation 1,115,708 1,103,990 1,108,174 ------------------------------------- Total property, plant and equipment 1,304,072 1,275,756 1,364,245 ------------------------------------- $ 2,931,468 2,913,277 2,862,003 ===================================== The accompanying notes are an integral part of these consolidated financial statements.
5 September 30, March 31, September 30, LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1998 1997 ---------------------------------------- (unaudited) (audited) (unaudited) (in thousands) Liabilities: Accounts payable and accrued expenses $ 138,172 144,201 106,471 Notes and loans 997,982 1,025,323 1,059,044 Policy benefits and losses, claims and loss expenses payable 566,974 592,642 477,980 Liabilities from premium deposits 429,730 425,347 427,556 Cash overdraft 25,024 21,414 21,113 Other policyholders' funds and liabilities 39,233 34,911 31,817 Deferred income 39,928 45,298 35,202 Deferred income taxes 66,286 29,082 48,476 ------------------------------------- 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, issued and outstanding as of September 30, 1998, March 31, 1998 and September 30, 1997 - - - Series B preferred stock, with no par value, 100,000 shares authorized, 50,000 shares issued and outstanding as of September 30, 1998, 75,000 shares issued and outstanding as of March 31, 1998 and 100,000 shares issued and outstanding as of September 30, 1997 - - - 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 September 30, 1998, March 31, 1998 and September 30, 1997 1,441 1,441 1,441 Common stock of $0.25 par value, 150,000,000 shares authorized, 36,487,505 shares issued as of September 30, 1998, March 31, 1998 and September 30, 1997 9,122 9,122 9,122 Additional paid-in capital 288,444 313,444 336,933 Accumulated other comprehensive income (15,642) (9,384) (10,424) Retained earnings 722,381 658,227 697,569 ------------------------------------- 1,005,746 972,850 1,034,641 Less: Cost of common shares in treasury, (19,635,913 shares as of September 30, 1998, March 31, 1998 and September 30, 1997) 359,723 359,723 359,723 Unearned employee stock ownership plan shares 17,884 18,068 20,574 ------------------------------------- Total stockholders' equity 628,139 595,059 654,344 Contingent liabilities and commitments $ 2,931,468 2,913,277 2,862,003 ===================================== The accompanying notes are an integral part of these consolidated financial statements.
6 AMERCO AND CONSOLIDATED SUBSIDIARIES Consolidated Statements of Earnings Six months ended September 30, (Unaudited) 1998 1997 -------------------------- (in thousands except share and per share data) Revenues Rental revenue $ 598,901 571,330 Net sales 107,567 105,611 Premiums 96,223 79,845 Net investment income 26,818 23,636 ------------------------ Total revenues 829,509 780,422 Costs and expenses Operating expense 446,984 416,997 Cost of sales 62,909 60,520 Benefits and losses 79,991 82,033 Amortization of deferred acquisition costs 8,799 7,123 Lease expense 56,532 45,455 Depreciation, net 31,902 31,415 ------------------------ Total costs and expenses 687,117 643,543 Earnings from operations 142,392 136,879 Interest expense, net of interest income of $6,878 and $7,064 in 1998 and 1997, respectively 29,757 33,644 ------------------------ Pretax earnings 112,635 103,235 Income tax expense (39,234) (35,005) ------------------------ Earnings from operations before extraordinary loss on early extinguishment of debt 73,401 68,230 Extraordinary loss on early extinguishment of debt, net - (4,138) ------------------------ Net earnings $ 73,401 64,092 ======================== Earnings per common share (both basic and diluted): Earnings from operations before extraordinary loss on early extinguishment of debt $ 2.93 2.63 Extraordinary loss on early extinguishment of debt, net - (0.19) ------------------------ Net earnings $ 2.93 2.44 ======================== Weighted average common shares outstanding 21,930,301 21,884,614 ======================== The accompanying notes are an integral part of these consolidated financial statements.
7 <TABLE> <CAPTION> AMERCO AND CONSOLIDATED SUBSIDIARIES Consolidated Statements of Changes in Stockholders' Equity Six months ended September 30, 1998 and 1997 (unaudited) (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 ---------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> Balance at March 31, 1998 $ 1,441 9,122 313,444 (9,384) 658,227 (359,723) (18,068) 595,059 Preferred stock repurchase (25,000) (25,000) Leveraged employee stock ownership plan: Purchase of shares (2) (2) Repayments from loan 186 186 Preferred stock dividends: Series A ($1.06 per share) (6,482) (6,482) Series B ($49.81 per share) (2,765) (2,765) Comprehensive income: Net income 73,401 73,401 $ 73,401 Other comprehensive income, net of tax: Foreign currency translation (5,496) (5,496) (5,496) Unrealized loss on investments (762) (762) (762) ------ Comprehensive income $ 67,143 ------ ----- ------- ------- ------- -------- -------- ------- ====== Balance at September 30, 1998 $ 1,441 9,122 288,444 (15,642) 722,381 (359,723) (17,884) 628,139 ====== ===== ======= ======= ======= ======== ======= ======= Balance at March 31, 1997 $ 1,441 9,122 337,933 (9,722) 644,009 (359,723) (20,740) 602,320 Preferred stock (1,000) (1,000) Leveraged employee stock ownership plan: Purchase of shares (3) (3) Repayments from loan 169 169 Preferred stock dividends: Series A ($1.06 per share) (6,482) (6,482) Series B ($40.50 per share) (4,050) (4,050) Comprehensive income: Net income 64,092 64,092 $ 64,092 Other comprehensive income, net of tax: Foreign currency translation (520) (520) (520) Unrealized loss on investments (182) (182) (182) ------ Comprehensive income $ 63,390 ------ ----- ------- ------- ------- -------- ------- ------- ====== Balance at September 30, 1997 $ 1,441 9,122 336,933 (10,424) 697,569 (359,723) (20,574) 654,344 ====== ===== ======= ======== ======= ========= ======= ======= <FN> The accompanying notes are an integral part of these consolidated financial statements. </FN> </TABLE>
8 AMERCO AND CONSOLIDATED SUBSIDIARIES Consolidated Statements of Earnings Quarters ended September 30, (Unaudited) 1998 1997 -------------------------- (in thousands except share and per share data) Revenues Rental revenue $ 317,488 306,184 Net sales 51,254 50,129 Premiums 57,793 44,380 Net investment income 13,636 12,081 ------------------------ Total revenues 440,171 412,774 Costs and expenses Operating expense 237,448 227,224 Cost of sales 30,214 29,710 Benefits and losses 44,411 43,612 Amortization of deferred acquisition costs 4,188 3,663 Lease expense 29,570 22,438 Depreciation, net 14,329 10,836 ------------------------ Total costs and expenses 360,160 337,483 Earnings from operations 80,011 75,291 Interest expense, net of interest income of $3,236 and $3,586 in 1998 and 1997, respectively 14,748 16,176 ------------------------ Pretax earnings from operations 65,263 59,115 Income tax expense (23,092) (20,083) ------------------------ Earnings from operations before extraordinary loss on early extinguishment of debt 42,171 39,032 Extraordinary loss on early extinguishment of debt, net - (4,138) ------------------------ Net earnings $ 42,171 34,894 ======================== Earnings per common share: Earnings from operations before extraordinary loss on early extinguishment of debt $ 1.71 1.54 Extraordinary loss on early extinguishment of debt, net - (0.19) ------------------------ Net earnings $ 1.71 1.35 ======================== Weighted average common shares outstanding 21,935,854 21,890,072 ======================== The accompanying notes are an integral part of these consolidated financial statements.
9 AMERCO AND CONSOLIDATED SUBSIDIARIES Consolidated Statements of Cash Flows Six months ended September 30, (Unaudited) 1998 1997 ------------------------- (in thousands) Cash flows from operating activities: Net earnings $ 73,401 64,092 Depreciation and amortization 47,676 42,368 Provision for losses on accounts receivable 2,272 2,350 Net (gain) loss on sale of real and personal property (1,677) (465) Net (gain) loss on sale of investments (1,979) 25 Changes in policy liabilities and accruals (210) 29,244 Additions to deferred policy acquisition costs (17,654) (5,709) Net change in other operating assets and liabilities (8,148) (8,842) ------------------------ Net cash provided by operating activities 93,681 123,063 ------------------------ Cash flows from investing activities: Purchases of investments: Property, plant and equipment (190,031) (284,035) Fixed maturities (113,073) (66,883) Equity investment - (24,500) Preferred stock (15,500) - Mortgage loans (1,246) (11,858) Proceeds from sale of investments: Property, plant and equipment 129,258 134,320 Fixed maturities 110,366 68,693 Real estate 4,749 194 Preferred stock 658 - Mortgage loans 9,710 10,623 Changes in other investments 5,063 3,083 ------------------------ Net cash provided (used) by investing activities (60,046) (170,363) ------------------------ Cash flows from financing activities: Net change in short-term borrowings 19,000 176,000 Debt issuance costs (378) (1,506) Principal payments on notes (46,341) (100,506) Extraordinary loss on early extinguishment of debt, net - (4,138) Leveraged Employee Stock Ownership Plan: Purchase of shares (2) (3) Repayments from loan 186 169 Net change in cash overdraft 3,610 (2,493) Preferred stock dividends paid (9,247) (10,532) Repurchase of preferred stock (25,000) - Investment contract deposits 39,257 11,726 Investment contract withdrawals (32,176) (29,338) ------------------------ Net cash provided (used) by financing activities (51,091) 39,379 ------------------------ Increase (decrease)in cash and cash equivalents (17,456) (7,921) Cash and cash equivalents at beginning of period 31,606 41,752 ------------------------ Cash and cash equivalents at end of period $ 14,150 33,831 ======================== The accompanying notes are an integral part of these consolidated financial statements.
10 AMERCO AND CONSOLIDATED SUBSIDIARIES Notes to Consolidated Financial Statements September 30, 1998, March 31, 1998 and September 30, 1997 (Unaudited) 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). 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. The consolidated balance sheets as of September 30, 1998 and 1997, and the related consolidated statements of earnings, changes in stockholders' equity and cash flows for the six months ended September 30, 1998 and 1997 are unaudited; in the opinion of management, all adjustments necessary for a fair presentation of such financial statements have been included. Such adjustments consisted only of normal recurring items. Interim results are not necessarily indicative of results for a full year. The operating results and financial position of AMERCO's consolidated insurance operations are determined on a one quarter lag. There were no effects related to intervening events which would significantly affect consolidated financial position or results of operations for the financial statements presented herein. The financial statements and notes are presented as permitted by Form 10-Q and do not contain certain information included in the Company's annual financial statements and notes. Basic earnings per common share are computed based on the weighted average number of shares outstanding for the period, 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. Certain reclassifications have been made to the financial statements for the six months ended September 30, 1997 to conform with the current year's presentation.
11 AMERCO AND CONSOLIDATED SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (Unaudited) 2. INVESTMENTS A comparison of amortized cost to market for fixed maturities is as follows: June 30, 1998 ------------- 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 $ 13,415 $ 13,249 1,413 - 14,662 U.S. government agency mortgage- backed securities $ 35,518 33,336 501 (458) 33,379 Obligations of states and political subdivisions $ 26,745 26,642 1,243 - 27,885 Corporate securities $ 140,772 143,464 4,178 (283) 147,359 Mortgage-backed securities $ 89,282 88,070 1,879 (279) 89,670 Redeemable preferred stocks 4,159 105,804 1,191 (771) 106,224 ---------------------------------------- 410,565 10,405 (1,791) 419,179 ---------------------------------------- June 30, 1998 ------------- 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 18,319 974 (3) 19,290 U.S. government agency mortgage- backed securities $ 33,332 32,795 1,281 (7) 34,069 States, municipalities and political subdivisions $ 8,137 8,537 416 (15) 8,938 Corporate securities $ 337,912 337,709 12,273 (1,351) 348,631 Mortgage-backed securities $ 50,652 50,459 1,190 (25) 51,624 Redeemable preferred stocks 1,126 28,747 664 (174) 29,237 ---------------------------------------- 476,566 16,798 (1,575) 491,789 ---------------------------------------- Total $ 887,131 27,203 (3,366) 910,968 ========================================
12 AMERCO AND CONSOLIDATED SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (Unaudited) 3. SUMMARIZED CONSOLIDATED FINANCIAL INFORMATION OF INSURANCE SUBSIDIARIES A summarized consolidated balance sheet for RWIC is presented below: June 30, ---------------------- 1998 1997 ---------------------- (in thousands) Investments - fixed maturities $ 431,983 412,140 Other investments 22,829 24,014 Receivables 139,927 117,613 Deferred policy acquisition costs 6,116 9,217 Due from affiliate 23,533 32,521 Deferred federal income taxes 17,244 16,851 Other assets 8,588 9,867 ------------------- Total assets $ 650,220 622,223 =================== Policy liabilities and accruals $ 380,188 348,252 Unearned premiums 47,562 55,235 Other policyholders' funds and liabilities 22,891 22,166 ------------------- Total liabilities 450,641 425,653 Stockholder's equity 199,579 196,570 ------------------- Total liabilities and stockholder's equity $ 650,220 622,223 =================== A summarized consolidated income statement for RWIC is presented below: Six months ended ------------------- June 30, ------------------- 1998 1997 ------------------- (in thousands) Premiums $ 65,261 78,996 Net investment income 16,652 15,280 ------------------- Total revenue 81,913 94,276 Benefits and losses 56,540 69,918 Amortization of deferred policy acquisition costs 2,401 4,311 Other expenses 16,454 14,224 ------------------- Income from operations 6,518 5,823 Federal income tax expense (1,960) (1,645) ------------------- Net income $ 4,558 4,178 ===================
13 AMERCO AND CONSOLIDATED SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (Unaudited) 3. SUMMARIZED CONSOLIDATED FINANCIAL INFORMATION OF INSURANCE SUBSIDIARIES, continued A summarized consolidated balance sheet for Oxford is presented below: June 30, ---------------------- 1998 1997 ---------------------- (in thousands) Investments - fixed maturities $ 470,371 444,243 Other investments 109,225 102,894 Receivables 33,543 14,527 Deferred policy acquisition costs 47,132 38,288 Due from affiliate (307) 121 Other assets 29,589 2,402 ------------------- Total assets $ 689,553 602,475 =================== Policy liabilities and accruals $ 139,224 81,928 Premium deposits 429,730 427,556 Other policyholders' funds and liabilities 19,475 5,108 Deferred taxes 11,047 10,033 ------------------- Total liabilities 599,476 524,625 Stockholder's equity 90,077 77,850 ------------------- Total liabilities and stockholder's equity $ 689,553 602,475 =================== A summarized consolidated income statement for Oxford is presented below: Six months ended June 30, ------------------- 1998 1997 ------------------- (in thousands) Premiums $ 36,302 12,700 Net investment income 9,440 8,909 ------------------- Total revenue 45,742 21,609 Benefits and losses 23,451 12,115 Amortization of deferred policy acquisition costs 6,398 2,812 Other expenses 9,140 2,776 ------------------- Income from operations 6,753 3,906 Federal income tax expense (2,088) (1,085) ------------------- Net income $ 4,665 2,821 =================== 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, domiciled in Texas, for $2,243,000. Safe Mate's 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.
14 AMERCO AND CONSOLIDATED SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (Unaudited) 4. ACCUMULATED OTHER COMPREHENSIVE INCOME A summary of accumulated comprehensive income components follows: Foreign Unrealized Accumulated currency gain (loss) comprehensive translation on investments income --------------------------------------- (in thousands) Balance at March 31, 1998 $ (18,675) 9,291 (9,384) Foreign currency translation (5,496) - (5,496) Unrealized gain (loss) on investments - (762) (762) -------------------------------------- Balance at September 30, 1998 $ (24,171) 8,529 (15,642) ====================================== Balance at March 31, 1997 $ (14,133) 4,411 (9,722) Foreign currency translation (520) - (520) Unrealized gain (loss) on investments - (182) (182) -------------------------------------- Balance at September 30, 1997 $ (14,653) 4,229 (10,424) ====================================== 5. CONTINGENT LIABILITIES AND COMMITMENTS During the six months ended September 30, 1998, a subsidiary of U-Haul entered into ten transactions, and has subsequently entered into two additional transactions, whereby the Company sold rental trucks and subsequently leased back. The Company has guaranteed $18,212,000 of residual values at September 30, 1998, and an additional $2,439,000 of residual values subsequent to September 30, 1998 for these assets at the end of the respective lease terms. U-Haul also subsequently entered into one transaction, whereby the Company sold and subsequently leased back computer equipment. Following are the lease commitments for the leases executed during the six months ended September 30, 1998, and subsequently which have a term of more than one year (in thousands): Net activity Year ended Lease subsequent to March 31, Commitments period end Total ---------------------------------------------------------- 1999 $ 8,344 907 9,251 2000 12,514 2,040 14,554 2001 12,514 2,040 14,554 2002 12,514 2,040 14,554 2003 12,514 2,040 14,554 Thereafter 29,817 5,210 35,027 ------------------------------------ $ 88,217 14,277 102,494 ==================================== 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 such suits, claims or proceedings involving the Company, individually or in the aggregate are expected to result in a material loss.
15 AMERCO AND CONSOLIDATED SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (Unaudited) 6. SUPPLEMENTAL CASH FLOWS INFORMATION The (increase) decrease in receivables, inventories and accounts payable and accrued liabilities net of other operating and investing activities follows: Six Months ended September 30, ------------------------------ 1998 1997 ------------------------------ (in thousands) Receivables $ (25,092) (14,736) ============================== Inventories $ (6,349) (6,479) ============================== Accounts payable and accrued liabilities $ (12,195) (26,112) ============================== Income taxes paid in cash amounted to $820,000 and $1,159,000 for the six months ended September 30, 1998 and 1997, respectively. Interest paid in cash amounted to $36,921,000 and $44,609,000 for the six months ended September 30, 1998 and 1997, respectively. 7. EARNINGS PER SHARE The following table reflects the calculation of the earnings per share: Six months ended Quarter ended September 30, September 30, 1998 1997 1998 1997 ----------------------------------------------- (in thousands except share and per share data) Earnings from operations before extraordinary loss on early extinguishment of debt $ 73,401 68,230 42,171 39,032 Less dividends on preferred shares 9,073 10,571 4,586 5,316 ---------------------- --------------------- 64,328 57,659 37,585 33,716 Extraordinary loss on early extinguishment of debt - (4,138) - (4,138) ---------------------- --------------------- Net earnings for per share calculation $ 64,328 53,521 37,585 29,578 ====================== ===================== Net earnings for per share: Earnings from operations before extraordinary loss on early extinguishment of debt $ 2.93 2.63 1.71 1.54 Extraordinary loss on early extinguishment of debt, net - (0.19) - (0.19) ---------------------- --------------------- Net earnings $ 2.93 2.44 1.71 1.35 ====================== ===================== Weighted average common shares outstanding 21,930,301 21,884,614 21,935,854 21,890,072 ====================== =====================
16 AMERCO AND CONSOLIDATED SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (Unaudited) 8. RELATED PARTIES During the six months ended September 30, 1998, a subsidiary 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 interest payments of $4,167,000 from SAC Holdings during the six months ended September 30, 1998. 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 $1,074,000 during the six months ended September 30, 1998. The management fee percentage is consistent with the fees received by the Company for other properties managed by the Company. As of September 30, 1998, a subsidiary of the Company funded the purchase of eleven properties by SAC Holdings for approximately $6,708,000. 9. 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. The Company is currently reviewing its implementation procedures. 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 Standards Board with future effective dates are either not applicable or not material to the consolidated financial statements of the Company.
17 AMERCO AND CONSOLIDATED SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (Unaudited) 10. 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 $ 707,194 77,162 45,153 - 829,509 Intersegment - 4,751 589 (5,340) - ---------------------------------------------------------- Total revenue $ 707,194 81,913 45,742 (5,340) 829,509 Depreciation/ amortization $ 33,576 3,438 10,662 - 47,676 Interest expense, net of interest income of $6,878 $ 29,757 - - - 29,757 Pretax earnings $ 99,364 6,518 6,753 - 112,635 Income tax $ 35,186 1,960 2,088 - 39,234 Identifiable assets $1,922,349 650,220 689,553 (330,654) 2,931,468 1997 - ---- Revenues: Outside $ 676,458 83,031 20,933 - 780,422 Intersegment - 11,245 676 (11,921) - ---------------------------------------------------------- Total revenue $ 676,458 94,276 21,609 (11,921) 780,422 Depreciation/ amortization $ 34,249 5,337 2,782 - 42,368 Interest expense, net of interest income of $7,064 $ 33,644 - - - 33,644 Pretax earnings $ 93,506 5,823 3,906 - 103,235 Income tax $ 32,275 1,645 1,085 - 35,005 Identifiable assets $1,961,218 622,223 602,475 (323,913) 2,862,003
18 AMERCO AND CONSOLIDATED SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (Unaudited) 10. 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 $ 811,223 18,286 829,509 Depreciation/amortization $ 46,038 1,638 47,676 Interest expense, net $ 29,874 (117) 29,757 Income tax $ 39,234 - 39,234 Identifiable assets $ 2,892,406 39,062 2,931,468 1997 - ---- Total revenues $ 761,326 19,096 780,422 Depreciation/amortization $ 41,091 1,277 42,368 Interest expense, net $ 33,736 (92) 33,644 Income tax $ 35,005 - 35,005 Identifiable assets $ 2,803,759 58,244 2,862,003 11. SUBSEQUENT EVENTS On November 3, 1998, the Company declared a cash dividend of $3,241,000 ($0.53125 per preferred share) to preferred stockholders of record as of November 13, 1998.
19 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. GENERAL Information on industry segments is incorporated by reference from "Item 1. Financial Statements - Notes 1, 3 and 10 of Notes to Consolidated Financial Statements". The notes discuss the principles of consolidation, summarized consolidated financial information and industry segment and geographical 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 SIX MONTHS ENDED SEPTEMBER 30, 1998 VERSUS SIX MONTHS ENDED SEPTEMBER 30, 1997 Moving and Storage Operations Revenues consist of rental revenues and net sales. Total rental revenues increased by $27.6 million, 4.8%, to $598.9 million during the first six months of fiscal 1999. Net revenues from the rental of moving related equipment increased by $24.8 million primarily due to an increase in truck rental revenue. The growth in truck rental revenue reflects higher utilization, increased inventory levels and improved in-town utilization. Net sales revenues were $107.6 million during the first six months of fiscal 1999, which represents a 1.9% increase, compared to fiscal 1998 net sales of $105.6 million. Revenue growth from the sale of moving support items (i.e. boxes, etc.), which increased 6.7% during this period, led to the improvement. Cost of sales was $62.9 million during the first six months of fiscal 1999, which represents an increase of 4.0%, compared to $60.5 million in fiscal 1998. Increased sales of moving support items, combined with higher material costs for the moving support items, were the major contributing factor. Operating expenses increased to $426.7 million during the first six months of fiscal 1999 from $404.1 million compared to fiscal 1998, an increase of 5.6%. Higher rental equipment maintenance expenditures are due to an increase in fleet size and transaction levels. Equipment maintenance expenditures are within the planned target range for fiscal 1999. Lease expense increased to $56.5 million during the first six months of fiscal 1999 compared to $45.5 million in fiscal 1998. Additional leasing activity over the past nine months reflects the increase. Net depreciation expense stayed consistent during the period, $31.9 million during the first six months of fiscal 1999 compared to $31.4 million in fiscal 1998. An increase in gain on sale of property offset by an increase in depreciation expense relating to rental equipment accounted for the minimal change. Property and Casualty RWIC gross premium writings for the six months ended June 30, 1998 were $76.9 million as compared to $87.9 million in 1997. The decrease in premium writings resulted primarily from reduced insurance transactions with U-Haul. The rental industry share of total premiums declined to 41.6% in 1998 as compared to 51.4% in 1997 due to the decrease in U-Haul transactions. RWIC underwrites professional reinsurance via broker markets and premiums in this area increased during the six months ended June 30, 1998 to 35.3% of total gross premiums, from 34.4% in 1997. RWIC's direct multiple peril coverage accounted for 15.7% of total gross premiums during the six months ended June 30, 1998, as compared to 11.9% in 1997. Premiums in selected general agency lines increased to a 7.4% of gross written premiums in 1998 as compared to a 2.3% in 1997. Increased written premium on the excess workers compensation business contributed to this increase.
20 Net earned premiums decreased to $65.3 million for the six months ended June 30, 1998, compared with $79.0 million for 1997. The premium decrease resulted from the U-Haul Liability programs in the rental industry market which decreased to $28.7 million from $45.1 million in 1997. An additional $0.2 million decrease is due to the general agency lines program which consisted of $3.2 million and $3.4 million for the six months ended June 30, 1998 and 1997, respectively. Direct multiple peril net earned premiums increased to $9.8 million at June 30, 1998 compared to $7.8 million for 1997. Assumed treaty reinsurance increased to $23.5 million for the six months ending June 30, 1998 as compared to $22.7 million in 1997. Net investment income was $16.7 million for the six months ended June 30, 1998, an increase of 9.2% over 1997 net investment income of $15.3 million. The increase resulted from enhanced yield provided by an increased investment in preferred stock. Underwriting expenses incurred were $75.4 million for the six months ended June 30, 1998, a decrease of $13.1 million, or 14.8% from 1997. The loss and loss adjustment expenses incurred decreased $13.9 million primarily due to the reduction in transactions with U-Haul and corresponds to the decrease in liabilities for unpaid claims due to estimated future losses for current and prior policies for those transactions. All other underwriting expenses increased in the aggregate by $0.8 million. RWIC completed the six months ending June 30, 1998 with income before tax expense of $6.5 million as compared to $5.8 million for 1997. This represents an increase of $0.7 million, or 12.1% over 1997. The increase resulted primarily from decreased underwriting expenses and increased realized gains. Life Insurance Total premiums from Oxford and its subsidiaries were $36.3 million for the six months ended June 30, 1998, an increase of $23.6 million over 1997. These increases are primarily due to the acquisition of North American Insurance Company (NAI) and Safe Mate Life Insurance Company (SML). Premiums from Oxford's reinsurance lines before intercompany eliminations were $11.2 million for the six months ended June 30, 1998, an increase of $2.5 million or approximately 28.7% over 1997 and accounted for 30.9% of Oxford's premiums in 1998. These premiums are primarily from term life insurance, credit life and accident and health insurance, and deferred annuity contracts that have matured. Increases in premiums are primarily from new credit insurance reinsurance contracts. Premiums from Oxford's direct lines before intercompany eliminations were $4.3 million for the six months ended June 30, 1998, an increase of $254 thousand or 6.3% from 1997. This increase in direct premium is primarily attributable to writing of new Single Premium Whole Life policies. Oxford's direct business related to group life and disability coverage issued to employees of the Company for the six months ended June 30, 1998 accounted for approximately 3.4% of premiums. Other direct lines, including credit life and health business, accounted for approximately 8.3% of Oxford's premiums in 1998. Premiums from Oxford's subsidiaries, NAI and SML were $20.4 million and accounted for 56.3% of premiums for the six months ended June 30, 1998. Net investment income before intercompany eliminations was $9.4 million and $8.9 million for the six months ended June 30, 1998 and 1997, respectively. This increase is due to a larger asset base resulting from the acquisition of NAI and SML. Benefits and expenses incurred were $41.2 million for the six months ended June 30, 1998. Oxford's benefits and expenses were $22.1 million, an increase of 25.6% over 1997. This increase is primarily due to increases in the amortization of policy acquisition costs for new credit insurance policies. Benefits and expenses related to Oxford's subsidiaries were $19.1 million for the six months ended June 30, 1998. Operating profit before tax and before intercompany eliminations increased by $2.8 million or approximately 72.8% in 1998 to $6.8 million, primarily due to the acquisition of NAI and SML. Interest Expense Net interest expense declined to $29.8 million during the first six months of fiscal 1999, as compared to $33.6 million compared to fiscal 1998. The decrease can be attributed to a reduction in the average cost of debt and a decrease in average debt levels outstanding.
21 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 $4.1 million, net of tax of $2.3 million ($0.19 per share). Consolidated Group As a result of the foregoing, pretax earnings of $112.6 million were realized during the first six months of fiscal 1999,, as compared to $103.2 million for fiscal 1998. After providing for income taxes and an extraordinary loss from the extinguishment of debt, net earnings for the first six months of fiscal 1999 were $73.4 million, as compared to $64.1 million for fiscal 1998. QUARTERLY RESULTS The following table presents unaudited quarterly results for the ten quarters in the period beginning April 1, 1996 and ending September 30, 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 rental operations are seasonal and proportionally more of the Company's revenues and net earnings from its U-Haul rental 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 for share and per share data). Quarter Ended ----------------------- Jun 30 Sep 30 1998 1998 ----------------------- Total revenues $ 389,338 440,171 Net earnings 31,230 42,171 Weighted average common shares outstanding (4) 21,924,749 21,935,854 Net earnings per common share (both basic and diluted) (1) 1.21 1.71 Quarter Ended ---------------------------------------------- Jun 30 Sep 30 Dec 31 Mar 31 1997 1997 1997 1998 ---------------------------------------------- Total revenues $ 372,021 412,774 322,543 298,607 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)
22 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) (4) (5) 1.15 1.29 (0.72) (0.97) Net earnings (loss) per common share (both basic and diluted) (1) (4) (5) 1.15 1.22 (0.74) (0.97) _______________ (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 values 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" of the Company's Form 10-K for the year ended March 31, 1998. (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).
23 QUARTER ENDED SEPTEMBER 30, 1998 VERSUS QUARTER ENDED SEPTEMBER 30, 1997 Moving and Storage Operations Revenues consist of rental revenue and net sales. Rental revenue increased by $11.3 million, approximately 3.7%, to $317.5 million in the second quarter of fiscal 1999. This reflects a $9.9 million increase in revenues from the rental of moving related equipment reflecting higher truck inventory levels and improved in- town truck utilization. Net sales were $51.3 million in the second quarter of fiscal 1999, which represents an increase of 2.4% from fiscal 1998 net sales of $50.1 million. Revenue growth from the sale of moving support items (i.e. boxes, etc.) accounted for the increase during the quarter. Cost of sales was $30.2 million in the second quarter of fiscal 1999, which represents an increase of 1.7% from $29.7 million for the same period in fiscal 1998. The increase in cost of sales primarily reflects increased material costs from the sale of moving support items which can be attributed to a higher sales level. Operating expense was relatively stable at $222.1 million for the second quarter of fiscal 1999 compared to $220.3 million for fiscal 1998. Lease expense increased to $29.6 million for the second quarter of fiscal 1999 compared to $22.4 million in fiscal 1998. Additional leasing activity over the past nine months reflects the increase. Net depreciation expense for the second quarter of fiscal 1999 was $14.3 million, as compared to $10.8 million in fiscal 1998. An increase in gain on sale of property offset by an increase in depreciation expense relating to rental equipment accounted for the change. Property and Casualty RWIC gross premium writings for the quarter ended June 30, 1998 were $50.8 million as compared to $54.9 million in 1997. The decreased premium writings resulted primarily from reduced insurance transactions with U-Haul. The rental industry share of total premiums declined to 54.1% for the quarter ended June 30, 1998 as compared to 58.7% for 1997. RWIC underwrites professional reinsurance via broker markets, and premiums in this area decreased during the second quarter of 1998 to 27.9% of total gross premiums, from 28.8% during 1997. Direct multiple peril coverage of various commercial properties and businesses accounted for 13.8% of total gross written premium during the second quarter of 1998, as compared to 11.4% in 1997. General agency premiums increased to 4.2% of gross written premiums during the second quarter of 1998 as compared to 1.3% in 1997. This increase can be attributed to decreased rental industry and professional reinsurance written premiums and increased writing of excess workers compensation. Net earned premiums decreased to $42.5 million for the quarter ended June 30, 1998, compared with $44.5 million for 1997. The premium decrease resulted from the U-Haul Liability programs in the rental industry market which decreased $3.8 million from $26.8 million for 1997. Offsetting this decrease in net earned premiums was a $1.1 million increase in the general agency and direct multiple peril business, which consisted of $1.6 million and $4.9 million for June 30, 1998 and $1.4 million and $4.0 million in 1997, respectively. Assumed treaty increased to $13.0 million for the quarter ended June 30, 1998 as compared to $12.3 million for 1997. Net investment income was $8.5 million for the quarter ended June 30, 1998, an increase of 6.3% over 1997 net investment income of $8.0 million. The increase resulted from enhanced yield provided by an increased investment in preferred stock. Underwriting expenses incurred were $46.7 million for the quarter ended June 30, 1998, a decrease of $5.1 million, or 9.8% from 1997. The losses and loss adjustment expenses incurred a decrease of $4.7 million resulting primarily from the reduction in insurance transactions with U-Haul and corresponds to the decrease in liabilities for unpaid claims due to estimated future losses for current and prior policies for those transactions. Net commissions decreased $1.3 million due to decreased assumed reinsurance deferred acquisition costs, which corresponds to the decrease in unearned premiums compared to 1997. All other underwriting expenses increased in the aggregate by $0.9 million.
24 RWIC completed the second quarter of 1998 with income before tax expense of $4.3 million as compared to $0.8 million for the same period in 1997. This represents an increase of $3.5 million, or 437.5% over 1997. The increase resulted primarily from decreased underwriting expenses. Life Insurance Total premiums from Oxford and its subsidiaries were $20.3 million for the quarter ended June 30, 1998, an increase of $13.5 million compared to 1997. These increases are due to new Single Premium Whole Life Writings and the acquisition of NAI and SML. Premiums from Oxford's reinsurance lines before intercompany eliminations were $6.1 million for the quarter ended June 30, 1998, a decrease of $700 thousand or 10.2% over 1997 and accounted for 30.0% of Oxford's premiums in the quarter ended June 30, 1998. These premiums are primarily from term life insurance and deferred annuity contracts that have matured. Decreases in premiums are primarily from these matured reinsurance agreements. Premiums from Oxford's direct lines before intercompany eliminations were $2.5 million in the quarter ended June 30, 1998, an increase of $500 thousand or 25.0% compared to 1997. This increase in direct premium is primarily attributable to the new writings of Single Premium Whole Life policies. Oxford's direct business related to group life and disability coverage issued to employees of the Company accounted for 3.0% of premiums. Other direct lines, including credit life and health business, accounted for 8.9% of Oxford's premium in the quarter ended June 30, 1998. Premiums from Oxford's subsidiaries, NAI and SML, were $11.7 million and accounted for 57.8% of premiums for the quarter ended June 30, 1998. Net investment income before intercompany eliminations was $5.0 million for the quarter ended June 30, 1998 and $4.4 million for 1997. Benefits and expenses incurred were $23.7 million for the quarter ended June 30, 1998. Oxford's benefits and expenses were $12.2 million, an increase of 32.6% compared to 1997. This increase is primarily due to increases in the amortization of policy acquisition costs. Benefits and expenses related to Oxford's subsidiaries were $11.5 million. Operating profit before tax and intercompany eliminations increased by $1.1 million, or 57.9%, in the quarter ended June 30, 1998 to $3.0 million, primarily due to the acquisition of NAI. Interest Expense, net Net interest expense was $14.7 million in the second quarter of fiscal 1999 versus $16.2 million for 1997. The decrease can be attributed to a decrease in average debt levels outstanding and a reduction in the average cost of debt. 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 $4.1 million, net of tax of $2.3 million ($0.19 per share). Consolidated Group As a result of the foregoing, pretax earnings of $65.3 million were realized during the second quarter of fiscal 1999, as compared to $59.1 million for fiscal 1998. After providing for income taxes and extraordinary losses from the extinguishment of debt, net earnings for the second quarter of fiscal 1999 were $42.2 million, as compared to $34.9 million for fiscal 1998.
25 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 September 30, 1998, net property, plant and equipment represented approximately 66.9% of total U-Haul assets and approximately 43.9% of consolidated assets. In the second quarter of fiscal 1999, capital expenditures were $190.0 million, as compared to $284.0 million for fiscal 1998, reflecting expansion of the rental truck fleet. These acquisitions were funded with internally generated funds from operations and lease financings. Cash flows provided by operating activities were $100.1 million for the first six months of fiscal 1999, as compared to $106.9 million in fiscal 1998. An increase in receivables was a contributing factor of the decrease. Property and Casualty Cash flows provided (used) by operating activities were $(8.8) million and $1.7 million for the six months ended June 30, 1998 and 1997, respectively. The change resulted primarily from increased paid losses recoverable, decreased loss and expense reserves, and a smaller unearned premium increase compared to 1997. Offsetting were increases in accounts receivable, due from affiliates and other liabilities. RWIC's cash and cash equivalents and short-term investment portfolio were $2.9 million and $5.5 million at June 30, 1998 and 1997, respectively. This balance reflects funds in transition from maturity proceeds to long-term investments. This level of liquid assets, combined with budgeted cash flow, is adequate to meet periodic 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 94.6% 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 118.4% of total liabilities. Stockholder's equity increased $3.0 million from $196.6 million at June 30, 1997 to $199.6 at June 30, 1998. RWIC considers current shareholder'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. Life Insurance Oxford's primary sources of cash are premiums, deferred annuity sales 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. Cash flows provided by operating activities were $2.4 million and $14.5 million for the six months ended June 30, 1998 and 1997, respectively. Cash flows provided (used) by financing activities were $7.1 million and $(17.6) million for the six months ended June 30, 1998 and 1997, respectively. Cash flows from deferred annuity sales are a component of financing activities and result in 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 June 30, 1998 and 1997, short-term investments amounted to $33.0 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 $89.6 million in 1998 from $77.8 million in 1997 primarily as a result of earnings from operations.
26 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 $0.6 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 zero at June 30, 1998. 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 an average of approximately $30-$115 million in annual long-term debt maturities during this same period, are expected to create annual average funding needs of approximately $325-$375 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 September 30, 1998, the Company had $998.0 million in total notes and loans payable outstanding, as compared with $1,025.3 million at March 31, 1998, and $1,059.0 million at September 30, 1997. Unutilized committed lines of credit are $225.0 million at September 30, 1998. 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 September 30, 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 a 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. 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. The Company has completed the assessment phase. The Company's internal information technology conversion phase is underway and on schedule with the testing phase scheduled for completion by fiscal year end. In particular, the Company has an outside consulting firm on-site currently making the necessary modifications to existing systems. The Company is also reviewing its non-information technology items for Year 2000 compliance, such as rental vehicles and storage facilities security systems. The Company expects to be fully Year 2000 compliant by March 1999 at an estimated cost of approximately $2.0 million, of which $1.0 million has been incurred through September 30, 1998. 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
27 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. The Company is communicating with its major business partners to determine the efforts being made on their part for compliance. Critical vendors with electronic data interchange will be scheduled for testing during the Company's fourth quarter, with other vendor testing to be scheduled during the remainder of the calendar year 1999. The Company is in the process of developing a contingency plan to be used, if in the most reasonably likely worst case scenario, a business partner is not Year 2000 compliant. It is anticipated that the contingency plan will be completed by fiscal year end. 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. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS As disclosed in the Company's Form 10-K for the year ended March 31, 1998, a judgment was entered on February 21, 1995 in 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. CV 88-20139 - ------------------------------------------------------- (the "Shoen Litigation") against Edward J. Shoen in the amount of $7.0 million as punitive damages. On July 15, 1998, Edward J. Shoen filed an appeal with the United States Supreme Court with respect to the award of punitive damages. On October 5, 1998, the punitive damage award in the Shoen Litigation (which was subsequently reduced by partial settlement to $6.0 million) became final when the United States Supreme Court denied certiorari. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The 1998 Annual Meeting of Stockholders was held August 28, 1998. At the 1998 Annual Meeting of Stockholders, William E. Carty and Charles J. Bayer were elected to serve until the 2002 Annual Meeting of Stockholders; John P. Brogan and James J. Grogan were elected to fill vacated seats until the 1999 Annual Meeting of Stockholders. Edward J. Shoen and Richard J. Herrera continue as directors with terms that expire at the 2000 Annual Meeting of Stockholders; John M. Dodds and James P. Shoen continue to serve as directors until the 2001 Annual Meeting of Stockholders. The following table sets forth the votes cast for, against or withheld, as well as the number of abstentions and broker non-votes with respect to each matter voted on at the 1998 Annual Meeting of Stockholders: Matters Submitted Votes cast Votes cast Votes Broker To a Vote For Against Withheld Abstentions Non-Votes - ----------------------------------------------------------------------------- 1. Election of Directors John P. Brogan 20,334,779 53,992 63,520 - - James J. Grogan 20,341,242 46,023 65,026 - - William E. Carty 20,344,328 41,797 66,166 - - Charles J. Bayer 20,353,788 33,703 63,800 - -
28 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. a. Exhibits Exhibit No. Description ----------- ----------- 3.1 Restated Articles of Incorporation (1) 3.2 Restated By-Laws of AMERCO as of August 27, 1997 (2) 27 Financial Data Schedule b. Reports on Form 8-K. No report on Form 8-K was filed during the quarter ended September 30, 1998. _____________________________________ (1) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 1992, file no. 0-7862. (2) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997, file no. 0-7862.
29 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. AMERCO ___________________________________ (Registrant) Dated: November 9, 1998 By: /S/ GARY B. HORTON ___________________________________ Gary B. Horton, Treasurer (Principal Financial Officer)