December 31, 2006 10Q Third Quarter Filing
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q

            (Mark One)
R QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended December 31, 2006

or

£ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the transition period from __________________ to __________________

     
Commission
File Number
Registrant, State of Incorporation,
Address and Telephone Number
I.R.S. Employer
Identification No.
 
 
AMERCO LOGO
 
1-11255
AMERCO
88-0106815
 
(A Nevada Corporation)
 
 
1325 Airmotive Way, Ste. 100
 
 
Reno, Nevada 89502-3239
 
 
Telephone (775) 688-6300
 
     
 
UHAUL LOGO
 
2-38498
U-Haul International, Inc.
86-0663060
 
(A Nevada Corporation)
 
 
2727 N. Central Avenue
 
 
Phoenix, Arizona 85004-1158
 
 
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 R No £
 
Indicate by check mark whether the registrant is a large accelerated filer, accelerated filer, or a non-accelerated filer. See definition of an “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer £   Accelerated filer R   Non-accelerated filer £
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)
Yes £ No R
 
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13, or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes R No £
 
21,284,604 shares of AMERCO Common Stock, $0.25 par value, were outstanding at February 6, 2007.
 
5,385 shares of U-Haul International, Inc. Common Stock, $0.01 par value, were outstanding at February 6, 2007.
 





TABLE OF CONTENTS

   
Page No.
 
PART I FINANCIAL INFORMATION
 
Item 1.
Financial Statements
 
 
1
 
2
 
3
 
4
 
5
 
6 - 33
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
34 - 56
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
56 - 57
Item 4.
Controls and Procedures
57
     
 
PART II OTHER INFORMATION
 
Item 1.
Legal Proceedings 
58
Item 1A.
Risk Factors
58
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
58
Item 3.
Defaults Upon Senior Securities
58
Item 4.
Submission of Matters to a Vote of Security Holders
59
Item 5.
Other Information
59
Item 6.
Exhibits
60

 

 






PART I FINANCIAL INFORMATION
 
ITEM 1. Financial Statements
AMERCO AND CONSOLIDATED ENTITIES
CONDENSED CONSOLIDATED BALANCE SHEETS
   
December 31,
 
March 31,
 
   
2006
 
2006
 
   
(Unaudited)
     
   
(In thousands)
 
ASSETS
         
Cash and cash equivalents
 
$
313,131
 
$
155,459
 
Reinsurance recoverables and trade receivables, net
   
214,517
   
230,179
 
Notes and mortgage receivables, net
   
1,810
   
2,532
 
Inventories, net
   
69,525
   
64,919
 
Prepaid expenses
   
40,310
   
53,262
 
Investments, fixed maturities and marketable equities
   
693,622
   
695,958
 
Investments, other
   
176,240
   
209,361
 
Deferred policy acquisition costs, net
   
42,466
   
47,821
 
Other assets
   
94,858
   
102,094
 
Related party assets
   
239,912
   
270,468
 
     
1,886,391
   
1,832,053
 
Property, plant and equipment, at cost:
             
Land
   
187,257
   
175,785
 
Buildings and improvements
   
803,988
   
739,603
 
Furniture and equipment
   
295,772
   
281,371
 
Rental trailers and other rental equipment
   
201,277
   
201,273
 
Rental trucks
   
1,505,270
   
1,331,891
 
SAC Holding II - property, plant and equipment
   
79,946
   
79,217
 
     
3,073,510
   
2,809,140
 
Less: Accumulated depreciation
   
(1,287,405
)
 
(1,273,975
)
Total property, plant and equipment
   
1,786,105
   
1,535,165
 
Total assets
 
$
3,672,496
 
$
3,367,218
 
LIABILITIES AND STOCKHOLDERS' EQUITY
             
Liabilities:
             
Accounts payable and accrued expenses
 
$
242,798
 
$
235,878
 
AMERCO's notes and loans payable
   
1,223,405
   
965,634
 
SAC Holding II notes and loans payable, non-recourse to AMERCO
   
75,253
   
76,232
 
Policy benefits and losses, claims and loss expenses payable
   
792,366
   
800,413
 
Liabilities from investment contracts
   
402,431
   
449,149
 
Other policyholders' funds and liabilities
   
9,476
   
7,705
 
Deferred income
   
12,853
   
21,346
 
Deferred income taxes
   
121,979
   
108,092
 
Related party liabilities
   
3,408
   
7,165
 
Total liabilities
   
2,883,969
   
2,671,614
 
Commitments and contingencies (notes 3, 6 and 7)
             
Stockholders' equity:
             
Series preferred stock, with or without par value, 50,000,000 shares authorized:
             
Series A preferred stock, with no par value, 6,100,000 shares authorized;
             
6,100,000 shares issued and outstanding as of December 31 and March 31, 2006
   
-
   
-
 
Series B preferred stock, with no par value, 100,000 shares authorized; none
             
issued and outstanding as of December 31 and March 31, 2006
   
-
   
-
 
Series 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;
             
3,716,181 shares issued as of December 31 and March 31, 2006
   
929
   
929
 
Common stock of $0.25 par value, 150,000,000 shares authorized;
             
38,269,519 issued as of December 31 and March 31, 2006
   
9,568
   
9,568
 
Additional paid-in capital
   
374,722
   
367,655
 
Accumulated other comprehensive loss
   
(40,650
)
 
(28,902
)
Retained earnings
   
870,493
   
773,784
 
Cost of common shares in treasury, net (20,701,096 shares as of
             
December 31 and March 31, 2006)
   
(418,092
)
 
(418,092
)
Unearned employee stock ownership plan shares
   
(8,443
)
 
(9,338
)
Total stockholders' equity
   
788,527
   
695,604
 
Total liabilities and stockholders' equity
 
$
3,672,496
 
$
3,367,218
 
The accompanying notes are an integral part of these condensed consolidated financial statements
 
 
1

 

AMERCO AND CONSOLIDATED ENTITIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 
       
Quarter Ended December 31,
 
       
2006
 
2005
 
       
(Unaudited)
 
   
                                     (In thousands, except share and per share amounts)
 
Revenues:
                   
Self-moving equipment rentals
       
$
328,149
 
$
353,409
 
Self-storage revenues
         
31,765
   
29,784
 
Self-moving and self-storage products and service sales
         
46,351
   
47,316
 
Property management fees
         
5,914
   
4,289
 
Life insurance premiums
         
29,454
   
30,743
 
Property and casualty insurance premiums
         
6,555
   
9,949
 
Net investment and interest income
         
13,019
   
12,807
 
Other revenue
         
5,631
   
7,373
 
Total revenues
         
466,838
   
495,670
 
                     
Costs and expenses:
                   
Operating expenses
         
271,891
   
271,368
 
Commission expenses
         
39,316
   
42,548
 
Cost of sales
         
24,970
   
23,376
 
Benefits and losses
         
31,461
   
35,202
 
Amortization of deferred policy acquisition costs
         
4,220
   
5,754
 
Lease expense
         
36,701
   
37,182
 
Depreciation, net of (gains) losses on disposals
         
50,017
   
34,821
 
Total costs and expenses
         
458,576
   
450,251
 
                     
Earnings from operations
         
8,262
   
45,419
 
Interest expense
         
(22,131
)
 
(17,791
)
Pretax earnings (loss)
         
(13,869
)
 
27,628
 
Income tax benefit (expense)
         
4,389
   
(12,458
)
Net earnings (loss)
         
(9,480
)
 
15,170
 
Less: Preferred stock dividends
         
(3,241
)
 
(3,241
)
Earnings (loss) available to common shareholders
       
$
(12,721
)
$
11,929
 
Basic and diluted earnings (loss) per common share
       
$
(0.61
)
$
0.57
 
Weighted average common shares outstanding:
                   
Basic and diluted
         
20,922,433
   
20,865,684
 
 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 
 
2

 


 
AMERCO AND CONSOLIDATED ENTITIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 
       
Nine Months Ended December 31,
 
       
2006
 
2005
 
       
(Unaudited)
 
   
                                       (In thousands, except share and per share amounts)
 
Revenues:
                   
Self-moving equipment rentals
       
$
1,181,103
 
$
1,201,374
 
Self-storage revenues
         
94,612
   
89,776
 
Self-moving and self-storage products and service sales
         
175,718
   
176,371
 
Property management fees
         
13,747
   
12,558
 
Life insurance premiums
         
91,493
   
90,050
 
Property and casualty insurance premiums
         
18,407
   
20,172
 
Net investment and interest income
         
42,757
   
38,873
 
Other revenue
         
22,563
   
31,470
 
Total revenues
         
1,640,400
   
1,660,644
 
                     
Costs and expenses:
                   
Operating expenses
         
814,078
   
827,861
 
Commission expenses
         
142,457
   
143,763
 
Cost of sales
         
88,734
   
85,337
 
Benefits and losses
         
90,909
   
89,225
 
Amortization of deferred policy acquisition costs
         
14,671
   
17,806
 
Lease expense
         
112,095
   
107,055
 
Depreciation, net of (gains) losses on disposals
         
132,775
   
103,380
 
Total costs and expenses
         
1,395,719
   
1,374,427
 
                     
Earnings from operations
         
244,681
   
286,217
 
Interest expense
         
(61,656
)
 
(52,672
)
Fees and amortization on early extinguishment of debt
         
(6,969
)
 
(35,627
)
Pretax earnings
         
176,056
   
197,918
 
Income tax expense
         
(69,624
)
 
(78,564
)
Net earnings
         
106,432
   
119,354
 
Less: Preferred stock dividends
         
(9,723
)
 
(9,723
)
Earnings available to common shareholders
       
$
96,709
 
$
109,631
 
Basic and diluted earnings per common share
       
$
4.62
 
$
5.26
 
Weighted average common shares outstanding:
                   
Basic and diluted
         
20,910,089
   
20,850,254
 
 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 
 
3

 


AMERCO AND CONSOLIDATED ENTITIES
 
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
 
   
Quarter Ended December 31,
 
   
2006
 
2005
 
   
(Unaudited)
 
   
(In thousands)
 
Comprehensive income (loss):
             
Net earnings (loss)
 
$
(9,480
)
$
15,170
 
Other comprehensive income (loss), net of tax:
             
Foreign currency translation
   
(3,396
)
 
(587
)
Unrealized gain (loss) on investments, net
   
3,777
   
(2,629
)
Fair market value of cash flow hedges
   
191
   
(128
)
Total comprehensive income (loss)
 
$
(8,908
)
$
11,826
 
               
 



   
Nine Months Ended December 31,
 
   
2006
 
2005
 
   
(Unaudited)
 
   
(In thousands)
 
Comprehensive income:
             
Net earnings
 
$
106,432
 
$
119,354
 
Other comprehensive income (loss), net of tax:
             
Foreign currency translation
   
(2,336
)
 
(689
)
Unrealized loss on investments, net
   
(912
)
 
(1,373
)
Fair market value of cash flow hedges
   
(8,500
)
 
3,119
 
Total comprehensive income
 
$
94,684
 
$
120,411
 
               
 


 
The accompanying notes are an integral part of these condensed consolidated financial statements.


 
 
4

 

AMERCO AND CONSOLIDATED ENTITIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
   
Nine Months Ended December 31,
 
   
2006
 
2005
 
   
(Unaudited)
 
   
(In thousands)
 
Cash flow from operating activities:
             
Net earnings
 
$
106,432
 
$
119,354
 
Depreciation
   
133,571
   
96,219
 
Amortization of deferred policy acquisition costs
   
14,671
   
17,806
 
Change in provision for losses on trade receivables
   
202
   
(24
)
Change in provision for losses on mortgage notes
   
(30
)
 
(1,216
)
Net (gain) loss on sale of real and personal property
   
(796
)
 
7,161
 
Net loss on sale of investments
   
1,615
   
3,041
 
Write-off of unamortized debt issuance costs
   
6,969
   
13,629
 
Deferred income taxes
   
15,451
   
50,556
 
Net change in other operating assets and liabilities:
             
Reinsurance recoverables and trade receivables
   
18,841
   
(1,642
)
Inventories
   
(3,082
)
 
(7,276
)
Prepaid expenses
   
4,325
   
(2,288
)
Capitalization of deferred policy acquisition costs
   
(4,192
)
 
(8,963
)
Other assets
   
2,487
   
2,215
 
Related party assets
   
40,279
   
5,589
 
Accounts payable and accrued expenses
   
15,145
   
(5,694
)
Policy benefits and losses, claims and loss expenses payable
   
(16,758
)
 
(5,618
)
Other policyholders' funds and liabilities
   
1,622
   
(14,878
)
Deferred income
   
(2,359
)
 
(17,485
)
Related party liabilities
   
(23,634
)
 
2,884
 
Net cash provided by operating activities
   
310,759
   
253,370
 
               
Cash flows from investing activities:
             
Purchases of:
             
Property, plant and equipment
   
(455,598
)
 
(252,362
)
Short term investments
   
(171,177
)
 
(369,804
)
Fixed maturities investments
   
(74,194
)
 
(183,677
)
Real estate
   
-
   
(2,362
)
Mortgage loans
   
(9,550
)
 
(5,838
)
Proceeds from sale of:
             
Property, plant and equipment
   
71,668
   
46,842
 
Short term investments
   
199,080
   
426,784
 
Fixed maturities investments
   
71,181
   
119,855
 
Cash received in excess of purchase for company acquired
   
1,235
   
-
 
Equity securities
   
-
   
10,615
 
Preferred stock
   
225
   
8,403
 
Real estate
   
9,542
   
45,425
 
Mortgage loans
   
4,835
   
10,338
 
Payments from notes and mortgage receivables
   
752
   
1,343
 
Net cash used by investing activities
   
(352,001
)
 
(144,438
)
               
Cash flows from financing activities:
             
Borrowings from credit facilities
   
321,189
   
1,248,550
 
Principal repayments on credit facilities
   
(64,383
)
 
(1,087,716
)
Debt issuance costs
   
(2,323
)
 
(29,597
)
Leveraged Employee Stock Ownership Plan - repayments from loan
   
895
   
1,251
 
Preferred stock dividends paid
   
(9,723
)
 
(9,723
)
Investment contract deposits
   
12,634
   
15,471
 
Investment contract withdrawals
   
(59,353
)
 
(55,943
)
Net cash provided by financing activities
   
198,936
   
82,293
 
               
Effects of exchange rate on cash
   
(22
)
 
(30
)
               
Increase in cash equivalents
   
157,672
   
191,195
 
Cash and cash equivalents at the beginning of period
   
155,459
   
55,955
 
Cash and cash equivalents at the end of period
 
$
313,131
 
$
247,150
 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
5

 


AMERCO AND CONSOLIDATED ENTITIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 
December 31, 2006, December 31, 2005 (Unaudited) and March 31, 2006,
 
 

 
 
1. Basis of Presentation
 
The third fiscal quarter for AMERCO ends on the 31st of December for each year that is referenced. Our insurance company subsidiaries have a third quarter that ends on the 30th of September for each year that is referenced. They have been consolidated on that basis. Our insurance companies’ financial reporting processes conform to calendar year reporting as required by state insurance departments. Management believes that consolidating their calendar year quarters into our fiscal year quarterly financial statements does not materially affect the financial position or results of operations. The Company discloses any material events occurring during the intervening period. Consequently, all references to our insurance subsidiaries’ years 2006 and 2005 correspond to the Company’s fiscal years 2007 and 2006.
 
Accounts denominated in non-U.S. currencies have been re-measured into U.S. dollars. Certain amounts reported in previous years have been reclassified to conform to the current presentation.
 
The consolidated financial statements for the third quarter and the first nine months of fiscal 2007 and fiscal 2006, and the balance sheet as of March 31, 2006 include the accounts of AMERCO and its wholly-owned subsidiaries and SAC Holding II Corporation and its subsidiaries (“SAC Holding II”).
 
The condensed consolidated balance sheet as of December 31, 2006 and the related condensed consolidated statements of operations and comprehensive income (loss) for the third quarter and the first nine months and the cash flows for the first nine months ended fiscal 2007 and 2006 are unaudited.
 
In our opinion, all adjustments necessary for the fair presentation of such condensed consolidated financial statements have been included. Such adjustments consist only of normal recurring items. Interim results are not necessarily indicative of results for a full year. The information in this 10-Q should be read in conjunction with Management’s Discussion and Analysis and financial statements and notes thereto included in the AMERCO 2006 Form 10-K.
 
Intercompany accounts and transactions have been eliminated.
 
Description of Legal Entities
 
AMERCO, a Nevada corporation (“AMERCO”), is the holding company for:
 
U-Haul International, Inc. (“U-Haul”),
 
Amerco Real Estate Company (“Real Estate”),
 
Republic Western Insurance Company (“RepWest”) and its wholly-owned subsidiary
 
North American Fire & Casualty Insurance Company (“NAFCIC”),
 
Oxford Life Insurance Company (“Oxford”) and its wholly-owned subsidiaries
 
North American Insurance Company (“NAI”)
 
Christian Fidelity Life Insurance Company (“CFLIC”)
 
Dallas General Life Insurance Company (“DGLIC”),
 
Unless the context otherwise requires, the term “Company,” “we,” “us” or “our” refers to AMERCO and its legal subsidiaries.
 

 


 
 
6




AMERCO AND CONSOLIDATED ENTITIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
 
 
Description of Operating Segments
 
AMERCO has four reportable segments. They are Moving and Storage Operations, Property and Casualty Insurance, Life Insurance and SAC Holding II.
 
Moving and Storage Operations include AMERCO, U-Haul and Real Estate and the wholly-owned subsidiaries of U-Haul and Real Estate and consist of the rental of trucks and trailers, sales of moving supplies, sales of towing accessories, sales of propane, the rental of self-storage spaces to the “do-it-yourself” mover and management of self-storage properties owned by others. Operations are conducted under the registered trade name U-Haul® throughout the United States and Canada.
 
Property and Casualty Insurance includes RepWest and its wholly-owned subsidiary. RepWest provides loss adjusting and claims handling for U-Haul through regional offices across North America. RepWest also underwrites components of the Safemove, Safetow and Safestor protection packages to U-Haul customers.
 
Life Insurance includes Oxford and its wholly-owned subsidiaries. Oxford originates and reinsures annuities, ordinary life, disability coverage and Medicare supplement insurance. Oxford also administers the self-insured employee health and dental plans for Arizona employees of the Company.
 
SAC Holding Corporation and its subsidiaries, and SAC Holding II Corporation and its subsidiaries, collectively referred to as “SAC Holdings”, own self-storage properties that are managed by U-Haul under property management agreements and act as independent U-Haul rental equipment dealers. AMERCO, through its subsidiaries, has contractual interests in certain SAC Holdings’ properties entitling AMERCO to potential future earnings based on the financial performance of these properties. With respect to SAC Holding II, AMERCO is considered the primary beneficiary of these contractual interests. Consequently, we include the results of SAC Holding II in the consolidated financial statements of AMERCO, as required by FIN 46(R).
 
2. Earnings (loss) per Share
 
Net earnings (loss) for purposes of computing earnings (loss) per common share are net earnings (loss) less preferred stock dividends. Preferred stock dividends include accrued dividends of AMERCO.
 
The shares used in the computation of the Company’s basic and diluted earnings (loss) per common share were as follows:
   
Quarter Ended December 31,
 
   
2006
 
2005
 
   
(Unaudited)
 
Basic and diluted earnings (loss) per common share
 
$
(0.61
)
$
0.57
 
Weighted average common shares outstanding:
             
Basic and diluted
   
20,922,433
   
20,865,684
 
 

   
Nine Months Ended December 31,
 
   
2006
 
2005
 
   
(Unaudited)
 
Basic and diluted earnings per common share
 
$
4.62
 
$
5.26
 
Weighted average common shares outstanding:
             
Basic and diluted
   
20,910,089
   
20,850,254
 
 
The weighted average common shares outstanding listed above exclude post-1992 shares of the employee stock ownership plan that have not been committed to be released. The unreleased shares net of shares committed to be released were 356,774 and 405,058 as of December 31, 2006 and December 31, 2005, respectively.
 
6,100,000 shares of preferred stock have been excluded from the weighted average shares outstanding calculation because they are not common stock and they are not convertible into common stock.

 

7


AMERCO AND CONSOLIDATED ENTITIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
 
 
3. Borrowings
 
Long-Term Debt
 
Long-term debt was as follows:
           
December 31,
 
March 31,
 
   
2006 Rate (a)
 
Maturities
 
2006
 
2006
 
           
(Unaudited)
     
           
(In thousands)
 
Real estate loan (amortizing term)
   
6.93
%
 
2018
 
$
297,500
 
$
242,585
 
Real estate loan (revolving credit)
   
-
   
2018
   
-
   
-
 
Senior mortgages
   
5.47%-5.75
%
 
2015
   
523,906
   
531,309
 
Mezzanine loan (floating) (b)
   
-
   
-
   
-
   
19,393
 
Construction loan (revolving credit)
   
-
   
2009
   
-
   
-
 
Working capital loan (revolving credit)
   
-
   
2008
   
-
   
-
 
Fleet loans (amortizing term)
   
6.81%-7.42
%
 
2012-2013
   
311,999
   
82,347
 
Fleet loan (revolving credit)
   
7.10
%
 
2010
   
90,000
   
90,000
 
Total AMERCO notes and loans payable
             
$
1,223,405
 
$
965,634
 
                           
(a) Interest rate as of December 31, 2006, including the effect of applicable hedging instruments
     
(b) Paid in full on August 30, 2006
                         
                           
 

 
Real Estate Backed Loans
 
Real Estate Loan
 
Amerco Real Estate Company and certain of its subsidiaries and U-Haul Company of Florida are borrowers under a Real Estate Loan. The lender is Merrill Lynch Commercial Finance Corp. The original amount of the Real Estate Loan was $465.0 million with an original maturity date of June 10, 2010. On August 18, 2006, the loan was amended to increase the availability to $500.0 million and extend the final maturity date to August 2018. The loan is comprised of a term loan facility with initial availability of $300.0 million and a revolving credit facility with an availability of $200.0 million. As of December 31, 2006 the outstanding balance on the Real Estate Loan was $297.5 million, with no portion of the revolver drawn down. On the date of the amendment, the Company expensed $7.0 million of deferred charges associated with the initial loan. U-Haul International, Inc. is a guarantor of this loan.
 
The amortizing term portion of the Real Estate Loan requires monthly principal and interest payments, with the unpaid loan balance and accrued and unpaid interest due at maturity. The revolving credit portion of the Real Estate Loan requires monthly interest payments when drawn, with the unpaid loan balance and any accrued and unpaid interest due at maturity. The Real Estate Loan is secured by various properties owned by the borrowers.
 
The interest rate, per the provisions of the amended Loan Agreement, is the applicable London Inter-Bank Offer Rate (“LIBOR”) plus the applicable margin. At December 31, 2006 the applicable LIBOR was 5.35% and the applicable margin was 1.50%, the sum of which was 6.85%. The applicable margin ranges from 1.50% to 2.00%. The rate on the term facility portion of the loan is hedged with an interest rate swap fixing the rate at 6.93% based on current margin. Refer to Item 3 “Quantitative and Qualitative Disclosures about Market Risk” of this filing for additional information.
 
The default provisions of the Real Estate Loan include non-payment of principal or interest and other standard reporting and change-in-control covenants. There are limited restrictions regarding our use of the funds.

 

8


AMERCO AND CONSOLIDATED ENTITIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
 
Senior Mortgages
 
Various subsidiaries of Amerco Real Estate Company and U-Haul International, Inc. are borrowers under the Senior Mortgages. The lenders for the Senior Mortgages are Merrill Lynch Mortgage Lending, Inc. and Morgan Stanley Mortgage Capital, Inc. The Senior Mortgages loan balances as of December 31, 2006 are in the aggregate amount of $467.6 million and are due July 2015. The Senior Mortgages require average monthly principal and interest payments of $3.0 million with the unpaid loan balance and accrued and unpaid interest due at maturity. The Senior Mortgages are secured by certain properties owned by the borrowers. The interest rates, per the provisions of the Senior Mortgages, are 5.68% per annum for the Merrill Lynch Mortgage Lending Agreement and 5.52% per annum for the Morgan Stanley Mortgage Capital Agreement. The default provisions of the Senior Mortgages include non-payment of principal or interest and other standard reporting and change-in-control covenants. There are limited restrictions regarding our use of the funds.
 
U-Haul Company of Canada is the borrower under a mortgage backed loan. The loan was arranged by Merrill Lynch Canada and the loan balance as of December 31, 2006 is $9.5 million ($11.1 million Canadian currency). The loan is secured by certain properties owned by the borrower. The loan was entered into on June 29, 2005 at a rate of 5.75%. The loan requires monthly principal and interest payments with the unpaid loan balance and accrued and unpaid interest due at maturity. It has a twenty-five year amortization with a maturity of July 1, 2015. The default provisions of the loan include non-payment of principal or interest and other standard reporting and change-in-control covenants. There are limited restrictions regarding our use of the funds.
 
A subsidiary of Amerco Real Estate Company is a borrower under a mortgage backed loan. The lender is Morgan Stanley Mortgage Capital, Inc. and the loan balance as of December 31, 2006 is $23.6 million. The loan was entered into on August 17, 2005 at a rate of 5.47%. The loan is secured by certain properties owned by the borrower. The loan requires monthly principal and interest payments with the unpaid loan balance and accrued and unpaid interest due at maturity. It has a twenty-five year amortization with a maturity of September 17, 2015. The default provisions of the loan include non-payment of principal or interest and other standard reporting and change-in-control covenants. There are limited restrictions regarding our use of the funds.
 
Various subsidiaries of Amerco Real Estate Company and U-Haul International, Inc. are borrowers under a mortgage backed loan. The lender is Lehman Brothers Bank, FSB and the loan balance as of December 31, 2006 is $23.2 million. The loan was entered into on October 6, 2005 at a rate of 5.72%. The loan is secured by certain properties owned by the borrower. The loan requires monthly principal and interest payments with the unpaid loan balance and accrued and unpaid interest due at maturity. It has a twenty-five year amortization with a maturity of October 11, 2015. The default provisions of the loan include non-payment of principal or interest and other standard reporting and change-in-control covenants. There are limited restrictions regarding our use of the funds.
 
Construction/ Working Capital Loans
 
Amerco Real Estate Company and a subsidiary of U-Haul International, Inc. entered into a revolving credit facility with MidFirst Bank effective June 29, 2006. The maximum amount that can be drawn at any one time is $40.0 million. The final maturity is June 2009. As of December 31, 2006 the Company had not drawn on this line.
 
The Construction Loan requires monthly interest only payments with the principal and any accrued and unpaid interest due at maturity. The loan can be used to develop new or existing storage properties. The loan will be secured by the properties being constructed. The interest rate, per the provision of the Loan Agreement, is the applicable LIBOR plus a margin of 1.50%. The default provisions of the loan include non-payment of principal or interest and other standard reporting and change-in-control covenants.
 
Amerco Real Estate Company is a borrower under an asset backed loan. The lender is JP Morgan Chase Bank, and the loan is in the amount of $20.0 million. The loan was entered into on November 27, 2006 and is secured by certain properties owned by the borrower. The interest rate, per the provision of the Loan Agreement, is the applicable LIBOR plus a margin of 1.50%. The loan agreement provides for revolving loans, subject to the terms of the loan agreement with final maturity in November 2008, subject to a one year extension. The loan requires monthly interest payments with the unpaid loan balance and accrued and unpaid interest due at maturity. The default provisions of the loan include non-payment of principal or interest and other standard reporting and change-in-control covenants. At December 31, 2006 the facility was un-drawn.

 

9


AMERCO AND CONSOLIDATED ENTITIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
 
 
Fleet Loans
 
Rental Truck Amortizing Loans
 
U-Haul International, Inc. and several of its subsidiaries are borrowers under an amortizing term loan. The lender is Merrill Lynch Commercial Finance Corp. The Company’s outstanding balance at December 31, 2006 was $124.9 million and the final maturity is April 2012.
 
The Merrill Lynch Rental Truck Amortizing Loan requires monthly principal and interest payments, with the unpaid loan balance and accrued and unpaid interest due at maturity. The Merrill Lynch Rental Truck Amortizing Loan was used to purchase new trucks. The interest rate, per the provision of the Loan Agreement, is the applicable LIBOR plus a margin between 1.50% and 1.75%. At December 31, 2006 the applicable LIBOR was 5.35% and the applicable margin was 1.75%, the sum of which was 7.10%. The interest rate is hedged with an interest rate swap fixing the rate at 6.81% based on the current margin. Refer to Item 3 “Quantitative and Qualitative Disclosures about Market Risk” of this filing for additional information. The default provisions of the loan include non-payment of principal or interest and other standard reporting and change-in-control covenants.
 
U-Haul International, Inc. and several of its subsidiaries are borrowers under an amortizing term loan. The lender is BTMU Capital Corporation (“BTMU”). The Company’s outstanding balance at December 31, 2006 was $141.3 million, and the final maturity is November 2012.
 
The BTMU Rental Truck Amortizing Loan requires monthly principal and interest payments, with the unpaid loan balance and accrued and unpaid interest due at maturity. The BTMU Rental Truck Amortizing Loan was used to purchase new trucks. The interest rate, per the provision of the Loan Agreement, is the applicable LIBOR plus a margin between 1.25% and 1.75%. At December 31, 2006 the applicable LIBOR was 5.35% and the applicable margin was 1.75%, the sum of which was 7.10%. The interest rate is hedged with an interest rate swap fixing the rate at 7.32% based on the current margin Refer to Item 3 “Quantitative and Qualitative Disclosures about Market Risk” of this filing for additional information. AMERCO and U-Haul International, Inc. are guarantors of the loan. The default provisions of the loan include non-payment of principal or interest and other standard reporting and change-in-control covenants.
 
U-Haul International, Inc. and several of its subsidiaries are borrowers under an amortizing term loan. The lender is Bayerische Hypo-und Vereinsbank AG (“HVB”). The Company’s outstanding balance at December 31, 2006 was $45.8 million and its final maturity is July 2013.
 
The HVB Rental Truck Amortizing Loan requires monthly principal and interest payments, with the unpaid loan balance and accrued and unpaid interest due at maturity. The HVB Rental Truck Amortizing Loan was used to purchase new trucks. The interest rate, per the provision of the Loan Agreement, is the applicable LIBOR plus a margin between 1.25% and 1.75%. At December 31, 2006 the applicable LIBOR was 5.35% and the applicable margin was 1.75%, the sum of which was 7.10%. The interest rate is hedged with an interest rate swap fixing the rate at 7.42% based on the current margin. Refer to Item 3 “Quantitative and Qualitative Disclosures about Market Risk” of this filing for additional information. U-Haul International, Inc. is a guarantor of this loan. The default provisions of the loan include non-payment of principal or interest and other standard reporting and change-in-control covenants.
 
Revolving Credit Agreement
 
U-Haul International, Inc. and several of its subsidiaries are borrowers under a revolving credit facility. The lender is Merrill Lynch Commercial Finance Corp. The maximum amount that can be drawn is $150.0 million and is due July 2010. As of December 31, 2006 the Company had $60.0 million available under this revolving credit facility.

 

10


AMERCO AND CONSOLIDATED ENTITIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
 
 
The Revolving Credit Agreement requires monthly interest payments, with the unpaid loan balance and accrued and unpaid interest due at maturity. The Revolving Credit Agreement is secured by various older rental trucks. The maximum amount that we can draw down under the Revolving Credit Agreement reduces by $50.0 million after the third year (July 2008) and another $50.0 million after the fourth year (July 2009). The interest rate, per the provision of the Loan Agreement, is the applicable LIBOR plus a margin of 1.75%. At December 31, 2006 the applicable LIBOR was 5.35% and the applicable margin was 1.75%, the sum of which was 7.10%.
 
Annual Maturities of AMERCO Consolidated Notes and Loans Payable
 
The annual maturities of AMERCO consolidated long-term debt as of December 31, 2006 for the next five years and thereafter is as follows:
   
Year Ending December 31,
 
   
2007
 
2008
 
2009
 
2010
 
2011
 
Thereafter
 
   
(Unaudited)
 
   
(In thousands)
 
Notes payable, secured
 
$
47,350
 
$
49,916
 
$
92,660
 
$
105,596
 
$
57,295
 
$
870,588
 
                                       
 

 
SAC Holding II Notes and Loans Payable to Third Parties
 
SAC Holding II notes and loans payable to third parties, other than AMERCO, were as follows:
   
December 31,
 
March 31,
 
   
2006
 
2006
 
   
(Unaudited)
     
   
(In thousands)
 
Notes payable, secured, 7.87% interest rate, due 2027
 
$
75,253
 
$
76,232
 
               
 

 
Secured notes payable are secured by deeds of trusts on the collateralized land and buildings. Principal and interest payments on notes payable to third party lenders are due monthly in the amount of $0.6 million. Certain notes payable contain provisions whereby the loans may not be prepaid at any time prior to the maturity date without payment to the lender of a Yield Maintenance Premium, as defined in the loan agreements.
 
On March 15, 2004, the SAC entities issued $200.0 million aggregate principal amount of 8.5% senior notes due 2014 (the “new SAC notes”). SAC Holding Corporation and SAC Holding II Corporation are jointly and severally liable for these obligations. The proceeds from this issuance flowed exclusively to SAC Holding Corporation and as such SAC Holding II has recorded no liability for this. On August 30, 2004, SAC Holdings paid down $43.2 million on this note.
 
Annual Maturities of SAC Holding II Notes and Loans Payable to Third Parties
 
The annual maturities of SAC Holding II long-term debt as of December 31, 2006 for the next five years and thereafter is as follows:
   
Year Ending December 31,
 
   
2007
 
2008
 
2009
 
2010
 
2011
 
Thereafter
 
   
(Unaudited)
 
   
(In thousands)
 
Notes payable, secured
 
$
1,394
 
$
1,592
 
$
1,756
 
$
1,899
 
$
2,054
 
$
66,558
 
                                       
 


 

11


AMERCO AND CONSOLIDATED ENTITIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
 
W.P. Carey Transactions
 
In 1999, AMERCO, U-Haul and Real Estate entered into financing agreements for the purchase and construction of self-storage facilities with the Bank of Montreal and Citibank (the “leases” or the “synthetic leases”). Title to the real property subject to these leases was held by non-affiliated entities.
 
These leases were amended and restated on March 15, 2004. In connection with such amendment and restatement, we paid down approximately $31.0 million of lease obligations and entered into leases with a three year term, with four one year renewal options. After such pay down, our lease obligation under the amended and restated synthetic leases was approximately $218.5 million.
 
On April 30, 2004, the amended and restated leases were terminated and the properties underlying these leases were sold to UH Storage (DE) Limited Partnership, an affiliate of W. P. Carey. U-Haul entered into a ten year operating lease with W. P. Carey (UH Storage DE) for a portion of each property (the portion of the property that relates to U-Haul’s truck and trailer rental and moving supply sales businesses). The remainder of each property (the portion of the property that relates to self-storage) was leased by W. P. Carey (UH Storage DE) to Mercury Partners, LP (“Mercury”) pursuant to a twenty year lease. These events are referred to as the “W. P. Carey Transactions.” As a result of the W. P. Carey Transactions, we no longer have a capital lease related to these properties.
 
The sales price for these transactions was $298.4 million and cash proceeds were $298.9 million. The Company realized a gain on the transaction of $2.7 million, which is being amortized over the life of the lease term.
 
As part of the W. P. Carey Transactions, U-Haul entered into agreements to manage these properties (including the portion of the properties leased by Mercury). These management agreements allow us to continue to operate the properties as part of the U-Haul moving and self-storage system.
 
U-Haul’s annual lease payments under the new lease are approximately $10.0 million per year, with Consumer Price Index (“CPI”) inflation adjustments beginning in the sixth year of the lease. The lease term is ten years, with a renewal option for an additional ten years. Upon closing of the W. P. Carey Transactions, we made a $22.9 million earn-out deposit, providing us with the opportunity to be reimbursed for certain capital improvements we previously made to the properties, and a $5.0 million security deposit. U-Haul met the requirements under the lease regarding the return of the earn-out deposit which was refunded in fiscal 2006.
 
The property management agreement we entered into with Mercury provides that Mercury will pay U-Haul a management fee based on gross self-storage rental revenues generated by the properties. During the first nine months of fiscal 2007 and fiscal 2006, U-Haul received cash payments of $1.3 million and $2.1 million, respectively in management fees from Mercury.

 

12


AMERCO AND CONSOLIDATED ENTITIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
 
 
4. Interest on Borrowings
 
Interest Expense
 
Expenses associated with loans outstanding were as follows:
   
Quarter Ended December 31,
 
   
2006
 
2005
 
   
(Unaudited)
 
   
(In thousands)
 
Interest expense
 
$
20,531
 
$
13,807
 
Capitalized interest
   
(150
)
 
(39
)
Amortization of transaction costs
   
787
   
892
 
Interest expense (income) resulting from derivatives
   
(552
)
 
1,589
 
Total AMERCO interest expense
   
20,616
   
16,249
 
SAC Holding II interest expense
   
3,265
   
3,403
 
Less: Intercompany transactions
   
1,750
   
1,861
 
Total SAC Holding II interest expense
   
1,515
   
1,542
 
Total
 
$
22,131
 
$
17,791
 
 

   
Nine Months Ended December 31,
 
   
2006
 
2005
 
   
(Unaudited)
 
   
(In thousands)
 
Interest expense
 
$
56,419
 
$
45,140
 
Capitalized interest
   
(321
)
 
(115
)
Amortization of transaction costs
   
3,161
   
2,241
 
Interest expense (income) resulting from derivatives
   
(2,153
)
 
778
 
Amortization of transaction costs related to early extinguishment of debt
   
6,969
   
14,384
 
Fees on early extinguishment of debt
   
-
   
21,243
 
Total AMERCO interest expense
   
64,075
   
83,671
 
SAC Holding II interest expense
   
9,865
   
9,547
 
Less: Intercompany transactions
   
5,315
   
4,919
 
Total SAC Holding II interest expense
   
4,550
   
4,628
 
Total
 
$
68,625
 
$
88,299
 
               
 

 
Interest paid in cash by AMERCO amounted to $20.9 million and $13.8 million for the third quarters of fiscal 2007 and fiscal 2006, respectively.
 
Interest paid in cash by AMERCO (excluding any fees from the early extinguishment of debt) amounted to $54.1 million and $39.7 million for the first nine months of fiscal 2007 and fiscal 2006, respectively. Early extinguishment fees paid in cash by AMERCO were $21.2 million in the first quarter of fiscal 2006.

 

13


AMERCO AND CONSOLIDATED ENTITIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
 
 
The exposure to market risk for changes in interest rates relates primarily to our variable rate debt obligations. We have used interest rate swap and interest rate cap agreements to provide for matching the gain or loss recognition on the hedging instrument with the recognition of the changes in the cash flows associated with the hedged asset or liability attributable to the hedged risk or the earnings effect of the hedged forecasted transaction. On June 8, 2005, the Company entered into separate interest rate swap contracts for $100.0 million of our variable rate debt over a three year term and for $100.0 million of our variable rate debt over a five year term, which were designated as cash flow hedges effective July 1, 2005. These swap contracts were cancelled on August 16, 2006 in conjunction with our amendment of the Real Estate Loan and we entered into new interest rate swap contracts for $300.0 million of our variable rate debt over a twelve year term effective on August 18, 2006. On May 13, 2004, the Company entered into separate interest rate cap contracts for $200.0 million of our variable rate debt over a two year term and for $50.0 million of our variable rate debt over a three year term; however these contracts were dedesignated as cash flow hedges effective July 11, 2005 when the Real Estate Loan was paid down by $222.4 million. The $200.0 million interest rate cap contract expired on May 17, 2006. On November 15, 2005, the Company entered into a forward starting interest rate swap contract for $142.3 million of a variable rate debt over a six year term that started on May 10, 2006. On June 21, 2006, the Company entered into a forward starting interest rate swap contract for $50.0 million of our variable rate debt over a seven year term that started on July 10, 2006. On June 9, 2006, the Company entered into a forward starting interest rate swap contract for $144.9 million of a variable rate debt over a six year term that started on October 10, 2006. These interest rate swap agreements were designated cash flow hedges on their effective dates.
 
Interest Rates
 
Interest rates and Company borrowings were as follows:
   
Revolving Credit Activity
 
   
Quarter Ended December 31,
 
   
2006
 
2005
 
   
(Unaudited)
 
   
(In thousands, except interest rates)
 
Weighted average interest rate during the third fiscal quarter
   
7.08
%
 
5.81
%
Interest rate at the end of the third fiscal quarter
   
7.10
%
 
6.11
%
Maximum amount outstanding during the third fiscal quarter
 
$
90,000
 
$
90,000
 
Average amount outstanding during the third fiscal quarter
 
$
90,000
 
$
90,000
 
               
 

   
Revolving Credit Activity
 
   
Nine Months Ended December 31,
 
   
2006
 
2005
 
   
(Unaudited)
 
   
(In thousands, except interest rates)
 
Weighted average interest rate during the first nine months
   
6.97
%
 
5.81
%
Interest rate at the end of the first nine months
   
7.10
%
 
6.11
%
Maximum amount outstanding during the first nine months
 
$
90,000
 
$
158,011
 
Average amount outstanding during the first nine months
 
$
90,000
 
$
100,795
 
               
 


 

14


AMERCO AND CONSOLIDATED ENTITIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
 
 
5. Accumulated Other Comprehensive Income (Loss)
 
A summary of the accumulated other comprehensive income (loss) components, net of tax, were as follows:
   
Foreign Currency Translation
 
Unrealized Gain (Loss) on Investments
 
Fair Market Value of Cash Flow Hedge
 
Accumulated Other Comprehensive Income (Loss)
 
   
(Unaudited)
 
   
(In thousands)
 
Balance at March 31, 2006
 
$
(34,247
)
$
717
 
$
4,628
 
$
(28,902
)
Change in foreign currency translation
   
(2,336
)
 
-
   
-
   
(2,336
)
Unrealized loss on investments
   
-
   
(912
)
 
-
   
(912
)
Change in fair market value of cash flow hedge
   
-
   
-
   
(8,500
)
 
(8,500
)
Balance at December 31, 2006
 
$
(36,583
)
$
(195
)
$
(3,872
)
$
(40,650
)
                           
 

 
6. Contingent Liabilities and Commitments
 
The Company leases a portion of its rental equipment and certain of its facilities under operating leases with terms that expire at various dates substantially through 2012, with the exception of one land lease expiring in 2034. At December 31, 2006, AMERCO has guaranteed $181.8 million of residual values for these rental equipment assets at the end of the respective lease terms. Certain leases contain renewal and fair market value purchase options as well as mileage and other restrictions. At the expiration of the lease, the Company has the option to renew the lease, purchase the asset for fair market value, or sell the asset to a third party on behalf of the lessor. AMERCO has been leasing equipment since 1987 and has experienced no material losses relating to these types of residual value guarantees.
 
Lease commitments for leases having terms of more than one year were as follows:
   
Property,
Plant and
Equipment
 
Rental
Equipment
 
Total
 
   
(Unaudited)
 
       
(In thousands)
     
Year-ended December 31:
                   
2007
 
$
12,001
 
$
115,929
 
$
127,930
 
2008
   
11,771
   
95,643
   
107,414
 
2009
   
11,404
   
82,487
   
93,891
 
2010
   
11,067
   
64,411
   
75,478
 
2011
   
10,925
   
45,859
   
56,784
 
Thereafter
   
30,542
   
46,089
   
76,631
 
Total
 
$
87,710
 
$
450,418
 
$
538,128
 
                     
 


 

15


AMERCO AND CONSOLIDATED ENTITIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
 
 
7. Contingencies
 
Shoen
 
On September 24, 2002, Paul F. Shoen filed a derivative action in the Second Judicial District Court of the State of Nevada, Washoe County, captioned Paul F. Shoen vs. SAC Holding Corporation et al., CV02-05602, seeking damages and equitable relief on behalf of AMERCO from SAC Holdings and certain current and former members of the AMERCO Board of Directors, including Edward J. Shoen, Mark V. Shoen and James P. Shoen as defendants. AMERCO is named a nominal defendant for purposes of the derivative action. The complaint alleges breach of fiduciary duty, self-dealing, usurpation of corporate opportunities, wrongful interference with prospective economic advantage and unjust enrichment and seeks the unwinding of sales of self-storage properties by subsidiaries of AMERCO to SAC Holdings over the last several years. The complaint seeks a declaration that such transfers are void as well as unspecified damages. On October 28, 2002, AMERCO, the Shoen directors, the non-Shoen directors and SAC Holdings filed Motions to Dismiss the complaint. In addition, on October 28, 2002, Ron Belec filed a derivative action in the Second Judicial District Court of the State of Nevada, Washoe County, captioned Ron Belec vs. William E. Carty, et al., CV 02-06331 and on January 16, 2003, M.S. Management Company, Inc. filed a derivative action in the Second Judicial District Court of the State of Nevada, Washoe County, captioned M.S. Management Company, Inc. vs. William E. Carty, et al., CV 03-00386. Two additional derivative suits were also filed against these parties. These additional suits are substantially similar to the Paul F. Shoen derivative action. The five suits assert virtually identical claims. In fact, three of the five plaintiffs are parties who are working closely together and chose to file the same claims multiple times. These lawsuits alleged that the AMERCO Board lacked independence. In reaching its decision to dismiss these claims, the court determined that the AMERCO Board of Directors had the requisite level of independence required in order to have these claims resolved by the Board. The court consolidated all five complaints before dismissing them on May 28, 2003. Plaintiffs appealed and, on July 13, 2006, the Nevada Supreme Court reviewed and remanded the claim to the trial court for proceedings consistent with its ruling, allowing the plaintiffs to file an amended complaint and plead in addition to substantive claims, demand futility. On November 8, 2006, the nominal plaintiffs filed an Amended Complaint. On December 22, 2006, the defendants filed Motions to Dismiss. Briefing will be concluded by February 21, 2007.
 
Environmental
 
In the normal course of business, AMERCO is a defendant in a number of suits and claims. AMERCO is also a party to several administrative proceedings arising from state and local provisions that regulate the removal and/or cleanup of underground fuel storage tanks. It is the opinion of management, that none of these suits, claims or proceedings involving AMERCO, individually or in the aggregate, are expected to result in a material loss.
 
Compliance with environmental requirements of federal, state and local governments significantly affects Real Estate’s business operations. Among other things, these requirements regulate the discharge of materials into the water, air and land and govern the use and disposal of hazardous substances. Real Estate is aware of issues regarding hazardous substances on some of its properties. Real Estate regularly makes capital and operating expenditures to stay in compliance with environmental laws and has put in place a remedial plan at each site where it believes such a plan is necessary. Since 1988, Real Estate has managed a testing and removal program for underground storage tanks.
 
Based upon the information currently available to Real Estate, compliance with the environmental laws and its share of the costs of investigation and cleanup of known hazardous waste sites are not expected to have a material adverse effect on AMERCO’s financial position or operating results. Real Estate expects to spend approximately $6.3 million in total through 2011 to remediate these properties.
 
Other 
 
The Company is named as a defendant in various other litigation and claims arising out of the normal course of business. In managements’ opinion none of these other matters will have a material effect on the Company’s financial position and results of operations.

 

16


AMERCO AND CONSOLIDATED ENTITIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
 
 

 
8. Related Party Transactions
 
AMERCO has engaged in related party transactions and has continuing related party interests with certain major stockholders, directors and officers of the consolidated group as disclosed below. Management believes that the transactions described below and in the related notes were consummated on terms equivalent to those that would prevail in arm’s-length transactions.
 
SAC Holdings was established in order to acquire self-storage properties. These properties are being managed by the Company pursuant to management agreements. The sale of self-storage properties by the Company to SAC Holdings has in the past provided significant cash flows to the Company and certain of the Company’s outstanding loans to SAC Holdings entitle the Company to participate in SAC Holdings’ excess cash flows (after senior debt service).
 
Management believes that its sales of self-storage properties to SAC Holdings in the past provided a unique structure for the Company to earn moving equipment rental revenues and property management fee revenues from the SAC Holdings self-storage properties that the Company manages and to participate in SAC Holdings’ excess cash flows as described above.
 
During the first nine months of fiscal 2007, subsidiaries of the Company held various junior unsecured notes of SAC Holdings. Substantially all of the equity interest of SAC Holdings is controlled by Blackwater Investments, Inc. (“Blackwater”), wholly-owned by Mark V. Shoen, a significant shareholder and executive officer of AMERCO. The Company does not have an equity ownership interest in SAC Holdings. The Company recorded interest income of $14.6 million and $14.3 million, and received cash interest payments of $40.7 million and $9.4 million, from SAC Holdings during the first nine months of fiscal 2007 and 2006, respectively. The cash interest payments for the first nine months of fiscal 2007 included a payment to significantly reduce the outstanding interest receivable from SAC Holdings. The largest aggregate amount of notes receivable outstanding during the first nine months of fiscal 2007 and the aggregate notes receivable balance at December 31, 2006 was $203.7 million, of which $75.1 million is with SAC Holding II and has been eliminated in the consolidating financial statements.
 
Interest accrues on the outstanding principal balance of junior notes of SAC Holdings that the Company holds at a stated rate of basic interest. A fixed portion of that basic interest is paid on a monthly basis.
 
On all but one loan, additional interest can be earned depending upon the amount of remaining basic interest and the cash flow generated by the underlying property. This amount is referred to as the “cash flow-based calculation.”
 
To the extent that this cash flow-based calculation exceeds the amount of remaining basic interest, contingent interest is paid on the same monthly date as the fixed portion of basic interest. To the extent that the cash flow-based calculation is less than the amount of remaining basic interest, the additional interest payable on the applicable monthly date is limited to the amount of that cash flow-based calculation. In such a case, the excess of the remaining basic interest over the cash flow-based calculation is deferred. In addition, subject to certain contingencies, the junior notes provide that the holder of the note is entitled to receive a portion of the appreciation realized upon, among other things, the sale of such property by SAC Holdings.
 
During the first nine months of fiscal 2007, AMERCO and U-Haul held various junior notes with Private Mini Storage Realty (“Private Mini”). The equity interests of Private Mini are ultimately controlled by Blackwater. The Company recorded interest income of $3.7 million and $3.8 million, and received cash interest payments of $3.7 million and $0.3 million, from Private Mini during the first nine months of fiscal 2007 and 2006, respectively. The balance of notes receivable from Private Mini at December 31, 2006 was $70.3 million. The largest aggregate amount outstanding during the first nine months of fiscal 2007 was $70.8 million.
 
The Company currently manages the self-storage properties owned or leased by SAC Holdings, Mercury, 4 SAC, 5 SAC, Galaxy and Private Mini pursuant to a standard form of management agreement, under which the Company receives a management fee of between 4% and 10% of the gross receipts plus reimbursement for certain expenses.

 

17


AMERCO AND CONSOLIDATED ENTITIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
 
 
The Company received management fees, exclusive of reimbursed expenses, of $17.0 million and $13.1 million from the above mentioned entities during the first nine months of fiscal 2007 and 2006, respectively. This management fee is consistent with the fee received for other properties the Company previously managed for third parties. SAC Holdings, 4 SAC, 5 SAC, Galaxy and Private Mini are substantially controlled by Blackwater. Mercury is substantially controlled by Mark V. Shoen. James P. Shoen, a significant shareholder and director of AMERCO, has an interest in Mercury.
 
RepWest and Oxford held a 46% limited partnership interest in Securespace Limited Partnership (“Securespace”), a Nevada limited partnership. A SAC Holdings subsidiary serves as the general partner of Securespace and owns a 1% interest. Another SAC Holdings subsidiary owned the remaining 53% limited partnership interest in Securespace. Securespace was formed by SAC Holdings to be the owner of various Canadian self-storage properties. RepWest and Oxford’s investment in Securespace was included in Related Party Assets and was accounted for using the equity method of accounting. On September 29, 2006, a subsidiary of SAC Holding Corporation exercised its right under the partnership agreement to purchase all of the partnership interests held by RepWest and Oxford for a combined amount of $11.9 million.
 
The Company leases space for marketing company offices, vehicle repair shops and hitch installation centers from subsidiaries of SAC Holdings, 5 SAC and Galaxy. Total lease payments pursuant to such leases were $2.0 million in each of the first nine months of fiscal 2007 and 2006, respectively. The terms of the leases are similar to the terms of leases for other properties owned by unrelated parties that are leased to the Company.
 
At December 31, 2006, subsidiaries of SAC Holdings, 4 SAC, 5 SAC, Galaxy and Private Mini acted as U-Haul independent dealers. The financial and other terms of the dealership contracts with the aforementioned companies and their subsidiaries are substantially identical to the terms of those with the Company’s other independent dealers whereby commissions are paid by the Company based upon equipment rental revenues. For the first nine months of both fiscal 2007 and 2006, the Company paid the above mentioned entities $29.2 million in commissions pursuant to such dealership contracts.
 
These agreements and notes with subsidiaries of SAC Holdings, 4 SAC, 5 SAC, Galaxy and Private Mini, excluding Dealer Agreements, provided revenue of $27.3 million, expenses of $2.0 million and cash flows of $54.4 million during the first nine months of fiscal 2007. Revenues and commission expenses related to the Dealer Agreements were $134.3 million and $29.2 million, respectively.
 
In prior years, U-Haul sold various properties to SAC Holding Corporation at prices in excess of U-Haul’s carrying values resulting in gains which U-Haul deferred and treated as additional paid-in capital. The transferred properties have historically been stated at the original cost basis as the gains were eliminated in consolidation. In March 2004, these deferred gains were recognized and treated as contributions from a related party in the amount of $111.0 million as a result of the deconsolidation of SAC Holding Corporation.
 
In July 2006, RepWest completed the sale of two properties to 5 SAC and the sale of twenty four properties to Real Estate, for approximately $11.6 million. RepWest received cash from these sales. These sales resulted from Real Estate and 5 SAC exercising contractual purchase options they previously held with RepWest.
 
Independent fleet owners own approximately 2.1% of all U-Haul rental trailers. There are approximately 544 independent fleet owners, including certain officers, directors, employees and stockholders of AMERCO. Such AMERCO officers, directors, employees and stockholders owned less than 1.0% of all U-Haul rental trailers during the first nine months of fiscal 2007 and fiscal 2006. Payments to these individuals under this program are de minimis (less than one thousand dollars per quarter, per person). All rental equipment is operated under contract with U-Haul whereby U-Haul administers the operations and marketing of such equipment and in return receives a percentage of rental fees paid by customers. Based on the terms of various contracts, rental fees are distributed to U-Haul (for services as operators), to the fleet owners (including certain subsidiaries and related parties of U-Haul) and to rental dealers (including Company-operated U-Haul Centers).

 

18


AMERCO AND CONSOLIDATED ENTITIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
 
 

 

 

 
Related Party Assets
 

   
December 31,
 
March 31,
 
   
2006
 
2006
 
   
(Unaudited)
     
   
(In thousands)
 
Private Mini notes, receivables and interest
 
$
72,026
 
$
74,427
 
Oxford note receivable from SAC Holding Corporation
   
5,040
   
5,040
 
U-Haul notes receivable from SAC Holding Coporation
   
123,578
   
123,578
 
U-Haul interest receivable from SAC Holding Corporation
   
22,624
   
42,189
 
U-Haul receivable from SAC Holding Corporation
   
15,547
   
5,688
 
SAC Holding II receivable from parent
   
-
   
2,900
 
U-Haul receivable from Mercury
   
3,673
   
2,342
 
Oxford and RepWest investment in Securespace
   
-
   
11,585
 
Other (a)
   
(2,576
)
 
2,719
 
   
$
239,912
 
$
270,468
 
               
(a) Credit balance due primarily to a timing difference between Oxford and AMERCO for payment of a surplus note and accrued interest; this will reverse in the Company's March 31, 2007 financial statements.
                               
 

 

 

 
Related Party Liabilities
 

   
December 31,
 
March 31,
 
   
2006
 
2006
 
   
(Unaudited)
     
   
(In thousands)
 
SAC Holding II payable to affiliate
 
$
3,408
 
$
7,165
 
               
 


 

19


AMERCO AND CONSOLIDATED ENTITIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
 
 
9. Consolidating Financial Information by Industry Segment
 
AMERCO has four reportable segments. They are Moving and Storage Operations, Property and Casualty Insurance, Life Insurance and SAC Holding II. Management tracks revenues separately, but does not report any separate measure of the profitability for rental vehicles, rentals of self-storage spaces and sales of products that are required to be classified as a separate operating segment and accordingly does not present these as separate reportable segments. Deferred income taxes are shown as liabilities on the consolidating statements.
 
This section includes condensed consolidating financial information which presents the condensed consolidating balance sheets as of December 31, 2006 and March 31, 2006 and the related condensed consolidating statements of operations for the third quarter and first nine months of fiscal 2007 and 2006 and the condensed consolidating cash flow statements for the first nine months of fiscal 2007 and 2006 for:
 
 
(a)
Moving and Storage Operations, comprised of AMERCO, U-Haul, and Real Estate and the subsidiaries of U-Haul and Real Estate
 
 
(b)
Property and Casualty Insurance, comprised of RepWest and its wholly-owned subsidiary
 
 
(c)
Life Insurance, comprised of Oxford and its wholly-owned subsidiaries
 
 
(d)
SAC Holding II and its subsidiaries
 
The information includes elimination entries necessary to consolidate AMERCO, the parent, with its subsidiaries and SAC Holding II and its subsidiaries.
 
Investments in subsidiaries are accounted for by the parent using the equity method of accounting.
 

 


 

20




AMERCO AND CONSOLIDATED ENTITIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
 
 
9. Financial Information by Consolidating Industry Segment:
 
Consolidating balance sheets by industry segment as of December 31, 2006 are as follows:
   
Moving & Storage
         
AMERCO Legal Group
     
AMERCO as Consolidated
 
   
AMERCO
 
U-Haul
 
Real Estate
 
Eliminations
     
Moving & Storage
Consolidated
 
Property & Casualty Insurance (a)
 
Life
Insurance (a)
 
Eliminations
     
AMERCO
Consolidated
 
SAC Holding II
 
Eliminations
     
Total Consolidated
 
   
(Unaudited)
 
   
(In thousands)
 
Assets:
   
Cash and cash equivalents
 
$
8
 
$
296,694
 
$
813
 
$
-
       
$
297,515
 
$
7,395
 
$
8,221
 
$
-
       
$
313,131
 
$
-
 
$
-
       
$
313,131
 
Reinsurance recoverables and trade receivables, net
   
-
   
20,504
   
25
   
-
         
20,529
   
178,856
   
15,132
   
-
         
214,517
   
-
   
-
         
214,517
 
Notes and mortgage receivables, net
   
-
   
1,294
   
516
   
-
         
1,810
   
-
   
-
   
-
         
1,810
   
-
   
-
         
1,810
 
Inventories, net
   
-
   
68,065
   
-
   
-
         
68,065
   
-
   
-
   
-
         
68,065
   
1,460
   
-
         
69,525
 
Prepaid expenses
   
437
   
39,492
   
219
   
-
         
40,148
   
-
   
-
   
-
         
40,148
   
162
   
-
         
40,310
 
Investments, fixed maturities and marketable equities
   
-
   
-
   
-
   
-
         
-
   
143,030
   
550,592
   
-
         
693,622
   
-
   
-
         
693,622
 
Investments, other
   
-
   
1,166
   
8,124
   
-
         
9,290
   
84,171
   
82,779
   
-
         
176,240
   
-
   
-
         
176,240
 
Deferred policy acquisition costs, net
   
-
   
-
   
-
   
-
         
-
   
335
   
42,131
   
-
         
42,466
   
-
   
-
         
42,466
 
Other assets
   
5
   
55,026
   
32,960
   
-
         
87,991
   
1,787
   
621
   
-
         
90,399
   
4,459
   
-
         
94,858
 
Related party assets
   
1,244,904
   
247,434
   
12,654
   
(1,177,341
)
 
(d
)
 
327,651
   
10,526
   
5,040
   
(24,190
)
 
(d
)
 
319,027
   
-
   
(79,115
)
 
(d
)
 
239,912
 
     
1,245,354
   
729,675
   
55,311
   
(1,177,341
)
       
852,999
   
426,100
   
704,516
   
(24,190
)
       
1,959,425
   
6,081
   
(79,115
)
       
1,886,391
 
                                                                                             
Investment in subsidiaries
   
(200,459
)
 
-
   
-
   
480,274
   
(c
)
 
279,815
   
-
   
-
   
(279,815
)
 
(c
)
 
-
   
-
   
-
         
-
 
Investment in SAC Holding II
   
(8,946
)
 
-
   
-
   
-
         
(8,946
)
 
-
   
-
   
-
         
(8,946
)
 
-
   
8,946
   
(c
)
 
-
 
Total investment in subsidiaries and SAC Holding II
   
(209,405
)
 
-
   
-
   
480,274
         
270,869
   
-
   
-
   
(279,815
)
       
(8,946
)
 
-
   
8,946
         
-
 
                                                                                             
Property, plant and equipment, at cost:
                                                                                           
Land
   
-
   
29,175
   
158,082
   
-
         
187,257
   
-
   
-
   
-
         
187,257
   
-
   
-
         
187,257
 
Buildings and improvements
   
-
   
109,938
   
694,050
   
-
         
803,988
   
-
   
-
   
-
         
803,988
   
-
   
-
         
803,988
 
Furniture and equipment
   
3,535
   
274,325
   
17,912
   
-
         
295,772
   
-
   
-
   
-
         
295,772
   
-
   
-
         
295,772
 
Rental trailers and other rental equipment
   
-
   
201,277
   
-
   
-
         
201,277
   
-
   
-
   
-
         
201,277
   
-
   
-
         
201,277
 
Rental trucks
   
-
   
1,505,270
   
-
   
-
         
1,505,270
   
-
   
-
   
-
         
1,505,270
   
-
   
-
         
1,505,270
 
SAC Holding II - property, plant and equipment (b)
   
-
   
-
   
-