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, 1996 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 [ ]. 20,364,087 shares of AMERCO Common Stock, $0.25 par value were outstanding at October 31, 1996. 5,385 shares of U-Haul International, Inc. Common Stock, $0.01 par value, were outstanding at October 31, 1996.August 11, 1995 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, 1996, March 31, 1996 and September 30, 1995................ 4 b) Consolidated Statements of Earnings for the Six Months ended September 30, 1996 and 1995............. 6 c) Consolidated Statements of Changes in Stockholders' Equity for the Six Months ended September 30, 1996 and 1995............................................. 7 d) Consolidated Statements of Earnings for the Quarters ended September 30, 1996 and 1995........... 9 e) Consolidated Statements of Cash Flows for the Six Months ended September 30, 1996 and 1995......... 10 f) Notes to Consolidated Financial Statements - September 30, 1996, March 31, 1996 and September 30, 1995................................... 11 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 18 PART II. OTHER INFORMATION Item 1. Legal Proceedings........................................ 28 Item 6. Exhibits and Reports on Form 8-K......................... 29 3 THIS PAGE LEFT INTENTIONALLY BLANK 4 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. AMERCO AND CONSOLIDATED SUBSIDIARIES Consolidated Balance Sheets September 30, March 31, September 30, ASSETS 1996 1996 1995 ---------------------------------- (unaudited) (audited) (unaudited) (in thousands) Cash and cash equivalents $ 32,380 31,168 33,283 Receivables 311,480 340,564 338,489 Inventories 54,718 45,891 51,402 Prepaid expenses 11,060 16,415 12,693 Investments, fixed maturities 879,699 879,702 800,481 Investments, other 162,697 126,587 139,713 Deferred policy acquisition costs 56,171 49,995 51,304 Other assets 56,508 20,941 18,725 --------------------------------- Property, plant and equipment, at cost: Land 214,853 212,593 210,928 Buildings and improvements 800,760 769,380 738,535 Furniture and equipment 191,826 188,734 184,189 Rental trailers and other rental equipment 150,388 256,411 258,264 Rental trucks 950,209 968,131 933,013 General rental items 22,290 24,197 49,581 --------------------------------- 2,330,326 2,419,446 2,374,510 Less accumulated depreciation 1,077,193 1,102,731 1,131,339 --------------------------------- Total property, plant and equipment 1,253,133 1,316,715 1,243,171 --------------------------------- $ 2,817,846 2,827,978 2,689,261 ================================ The accompanying notes are an integral part of these consolidated financial statements. 5 September 30, March 31, September 30, LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1996 1995 --------------------------------------- (unaudited) (audited) (unaudited) (in thousands) Liabilities: Accounts payable and accrued liabilities $ 153,732 151,754 150,198 Notes and loans 940,282 998,220 796,738 Policy benefits and losses, claims and loss expenses payable 485,932 483,561 475,220 Liabilities from premium deposits 435,789 410,787 374,407 Cash overdraft 22,740 32,159 23,450 Other policyholders' funds and liabilities 31,711 25,713 25,843 Deferred income 36,694 2,926 9,533 Deferred income taxes 57,936 73,310 92,008 ---------------------------------- Stockholders' equity: Serial preferred stock, with or without par value, 50,000,000 shares authorized; 6,100,000 shares issued without par value and outstanding as of September 30, 1996, March 31, 1996 and September 30, 1995 - - - Series B preferred stock, with no par value, 100,000 shares authorized; 100,000 shares issued and outstanding as of September 30, 1996, none issued and outstanding as of March 31, 1996 and September 30, 1995 - - - Serial common stock, with or without par value, 150,000,000 shares authorized, none issued and outstanding - - - Series A common stock of $0.25 par value, 10,000,000 shares authorized, 5,762,495 shares issued as of September 30, 1996, March 31, 1996, and September 30, 1995 1,441 1,441 1,441 Common stock of $0.25 par value, 150,000,000 shares authorized, 34,237,505 shares issued as of September 30, 1996, March 31, 1996, and September 30, 1995 8,559 8,559 8,559 Additional paid-in capital 264,378 165,756 165,675 Foreign currency translation (12,451) (11,877) (10,609) Unrealized gain(loss) on investments 315 11,097 6,771 Retained earnings 680,279 609,019 605,616 --------------------------------- 942,521 783,995 777,453 Less: Cost of common shares in treasury, (15,599,609 shares as of September 30, 1996, 7,209,077 shares as of March 31, 1996, 1,380,937 shares as of September 30, 1995) 266,315 111,118 11,457 Unearned employee stock ownership plan shares 23,176 23,329 24,132 --------------------------------- Total stockholders' equity 653,030 649,548 741,864 Contingent liabilities and commitments --------------------------------- $ 2,817,846 2,827,978 2,689,261 ================================= 6 AMERCO AND CONSOLIDATED SUBSIDIARIES Consolidated Statements of Earnings Six Months ended September 30, (Unaudited) 1996 1995 --------------------- (in thousands except per share data) Revenues Rental and other revenue $ 555,055 504,429 Net sales 107,192 102,675 Premiums 72,749 71,385 Net investment income 25,140 23,287 --------------------- Total revenues 760,136 701,776 Costs and expenses Operating expense 406,130 353,185 Advertising expense (see note 9) 16,014 24,061 Cost of sales 62,639 58,001 Benefits and losses 66,716 68,099 Amortization of deferred acquisition costs 8,057 7,799 Depreciation 38,719 76,275 Interest expense 35,282 35,554 --------------------- Total costs and expenses 633,557 622,974 Pretax earnings from operations 126,579 78,802 Income tax expense (46,833) (28,293) --------------------- Earnings from operations before extraordinary loss on early extinguishment of debt 79,746 50,509 Extraordinary loss on early extinguishment of debt, net (2,004) - --------------------- Net earnings $ 77,742 50,509 ===================== Earnings per common share: Earnings from operations before extraordinary loss on early extinguishment of debt $ 2.43 1.16 Extraordinary loss on early extinguishment of debt, net (.07) - --------------------- Net earnings $ 2.36 1.16 ===================== Weighted average common shares outstanding 29,845,247 37,931,825 ===================== The accompanying notes are an integral part of these consolidated financial statements. 7 AMERCO AND CONSOLIDATED SUBSIDIARIES Consolidated Statements of Changes in Stockholders' Equity Six Months ended September 30, (Unaudited) 1996 1995 ------------------- (in thousands) Series A common stock of $0.25 par value: 10,000,000 shares authorized, 5,762,495 shares issued as of September 30, 1996, March 31, 1996 and September 30, 1995 Beginning and end of period $ 1,441 1,441 ------------------ Common stock of $0.25 par value: 150,000,000 shares authorized, 34,237,505 shares issued as of September 30, 1996, March 31, 1996 and September 30, 1995 Beginning and end of period 8,559 8,559 ------------------- Additional paid-in capital: Beginning of period 165,756 165,675 Issuance of preferred stock 98,622 - ------------------- End of period 264,378 165,675 ------------------- Foreign currency translation: Beginning of period (11,877) (12,435) Change during period (574) 1,826 ------------------- End of period (12,451) (10,609) ------------------- Unrealized gain (loss) on investments: Beginning of period 11,097 (6,483) Change during period (10,782) 13,254 ------------------- End of period 315 6,771 ------------------- Retained earnings: Beginning of period 609,019 561,589 Net earnings 77,742 50,509 Dividends paid to stockholders: Preferred stock: ($1.06 per share for 1996 and 1995, respectively) (6,482) (6,482) ------------------- End of period 680,279 605,616 ------------------- The accompanying notes are an integral part of these consolidated financial statements. 8 AMERCO AND CONSOLIDATED SUBSIDIARIES Consolidated Statements of Changes in Stockholders' Equity Six Months ended September 30, (Unaudited) 1996 1995 ------------------- (in thousands) Less Treasury stock: Beginning of period 111,118 10,461 Net increase (8,390,532 shares in 1996 and 45,000 shares in 1995) 155,197 996 ----------------- End of period 266,315 11,457 ----------------- Less Unearned employee stock ownership plan shares: Beginning of period 23,329 14,953 Increase in loan - 3,168 Proceeds from loan (153) (137) ----------------- End of period 23,176 24,132 ----------------- Total stockholders' equity $ 653,030 741,864 ================= The accompanying notes are an integral part of these consolidated financial statements. 9 AMERCO AND CONSOLIDATED SUBSIDIARIES Consolidated Statements of Earnings Quarters ended September 30, (Unaudited) 1996 1995 ----------------------- (in thousands except per share data) Revenues Rental and other revenue $ 295,483 269,118 Net sales 51,213 49,559 Premiums 41,594 40,683 Net investment income 12,138 11,907 ----------------------- Total revenues 400,428 371,267 Costs and expenses Operating expense 215,351 178,939 Advertising expense (see note 9) 7,868 7,192 Cost of sales 31,058 29,042 Benefits and losses 43,458 40,858 Amortization of deferred acquisition costs 4,035 4,871 Depreciation 19,940 38,582 Interest expense 16,426 16,722 ----------------------- Total costs and expenses 338,136 316,206 Pretax earnings from operations 62,292 55,061 Income tax expense (22,551) (19,729) ----------------------- Earnings from operations before extraordinary loss on early extinguishment of debt 39,741 35,332 Extraordinary loss on early extinguishment of debt, net (2,004) - ----------------------- Net earnings $ 37,737 35,332 ======================= Earnings per common share: Earnings from operations before extraordinary loss on early extinguishment of debt $ 1.32 .85 Extraordinary loss on early extinguishment of debt, net (.07) - ----------------------- Net earnings $ 1.22 .85 ======================= Weighted average common shares outstanding 27,675,192 37,905,225 ======================= The accompanying notes are an integral part of these consolidated financial statements. 10 AMERCO AND CONSOLIDATED SUBSIDIARIES Consolidated Statements of Cash Flows Six Months ended September 30, (Unaudited) 1996 1995 -------------------- (in thousands) Cash flows from operating activities: Net earnings $ 77,742 50,509 Depreciation and amortization 48,582 84,339 Provision for losses on accounts receivable 1,841 2,819 Net (gain) loss on sale of real and personal property (6,980) 581 Gain (loss) on sale of investments 50 (2,970) Changes in policy liabilities and accruals 6,887 1,146 Additions to deferred policy acquisition costs (10,469) (11,954) Net change in other operating assets and liabilities (16,337) 27,389 -------------------- Net cash provided by operating activities 101,316 151,859 -------------------- Cash flows from investing activities: Purchases of investments: Property, plant and equipment (134,247) (143,082) Fixed maturities (90,891) (162,081) Real estate (767) (5,629) Mortgage loans (8,944) (7,384) Proceeds from sale of investments: Property, plant and equipment 200,785 97,030 Fixed maturities 68,895 89,348 Real estate 389 570 Mortgage loans 12,943 17,573 Changes in other investments (40,510) 1,186 -------------------- Net cash provided (used) by investing activities 7,653 (112,469) -------------------- Cash flows from financing activities: Net change in short-term borrowings (177,500) (163,500) Proceeds from notes 337,500 140,184 Debt issuance costs (4,125) (636) Loan to leveraged Employee Stock Ownership Plan - (3,168) Proceeds from leveraged Employee Stock Ownership Plan 153 137 Principal payments on notes (217,938) (61,168) Issuance of preferred stock 98,622 - Net change in cash overdraft (9,419) (7,913) Dividends paid (6,482) (6,482) Treasury stock acquisitions (155,197) (996) Investment contract deposits 54,554 101,667 Investment contract withdrawals (27,925) (39,518) -------------------- Net cash used by financing activities (107,757) (41,393) -------------------- Increase (decrease)in cash and cash equivalents 1,212 (2,003) Cash and cash equivalents at beginning of period 31,168 35,286 -------------------- Cash and cash equivalents at end of period $ 32,380 33,283 -------------------- The accompanying notes are an integral part of these consolidated financial statements. 11 AMERCO AND CONSOLIDATED SUBSIDIARIES Notes to Consolidated Financial Statements September 30, 1996, March 31, 1996 and September 30, 1995 (Unaudited) 1. PRINCIPLES OF CONSOLIDATION AMERCO, a Nevada corporation (the Company), is the holding company for U-Haul International, Inc. (U-Haul), Ponderosa Holdings, Inc. (Ponderosa), and Amerco Real Estate Company (AREC). The consolidated financial statements include the accounts of the parent corporation, AMERCO, and its subsidiaries, 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, 1996 and 1995, and the related consolidated statements of earnings, changes in stockholders' equity and cash flows for the six months ended September 30, 1996 and 1995 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. Based on an in-depth market analysis, the Company increased the estimated salvage value of certain rental trucks during the third and fourth quarters of fiscal year ended March 31, 1996. 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. Earnings per share are computed based on the weighted average number of shares outstanding, excluding shares of the employee stock ownership plan that have not been committed to be released. Net income is reduced for preferred dividends for purposes of the calculation. Certain reclassifications have been made to the financial statements for the quarter ended September 30, 1995 to conform with the current year's presentation. 12 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 (in thousands, except for par value): June 30, 1996 Par Value Gross Gross Estimated - ----------------- Consolidated or number Amortized unrealized unrealized market Held-to-Maturity of shares cost gains losses value ------------------------------------------------------ U.S. treasury securities and government obligations $ 17,805 $ 17,713 1,163 - 18,876 U.S. government agency mortgage backed securities $ 57,843 57,434 520 (2,497) 55,457 Obligations of states and political subdivisions $ 33,100 32,838 1,110 (227) 33,721 Corporate securities $ 186,971 191,427 2,422 (3,614) 190,235 Mortgage-backed securities $ 98,349 96,577 1,215 (2,912) 94,880 Redeemable preferred stocks 221 6,471 251 (184) 6,538 ---------------------------------------- 402,460 6,681 (9,434) 399,707 ---------------------------------------- June 30, 1996 Par Value Gross Gross Estimated - --------------- Consolidated or number Amortized unrealized unrealized market Available-for-Sale of shares cost gains losses value ----------------------------------------------------- U.S. treasury securities and government obligations $ 11,685 11,780 905 - 12,685 U.S. government agency mortgage backed securities $ 26,252 25,736 143 (389) 25,490 States, municipalities and political subdivisions $ 7,100 7,023 485 (34) 7,474 Corporate securities $ 340,024 345,964 5,163 (6,798) 344,329 Mortgage-backed securities $ 85,947 85,338 912 (1,595) 84,655 Redeemable preferred stocks 106 2,596 22 (12) 2,606 ---------------------------------------- 478,437 7,630 (8,828) 477,239 ---------------------------------------- Total $ 880,897 14,311 (18,262) 876,946 ======================================== 13 AMERCO AND CONSOLIDATED SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (Unaudited) 3. SUMMARIZED CONSOLIDATED FINANCIAL INFORMATION OF PONDEROSA HOLDINGS, INC. AND ITS SUBSIDIARIES A summary consolidated balance sheet (unaudited) for Ponderosa Holdings, Inc. and its subsidiaries is presented below: September 30, 1996 1995 ---------------------- (in thousands) Investments - fixed maturities $ 879,699 800,481 Other investments 98,910 117,972 Receivables 150,100 151,546 Deferred policy acquisition costs 56,171 51,304 Due from affiliate 36,947 22,603 Deferred federal income taxes 7,865 4,671 Other assets 14,977 8,067 ---------------------- Total assets $ 1,244,669 1,156,644 ====================== Policy liabilities and accruals $ 411,865 409,521 Unearned premiums 74,266 65,699 Premium deposits 435,789 374,407 Other policyholders' funds and liabilities 32,706 28,263 ---------------------- Total liabilities 954,626 877,890 Stockholder's equity 290,043 278,754 ---------------------- Total liabilities and stockholder's equity $ 1,244,669 1,156,644 ====================== A summarized consolidated income statement (unaudited) for Ponderosa Holdings, Inc. and its subsidiaries is presented below: Six months ended September 30, 1996 1995 ---------------------- (in thousands) Premiums $ 79,056 76,442 Net investment income 24,542 23,395 Other income 1,178 4,592 --------------------- Total revenue 104,776 104,429 Benefits and losses 66,716 68,099 Amortization of deferred policy acquisition costs 8,057 7,799 Other expenses 14,712 12,121 --------------------- Income from operations 15,291 16,410 Federal income tax expense (4,934) (4,617) --------------------- Net income $ 10,357 11,793 ===================== The Company has engaged an investment banking firm to explore various alternatives with regard to Oxford, its life insurance subsidiary. Such alternatives may include strategic alliances with other insurance companies or Oxford's possible sale. 14 AMERCO AND CONSOLIDATED SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (Unaudited) 4. NOTES AND LOANS 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. In August 1996, the Company extinguished $86,400,000 of its long-term notes originally due in fiscal 1997 through fiscal 1999. The above transactions resulted in an extraordinary loss of $2,004,000 net of tax of $1,541,000 ($0.07 per share). 5. STOCKHOLDERS' EQUITY On July 19, 1996, pursuant to the judgment in the Shoen Litigation, the Company paid CEMAR, Inc. (Cemar) approximately $15,857,000 to repurchase 2,331,984 shares of Common Stock held by Cemar. On the same date the Company paid damages to Cecilia M. Hanlon of approximately $43,139,000 and statutory post-judgment pre- petition interest on the above amounts of approximately $129,000. On August 6, 1996, the Company funded approximately $8,283,000 of post-petition date interest by depositing the same into an escrow account pending the outcome of a dispute involving the entitlement of the plaintiffs in the Shoen Litigation to post-petition date interest. The Common Stock held by Cemar was transferred into the Company treasury. Cecilia M. Hanlon, the sole voting stockholder of Cemar, is the sister of Edward J., Mark V., and James P. Shoen, who are major stockholders and directors of the Company. On August 30, 1996, the Company issued 100,000 shares of its Series B Preferred Stock with no par value for $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 will be convertible, in certain events, at the holder's option, into either shares of the Company's Series B Common Stock, $0.25 par value or all of the outstanding shares of Picacho Peak Investment Co., a subsidiary of AMERCO. On September 6, 1996, pursuant to the judgment in the Shoen Litigation, the Company paid Katabasis International, Inc. (Katabasis) approximately $27,485,000 to repurchase 4,041,924 shares of Common Stock held by Katabasis. The Company also paid damages to Samuel W. Shoen of approximately $74,771,000 and statutory post-judgment pre-petition interest on the above amounts of approximately $224,000. The Company also funded approximately $15,726,000 of post-petition date interest by depositing the same into an escrow account pending the outcome of a dispute involving the entitlement of the plaintiffs in the Shoen Litigation to post- petition date interest. The Common Stock held by Katabasis was transferred into the Company treasury. Samuel W. Shoen, the sole voting stockholder of Katabasis, is the brother of Edward J., Mark V., and James P. Shoen, who are major stockholders and directors of the Company. 15 AMERCO AND CONSOLIDATED SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (Unaudited) 5. STOCKHOLDERS' EQUITY, continued On September 20, 1996, pursuant to the judgment in the Shoen Litigation, the Company paid Kattydid, Inc. (Kattydid) approximately $8,719,000 to repurchase 1,282,248 shares of Common Stock held by Kattydid. The Company paid damages to Katrina (Shoen) Carlson of approximately $37,305,000 and statutory post-judgment pre-petition interest on the above amounts of approximately $112,000. The Company also paid Katrina (Shoen) Carlson approximately $4,994,000 to repurchase 734,376 shares of Common Stock held by her and funded approximately $8,041,000 of post- petition date interest by depositing the same into an escrow account pending the outcome of a dispute involving the entitlement of the plaintiffs in the Shoen Litigation to post-petition date interest. The Common Stock held by Kattydid and Katrina (Shoen) Carlson was transferred into the Company treasury. Katrina (Shoen) Carlson, the sole voting stockholder of Kattydid, is the sister of Edward J., Mark V., and James P. Shoen, who are major stockholders and directors of the Company. On October 1, 1996, pursuant to the judgment in the Shoen Litigation, the Company paid Mickl, Inc. (Mickl) approximately $27,444,000 to repurchase 4,035,924 shares of Common Stock held by Mickl. On the same date the Company paid net damages to Michael L. Shoen of approximately $73,158,000 and statutory post-judgment pre- petition interest on the above amounts of approximately $224,000. On the same date, the Company paid Michael L. Shoen approximately $3,000 to repurchase 380 shares of Common Stock held by him and funded approximately $16,400,000 of post-petition date interest by depositing the same into an escrow account pending the outcome of a dispute involving the entitlement of the plaintiffs in the Shoen Litigation to post-petition date interest. The Common Stock held by Mickl and Michael L. Shoen was transferred into the Company treasury. Michael L. Shoen, the sole voting stockholder of Mickl, is the brother of Edward J., Mark V., and James P. Shoen, who are major stockholders and directors of the Company. See Part II. Item 1. Legal Proceedings for more information on the Shoen Litigation. 6. CONTINGENT LIABILITIES AND COMMITMENTS During the six months ended September 30, 1996, U-Haul Leasing & Sales Co., a wholly-owned subsidiary of U-Haul International, Inc., entered into ten transactions, whereby the Company sold rental trucks or trailers and subsequently leased them back. AMERCO has guaranteed $13,512,000 of residual values at September 30, 1996 on the rental trucks and trailers at the end of the lease term. U-Haul entered into one transaction, whereby the Company sold rental trailers and subsequently leased them back. Also, U- Haul entered into three transactions, 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, 1996, which have a term of more than one year (in thousands): Year ended Lease March 31, Commitments ------------------------ 1997 $ 17,331 1998 24,135 1999 24,135 2000 24,135 2001 23,153 Thereafter 112,690 ------- $ 225,579 ======= 16 AMERCO AND CONSOLIDATED SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (Unaudited) 6. CONTINGENT LIABILITIES AND COMMITMENTS, continued 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. 7. 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, 1996 1995 -------------------- (in thousands) Receivables $ 22,396 (35,299) ===================== Inventories $ (8,827) (1,065) ===================== Accounts payable and accrued liabilities $ 1,779 22,585 ===================== Income taxes paid in cash amounted to $1,694,000 and $143,000 for the quarters ended September 30, 1996 and 1995, respectively. Interest paid in cash amounted to $36,173,000 and $36,755,000 for the quarters ended September 30, 1996 and 1995, respectively. 8. RELATED PARTIES During the six months ended September 30, 1996, a subsidiary of the Company received principal payments of $84,001,000, interest payments of $3,839,000 and management fees of $745,000 from Three SAC Self-Storage Corporation (Three SAC). Three SAC's voting common stock is owned by SAC Holding Corporation (SAC Holding) and the non- voting preferred stock is owned by SAC Non-Business Trust. The voting common stock of SAC Holding is held by Mark V. Shoen, a major stockholder, director and officer of the Company. Three SAC properties are currently managed by the Company pursuant to a management agreement, under which the Company receives a management fee equal to 6% of the gross receipts from the properties. The management fee percentage is consistent with the fee received by the Company for other properties managed by the Company. On June 27, 1996, a subsidiary of the Company sold Three SAC notes of $86,000,000 to an outside party. As of September 30, 1996, a subsidiary of the Company funded the purchase of seventeen properties, with one additional property funded subsequent to the quarter end, by Four SAC Self-Storage Corporation (Four SAC) for an amount of approximately $15,487,000. Four SAC is owned by SAC Holding. The voting common stock of SAC Holding is held by Mark V. Shoen, a major stockholder, director, and officer of the Company. Four SAC acquired three of the properties from a subsidiary of the Company at a purchase price equal to the Company's acquisition cost plus capitalized costs. Such properties are currently managed by the Company for which the Company will receive a management fee equal to 6% of the gross receipts from the properties. The management fee percentage is consistent with the fee received by the Company for other properties managed by the Company. 17 AMERCO AND CONSOLIDATED SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (Unaudited) 9. NEW ACCOUNTING STANDARDS On April 1, 1996, the Company adopted Statement of Financial Accounting Standards No. 121 - Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of. Effective for fiscal years beginning after December 15, 1995 the standard establishes accounting standards for the impairment of long-lived assets, certain identifiable intangibles, and goodwill related to those assets to be held and used and for long-lived assets and certain identifiable intangibles to be disposed of. The adoption of this statement had no impact on the financial condition or results of operations of the Company. 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 six months ended September 30, 1995. 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. 18 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. RESULTS OF OPERATIONS The following table shows industry segment data from the Company's three industry segments: rental operations, life insurance and property and casualty insurance, for the six months ended September 30, 1996 and 1995. Rental operations is composed of the operations of U-Haul and Amerco Real Estate Company. Life insurance is composed of the operations of Oxford Life Insurance Company (Oxford). Property and casualty insurance is composed of the operations of Republic Western Insurance Company (RWIC). The Company's results of operations have historically fluctuated from quarter to quarter. In particular, the Company's U-Haul rental operations are seasonal and proportionately more of the Company's revenues and net earnings are generated in the first and second quarters each fiscal year (April through September). Property/ Adjustments Rental Life Casualty and Operations Insurance Insurance Eliminations Consolidated ----------------------------------------------------------- (in thousands) Six months ended September 30, 1996 Revenues: Outside $ 661,958 23,740 74,438 - 760,136 Intersegment - 782 5,843 (6,625) - ------------------------------------------------------- Total revenues 661,958 24,522 80,281 (6,625) 760,136 ======================================================== Operating profit $ 146,570 5,590 9,701 - 161,861 =========================================== Interest expense 35,282 -------- Pretax earnings from operations $ 126,579 ======== Identifiable assets $1,908,032 621,686 622,983 (334,855) 2,817,846 ======================================================= Property/ Adjustments Rental Life Casualty and Operations Insurance Insurance Eliminations Consolidated ----------------------------------------------------------- (in thousands) Six months ended September 30, 1995 Revenues: Outside $ 602,687 24,265 74,824 - 701,776 Intersegment (270) 708 4,662 (5,100) - ------------------------------------------------------- Total revenues 602,417 24,973 79,486 (5,100) 701 776 ======================================================= Operating profit $ 97,676 6,838 9,572 270 114,356 ========================================== Interest expense 35,554 -------- Pretax earnings from operations $ 78,802 ======== Identifiable assets $1,845,370 563,138 593,506 (312,753) 2,689,261 ======================================================= 19 SIX MONTHS ENDED SEPTEMBER 30, 1996 VERSUS SIX MONTHS ENDED SEPTEMBER 30, 1995 U-Haul U-Haul revenues consist of (i) total rental and other revenue and (ii) net sales. Total rental and other revenue increased by $54.0 million, approximately 10.8%, to $554.2 million in the first six months of fiscal 1997. The increase reflects higher net revenues from the rental of moving related equipment and self-storage facilities which increased $27.3 million due to growth (volume) in truck rental transactions, additional rentable square footage, and an increase in management fees from storage facilities managed for others. Other revenue increased $26.7 million. Contributing to the increase is the recognition of increased net gains on the sale of real and personal property of $7.6 million over the comparable period for fiscal 1996. Net sales revenues were $107.2 million in the first six months of fiscal 1997, which represents an increase of approximately 4.4% from the first six months of fiscal 1996 net sales of $102.7 million. Revenue growth from the sale of moving support items, hitches, and propane resulted in a $5.0 million increase during the six months, which was partially offset by a decrease in gasoline sales consistent with the Company's ongoing efforts to remove underground storage tanks and gradually discontinue gasoline sales. Cost of sales was $62.6 million in the first six months of fiscal 1997, which represents an increase of approximately 8.0% from $58.0 million for the same period in fiscal 1996. This increase in cost of sales reflects higher material costs from the sale of moving support items, hitches and propane which can be primarily attributed to higher sales levels and increased allowance for inventory shrinkage. Operating expenses increased to $398.0 million in the first six months of fiscal 1997 from $346.460.7 million in the first six months of fiscal 1996, an increase of15.6 approximately 14.97%. Rental equipment maintenance costs increased $20.7 million due to an increase in fleet size and transaction levels. Personnel expense increased $13.7 million due to higher levels of business activity. All other operating expense categories increased in the aggregate by $17.2 million compared to the prior year. Advertising expense decreased to $16.0 million in the first six months of fiscal 1997 from $24.1 million in the first six months of fiscal 1996. The decrease primarily reflects a one-time expense of $8.7 million recognized during the first six months of fiscal 1996, due to the adoption of Statement of Position 93-7 which requires immediate recognition of advertising costs not qualifying as direct-response. Depreciation expense for the first six months of fiscal 1997 was $38.7 million, as compared to $76.3 million during the same period of the prior year. During the third and fourth quarters of fiscal 1996, based on the Company's in-depth market analysis, the Company increased the estimated salvage value of certain rental trucks. Oxford - Life Insurance Premiums from Oxford's reinsurance lines before intercompany eliminations were $10.6 million for the six months ended June 30, 1996, or 74.1% of total premiums for that period. This represents an increase of $1.7 million over the same period in 1995 or an increase of 19.1%. Reinsurance premiums are primarily from term life insurance, deferred annuity contracts that have matured, and credit insurance business. Increases in premiums are primarily from the anticipated increase in annuitizations as a result of the maturing of deferred annuities and from additional production in the credit life and credit accident and health business. Premiums from Oxford's direct lines before intercompany eliminations were $3.7 million for the six months ended June 30, 1996, a decrease of $0.3 million. This decrease in direct premium is primarily attributable to the credit insurance business. Oxford's direct business related to group life and disability coverage issued to employees of the Company for the six months ended June 30, 1996 accounted for approximately 7.5% of premiums. Other direct lines, including the credit insurance business, accounted for approximately 18.4% of Oxford's premiums for the six months ended June 30, 1996. 20 Net investment income before intercompany eliminations was $$9.4 million and $8.0 million for the six month periods ended June 30, 1996 and 1995, respectively. This increase is primarily due to increases in deposit funds from additional production and increasing margins on the interest sensitive business. Other income is comprised of gains/(losses) on the disposition of investments and income on the surrender of deferred annuity products. Gains/(losses) on the disposition of investments were ($0.4) million and $2.9 million for the six months ended June 30, 1996 and 1995, respectively. Oxford had $1.2 million and $1.0 million of ssurrender charge income, for the six month period ended June 30, 1996 and 1995, respectively. Benefits and expenses incurred were $18.9 million for the six months ended June 30, 1996, an increase of 4.4% from 1995. Comparable benefits and expenses incurred for 1995 were $18.1 million. This increase is primarily due to the increase in annuitizations discussed above. Operating profit before intercompany eliminations decreased by $1.2 million, or approximately 17.6%, in 1996 to $5.6 million, primarily due to a decrease in gains on the disposition of fixed maturity investments. RWIC - Property and Casualty RWIC gross premium writings for the six months ended June 30, 1996 were $89.4 million as compared to $81.4 million in the first six months of 1995. This represents an increase of $8.0 million, or 9.8%. As in prior years, the rental industry market accounts for a significant share of total premiums, approximately 46.0% and 41.5% in the first six months of 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 professional reinsurance via broker markets. Premiums in this area increased during the first six months of 1996 to $28.8 million, or 32.2% of total gross premiums, from comparable 1995 figures of $27.9 million, or 34.3% of total premiums. Premium writings in selected general agency lines are expected to remain consistent with prior years. Premiums from selected general agency lines accounted for 13.5% of written premiums in the first six months of 1996 as compared to 16.9% in the first six months of 1995. RWIC continued its direct multiple peril coverage of various commercial properties and businesses in 1996. These premiums accounted for 8.2% of the total gross written premium during first six months of 1996, as compared to 6.3% for the first six months of 1995. Net earned premiums increased $1.3 million, or 2.1%, to $64.8 million for the six months ended June 30, 1996, compared with premiums of $63.5 million for the six months ended June 30, 1995. The premium increase was primarily due to improved processing. Underwriting expenses incurred were $70.6 million for the six months ended June 30, 1996, an increase of $0.7 million, or 1.0% over 1995. Comparable underwriting expenses incurred for the first six months of 1995 were $69.9 million. The increase is attributed to increased commission expense offset by decreased loss and loss adjusting expenses. The increased commission expense resulted from a smaller adjustment to realize a margin on a canceled general agency program, combined with increased acquisition expense on assumed treaty reinsurance business. The reduction in loss and loss adjusting expenses occurred in the rental industry liability and assumed treaty reinsurance lines. Net investment income was $15.2 million for the six months ended June 30, 1996, a decrease of 0.7% from the six months ended June 30, 1995 net investment income of $15.3 million. RWIC completed the first six months of 1996 with income before tax expense of $9.7 million as compared to $9.6 million for the comparable period ended June 30, 1995. This represents an increase of $0.1 million, or 1.0% over 1995. Increased premium earnings were offset by increased underwriting expenses to produce this minimal change. Interest Expense Interest expense decreased to $35.3 million for the six months ended September 30, 1996, as compared to $35.6 million for the six months ended September 30, 1995. 21 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 $86.4 million of its long-term notes originally due in fiscal 1997 through fiscal 1999. These transactions resulted in an extraordinary loss of $2.0 million net of tax of $1.5 million ($0.07 per share). Consolidated Group As a result of the foregoing, pretax earnings of $123.4 million were realized during the six months ended September 30, 1996, as compared to $78.8 million for the same period in 1995. After providing for income taxes and extraordinary loss on the extinguishment of debt, net earnings for the six months ended September 30, 1996 were $75.720.9 million, as compared to $50.5 million for the same period of the prior year. 22 QUARTERLY RESULTS The following table presents unaudited quarterly results for the ten quarters in the period beginning April 1, 1994 and ending September 30, 1996. 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 per share data). Quarter Ended -------------------------- Jun 30, Sep 30, 1996 1996 -------------------------- Total revenues $ 359,708 400,428 Net earnings (loss) 40,005 37,737 Weighted average common shares outstanding (4) 32,015,301 27,675,192 Net earnings (loss) per common share (1) 1.15 1.22 Quarter Ended ------------------------------------------------ Jun 30, Sep 30, Dec 31, Mar 31, 1995 1995 1995 1996 ------------------------------------------------ Total revenues $ 330,509 371,267 307,452 285,195 Net earnings (loss) (2) (3) 15,177 35,332 7,701 2,184 Weighted average common shares outstanding (4) 37,958,426 37,905,225 36,796,961 32,554,458 Net earnings (loss) per common share (1) 0.31 0.85 0.13 (0.04) Quarter Ended ------------------------------------------------ Jun 30, Sep 30, Dec 31, Mar 31, 1994 1994 1994 1995 ------------------------------------------------ Total revenues $ 322,333 359,520 294,858 259,521 Net earnings (loss) 29,413 40,071 1,907 (11,359) Weighted average common shares outstanding 37,107,536 37,053,707 37,025,575 38,072,543 Net earnings (loss) per common share (1) 0.71 1.00 (0.04) (0.44) ________________ (1)Net earnings (loss) per common share amounts were computed after giving effect to the dividend on the Company's Series A 8 1/2% Preferred Stock. (2)Reflects the adoption of Statement of Position 93-7, "Reporting on Advertising Costs." (3)Reflects the change in estimated salvage value during the third and fourth quarters of fiscal 1996. (4)Reflects the acquisition of treasury shares acquired pursuant to the Shoen Litigation as discussed in Part II. - Item 1. Legal Proceedings. 23 QUARTER ENDED SEPTEMBER 30, 1996 VERSUS QUARTER ENDED SEPTEMBER 30, 1995 U-Haul U-Haul revenues consist of (i) total rental and other revenue and (ii) net sales. Total rental and other revenue increased by $28.2 million, approximately 10.6%, to $294.5 million in the second quarter of fiscal 1997. The increase reflects higher net revenues from the rental of moving related equipment and self-storage facilities which increased by $12.2 million due to growth (volume) in truck rental transactions, additional rentable square footage, and an increase in management fees from storage facilities managed for others. Other revenue accounted for the remaining increase, including increased net gains on the sale of real and personal property. Net sales revenues were $51.2 million in the second quarter of fiscal 1997, which represents an increase of approximately 3.3% from the second quarter of fiscal 1996 net sales of $49.6 million. Increased sales of moving support items, hitches, and propane resulted in revenue growth of $2.1 million during the quarter. Cost of sales was $31.1 million in the second quarter of fiscal 1997, which represents an increase of approximately 6.9% from $29.0 million for the same period in fiscal 1996. This increase in cost of sales reflects higher allowances for inventory shrinkage and higher material costs from the sale of hitches and propane which can be primarily attributed to higher sales levels. Operating expenses increased to $214.7 million in the second quarter of fiscal 1997 from $177.960.7 million in the second quarter of fiscal 1996, an increase of15.6 approximately 20.77%. Rental equipment maintenance costs increased $7.0 million due to an increase in fleet size and transaction levels. New leasing activities increased lease expense by $5.5 million. Higher levels of business activity increased personnel expense by approximately $9.3 million. All other operating expense categories increased in the aggregate by $15.0 million compared to the prior year. Advertising expense increased to $7.9 million in the second quarter of fiscal 1997 from $7.2 million in the second quarter of fiscal 1996. Depreciation expense for the quarter was $19.9 million, as compared to $38.6 million during the same period of the prior year. During the third and fourth quarters of fiscal 1996, based on the Company's in-depth market analysis, the Company increased the estimated salvage value of certain rental trucks. Oxford - Life Insurance Premiums from Oxford's reinsurance lines before intercompany eliminations were $5.4 million for the quarter ended June 30, 1996, or 75.0% of total premiums for that period. This represents an increase of $0.5 million over the same period in 1995 or an increase of 10.2%. Reinsurance premiums are primarily from term life insurance, deferred annuity contracts that have matured, and credit insurance business. Increases in premiums are primarily from the anticipated increase in annuitizations as a result of the maturing of deferred annuities and from additional production in the credit life and credit accident and health business. Premiums from Oxford's direct lines before intercompany eliminations were $1.8 million for the quarter ended June 30, 1996, a decrease of $0.2 million. This decrease in direct premium is primarily attributable to the credit insurance business. Oxford's direct business related to group life and disability coverage issued to employees of the Company for the quarter ended June 30, 1996 accounted for approximately 7.2% of premiums. Other direct lines, including the credit insurance business, accounted for approximately 17.8% of Oxford's premiums for the quarter ended June 30, 1996. 24 Net investment income before intercompany eliminations was $4.5 million and $4.2 million for the quarters ended June 30, 1996 and 1995, respectively. This increase is primarily due to increases in deposit funds from additional production and increasing margins on the interest sensitive business. Other income is comprised of gains on the disposition of investments and income on the surrender of deferred annuity products. Gains on the disposition of investments were $0.2 million and $2.8 million for the quarters ended June 31, 1996 and 1995, respectively. Oxford had $0.6 million and $0.5 million of surrender charge income for the quarters ended June 30, 1996 and 1995, respectively. Benefits and expenses incurred were $9.9 million for the quarter ended June 30, 1996, a decrease of 2.0% from 1995. Comparable benefits and expenses incurred for 1995 were $10.1 million. This decrease is primarily due to a decrease in the amortization of deferred acquisition costs primarily as a result of the decrease in realized capital gains on the disposition of fixed maturities partially offset by the increase in annuitizations discussed above. Operating profit before intercompany eliminations decreased by $1.6 million, or approximately 38.1%, in 1996 to $2.6 million, primarily due to the decrease in gains on the disposition of fixed maturity investments. RWIC - Property and Casualty RWIC gross premium writings for the quarter ended June 30, 1996 were $41.4 million as compared to $45.2 million in the second quarter of 1995. The rental industry market accounts for a significant share of total premiums, approximately 66.9% and 60.1% in the second quarters of 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 professional reinsurance via broker markets. Premiums in this area decreased during the second quarter of 1996 to $4.7 million, or 11.4% of total gross premiums, from comparable 1995 figures of $7.7 million, or 17.1% of total premiums. Premium writings in selected general agency lines are expected to remain consistent with prior years. Premiums from selected general agency lines accounted for 12.1% share of written premiums in 1996 as compared to 16.5% share in 1995. RWIC continued its direct multiple peril coverage of various commercial properties and businesses in 1996. These premiums accounted for 9.5% of total gross written premium during second quarter 1996, as compared to 6.3% in 1995. This increase is the result of improved policy processing. Net earned premiums remained at $39.5 million for the quarter ended June 30, 1996, consistent with the same amount of premium for the quarter ended June 30, 1995. Underwriting expenses incurred were $43.6 million for the quarter ended June 30, 1996, an increase of $1.2 million, or 2.8% over 1995. Comparable underwriting expenses incurred for the second quarter of 1995 were $42.4 million. The increase resulted from a smaller adjustment to realize a margin on a canceled general agency program and an increase in acquisition expense on assumed treaty reinsurance business. Net investment income was $7.4 million for the quarter ended June 30, 1996, a decrease of 3.9% over 1995 net investment income of $7.7 million. The decrease is due to lower cash flow from operations and a 1995 timing adjustment in mortgage interest earned. RWIC completed the second quarter of 1996 with income before tax expense of $3.7 million as compared to $4.5 million for the comparable period ended June 30, 1995. This represents a decrease of $0.8 million, or 17.8% under 1995. The decrease resulted from the combination of increased underwriting expenses and decreased investment income, offset by realized gains and other income. Interest Expense Interest expense decreased to $16.4 million for the quarter ended September 30, 1996, as compared to $16.7 million for the quarter ended September 30, 1995. Extraordinary Loss on Extinguishment of Debt During the second quarter of fiscal year 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 $86.4 million of its long-term notes originally due in fiscal 1997 through fiscal 1999. These transactions resulted in an extraordinary loss of $2.0 million net of tax of $1.5 ($0.07 per share). 25 Consolidated Group As a result of the foregoing, pretax earnings of $59.1 million were realized during the quarter ended September 30, 1996, as compared to $55.1 million for the same period in 1995. After providing for income taxes and extraordinary loss on the extinguishment of debt, net earnings for quarter ended September 30, 1996 were $35.7 million, as compared to $35.3 million for the same period of the prior year. LIQUIDITY AND CAPITAL RESOURCES U-Haul To meet the needs of its customers, U-Haul must maintain a large inventory of fixed asset rental items. At September 30, 1996, net property, plant and equipment represented approximately 65.7% of total U-Haul assets and approximately 44.5% of consolidated assets. During the first six months of fiscal 1997, capital expenditures were $134.2 million, as compared to $143.1 million during the first six months of fiscal 1996, reflecting expansion of the rental truck fleet, and real property acquisitions. These acquisitions were funded with internally generated funds from operations, operating leases, equity placement, and debt financings. Cash flows from operations were $104.5 million during the first six months of fiscal 1997, as compared to $145.9 million during the first six months of fiscal 1996. The decrease of $41.4 million is primarily due to an increase in other assets offset by increased earnings and the sale of mortgage note receivables. Cash flows from investing activities were affected by the sale and subsequent leaseback of rental trailers for net proceeds of $97.4 million. Oxford - 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. Cash provided by operating activities were $9.3 million and $5.1 million for the six months ended June 30, 1996 and 1995, respectively. Cash flows from financing activities were $22.7 million and $62.1 million for the six months ended June 30, 1996 and 1995, 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 June 30, 1996 and 1995, short-term investments amounted to $9.5 million and $18.0 million, respectively. Management believes that the overall sources of liquidity will continue to meet foreseeable cash needs. Stockholder's equity of Oxford decreased to $97.3 million in 1996 from $99.6 million in 1995. During the six months ended June 30, 1996, Oxford paid dividends to Ponderosa of $3.9 million. 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 in the amount of $400,000. 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. Statutory surplus that can be distributed as dividends without prior regulatory approval is $7,080,000. These restrictions are not expected to have a material adverse effect on the ability of the Company to meet its cash obligations. RWIC - Property and Casualty Cash flows from operating activities decreased $12.5 million during the six months ended June 30, 1996, as compared to an increase of $0.1 million for the comparable period of 1995. The change is due to temporary increases in accounts receivable and due from affiliates. RWIC's short-term investment portfolio was $4.5 million at June 30, 1996. This level of liquid assets is adequate to meet periodic needs as well as any near term shortfall. This balance also reflects funds in transition from maturity proceeds to long- term investments. The structure of the long-term portfolio is designed to match future cash needs. Capital and operating budgets allow RWIC to accurately schedule cash needs. 26 RWIC maintains a diversified investment portfolio. Approximately 96.6% of the portfolio consists of investment grade securities. The maturity distribution is designed to provide sufficient liquidity to meet future cash needs. Current liquidity is adequate, with current invested assets equal to 94.9% of total liabilities. Stockholder's equity increased 2.4% from $188.2 million at December 31, 1995 to $192.7 million at June 30, 1996. 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. RWIC paid no stockholder's dividends during the six months ended June 30, 1996, however it did declare a $6.7 million dividend to Ponderosa. Consolidated Group At September 30, 1996, total notes and loans payable outstanding was $940.3 million as compared to $998.2 million at March 31, 1996, and $866.1 million at September 30, 1995. During each of the fiscal years ending March 31, 1997, 1998, and 1999, U-Haul estimates gross capital expenditures will average approximately $290 million as a result of the expansion of the rental truck fleet and self-storage operation. This level of capital expenditures, combined with an average of approximately $100 million in annual long-term debt maturities during this same period, are expected to create annual average funding needs of approximately $390 million. Management estimates that U-Haul will fund approximately 75% of these requirements with internally generated funds, including proceeds from the disposition of older trucks and other asset sales. The remainder of the anticipated capital expenditures are expected to be financed through existing credit facilities, new debt placements, lease fundings, and equity offerings. On August 30, 1996, the Company issued 100,000 shares of its Series B Preferred Stock with no par value for $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 will be convertible, at the holder's option, into either shares of the Company's Series B Common Stock, $0.25 par value or all of the outstanding shares of Picacho Peak Investment Co., a subsidiary of AMERCO. 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 a long-standing legal dispute involving the Shoen family and related to control of the Company. As a result, the plaintiffs were required to transfer all of their 18,256,976 shares of Common Stock to the Company. The Company plans to deduct for income tax purposes approximately $324.0 million of the payments made to the plaintiffs, which will reduce the Company's income tax liability. 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. Since the current management was put in place in 1987, the Company has pursued a strategic plan that emphasizes its core do-it- yourself rental, moving and storage business. Consistent with its strategic plan, the Company has engaged an investment banking firm to explore various alternatives with regard to Oxford, its life insurance subsidiary. Such alternatives may include strategic alliances with other insurance companies or Oxford's possible sale. 27 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, 1996, the Company had $940.3 million in total notes and loans payable outstanding and unutilized committed lines of credit of approximately $382.0 million. In May 1996, the Company issued $175.0 million of 7.85% Senior Notes Due May 15, 2003. The Company has applied and will continue to apply the net proceeds from the sale of the notes to pay down, at maturity, a portion of the Company's long-term debt. 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, 1996, the Company was in compliance with these covenants. The Company is 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. 28 PART II. OTHER INFORMATION Item 1. Legal Proceedings. As disclosed in the Company's Form 10-K for the year ended March 31, 1996, Edward J. Shoen, James P. Shoen, Aubrey K. Johnson, John M. Dodds, and William E. Carty, who are current members of the Board of Directors of the Company (the Director-Defendants), filed for protection under Chapter 11 of the federal bankruptcy laws on February 21, 1995, as a result of the judgment entered on that date in the action entitled Samuel W. Shoen, M.D., et al. v. Edward J. ------------------------------------------- Shoen, et al., No. CV88-20139 (the Shoen Litigation). The Director- - ------------- Defendants, in cooperation with the Company, filed separate plans of reorganization, 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 are collectively referred to as the "Plan." The Plan was confirmed by the bankruptcy court on March 15, 1996. Pursuant to the Plan, the Company, prior to July 1, 1996, paid a total of approximately $133.2 million to six of the plaintiffs to repurchase a total of 5,828,140 shares of Common Stock and satisfy the damages judgment in the Shoen Litigation with respect to those plaintiffs. In addition, on July 19, 1996, the Company paid Cemar, Inc. (Cemar) approximately $15.9 million to repurchase 2,331,984 shares of Common Stock held by Cemar. On the same date, the Company paid damages of approximately $43.1 million and statutory post-judgment, pre-petition date interest of $129,000 to Cecilia M. Hanlon. On August 6, 1996, the Company funded approximately $8.3 million of post-petition date interest by depositing such amount into an escrow account (the Escrow Account) pending the outcome of a dispute involving the entitlement of the plaintiffs in the Shoen Litigation to post-petition date interest (discussed below). The Common Stock held by Cemar was transferred into the Company treasury. In addition, on September 6, 1996, the Company paid Katabasis International, Inc. (Katabasis) approximately $27.5 million to repurchase 4,041,924 shares of Common Stock held by Katabasis. On the same date, the Company paid damages of approximately $74.8 million and statutory post-judgment, pre- petition date interest of $224,000 to Samuel W. Shoen. The Company also funded approximately $15.7 million of post-petition date interest into the Escrow Account. On September 20, 1996, the Company paid Kattydid, Inc. (Kattydid) approximately $8.7 million to repurchase 1,282,248 shares of Common Stock held by Kattydid and paid Katrina (Shoen) Carlson approximately $5.0 million to repurchase 734,376 shares of Common Stock held by her. On the same date, the Company paid damages of approximately $37.3 million and statutory post-judgment, pre-petition date interest of $112,000 to Katrina Shoen Carlson. The Company also funded approximately $8.0 million of post-petition date interest into the Escrow Account. Finally, on October 1, 1996, the Company paid MICKL, Inc. (MICKL) approximately $27.4 million to repurchase 4,035,924 shares of Common Stock held by MICKL and paid Michael L. Shoen $2,600 to repurchase 380 shares of Common Stock held by him. On the same date, the Company paid damages of approximately $73.2 million and statutory post-judgment, pre-petition date interest of $224,000 to Michael L. Shoen. The Company also funded approximately $16.2 million of post-petition date interest into the Escrow Account. As a result of the foregoing transactions, the balance of the judgment in the Shoen Litigation has been satisfied in full. On October 1, 1996, the Director-Defendants emerged from bankruptcy upon the filing of a Notice with the bankruptcy court that the effective date of the reorganized debtors' confirmed Plans has occurred and that the confirmed Plans have been performed and are 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 that the plaintiffs are entitled to such interest. The Director-Defendants and the Company have appealed the court's decision. As discussed above, the Company has deposited approximately $48.2 million into the Escrow Account to secure payment of the disputed interest, pending the final resolution of this issue (including all appeals by either side). If the interest issue is decided adversely to the Company and the Director-Defendants, the amount deposited into escrow 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 income, but could reduce shareholders' equity. 29 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. a. Exhibits 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 4.1 Certificate of Designations, Preferences and Rights of Series B Preferred Stock 4.2 Certificate of Designations, Preferences and Rights of Series B Common Stock 10.1 Series B Preferred Stock Purchase Agreement, dated as of August 30, 1996 10.2 Side Agreement, dated as of October 29, 1996 27 Financial Data Schedule b. Reports on Form 8-K. A report on Form 8-K was filed on September 6, 1996 in connection with the Company's issuance of up to an aggregate of $600,000,000 of Medium-Term Notes. _____________________________________ (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. 30 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: October 31, 1996 By: /S/ GARY B. HORTON ___________________________________ Gary B. Horton, Treasurer (Principal Financial Officer)