<PAGE> 1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-7850
SOUTHWEST GAS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
CALIFORNIA 88-0085720
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
5241 SPRING MOUNTAIN ROAD 89193-8510
POST OFFICE BOX 98510 (ZIP CODE)
LAS VEGAS, NEVADA
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (702) 876-7237
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
<TABLE>
<CAPTION>
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
- --------------------------------------------------------------------------------------------
<S> <C>
Common Stock, $1 par value New York Stock Exchange, Inc.
Pacific Stock Exchange, Inc.
9.125% Trust Originated Preferred Securities New York Stock Exchange, Inc.
Pacific Stock Exchange, Inc.
</TABLE>
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
<TABLE>
<S> <C>
9% DEBENTURES, SERIES A, DUE 2011 9 3/8% DEBENTURES, SERIES D, DUE 2017
9% DEBENTURES, SERIES B, DUE 2011 10% DEBENTURES, SERIES E, DUE 2013
8 3/4% DEBENTURES, SERIES C, DUE 2011 9 3/4% DEBENTURES, SERIES F, DUE 2002
</TABLE>
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES 'X' NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ['X']
AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY
NONAFFILIATES OF THE REGISTRANT:
$401,741,616 at March 15, 1996
THE NUMBER OF SHARES OUTSTANDING OF COMMON STOCK:
Common Stock, $1 Par Value 24,722,561 shares as of March 15, 1996
DOCUMENTS INCORPORATED BY REFERENCE
None
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
TABLE OF CONTENTS
PART I
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
ITEM 1. BUSINESS.................................................................. 1
Continuing Operations -- Natural Gas Operations........................... 1
General Description..................................................... 1
Properties.............................................................. 2
Rates and Regulation.................................................... 4
Competition............................................................. 4
Demand for Natural Gas.................................................. 5
Natural Gas Supply...................................................... 5
Environmental Matters................................................... 6
Employees............................................................... 6
Discontinued Operations -- Financial Services Activities.................. 7
General Description..................................................... 7
Lending Activities...................................................... 7
Asset Quality........................................................... 12
Real Estate Development Activities...................................... 14
Investment Activities................................................... 15
Deposit Activities...................................................... 16
Borrowings.............................................................. 17
Employees............................................................... 18
Competition............................................................. 18
Properties.............................................................. 18
Regulation.............................................................. 18
Holding Company Matters................................................... 24
ITEM 2. PROPERTIES................................................................ 25
ITEM 3. LEGAL PROCEEDINGS......................................................... 25
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS....................... 25
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS................................................................... 26
ITEM 6. SELECTED FINANCIAL DATA................................................... 27
Consolidated Selected Financial Statistics................................ 27
Natural Gas Operations.................................................... 28
Discontinued Operations -- Financial Services............................. 29
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS................................................................ 30
Capital Resources and Liquidity........................................... 30
Results of Operations..................................................... 31
Recently Issued Accounting Pronouncements................................. 32
Continuing Operations -- Natural Gas Operations........................... 32
Capital Resources and Liquidity......................................... 32
Results of Natural Gas Operations....................................... 34
Rates and Regulatory Proceedings........................................ 36
</TABLE>
i
<PAGE> 3
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
Discontinued Operations -- Financial Services Segment..................... 37
Financial and Regulatory Capital........................................ 37
Deposit Premiums........................................................ 38
Capital Resources and Liquidity......................................... 38
Risk Management......................................................... 39
Results of Financial Services Operations................................ 46
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA............................... 50
Consolidated Balance Sheets............................................... 50
Consolidated Statements of Income......................................... 51
Consolidated Statements of Cash Flows..................................... 52
Consolidated Statements of Stockholders' Equity........................... 53
Notes to Consolidated Financial Statements................................ 54
Note 1 -- Summary of Significant Accounting Policies................... 54
Note 2 -- Utility Plant................................................ 55
Note 3 -- Receivables and Related Allowances........................... 56
Note 4 -- Regulatory Assets and Liabilities............................ 56
Note 5 -- Preferred Stock, Preference Stock, and Preferred Securities.. 57
Note 6 -- Long-Term Debt............................................... 58
Note 7 -- Short-Term Debt.............................................. 59
Note 8 -- Commitments and Contingencies................................ 59
Note 9 -- Employee Postretirement Benefits............................. 60
Note 10 -- Income Taxes................................................. 63
Note 11 -- Quarterly Financial Data (Unaudited)......................... 65
Note 12 -- Discontinued Operations -- Financial Services Activities..... 66
Note 13 -- PriMerit Bank................................................ 68
Report of Independent Public Accountants.................................. 97
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE...................... 98
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT........................ 98
ITEM 11. EXECUTIVE COMPENSATION.................................................... 102
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT................................................................ 107
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................ 107
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K........... 108
List of Exhibits.......................................................... 109
SIGNATURES.......................................................................... 112
GLOSSARY OF TERMS................................................................... 114
</TABLE>
ii
<PAGE> 4
PART I
ITEM 1. BUSINESS
The registrant, Southwest Gas Corporation (the Company), is incorporated
under the laws of the State of California effective March 1931. The executive
offices of the Company are located at 5241 Spring Mountain Road, P.O. Box 98510,
Las Vegas, Nevada, 89193-8510, telephone number (702) 876-7237.
The Company is principally engaged in the business of purchasing,
transporting, and distributing natural gas in portions of Arizona, Nevada, and
California. The Company also engaged in financial services activities, through
PriMerit Bank, Federal Savings Bank (PriMerit or the Bank), a wholly owned
subsidiary. See Selected Financial Data for financial information related to
natural gas operations and discontinued financial services operations.
In January 1996, the Company entered into a definitive agreement with
Norwest Corporation to sell PriMerit. The sale is expected to be finalized in
the third quarter of 1996. The financial services activities are accounted for
as discontinued operations for consolidated financial reporting purposes.
However, as required, the Company has also included the separate, stand-alone
financial results and disclosures for the Bank on a going-concern basis in this
Form 10-K. Full disclosure of Bank operating activities and results on a
going-concern basis is included herein for purposes of providing information
considered useful in analyzing the proposed sale.
Separate, stand-alone financial results and disclosures reported for the
Bank on a going-concern basis are included in ITEM 1, BUSINESS (pages 7 to 23),
ITEM 6, SELECTED FINANCIAL INFORMATION (page 29), ITEM 7, MANAGEMENT'S
DISCUSSION AND ANALYSIS (MD&A) (pages 37 to 49), and Note 13 of ITEM 8,
FINANCIAL STATEMENTS (pages 68 to 96). The separate stand-alone financial
results and disclosures reported for the Bank on a going-concern basis differ
from the results and disclosures reported for the Bank as a discontinued
operation. See Note 12 of the Notes to Consolidated Financial Statements for
reconciliations of Bank stand-alone financial information to the amounts shown
as discontinued operations in the consolidated financial statements. In 1996,
while the Company will continue, as required, to disclose the ongoing operating
results of the Bank through the close of the proposed transaction, those amounts
will not be realized or recognized by the Company in its consolidated financial
statements, consistent with the terms of the sales agreement.
In November 1995, the Company entered into a definitive agreement to
acquire Northern Pipeline Construction Co. (NPL), a full-service underground gas
pipeline contractor. NPL provides local gas distribution companies with
installation, replacement and maintenance services for underground natural gas
distribution systems. The acquisition is anticipated to be completed during the
first half of 1996. See Note 8 of the Notes to Consolidated Financial Statements
for additional information.
CONTINUING OPERATIONS -- NATURAL GAS OPERATIONS
GENERAL DESCRIPTION
The Company is subject to regulation by the Arizona Corporation Commission
(ACC), the Public Service Commission of Nevada (PSCN), and the California Public
Utilities Commission (CPUC). These commissions regulate public utility rates,
practices, facilities, and service territories in their respective states. The
CPUC also regulates the issuance of all securities by the Company, with the
exception of short-term borrowings. Certain of the Company's accounting
practices, transmission facilities, and rates are subject to regulation by the
Federal Energy Regulatory Commission (FERC).
The Company purchases, transports, and distributes natural gas to
approximately 1,029,000 residential, commercial, and industrial customers in
geographically diverse portions of Arizona, Nevada, and California. There were
49,000 customers added to the system during 1995. See Natural Gas Operations
Segment -- Capital Resources and Liquidity of MD&A for discussion of capital
requirements to meet the Company's expected future growth.
For each of the years in the three-year period ended December 31, 1995, the
percentage of operating margin (operating revenues less net cost of gas) derived
from residential and small commercial customers was
1
<PAGE> 5
79 percent, while the percentage related to large commercial, industrial, and
other users was 7 percent. The remaining 14 percent was derived from
transportation, electric generation, and resale customers.
The volume of sales and transportation activity for electric utility
generating plants varies greatly according to demand for electricity and the
availability of alternative energy sources; however, the corresponding income is
not material in relation to the Company's earnings. In addition, the Company is
not dependent on any one or a few customers to the extent that the loss of any
one or several would have a significant adverse impact on the Company.
Transportation of customer-secured gas to end-users on the Company's system
continues to have a significant impact on the Company's throughput, accounting
for 56 percent of total system throughput in 1995. Although the volumes were
significant, these customers provide a much smaller proportionate share of the
Company's operating margin. In 1995, customers who utilized this service
transported over one billion therms.
The demand for natural gas is seasonal. Variability in weather from normal
temperatures may materially impact results of operations. It is management's
opinion that comparisons of earnings for interim periods do not reliably reflect
overall trends and changes in the Company's operations. Also, earnings for
interim periods can be significantly affected by the timing of general rate
relief.
PROPERTIES
The plant investment of the Company consists primarily of transmission and
distribution mains, compressor stations, peak shaving/storage plants, service
lines, meters, and regulators which comprise the pipeline systems and facilities
located in and around the communities served. The Company also includes other
properties such as land, buildings, furnishings, work equipment, and vehicles in
plant investment. The Company's northern Nevada and northern California
properties are referred to as the northern system; the Arizona, southern Nevada,
and southern California properties are referred to as the southern system.
Several properties are leased by the Company, including a Liquefied Natural Gas
(LNG) storage plant on its northern Nevada system and a portion of the corporate
headquarters office complex located in Las Vegas, Nevada. See Note 2 of the
Notes to Consolidated Financial Statements for additional discussion regarding
these leases. Total gas plant, exclusive of leased property, at December 31,
1995, was $1.6 billion, including construction work in progress. It is the
opinion of management that the properties of the Company are suitable and
adequate for its purposes.
Substantially all of the Company's gas mains and service lines are
constructed across property owned by others under right-of-way grants obtained
from the record owners thereof, on the streets and grounds of municipalities
under authority conferred by franchises or otherwise, or on public highways or
public lands under authority of various federal and state statutes. None of the
Company's numerous county and municipal franchises are exclusive, and some are
of limited duration. These franchises are renewed regularly as they expire, and
the Company anticipates no serious difficulties in obtaining future renewals.
With respect to the right-of-way grants, the Company has had continuous and
uninterrupted possession and use of all such rights-of-way, and the associated
gas mains and service lines, commencing with the initial stages of the
construction of such facilities. Permits have been obtained from public
authorities in certain instances to cross, or to lay facilities along, roads and
highways. These permits typically are revocable at the election of the grantor,
and the Company occasionally must relocate its facilities when requested to do
so by the grantor. Permits have also been obtained from railroad companies to
cross over or under railroad lands or rights-of-way, which in some instances
require annual or other periodic payments and are revocable at the grantors'
elections.
The Company operates two major pipeline transmission systems: (i) a system
owned by Paiute Pipeline Company (Paiute), a wholly owned subsidiary, extending
from the Idaho-Nevada border to the Reno, Sparks, and Carson City areas and
communities in the Lake Tahoe area in both California and Nevada and other
communities in northern and western Nevada; and (ii) a system extending from the
Colorado River at the southern tip of Nevada to the Las Vegas distribution area.
The Company also owns a 35,000 acre site in northern Arizona which was
acquired for the purpose of constructing an underground natural gas storage
facility, known as the Pataya Gas Storage Project (Pataya),
2
<PAGE> 6
to serve its southern system. Based upon current studies and the continued
restructuring of the utility industry, the Company believes that it will need an
underground natural gas storage facility, such as Pataya, in the future to meet
the needs of its customers on the southern system. Project costs of $11.1
million have been capitalized through December 1995 and include land acquisition
and related development costs.
The map below shows the locations of the Company's major facilities and
major transmission lines, and principal communities to which the Company
supplies gas either as a wholesaler or distributor. The map also shows major
supplier transmission lines that are interconnected with the Company's systems.
[MAP]
[DESCRIPTION: Map of Arizona, Nevada, and southern California indicating
the location of the Company's service areas. Service areas in Arizona include
most of the central and southern areas of the state including Phoenix, Tucson,
Yuma, and surrounding communities. Service areas in northern Nevada include
Carson City, Yerington, Fallon, Lovelock, Winnemucca, and Elko. Service areas in
southern Nevada include the Las Vegas valley (including Henderson and Boulder
City), and Laughlin. Service areas in southern California include Barstow, Big
Bear, Needles, and Victorville. Service areas in northern California include the
north shore of Lake Tahoe. Companies providing gas transportation services for
the Company are indicated by showing the location of their pipelines. Major
transporters include El Paso Natural Gas Company, Kern River Gas Transmission
Company, Northwest Pipeline Corporation, and Southern California Gas Company.
The location of Paiute Pipeline Company's transmission pipeline (extending from
the Idaho/Nevada border to the Reno/Tahoe area) and the Company's pipeline
(extending from Laughlin/Bullhead City to the Las Vegas valley) are indicated.
The LNG facility is located near Lovelock, Nevada. The liquefied petroleum gas
facility is located near Reno, Nevada.]
3
<PAGE> 7
RATES AND REGULATION
Rates that the Company is authorized to charge its distribution system
customers are determined by the ACC, CPUC, and PSCN in general rate cases and
are derived using rate base, cost of service, and cost of capital experienced in
a historical test year, as adjusted in Arizona and Nevada, and projected for a
future test year in California. The FERC regulates the northern Nevada
transmission and LNG storage facilities of Paiute and the rates it charges for
transportation of gas directly to certain end-users and to various local
distribution companies (LDCs). The LDCs transporting on Paiute's system are:
Sierra Pacific Power Company (Reno and Sparks, Nevada), Washington Water Power
Company (South Lake Tahoe, California), and Southwest Gas Corporation (North
Lake Tahoe, California and various locations throughout northern Nevada).
Rates charged to customers vary according to customer class and are fixed
at levels allowing for the recovery of all prudently incurred costs, including a
return on rate base sufficient to pay interest on debt, preferred dividends, and
a reasonable return on common equity. The Company's rate base consists generally
of the original cost of utility plant in service, plus certain other assets such
as working capital and inventories, less accumulated depreciation on utility
plant in service, net deferred income tax liabilities, and certain other
deductions. The Company's rate schedules in all of its service areas contain
purchased gas adjustment (PGA) clauses which permit the Company to adjust its
rates as the cost of purchased gas changes. Generally, the Company's tariffs
provide for annual adjustment dates for changes in purchased gas costs. However,
the Company may request to adjust its rates more often than once each year, if
conditions warrant. These changes have no significant impact on the Company's
profit margin. See additional discussion of recent PGA filings in Natural Gas
Operations -- Capital Resources and Liquidity of MD&A.
The table below lists the docketed general rate filings initiated and/or
completed within each ratemaking area in 1995 and the first quarter of 1996:
<TABLE>
<CAPTION>
MONTH
FINAL RATES
RATEMAKING AREA TYPE OF FILING MONTH FILED EFFECTIVE
- --------------------------------------- ---------------------- -------------- --------------
<S> <C> <C> <C>
California:
Northern............................. Operational attrition November 1995 January 1996
Northern & Southern.................. General rate case January 1994 January 1995
Nevada:
Northern & Southern.................. General rate case December 1995 --
FERC:
Paiute............................... General rate case October 1992 April 1993(1)
</TABLE>
- ---------------
(1) Interim rates reflecting the increased revenues became effective in April
1993. The rates were subject to refund until a final order was issued in
January 1995.
See Natural Gas Operations -- Rates and Regulatory Proceedings of MD&A for
a discussion of the financial impact of recent general rate cases.
COMPETITION
Electric utilities are the Company's principal competitors for the
residential and small commercial markets throughout the Company's service areas.
Competition for space heating, general household, and small commercial energy
needs generally occurs at the initial installation phase when the
customer/builder typically makes the decision as to which type of equipment to
install and operate. The customer will generally continue to use the chosen
energy source for the life of the equipment. As a result of its success in these
markets, the Company has experienced consistent growth among the residential and
small commercial customer classes.
Unlike residential and small commercial customers, certain large
commercial, industrial, and electric generation customers have the capability to
switch to alternative energy sources. The Company has been successful in
retaining these customers by setting rates at levels competitive with
alternative energy sources
4
<PAGE> 8
such as fuel oils and coal. As a result, management does not anticipate any
material adverse impact on its operating margin. The Company maintains no
backlog on its orders for gas service.
The Company continues to compete with interstate transmission pipeline
companies, such as El Paso Natural Gas Company (El Paso), Kern River Gas
Transmission Company (Kern River), and Tuscarora Gas Transmission Company, to
provide service to end-users. End-use customers located in close proximity to
these interstate pipelines pose a potential bypass threat and, therefore,
require the Company to closely monitor each customer's situation and provide
competitive service in order to retain the customer.
The Company has maintained an intensive effort to mitigate bypass risks
through the use of discounted transportation contract rates, special long-term
contracts with electric generation and cogeneration customers, and new tariff
programs. One such program currently in use in Arizona and proposed in Nevada is
the special gas procurement program. This program provides an opportunity for
potential bypass customers to purchase all natural gas-related services as a
rebundled package, including the procurement of gas supply. The Company would
enter into gas supply contracts for eligible customers, which would not be
included in its system supply portfolio, and provide nomination and balancing
services on behalf of the customer. The Company's competitive response
initiatives, and otherwise competitive rates, have resulted in the Company
experiencing no significant financial impact from the threat of bypass.
DEMAND FOR NATURAL GAS
Deliveries of natural gas by the Company are made under a priority system
established by each regulatory commission having jurisdiction over the Company.
The priority system is intended to ensure that the gas requirements of
higher-priority customers, primarily residential customers and nonresidential
customers who use 500 therms of gas per day or less, are fully satisfied on a
daily basis before lower-priority customers, primarily electric utility and
large industrial customers able to use alternative fuels, are provided any
quantity of gas or capacity.
Demand for natural gas is greatly affected by temperature. On cold days,
use of gas by residential and commercial customers may be as much as eight times
greater than on warm days because of increased use of gas for space heating. To
fully satisfy this increased high-priority demand, gas is withdrawn from
storage, or peaking supplies are purchased from suppliers. If necessary, service
to interruptible lower-priority customers may also be curtailed to provide the
needed delivery system capacity.
The Company has entered the residential cooling market by working with the
manufacturers of gas air conditioning units and the builders of new residential
units in the Arizona and southern Nevada areas. Gas air conditioning represents
an emerging market with the long-term potential for the Company to smooth its
currently seasonal earnings.
NATURAL GAS SUPPLY
The Company believes that natural gas supplies and pipeline capacity will
remain plentiful and readily available. The Company primarily obtains its gas
supplies for its southern system from producing regions in New Mexico (San Juan
basin), and Texas (Permian basin). For its northern system, the Company
primarily obtains gas from Rocky Mountain producing areas and from Canada. The
Company arranges for transportation of gas to its Arizona, Nevada, and
California service territories through the pipeline systems of El Paso, Kern
River, Northwest Pipeline Corporation, and Southern California Gas Company
(SoCal). The Company continually monitors supply and pipeline capacity
availability on both short-term and long-term bases to ensure the continued
reliability of service to its customers.
The Company's primary objective with respect to gas supply is to ensure
that adequate, as well as economical, supplies of natural gas are available from
reliable sources. The Company acquires its gas from a wide variety of sources,
including suppliers on the spot market and those who provide firm supplies over
short-term and longer-term durations. Balancing firm supply assurances against
the associated costs dictate a continually changing natural gas purchasing mix
within the Company's supply portfolio. The Company believes its balanced
portfolio provides security as well as the operating flexibility needed to meet
changing
5
<PAGE> 9
market conditions. During 1995, the Company acquired gas supplies from over 70
suppliers. In managing its gas supply portfolio, the Company does not utilize
derivative financial instruments.
The purchase of natural gas at the wellhead is not regulated as all price
ceilings were abolished by January 1993. The last few years have generally
demonstrated seasonal volatility in the price of natural gas, with higher prices
in the heating season and lower prices during the summer or off-peak consumption
period.
The Company continues to evaluate natural gas storage as an option to
enable the Company to take advantage of seasonal price differentials in
obtaining natural gas from a variety of sources to meet the growing demand of
its customers.
ENVIRONMENTAL MATTERS
Federal, state, and local laws and regulations governing the discharge of
materials into the environment have had little direct impact upon either the
Company or its subsidiaries. Environmental efforts, with respect to matters such
as protection of endangered species and archeological finds, have increased the
complexity and time required to obtain pipeline rights-of-way and sites for
other facilities. However, increased environmental legislation and regulation
are also perceived to be beneficial to the natural gas industry. Because natural
gas is one of the most environmentally safe fuels currently available, its use
will allow energy users to comply with stricter environmental standards. For
example, management is of the opinion that legislation, such as the Clean Air
Act Amendments of 1990 and the Energy Policy Act of 1992, has a positive effect
on natural gas demand, including provisions encouraging the use of natural gas
vehicles, cogeneration, and independent power production.
EMPLOYEES
At December 31, 1995, the natural gas operations segment had 2,383 regular
full-time equivalent employees. The Company believes it has a good relationship
with its employees. No employees are represented by a union.
Reference is hereby made to Item 10 in Part III of this report on Form 10-K
for information relative to the executive officers of the Company.
6
<PAGE> 10
DISCONTINUED OPERATIONS -- FINANCIAL SERVICES ACTIVITIES
In January 1996, the Company reached an agreement to sell PriMerit to
Norwest Corporation for approximately $175 million in cash. The sale is expected
to be finalized in the third quarter of 1996, following receipt of shareholder
and various governmental approvals and satisfaction of other customary closing
conditions. Due to the intended sale of PriMerit during 1996, the financial
services activities are considered discontinued operations for consolidated
financial reporting purposes. The following Bank-related information and
disclosures present the Bank as a stand-alone entity, and are presented for
purposes of additional analysis. See Note 13 of the Notes to Consolidated
Financial Statements for the Bank's stand-alone financial information.
GENERAL DESCRIPTION
The Bank is a federally chartered stock savings bank conducting business
through branch offices in Nevada. The Bank was organized in 1955 as Nevada
Savings and Loan Association which, in 1988, changed its name to PriMerit Bank
and its charter from a state chartered stock savings and loan association to a
federally chartered stock savings bank. Deposit accounts are insured to the
maximum extent permitted by law by the Federal Deposit Insurance Corporation
(FDIC) through the Savings Association Insurance Fund (SAIF). The Bank is
regulated by the Office of Thrift Supervision (OTS) and the FDIC, and is a
member of the Federal Home Loan Bank (FHLB) system.
The Bank's principal business is to attract deposits from the general
public and make loans secured by real estate and other collateral to enable
borrowers to purchase, refinance, construct, or improve such property. Revenues
are derived from interest income on real estate loans; debt securities;
commercial, construction, corporate, and consumer loans; and to a lesser extent,
fees received in connection with loans and deposits. The Bank's major expense is
the interest paid on savings deposits and borrowings.
Since December 31, 1990, total assets have declined from $2.7 billion to
$1.8 billion at December 31, 1995 as management restructured the balance sheet
to more effectively operate under the guidelines of the Financial Institutions
Reform, Recovery and Enforcement Act (FIRREA), the Federal Deposit Insurance
Corporation Improvement Act of 1991 (FDICIA), and as part of a long-term
strategy to optimize the Bank's size and earnings potential.
The following table sets forth certain ratios for the Bank for each of the
periods stated:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C>
Return on average assets (net income divided by average
total assets)........................................ (0.2)% 0.4% 0.3 % (0.5)% (1.2)%
Return on average equity (net income divided by average
stockholder's equity)................................ (1.8)% 4.4% 4.0 % (6.0)% (17.2)%
Equity-to-assets ratio (average stockholder's equity
divided by average total assets)..................... 10.0% 10.1% 8.2 % 7.5% 6.7%
</TABLE>
LENDING ACTIVITIES
The Bank's loan portfolio totaled $1.1 billion at December 31, 1995,
representing 61 percent of total assets at that date. The loan portfolio
consists principally of intermediate-term and long-term real estate loans and,
to a lesser extent, secured and unsecured commercial, corporate, and
construction loans, and consumer loans including: recreational vehicle, marine,
mobile home, auto, equity, and home improvement loans. The contractual maturity
of loans secured by single-family dwellings has historically been 30 years,
although in recent years the Bank has made a number of loans with maturities of
23 years or less.
7
<PAGE> 11
The following table sets forth the composition of the loan portfolio by
type of loan at the dates indicated (thousands of dollars):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------------
1995 1994 1993 1992 1991
---------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Loans collateralized by real
estate:
Conventional single-family
residential................... $ 531,147 $490,157 $436,853 $395,976 $497,448
FHA and VA insured single-family
residential................... 44,018 35,429 25,051 24,670 35,563
Commercial mortgage.............. 178,507 178,076 192,046 198,235 212,518
Construction and land(1)......... 137,728 90,992 82,638 91,344 120,776
---------- -------- -------- -------- --------
891,400 794,654 736,588 710,225 866,305
Commercial secured................. 58,352 40,349 25,443 30,137 26,736
Commercial unsecured............... 4,678 2,317 354 384 3,966
Consumer installment............... 157,726 119,460 93,431 42,444 53,537
Consumer unsecured................. 7,128 6,570 19,309 18,371 16,568
Equity and property improvement
loans............................ 29,216 26,054 21,061 16,712 14,287
Deposit accounts................... 2,392 2,659 2,944 4,248 5,122
---------- -------- -------- -------- --------
1,150,892 992,063 899,130 822,521 986,521
---------- -------- -------- -------- --------
Undisbursed proceeds............... (68,646) (41,702) (48,251) (44,937) (44,544)
Allowance for estimated credit
losses........................... (16,353) (17,659) (16,251) (17,228) (12,061)
Premiums (discounts)............... 9,314 5,969 3,270 (125) (1,294)
Deferred fees...................... (5,362) (4,999) (4,782) (4,406) (6,678)
Accrued interest................... 6,091 4,479 4,214 4,586 6,358
---------- -------- -------- -------- --------
(74,956) (53,912) (61,800) (62,110) (58,219)
---------- -------- -------- -------- --------
Loans receivable, net.............. $1,075,936 $938,151 $837,330 $760,411 $928,302
========== ======== ======== ======== ========
</TABLE>
- ---------------
(1) The Bank's construction and land loans are generally due in one year or
less.
Loan Origination and Credit Risk
One of the Bank's primary businesses is to make and acquire loans secured
by real estate and other collateral to enable borrowers to purchase, refinance,
construct, and improve such property. These activities entail potential credit
losses, the size of which depends on a variety of economic factors affecting
borrowers and the real estate collateral. While the Bank has adopted
underwriting guidelines and credit review procedures to minimize credit losses,
some losses will inevitably occur. Therefore, periodic reviews are made of the
assets in an attempt to identify and deal appropriately with potential credit
losses.
The Bank originates both fixed- and adjustable-rate loans in the
single-family residential, commercial mortgage, and consumer home equity
portfolios. The Bank's adjustable-rate loans in these portfolios are based on
various indices, including the one-year constant maturity Treasury yield, the
prime rate, the six-month London Interbank Offering Rate (LIBOR), and to a
lesser extent, the 11th District cost of funds. Other consumer loans are
generally fixed-rate, while construction and non-real estate commercial loans
are generally adjustable-rate prime-based loans.
The Bank currently originates single-family residential (SFR)
adjustable-rate mortgage (ARM) loans which generally have an initial interest
rate below the current market rate and adjust to the applicable index plus a
defined spread, subject to caps, after the first repricing date, which is
generally at six months or one year. The Bank's ARM loans generally provide that
the maximum rate that can be charged cannot exceed the initial rate by more than
six percentage points. The annual interest rate adjustment on the Bank's ARM
loans is generally limited to two percentage points.
8
<PAGE> 12
Many of the other adjustable-rate loans contain limitations as to both the
amount and the interest rate change at each repricing date (periodic caps) and
the maximum rates the loan can be repriced at over the life of the loan
(lifetime caps). At December 31, 1995, periodic caps in the adjustable loan
portfolio ranged from 25 to 500 basis points. Lifetime caps ranged from 9.75 to
22 percent.
The Bank's loan policies and underwriting standards are the primary means
used to reduce credit risk exposure. The loan approval process is intended to
assess both: (i) the borrower's ability to repay the loan by determining whether
the borrower meets the established underwriting criteria; and (ii) the adequacy
of the proposed collateral by determining whether the appraised value of (and,
if applicable, the cash flow from) the collateral property is sufficient for the
proposed loan. Under OTS regulations, management is held responsible for
developing, implementing, and maintaining prudent appraisal policies.
The Bank reviews adherence to approved lending policies and procedures,
including proper approvals, timely completion of quarterly asset reviews, early
identification of problem loans, reviewing the quality of underwriting and
appraisals, tracking trends in asset quality, and evaluating the adequacy of the
allowance for estimated credit losses. To further control its credit risk, the
Bank monitors and manages its credit exposure in portfolio concentrations.
Portfolio concentrations, including collateral types, industry groups,
geographic locations, and loan types are assessed and the exposure is managed
through the establishment of limitations of aggregate exposures.
The Bank maintains a comprehensive risk-rating system used in determining
classified assets and allowances for estimated credit losses. The system
involves an ongoing review of all assets containing an element of credit risk
including loans, real estate, and investment securities. The review process
assigns a risk rating to each asset reviewed based upon various credit criteria.
If the review indicates that it is probable that some portion of an asset will
result in a loss, the asset is written down to its expected recovery value. An
allocated valuation allowance is established for each asset reviewed which has
been assigned a risk classification. The allowance is determined, subject to
certain minimum percentages, based upon probability of default (in the case of
loans), and estimated ranges of recovery. An allowance for estimated credit
losses on classified assets not subject to a detailed review is established by
multiplying a percentage by the aggregate balances of the assets outstanding in
each risk category. The percentages assigned increase based on the degree of
risk and reflect management's estimate of potential future losses from assets in
a specific risk category. With respect to loans not subject to specific reviews,
principally single-family residential and consumer loans, the allowance is
established based upon historical loss experience. Additionally, an unallocated
allowance is established to reflect economic and other conditions that may
negatively affect the portfolio in the aggregate.
As part of the regular asset review process, management reviews factors
relating to the possibility and magnitude of prospective loan and real estate
losses, including historical loss experience, prevailing market conditions, and
classified asset levels. The Bank is required to classify assets and establish
prudent valuation allowances in accordance with OTS regulations.
Each loan portfolio contains unique credit risks for which the Bank has
developed policies and procedures to manage as follows:
Single-Family Residential Lending. SFR mortgage loans comprise 53 percent
of the loan portfolio at December 31, 1995, compared to 56 percent at December
31, 1994. This portfolio represents the largest lending component and is the
component which contains the least credit risk.
It is the general policy of the Bank not to make SFR loans which have a
loan-to-value ratio in excess of 80 percent unless insured by private mortgage
insurance, Federal Housing Authority (FHA) insurance, or guaranteed by the
Veterans Administration (VA). Single-family loans are generally underwritten to
underwriting guidelines established by FHA, VA, Federal Home Loan Mortgage
Corporation (FHLMC), Federal National Mortgage Association (FNMA), or
preapproved private investors. On its SFR ARM loans offered with initial rates
below the current market rate, the Bank qualifies the applicants using the fully
indexed rate.
9
<PAGE> 13
During 1995, the Bank made $24.7 million of loans using brokers. These
loans were underwritten by the Bank using the same guidelines as loans
originated internally.
The Bank requires title insurance on all loans secured by liens on real
property. The Bank also requires fire and other hazard insurance be maintained
in amounts at least equal to the replacement cost on all properties securing its
loans. Earthquake insurance, however, is not required.
Consumer Lending. Consumer loans include: installment loans secured by
auto, recreational vehicles, boats, and mobile homes; home equity and property
improvement loans; and loans secured by deposit accounts. Approximately 96
percent of the consumer loan portfolio is collateralized at December 31, 1995.
The credit risk of the consumer loan portfolio is managed through both the
origination function and the collection process. All consumer loan origination
and collection efforts, except for loans secured by deposits, are performed at a
central location in order to provide greater control in the process and a more
uniform application of credit standards.
The Bank originates a majority of its installment loans through automobile,
recreational vehicle, and marine dealers. These loans are subject to credit
scoring and underwriting by Bank personnel. Additionally, credit reviews of the
dealers are performed on a periodic basis. The Bank pays dealers a fee for these
loans, in some cases through a broker, based upon the excess of the contractual
interest rate of the loan over the Bank's stated rate schedule. The Bank
utilizes a credit scoring model to assist in the analysis of loan applications
and credit reports. Additionally, as a follow up to the application process, a
review of selected originations is performed to monitor adherence to credit
standards.
Premiums on loans primarily represent premiums paid to dealers for
originating consumer installment loans for the Bank. Prepayments of the loans
can adversely affect the yield of the installment portfolio should the unearned
premium be uncollectible from the dealer due to the contractual terms of the
dealer agreement or the creditworthiness of the dealer or broker.
Commercial and Construction. The commercial and construction loan
portfolios consist of amortizing mortgage loans on multi-family residential and
nonresidential real estate, construction and development loans secured by real
estate, and commercial loans secured by collateral other than real estate.
Commercial secured loans include corporate loans secured by inventory,
receivables, real estate, and collateral other than real estate. Residential
tract construction loans are generally underwritten with a stabilized
loan-to-value ratio of less than 85 percent, while commercial/income property
loans are generally underwritten with a ratio less than or equal to 75 percent.
Construction loans involve risks different from completed project lending
because loan funds are advanced upon the security of the project under
construction, and if the loan goes into default, additional funds may have to be
advanced to complete the project before it can be sold. Moreover, construction
projects are subject to uncertainties inherent in estimating construction costs,
potential delays in construction time, market demand, and the accuracy of the
estimate of value upon completion.
The Bank manages its risk in these portfolios through its credit
evaluation, approval, and monitoring processes. In addition to obtaining
appraisals on real estate collateral-based loans, a review of actual and
forecasted financial statements and cash flow analyses is performed. After such
loans are funded, they are monitored by obtaining and analyzing current
financial and cash flow information on a periodic basis.
To further control its credit risk in this portfolio, the Bank monitors and
manages credit exposure on portfolio concentrations. The Bank regularly monitors
portfolio concentrations by collateral types, industry groups, loan types, and
individual and related borrowers. Such concentrations are assessed and exposures
managed through establishment of limitations of aggregate exposures. The Bank no
longer originates new construction and commercial loans outside of Nevada. At
December 31, 1995, 32 percent, or $18.5 million, of the Bank's outstanding
commercial secured loan portfolio consisted of loans to borrowers in the gaming
industry, with additional unfunded commitments of $9.9 million. These loans are
generally secured by real estate and equipment. The Bank's portfolio of loans,
collateralized by real estate, consists principally of real estate located in
Nevada, California, and to a lesser extent, Arizona. Collectibility is,
therefore, somewhat dependent on the economies and real estate values of these
areas and industries. Construction loans and
10
<PAGE> 14
commercial real estate loans (including multi-family) generally have higher
default rates than single-family residential loans.
Origination, Purchase, and Sale of Loans
The Bank originates the majority of its loans within the state of Nevada;
however, under current laws and regulations, the Bank may also originate and
purchase loans or purchase participating interests in loans without regard to
the location of the secured property. The Bank originated $525 million and $466
million in new loans during 1995 and 1994, respectively, virtually all of which
were secured by property located in Nevada. As of December 31, 1995, 86 percent
of the loan portfolio was secured by property located in Nevada, 9 percent
secured by property located in California, and 5 percent secured by property
located in Arizona. The Bank originates real estate and commercial loans
principally through its in-house personnel, with some broker-originated SFR
loans. In 1994, the Bank purchased $41.9 million of single-family residential
whole loans, while no such purchases of loans occurred in 1995.
Secondary Marketing Activity
The Bank has been involved in secondary mortgage market transactions
through the sale of whole loans. In accordance with the Bank's Accounting
Policy, fixed-rate residential loans with maturities greater than 25 years have
been designated as held for sale. At December 31, 1995, $5.9 million of
residential loans are designated as held for sale. See Note 13 of the Notes to
Consolidated Financial Statements for additional discussion relating to such
loans.
Under its loan participation and whole loan sale agreements, the Bank may
continue to service the loans and collect payments on the loans as they become
due. The amount of loans serviced for others was $430 million at December 31,
1995, compared to $415 million at year-end 1994, including $58 million and $68
million, respectively, of loans serviced for mortgage-backed securities (MBS)
originated and owned by the Bank. The Bank pays the participating lender, under
the terms of the participation agreement, a yield on the participant's portion
of the loan, which is usually less than the interest agreed to be paid by the
borrower. The difference is retained by the Bank as servicing income.
In connection with mortgage loan sales, the Bank makes representations and
warranties customary in the industry relating to, among other things, compliance
with laws, regulations and program standards, and accuracy of information. In
the event of a breach of these representations and warranties, or under certain
limited circumstances, regardless of whether there has been such a breach, the
Bank may be required to repurchase such mortgage loans. Typically, any
documentation defects with respect to these mortgage loans that caused them to
be repurchased, are corrected and the mortgage loans are resold. Certain
repurchased mortgage loans may remain in the Bank's loan portfolio and, in some
cases, repurchased mortgage loans are foreclosed and the acquired real estate
sold.
In May 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 122, "Accounting for
Mortgage Servicing Rights." The statement eliminates the previous distinction
between purchased and originated mortgage servicing rights. The statement
requires an allocation of the cost basis of a mortgage loan between the mortgage
servicing rights and the loan when mortgage loans are sold or securitized and
the servicing is retained. The Bank adopted SFAS No. 122 effective April 1,
1995.
The servicing rights are being amortized over their estimated lives using a
method approximating a level yield method. The book value of capitalized
mortgage servicing rights at December 31, 1995 was $350,000. As all servicing
rights capitalized during the year have been on new loan originations and no
significant change in interest rates or servicing rights values have occurred,
fair value is estimated to approximate book value at December 31, 1995.
11
<PAGE> 15
Loan Fees
The Bank receives loan origination fees for originating loans and
commitment fees for making commitments to originate construction, income
property, and multi-family residential loans. It also receives loan fees and
charges related to existing loans, including prepayment fees, late charges, and
assumption fees. The amount of loan origination fees, commitment fees, and
discounts received varies with loan volumes, loan types, purchase commitments
made, and competitive and economic conditions. Loan origination and commitment
fees, offset by certain direct loan origination costs, are being deferred and
recognized over the contractual life of such loans as yield adjustments.
ASSET QUALITY
Loan Impairment. On January 1, 1995, the Bank adopted SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan," and SFAS No. 118,
"Accounting by Creditors for Impairment of a Loan -- Income Recognition and
Disclosures." SFAS No. 114 requires the measurement of loan impairment to be
based on the present value of expected future cash flows discounted at the
loan's original effective interest rate or the fair value of the underlying
collateral on collateral-dependent loans. SFAS No. 118 allows a creditor to use
existing methods for recognizing interest income on impaired loans.
Upon adoption of SFAS No. 114 in the first quarter of 1995, $2.9 million of
in-substance foreclosed assets were reclassified on the Bank's consolidated
statement of financial condition from real estate acquired through foreclosure
(REO-F) to loans receivable. SFAS No. 114 eliminated the in-substance
designation. No other financial statement impact resulted from the Bank's
adoption of SFAS No. 114.
In general, under SFAS No. 114, interest income on impaired loans will
continue to be recognized by the Bank on the accrual basis of accounting, unless
the loan is greater than 90 days delinquent with respect to principal or
interest, or the loan has been partially or fully charged-off. Interest on loans
greater than 90 days delinquent is generally recognized on a cash basis.
Interest income on loans which have been fully or partially charged-off is
generally recognized on a cost-recovery basis; that is, all proceeds from the
loan payments are first applied as a reduction to principal before any income is
recorded.
Interest payments received on impaired loans are recorded as interest
income unless collection of the remaining recorded investment is in doubt, in
which case payments received are recorded as reductions of principal.
Nonperforming Assets. Nonperforming assets are comprised of nonaccrual
assets, restructured loans, and REO-F. Nonaccrual assets are those on which
management believes the timely collection of interest or principal is doubtful.
Assets are transferred to nonaccrual status when payments of interest or
principal are 90 days past due or if, in management's opinion, the accrual of
interest should be ceased sooner. There are no assets on accrual status which
are over 90 days delinquent or past maturity.
Nonaccrual assets are restored to accrual status when, in the opinion of
management, the financial condition of the borrower and/or debt service capacity
of the security property has improved to the extent that collectibility of
interest and principal appears assured and interest payments sufficient to bring
the asset current are received.
Restructured loans represent loans for which the borrower is complying with
the terms of a loan modified as to rate, maturity, or payment amount.
12
<PAGE> 16
The following table summarizes nonperforming assets as of the dates indicated
(thousands of dollars):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------
1995 1994 1993 1992 1991
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans past due 90 days or
more:
Mortgage loans:
Construction and land............... $ 893 $ 576 $ 1,233 $ 8,514 $ 8,904
Single-family residences............ 3,720 5,517 6,636 4,667 7,737
Other mortgage loans................ 3,315 5,696 6,728 3,736 10,388
------- ------- ------- ------- -------
7,928 11,789 14,597 16,917 27,029
Nonmortgage loans...................... 637 904 184 2,164 87
Restructured loans....................... 9,320 16,768 2,842 1,190 1,229
------- ------- ------- ------- -------
Total nonperforming loans........... 17,885 29,461 17,623 20,271 28,345
REO-F.................................... 3,403 7,631 9,707 24,488 14,875
------- ------- ------- ------- -------
Total nonperforming assets............... $21,288 $37,092 $27,330 $44,759 $43,220
======= ======= ======= ======= =======
Allowance for estimated credit losses.... $16,620 $17,659 $16,251 $17,228 $12,061
======= ======= ======= ======= =======
Allowance for estimated credit losses as
a percentage of nonperforming loans.... 92.93% 59.94% 92.21% 84.99% 42.55%
======= ======= ======= ======= =======
Allowance for estimated credit losses as
a percentage of nonperforming assets... 78.07% 47.61% 59.46% 38.49% 27.91%
======= ======= ======= ======= =======
</TABLE>
The increase in restructured loans in 1994 is a result of the
classification of $13.9 million of single-family residential loan modifications
made for borrowers with earthquake-related damage in California. Federal
agencies encouraged financial institutions to modify loan terms for certain
borrowers who were affected by the earthquake which occurred in January 1994.
The terms of these modifications were generally three- to six-month payment
extensions with no negative credit reporting regarding the borrower. These loans
were on a nonaccrual basis during the extension period. Current OTS regulations
allow for removal of these loans from the "troubled debt restructured"
designation, once the loan performs according to its contractual terms for
twelve consecutive months. The reduction of $7.4 million in restructured loans
from 1994 to 1995 was primarily due to earthquake-modified loans which met this
criteria.
At December 31, 1995, all nonaccrual loans and REO-F are classified
substandard. Additionally, $3.1 million of restructured loans are classified
substandard.
The amount of interest income that would have been recorded on the
nonaccrual and restructured assets if they had been current under their original
terms was $1.3 million for 1995. Actual interest income recognized on these
assets was $439,000, resulting in $856,000 of interest income foregone for the
year. See further discussion below in Provision and Allowance for Estimated
Credit Losses.
Classified Assets. OTS regulations require the Bank to classify certain
assets and establish prudent valuation allowances. Classified assets fall in one
of three categories -- "substandard," "doubtful," and "loss." In addition, the
Bank can designate an asset as "special mention."
Assets classified as "substandard" are inadequately protected by the
current net worth or paying capacity of the obligor or the collateral pledged,
if any. Assets which are designated as "special mention" possess weaknesses or
deficiencies deserving close attention, but do not currently warrant
classification as "substandard."
Provision and Allowance for Estimated Credit Losses. The provision for
estimated credit losses is dependent upon management's evaluation as to the
amount needed to maintain the allowance for losses at a level considered
appropriate to the perceived risk of future losses. A number of factors are
weighed by management in determining the adequacy of the allowance, including
internal analyses of portfolio quality measures and trends, specific economic
and market conditions affecting valuation of the security properties, and
certain other factors. In addition, the OTS considers the adequacy of the
allowance for credit losses and
13
<PAGE> 17
the net carrying value of real estate owned in connection with periodic
examinations of the Bank. The OTS has the ability to require the Bank to
recognize additions to the allowance or reductions in the net carrying value of
real estate owned based on their judgement at the time of such examinations. In
connection with the most recent examination by the OTS in 1995, no additional
allowances for losses were required to be recorded by the Bank.
Activity in the allowances for estimated credit losses on loans, debt
securities, and real estate is summarized as follows (thousands of dollars):
<TABLE>
<CAPTION>
REAL REAL
ESTATE ESTATE
CONSTRUCTION NON- ACQUIRED HELD FOR
MORTGAGE & LAND MORTGAGE TOTAL DEBT THROUGH SALE OR
LOANS LOANS LOANS LOANS SECURITIES FORECLOSURE DEVELOPMENT TOTAL RATIO*
-------- ------------ -------- -------- ---------- ----------- ----------- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, 12/31/90.... $ 1,134 $ 1,299 $ 1,213 $ 3,646 $ -- $ 4,087 $ 4,158 $ 11,891
Provisions for
estimated credit
losses............. 5,835 2,643 3,580 12,058 -- 1,686 49,010 62,754
Charge-offs.......... (844) (1,121) (2,111) (4,076) -- (6,914) (49,564) (60,554)
Recoveries........... 450 -- 566 1,016 -- 319 35 1,370
Transfers............ (583) -- -- (583) -- 822 -- 239
------- ------- ------- -------- ------- ------- -------- --------
Balance, 12/31/91.... 5,992 2,821 3,248 12,061 -- -- 3,639 15,700 5.85%
Provisions for
estimated credit
losses............. 1,903 6,460 5,766 14,129 -- -- 18,309 32,438
Charge-offs.......... (717) (4,262) (5,837) (10,816) -- -- (20,490) (31,306)
Recoveries........... 202 497 1,155 1,854 -- -- 5 1,859
------- ------- ------- -------- ------- ------- -------- --------
Balance, 12/31/92.... 7,380 5,516 4,332 17,228 -- -- 1,463 18,691 3.29%
Provisions for
estimated credit
losses............. 4,634 172 1,406 6,212 -- -- 1,010 7,222
Charge-offs.......... (3,652) (3,100) (3,060) (9,812) -- -- (1,538) (11,350)
Recoveries........... 461 852 1,310 2,623 -- -- -- 2,623
------- ------- ------- -------- ------- ------- -------- --------
Balance, 12/31/93.... 8,823 3,440 3,988 16,251 -- -- 935 17,186 1.07%
Provisions for
estimated credit
losses............. 2,954 71 4,205 7,230 -- -- 163 7,393
Charge-offs.......... (2,601) (1,499) (3,787) (7,887) -- -- (1,412) (9,299)
Recoveries........... 815 202 1,048 2,065 -- -- 790 2,855
------- ------- ------- -------- ------- ------- -------- --------
Balance, 12/31/94.... 9,991 2,214 5,454 17,659 -- -- 476 18,135 0.72%
Provisions for
estimated credit
losses............. (2,609) (151) 8,506 5,746 2,077 326 162 8,311
Charge-offs.......... (1,105) (312) (7,207) (8,624) (2,077) (395) (139) (11,235)
Recoveries........... 145 172 1,255 1,572 -- 336 364 2,272
------- ------- ------- -------- ------- ------- -------- --------
Balance, 12/31/95.... $ 6,422 $ 1,923 $ 8,008 $ 16,353 $ -- $ 267 $ 863 $ 17,483 0.56%
======= ======= ======= ======== ======= ======= ======== ========
</TABLE>
* Ratio = Net charge-offs to average loans and real estate outstanding (includes
debt securities for 1995).
Allocation of Allowance for Estimated Credit Losses. The following is a
breakdown of allocated loan loss allowance amounts by major categories. However,
in management's opinion, the allowance must be viewed in its entirety.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991
-------------------- -------------------- -------------------- -------------------- --------------------
PERCENT PERCENT PERCENT PERCENT PERCENT
OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS
ALLOWANCE TO TOTAL ALLOWANCE TO TOTAL ALLOWANCE TO TOTAL ALLOWANCE TO TOTAL ALLOWANCE TO TOTAL
AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
--------- -------- --------- -------- --------- -------- --------- -------- --------- --------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans by type
Real estate..... $ 6,422 69.1 $ 9,991 73.6 $ 8,823 76.9 $ 7,380 81.2 $ 5,992 82.4
Construction and
land.......... 1,923 6.3 2,214 5.1 3,440 4.0 5,516 4.3 2,821 4.8
Nonmortgage..... 8,008 24.6 5,454 21.3 3,988 19.1 4,332 14.5 3,248 12.8
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total....... $16,353 100.0 $17,659 100.0 $16,251 100.0 $17,228 100.0 $12,061 100.0
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
</TABLE>
REAL ESTATE DEVELOPMENT ACTIVITIES
The Bank's investment in real estate held for development, net of allowance
for estimated losses, excluding REO-F, decreased from $28.1 million at December
31, 1991 to $247,000 at December 31, 1995.
14
<PAGE> 18
The Bank's pretax loss from real estate operations was $196,000 in 1995,
$612,000 in 1994, and $910,000 in 1993.
The Bank and its subsidiaries have ceased making investments in new real
estate development activities as a result of legislative and regulatory actions
which have placed certain restrictions on the Bank's ability to invest in real
estate. See Regulation -- General herein for additional discussion. The Bank and
its subsidiaries are continuing the sale and wind down of remaining real estate
investments.
INVESTMENT ACTIVITIES
Federal regulations require thrifts to maintain certain levels of liquidity
and to invest in various types of liquid assets. The Bank invests in a variety
of securities, including commercial paper, certificates of deposit, U.S.
government and U.S. agency obligations, short-term corporate debt, municipal
bonds, repurchase agreements, and federal funds. The Bank also invests in longer
term investments such as MBS and collateralized mortgage obligations (CMO) to
supplement its loan production and to provide liquidity to meet unforeseen cash
outlays. Income from cash equivalents and debt securities provides a significant
source of revenue for the Bank, constituting 41 percent, 32 percent and 29
percent of total revenues for each of the years ended December 31, 1993, 1994
and 1995, respectively.
In order to mitigate the interest rate risk (IRR) and credit risk exposure
in the debt security portfolio, the Bank has established guidelines within its
Investment Portfolio Policy for maximum duration, credit quality, concentration
limits per issuer, and counterparty capital requirements. The Investment
Portfolio Policy also sets forth the types of permissible investment securities
and unsuitable investment activities.
Additionally, the debt security portfolio is subject to the Asset
Classification Policy of the Bank based on credit risk as determined by private
rating firms, such as Standard and Poor's Corporation and Moody's Investors
Services.
On December 31, 1993, the Bank adopted SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." In conjunction with
adoption, the Bank designated the vast majority of its debt security portfolio
as available for sale. At December 31, 1995 and 1994, no securities were
designated as "trading securities."
In November 1995, the FASB issued a Special Report, "A Guide to
Implementation of Statement 115 on Accounting for Certain Investments in Debt
and Equity Securities" (the Special Report). The Special Report allowed a
one-time opportunity, until December 31, 1995, for institutions to reassess the
appropriateness of their designations of all securities and transfer debt
securities from the held-to-maturity portfolio before calendar year-end 1995,
without calling into question their intent to hold other debt securities to
maturity in the future. The Bank reassessed its securities designations in light
of the Special Report guidance and made no reclassifications.
The following tables present the composition of the debt security
portfolios as of the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1995 1994 1993
-------- -------- --------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
DEBT SECURITIES HELD TO MATURITY
Corporate issue MBS............................................ $ 43,964 $ 60,922 $ 69,660
U.S. Treasury securities....................................... 20,290 40,958 --
-------- -------- --------
Total................................................ $ 64,254 $101,880 $ 69,660
======== ======== ========
</TABLE>
15
<PAGE> 19
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1995 1994 1993
-------- -------- --------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
DEBT SECURITIES AVAILABLE FOR SALE
GNMA -- MBS.................................................... $ 5,933 $ 6,397 $ 9,672
FHLMC -- MBS................................................... 238,926 300,896 379,786
FNMA -- MBS.................................................... 94,894 109,108 119,657
CMO............................................................ 66,359 88,380 47,249
Corporate issue MBS............................................ 16,309 19,517 24,106
Money market instruments....................................... -- -- 10,036
U.S. Treasury securities and obligations of
U.S. Government corporations and agencies.................... -- 5,102 5,220
-------- -------- --------
Total................................................ $422,421 $529,400 $595,726
======== ======== ========
</TABLE>
The following schedule of the expected maturity of debt securities held to
maturity is based upon dealer prepayment expectations and historical prepayment
activity (thousands of dollars):
<TABLE>
<CAPTION>
EXPECTED/CONTRACTUAL MATURITY
--------------------------------------------------------------------
AFTER AFTER AFTER
WITHIN ONE YEAR FIVE YEARS TEN YEARS TOTAL
ONE BUT WITHIN BUT WITHIN BUT WITHIN AMORTIZED
DECEMBER 31, 1995 YEAR FIVE YEARS TEN YEARS TWENTY YEARS COST YIELD
- ------------------------------------- ------- ---------- ---------- ------------ --------- -----
<S> <C> <C> <C> <C> <C> <C>
Corporate issue MBS.................. $11,360 $27,853 $4,596 $ 155 $43,964 7.99%
U.S. Treasury securities............. 20,290 -- -- -- 20,290 7.37%
------- ------- ------ ----- ------- ----
Total...................... $31,650 $27,853 $4,596 $ 155 $64,254 7.79%
======= ======= ====== ===== ======= ====
Yield................................ 7.57% 7.91% 8.55% 7.23% 7.79%
======= ======= ====== ===== =======
</TABLE>
The following schedule reflects the expected maturities of MBS and CMO and
the contractual maturity of all other debt securities available for sale. The
expected maturities of MBS and CMO are based upon dealer prepayment expectations
and historical prepayment activity (thousands of dollars):
<TABLE>
<CAPTION>
EXPECTED/CONTRACTUAL MATURITY
------------------------------------------------------------------------
AFTER AFTER AFTER TOTAL
ONE YEAR FIVE YEARS TEN YEARS ESTIMATED
WITHIN BUT WITHIN BUT WITHIN BUT WITHIN FAIR
DECEMBER 31, 1995 ONE YEAR FIVE YEARS TEN YEARS TWENTY YEARS VALUE YIELD(1)
- ---------------------------------- -------- ---------- ---------- ------------ --------- --------
<S> <C> <C> <C> <C> <C> <C>
GNMA -- MBS....................... $ 1,375 $ 3,780 $ 778 $ -- $ 5,933 8.27%
FHLMC -- MBS...................... 60,947 148,188 25,625 4,166 238,926 7.45%
FNMA -- MBS....................... 14,808 46,644 22,346 11,096 94,894 7.07%
CMO............................... 24,400 41,661 298 -- 66,359 5.50%
Corporate Issue MBS............... 3,027 10,855 1,661 766 16,309 7.25%
-------- -------- ------- ------- -------- ----
Total................... $104,557 $251,128 $50,708 $16,028 $422,421 7.06%
======== ======== ======= ======= ======== ====
Yield............................. 6.94% 7.05% 7.27% 7.18% 7.06%
======== ======== ======= ======= ========
</TABLE>
- ---------------
(1) The yields are computed based on amortized cost.
DEPOSIT ACTIVITIES
Deposit accounts are the Bank's primary source of funds constituting 79
percent of the Bank's total liabilities at December 31, 1995. The Bank solicits
both short-term and long-term deposits in the form of transaction-based and
certificate of deposit accounts.
The Bank's average retail deposit base, as a percent of average
interest-bearing liabilities, has remained steady during the past three years.
The total average deposit base declined in 1994 versus 1993 as a result of the
sale of the Bank's Arizona deposits in 1993. See Note 13 of the Notes to
Consolidated Financial Statements for further discussion of the Arizona sale.
Average retail deposits, as a percentage of average interest-bearing
liabilities, were 79 percent in 1995, compared to 80 percent in 1994 and 79
percent in 1993.
16
<PAGE> 20
The Bank has emphasized retail deposits over wholesale funding sources in an
effort to reduce the volatility of its cost of funds. Additionally, the Bank has
emphasized growth in transaction-based accounts versus term accounts in order to
reduce its overall cost of funds.
The Bank's deposits increased $26 million during 1995. This growth was
principally in transaction-based accounts which increased by $27 million, offset
by a decrease of $1 million in certificates of deposit. During 1995, the Bank
offered new and restructured money market demand account (MMDA) products in
order to encourage this growth and minimize loss of deposits to competitive
products offered by other financial intermediaries.
At December 31, 1995, the Bank maintained over $419 million in collateral,
at market value, which could be borrowed against or sold to offset any deposit
outflows which could occur in a declining or low interest rate environment, or
as a result of the pending acquisition of the Bank. While some loss of deposits
may be experienced by the Bank, the anticipated volume is not expected to be
significant.
The average balances in and average rates paid on deposit accounts for the
years indicated are summarized as follows (thousands of dollars):
<TABLE>
<CAPTION>
1995 1994 1993
------------------ ------------------ ------------------
BALANCE YIELD BALANCE YIELD BALANCE YIELD
---------- ----- ---------- ----- ---------- -----
<S> <C> <C> <C> <C> <C> <C>
Noninterest-bearing demand deposits... $ 80,028 -- $ 66,339 -- $ 77,144 --
Interest-bearing demand deposits...... 319,449 3.23% 327,020 2.67% 329,785 2.60%
Savings deposits...................... 71,963 2.38% 84,584 2.52% 83,935 2.81%
Certificates of deposit............... 774,948 5.15% 751,572 4.42% 952,764 4.90%
---------- ---- ---------- ---- ---------- ----
$1,246,388 4.17% $1,229,515 3.59% $1,443,628 3.99%
========== ==== ========== ==== ========== ====
</TABLE>
Certificates of deposit include approximately $171 million, $169 million,
and $152 million in time certificates of deposits in amounts of $100,000 or more
at December 31, 1995, 1994, and 1993, respectively. The following table
represents time certificates of deposits, none of which are brokered, in amounts
of $100,000 or more by time remaining until maturity as of December 31, 1995
(thousands of dollars):
<TABLE>
<CAPTION>
LESS THAN 3 MONTHS 3 MONTHS-6 MONTHS 6 MONTHS-1 YEAR GREATER THAN 1 YEAR
- ------------------ ----------------- --------------- -------------------
<S> <C> <C> <C>
$ 60,121 $29,724 $35,798 $45,696
======== ======= ======= =======
</TABLE>
BORROWINGS
Sources of funds other than deposits have included advances from the FHLB,
reverse repurchase agreements, and other borrowings.
FHLB Advances. As a member of the FHLB system, the Bank may obtain
advances from the FHLB pursuant to various credit programs offered from time to
time. The Bank borrows these funds from the FHLB principally on the security of
certain of its mortgage loans. See Regulation -- Federal Home Loan Bank System
herein for additional discussion. Such advances are made on a limited basis to
supplement the Bank's supply of lendable funds, to meet deposit withdrawal
requirements and to lengthen the maturities of its borrowings. See Note 13 of
the Notes to Consolidated Financial Statements for additional discussion.
Securities Sold Under Repurchase Agreements. The Bank sells securities
under agreements to repurchase (reverse repurchase agreements). Reverse
repurchase agreements involve the Bank's sale of debt securities to a
broker/dealer with a simultaneous agreement to repurchase the same debt
securities on a specified date at a specified price. The initial price paid to
the Bank under reverse repurchase agreements is less than the fair market value
of the debt securities sold, and the Bank may be required to pledge additional
collateral if the fair market value of the debt securities sold declines below
the price paid to the Bank for these debt securities.
17
<PAGE> 21
Reverse repurchase agreements are summarized as follows (thousands of
dollars):
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Balance at year end.................................... $140,710 $281,935 $259,041
Accrued interest payable at year end................... 1,417 3,335 3,871
Daily average amount outstanding during year........... 175,618 222,620 305,123
Maximum amount outstanding at any month end............ 282,374 281,935 367,859
Weighted-average interest rate during the year......... 6.20% 4.95% 4.30%
Weighted-average interest rate on year-end balances.... 6.10% 6.37% 4.31%
</TABLE>
EMPLOYEES
At December 31, 1995, the Bank had 601 full-time equivalent employees. No
employees are represented by any union or collective bargaining group and the
Bank considers its relations with its employees to be good.
COMPETITION
The Bank experiences substantial competition in attracting and retaining
deposit accounts and in making mortgage and other loans. The primary factors in
competing for deposit accounts are interest rates paid on deposits, the range of
financial services offered, the quality of service, convenience of office
locations, and the financial strength of an institution. Direct competition for
deposit accounts comes from savings and loan associations, commercial banks,
money market mutual funds, credit unions, and insurance companies. During 1995,
the Bank experienced deposit outflows from certificate of deposit accounts as
customers sought higher yielding alternative investments in a low interest rate
environment. The Bank has sought to retain relationships with these customers by
establishing an agreement with a third party broker to offer uninsured
investment alternatives in the Bank's branches and through restructuring its
MMDA product offerings.
The primary factors in competing for loans are interest rates, loan
origination fees, quality of service, and the range of lending services offered.
Competition for origination of first mortgage loans normally comes from savings
and loan associations, mortgage banking firms, commercial banks, insurance
companies, real estate investment trusts, and other lending institutions.
PROPERTIES
The Bank occupies facilities at 25 locations in Nevada, of which 11 are
owned. The Bank leases the remaining facilities. The Bank opened a new branch in
the Las Vegas area in May of 1995 while consolidating another branch during the
year. See Note 13 of the Notes to Consolidated Financial Statements for a
schedule of net future minimum rental payments that have initial or remaining
noncancelable lease terms in excess of one year as of December 31, 1995.
REGULATION
General
In August 1989, FIRREA was enacted into law. FIRREA had and will continue
to have a significant impact on the thrift industry including, among other
things, imposing significantly higher capital requirements and providing funding
for the liquidation of insolvent thrifts. In December 1991, FDICIA was enacted
into law. This legislation included changes in the qualified thrift lender test,
deposit insurance assessments, and capital standards.
Regulatory Infrastructure. The Bank's principal supervisory agency is the
OTS, an agency reporting to the U.S. Treasury Department. The OTS is responsible
for the examination and regulation of all thrifts and for the organization,
incorporation, examination, and regulation of federally chartered thrifts.
The FDIC is the Bank's secondary regulator and is the administrator of the
SAIF which generally insures the deposits of thrifts.
Deposit Insurance Premiums. During 1993, the FDIC implemented a risk-based
deposit insurance premium assessment. Under the regulation, annual deposit
insurance premiums ranging from 23 to 31 basis points are imposed on
institutions based upon the institution's level of capital and a supervisory
risk assessment. Congressional proposals are currently pending to decrease the
deposit insurance premiums after a one-time assessment is imposed to fully
capitalize the SAIF.
18
<PAGE> 22
Capital Standards. Effective December 1989, the OTS issued the minimum
regulatory capital regulations (capital regulations) required by FIRREA.
The capital regulations require that all thrifts meet three separate
capital standards as follows:
1. A tangible capital requirement equal to at least 1.5 percent of
adjusted total assets (as defined).
2. A core capital requirement equal to at least three percent of
adjusted total assets (as defined).
3. A risk-based capital requirement equal to at least eight percent of
risk-weighted assets (as defined).
The OTS may establish, on a case by case basis, individual minimum capital
requirements for a thrift institution which may vary from the requirements which
would otherwise be applicable under the capital regulations. The OTS has not
established such minimum capital requirements for the Bank.
A thrift institution which fails to meet one or more of the applicable
capital requirements is subject to various regulatory limitations and sanctions,
including a prohibition on growth and the issuance of a capital directive by the
OTS requiring the following: an increase in capital, a reduction of rates paid
on savings accounts, cessation of or limitations on deposit taking and lending,
limitations on operational expenditures, an increase in liquidity, and such
other actions as are deemed necessary or appropriate by the OTS. In addition, a
conservator or receiver may be appointed under certain circumstances.
FDICIA requires federal banking regulators to take prompt corrective action
if an institution fails to satisfy minimum capital requirements. Under FDICIA,
capital requirements include a leverage limit, a risk-based capital requirement,
and any other measure of capital deemed appropriate by the federal banking
regulators for measuring the capital adequacy of an insured depository
institution. All institutions, regardless of their capital levels, are
restricted from making any capital distribution or paying management fees which
are not in capital requirement compliance or if such payment would cause the
institution to fail to satisfy minimum levels for any of its capital
requirements.
Insured institutions are divided into five capital categories -- (1) well
capitalized, (2) adequately capitalized, (3) undercapitalized, (4) significantly
undercapitalized, and (5) critically undercapitalized. The categories are
defined as follows:
<TABLE>
<CAPTION>
CORE CAPITAL TO
RISK-BASED RISK-BASED CORE
CATEGORY CAPITAL RATIO ASSETS CAPITAL RATIO
--------------------------------- ------------- ---------------- -------------
<S> <C> <C> <C>
Well capitalized................. > or =10% > or =6% > or =5%
Adequately capitalized........... > or =8%<10% > or =4%<6% > or =4%<5%
Undercapitalized................. > or =6%<8% > or =3%<4% > or =3%<4%
Significantly undercapitalized... <6% <3% <3%
</TABLE>
- ---------------
Critically undercapitalized if tangible equity to total assets ratio < or =2%.
Institutions must meet all three capital ratios in order to qualify for a
given category. At December 31, 1995, the Bank was classified as "well
capitalized." At December 31, 1995, under fully phased-in capital rules
applicable to the Bank at July 1, 1996, the Bank would have exceeded the
"adequately capitalized" total risk-based, tier 1 risk-based, and tier 1
leverage ratios by $53.2 million, $81.6 million, and $52.6 million,
respectively.
In January 1993, the OTS issued a Thrift Bulletin limiting the amount of
deferred tax assets that can be used to meet capital requirements. Under the
bulletin, for purposes of calculating regulatory capital, net deferred tax
assets are limited to the amount which could be theoretically realized from
carryback potential plus the lesser of the tax on one year's projected earnings
or ten percent of core capital. Transitional provisions apply to deferred tax
assets existing at December 31, 1992, which are not subject to the limitation.
At December 31, 1995, the Bank has a net deferred tax liability and, therefore,
is not subject to the limitation. Management does not anticipate this regulation
will impact the Bank's compliance and capital standards in the foreseeable
future.
19
<PAGE> 23
In November 1994, the OTS announced its decision to reverse immediately its
1993 interim policy requiring associations to include unrealized gains and
losses, net of income taxes, on available for sale (AFS) debt securities in
regulatory capital. Under the revised OTS policy, associations exclude any
unrealized gains and losses, net of income taxes, on a prospective basis, on AFS
debt securities reported as a separate component of equity capital pursuant to
SFAS No. 115.
The capital regulations specify that only the following elements may be
included in tangible capital: stockholder's equity, noncumulative perpetual
preferred stock, retained earnings, and minority interests in the equity
accounts of fully consolidated subsidiaries. Further, goodwill and investments
in and loans to subsidiaries engaged in activities not permitted by national
banks must be deducted from assets and capital. See Regulation -- General --
Separate Capitalization of Nonpermissible Activities herein for additional
discussion.
In calculating adjusted total assets under the capital regulations, certain
adjustments are made to exclude certain assets from tangible capital and to
appropriately account for the investments in and assets of both includable and
nonincludable activities.
Core capital under the current regulations may include only tangible
capital, plus certain intangible assets up to a limit of 25 percent of core
capital, provided such assets are: (i) separable from the thrift's assets, (ii)
valued at an established market value through an identifiable stream of cash
flows with a high degree of certainty that the asset will hold this market value
notwithstanding the prospects of the thrift, and (iii) salable in a market that
is liquid. In addition, prior to January 1, 1995, certain qualifying
"supervisory" goodwill was includable as core capital. Under the regulation, on
January 1, 1995, none of the Bank's supervisory goodwill was includable in core
capital.
Regarding the risk-based capital requirement, under the capital
regulations, assets are assigned to one of four "risk-weighted" categories (zero
percent, 20 percent, 50 percent or 100 percent) based upon the degree of
perceived risk associated with the asset. The total amount of a thrift's
risk-weighted assets is determined by multiplying the amount of each of its
assets by the risk weight assigned to it, and totaling the resulting amounts.
The capital regulation also establishes the concept of "total capital" for
the risk-based capital requirement. As defined, total capital consists of core
capital and supplementary capital. Supplementary capital includes: (i) permanent
capital instruments such as cumulative perpetual preferred stock, perpetual
subordinated debt, and mandatory convertible subordinated debt (capital notes);
(ii) maturing capital instruments such as subordinated debt, intermediate-term
preferred stock, mandatory convertible subordinated debt (commitment notes), and
mandatory redeemable preferred stock subject to an amortization schedule; and
(iii) general valuation loan and lease loss allowances up to 1.25 percent of
risk-weighted assets.
In 1994, the OTS issued a regulation which added a component to an
institution's risk-based capital calculation for institutions with interest rate
risk (IRR) exposure classified as "above normal." In 1995, the regulation was
indefinitely delayed and allowed "well capitalized" institutions, such as the
Bank, to utilize their internal model to measure the IRR capital component. As
measured by both the Bank's model and the OTS model, the Bank has a "normal"
classification of IRR exposure as defined in the delayed regulation. Had the
regulation been implemented, no capital deduction would have been required
during any period presented.
See Note 13 of the Notes to Consolidated Financial Statements for the
calculation of the Bank's regulatory capital and related excesses as of December
31, 1995 and 1994.
Separate Capitalization of Nonpermissible Activities. For purposes of
determining a thrift's capital under all three capital requirements, its entire
investment in and loans to any subsidiary engaged in an activity not permissible
for a national bank must be deducted from the capital of the thrift. The capital
regulations provide for a transition period with respect to this provision.
During the transition period, a thrift is permitted to include in its
calculation the applicable percentage (as provided below) of the lesser of the
thrift's investments in and loans to such subsidiaries on: (i) April 12, 1989 or
(ii) the date on which the thrift's capital is being determined, unless the FDIC
determines with respect to any particular thrift that a lesser percentage should
be applied in the interest of safety and soundness.
20
<PAGE> 24
In July 1992, legislation was enacted which delayed the increased
transitional deduction from capital for real estate investments, and allowed
thrifts to apply to the OTS for use of a delayed schedule. The Bank applied for
and received approval for use of the delayed phase-out schedule. The Bank had
$674,000 in investments in and loans to nonpermissible activities at December
31, 1995. These investments, which fall under this section of FIRREA, will be
deductible from capital by 60 percent from July 1, 1995 to June 30, 1996 and
thereafter, totally deductible. Included in this amount are investments in real
estate, land loans, and certain REO-F.
Lending Activities. FIRREA limits the amount of commercial real estate
loans that a federally chartered thrift may make to four times its capital (as
defined). Based on core capital of $122 million at December 31, 1995, the Bank's
commercial real estate lending limit was $488 million. At December 31, 1995, the
Bank had $179 million invested in commercial real estate loans and, therefore,
this limitation should not unduly restrict the Bank's ability to engage in
commercial real estate loans.
FIRREA conformed thrifts' loans-to-one-borrower limitations to those
applicable to national banks. After March 1995, thrifts generally are not
permitted to make loans to a single borrower in excess of 15 percent of the
thrift's Tier 1 and Tier 2 capital actually included in risk-based capital, plus
the allowance for loan and lease losses not included in Tier 2 capital, except
that a thrift may make loans-to-one-borrower in excess of such limits under one
of the following circumstances: (i) for any purpose, in an amount not to exceed
$500,000 and (ii) to develop domestic residential housing units, in an amount
not to exceed the lesser of $30 million, or 30 percent, of the thrift's
unimpaired capital and unimpaired surplus, provided the thrift meets fully
phased-in capital requirements and certain other conditions are satisfied. The
Bank was in compliance with the loans-to-one-borrower limitation of $21 million
at December 31, 1995. This limitation is not expected to materially affect the
operations of the Bank.
In December 1992, the OTS issued a regulation (Real Estate Lending
Standards) as mandated by FDICIA, which became effective in March 1993. The
regulation requires insured depository institutions to adopt and maintain
comprehensive written real estate lending policies which include: prudent
underwriting standards; loan administration procedures; portfolio
diversification standards; and documentation, approval, and reporting
requirements. The policies must be reviewed and approved annually to ensure
appropriateness for current market conditions. The regulation also provides
supervisory loan-to-value limits for various types of real estate based loans.
Loans may be originated in excess of these limitations up to a maximum of 100
percent of total regulatory capital. The regulation has not made a material
impact on the Bank's lending operations.
In August 1993, the OTS issued revised guidance for the classification of
assets and a new policy on the classification of collateral-dependent loans
(where proceeds from repayment can be expected to come only from the operation
and sale of the collateral). With limited exceptions, effective September 1993,
for troubled collateral-dependent loans where it is probable that the lender
will be unable to collect all amounts due, an institution must classify as
"loss" any excess of the recorded investment in the loan over its "value" and
classify the remainder as "substandard." The value of a loan is either the
present value of the expected future cash flows, the loan's observable market
price, or the fair value of the collateral. The policy did not materially impact
the Bank.
The federal agencies regulating financial institutions issued a joint
policy statement in December 1993 providing quantitative guidance and
qualitative factors to consider in determining the appropriate level of
valuation allowances that institutions should maintain against various asset
portfolios. The policy statement also requires institutions to maintain
effective asset review systems and to document the institution's process for
evaluating and determining the level of its valuation allowance. Management
believes the Bank's current policies and procedures regarding valuation
allowances and asset review procedures are consistent with the policy statement.
FDICIA amended the Qualified Thrift Lender (QTL) test prescribed by FIRREA
by reducing the qualified percentage to 65 percent and adding certain
investments as qualifying investments. A savings institution must meet the
percentage in at least 9 of every 12 months. At December 31, 1995, the Bank's
QTL
21
<PAGE> 25
ratio was approximately 79.5 percent. A thrift that fails to meet the QTL test
must either become a commercial bank or be subject to a series of restrictions.
Safety and Soundness Standards. Pursuant to statutory requirements, the
OTS issued a proposed rule in November 1993, that prescribes certain "safety and
soundness standards." A final rule providing safety and soundness guidelines was
issued in August 1995. The standards are intended to enable the OTS to address
problems at savings associations before the problems cause significant
deterioration in the financial condition of the association. The regulation
provides operational and managerial standards for internal controls and
information systems; loan documentation; internal audit systems; credit
underwriting; interest rate exposure; asset growth; and compensation, fees, and
benefits. The regulation also provides for procedures for the submission of
compliance plans and the issuance of orders to correct deficiencies, if
necessary. This final rule will have no material adverse impact on the Bank.
Federal Home Loan Bank System
The FHLB system consists of 12 regional FHLB banks, which provide a central
credit facility primarily for member institutions. The Bank, as a member of the
FHLB of San Francisco, is required to own capital stock in that institution in
an amount at least equal to: 1 percent of the aggregate outstanding balance at
the beginning of the year of its outstanding residential mortgage loans, home
purchase contracts, and similar obligations; 0.3 percent of total assets; or 5
percent of its advances from the FHLB, whichever is greater. The Bank is in
compliance with this requirement, with an investment in FHLB stock at December
31, 1995, of $11.1 million.
Liquidity
The Bank is required to maintain an average daily balance of liquid assets
equal to at least five percent of its liquidity base (as defined in the
Regulation) during the preceding calendar month. The Bank is also required to
maintain an average daily balance of short-term liquid assets equal to at least
one percent of its liquidity base. The Bank has complied with these regulatory
requirements and maintains a ratio substantially higher than the requirement due
to its higher level of transaction accounts relative to a traditional thrift.
For the month of December 1995, the Bank's liquidity ratios were 11.9 percent
and 6.5 percent, respectively.
Investments
A Federal Financial Institutions Examinations Council Supervisory Policy
Statement on Securities Activities (Policy Statement): (1) addresses the
selection of securities dealers, (2) requires depository institutions to
establish prudent policies and strategies for securities transactions, (3)
defines securities trading or sales practices that are viewed by the agencies as
being unsuitable when conducted in an investment portfolio, (4) indicates
characteristics of loans held for sale or trading, and (5) establishes a
framework for identifying when certain mortgage derivative products are
high-risk mortgage securities which must be held either in a trading or held for
sale account. Management believes that items (1) through (4) have not unduly
restricted the operating strategies of the Bank. Under item (5), the Bank will
have to apply the specified tests to any mortgage derivative product, including
CMO, Real Estate Mortgage Investment Conduits (REMIC), CMO and REMIC residuals,
and stripped MBS purchases in the future.
Insurance of Deposits
The Bank's deposits are insured by the FDIC through the SAIF up to the
maximum amount permitted by law, currently $100,000 per insured depositor. The
SAIF required quarterly insurance premium payments beginning in 1995 instead of
semi-annual payments as in prior years. Legislation is pending to provide for a
one-time special assessment of approximately 75 to 79 basis points on SAIF
insured deposits. See Regulation -- General -- Deposit Insurance Premiums herein
for additional discussion of insurance premiums to be paid by SAIF members.
Insurance of deposits may be terminated by the FDIC, after notice and
hearing, upon a finding by the FDIC that a thrift has engaged in unsafe or
unsound practices, or is in an unsafe or unsound condition to
22
<PAGE> 26
continue operations, or has violated any applicable law, regulation, rule,
order, or condition imposed by the OTS and FDIC. Management of the Bank is not
aware of any practice, condition, or violation that might lead to termination of
its deposit insurance.
Community Reinvestment Act
The Community Reinvestment Act of 1977 (CRA) and regulations promulgated
under the act encourage savings associations to help meet the credit needs of
the communities they do business in, particularly the credit needs of low and
moderate income neighborhoods. The OTS periodically evaluates the Bank's
performance under CRA. This evaluation is taken into account in determining
whether to grant approval for new branches, relocations, mergers, acquisitions,
and dispositions. The Bank received an "outstanding" evaluation in its most
recent examination.
In April 1995, the Federal Reserve approved the final version of a new CRA
regulation, to be fully implemented in July 1997. Data collection for large
institutions, such as the Bank, began in January 1996. The regulation provides
for different examination procedures for different sized financial institutions,
to facilitate the basic differences in institutions structures and operations.
The intent of the regulation is to establish performance-based CRA examinations
that are complete and accurate but, to the maximum extent possible, mitigate the
compliance burden for institutions.
Examiners will evaluate the CRA performance based on review of objective
information about the institution, its community and its competitors, available
demographic and economic data, and any information the institution chooses to
provide about lending, service, and investment opportunities in its assessment
area. The Bank implemented the new CRA regulation in 1995 and it had no material
impact.
Federal Reserve System
The Board of Governors of the Federal Reserve System (the Federal Reserve)
has adopted regulations that require depository institutions to maintain
noninterest earning reserves against their transaction accounts (primarily
negotiable order of withdrawal (NOW), demand deposit accounts, and Super NOW
accounts) and nonpersonal money market deposit accounts. These regulations
generally require that reserves of three percent be maintained against aggregate
transaction accounts in an institution, up to $47.7 million, and an initial
reserve of ten percent be maintained against that portion of total transaction
accounts in excess of such amount. In addition, an initial reserve of three
percent must be maintained on nonpersonal MMDA (which include borrowings with
maturities of less than four years). These accounts and percentages are subject
to adjustment by the Federal Reserve. The balances maintained to meet the
reserve requirements imposed by the Federal Reserve may be used to satisfy
liquidity requirements imposed by the OTS. At December 31, 1995, the Bank was
required to maintain approximately $5.3 million in noninterest earning reserves
and was in compliance with this requirement.
As a creditor and financial institution, the Bank is subject to various
additional regulations promulgated by the Federal Reserve, including, without
limitation, Regulation B (Equal Credit Opportunity Act), Regulation E
(Electronic Funds Transfer Act), Regulation F (Interbank Liabilities),
Regulation Z (Truth-in-Lending Act), Regulation CC (Expedited Funds Availability
Act), Regulation O (Insider Lending), and Regulation DD (Truth-in-Savings Act).
23
<PAGE> 27
HOLDING COMPANY MATTERS
The Bank is a wholly owned subsidiary of the Company. As a unitary savings
bank holding company, the Company is subject to certain OTS regulation,
examination, supervision, and reporting requirements. The Bank is generally
prohibited from engaging in certain transactions with the Company and is subject
to certain OTS restrictions on the payment of dividends to the Company.
In 1990, the OTS issued a regulation governing limitations of capital
distributions, including dividends. Under the regulation, a tiered system keyed
to capital is imposed on capital distributions. Insured thrifts fall under one
of three tiers.
1. Tier 1 includes those thrifts with net capital exceeding fully phased-in
requirements and with Capital, Assets, Management, Earnings, and
Liquidity (CAMEL) ratings of 1 or 2. (The CAMEL system was established
by the FDIC and adopted by the OTS to comprehensively and uniformly
grade all thrifts with regard to financial condition, compliance with
laws and regulations, and overall operating soundness.)
2. Tier 2 includes those thrifts having net capital above their regulatory
capital requirement, but below the fully phased-in requirement.
3. Tier 3 includes those thrifts with net capital below the current
regulatory requirement.
Under the regulation, insured thrifts are permitted to make dividend
payments as follows:
1. Tier 1 thrifts are permitted to make (without application but with
notification) capital distributions of half their surplus capital (as
defined) at the beginning of a calendar year plus 100 percent of their
earnings to date for the year.
2. Tier 2 thrifts can make (without application but with notification)
capital distributions ranging from 25 to 75 percent of their net income
over the most recent four quarter period, depending upon their level of
capital in relation to the fully phased-in requirements.
3. Tier 3 thrifts are prohibited from making any capital distributions
without prior supervisory approval.
Based upon these regulations, the Bank is classified as a Tier 1 thrift.
In December 1994, the OTS proposed an amendment to the capital
distributions regulation to conform to the FDICIA prompt corrective action
system. Under the proposal, a savings association that is not held by a savings
and loan holding company and that has a CAMEL rating of "1" or "2" need not
notify the OTS before making a capital distribution. Other institutions that
remain adequately capitalized after making a capital distribution would be
required to provide notice to the OTS. Troubled and undercapitalized
institutions must file and receive approval from the OTS prior to making capital
distributions. This proposed regulation has no material impact on the Bank.
Generally transactions between a savings and loan association and its
affiliates are required to be on terms as favorable to the association as
comparable transactions with nonaffiliates. In addition, certain of these
transactions are restricted to a percentage of the association's capital.
Affiliates of the Bank include the Company. In addition, a savings and loan
association may not lend to any affiliate engaged in activities not permissible
for a bank holding company or acquire the securities of such affiliates. It is
not permissible for bank holding companies to operate a gas utility. Therefore,
loans by the Bank to the Company and purchases of the Company's securities by
the Bank are prohibited.
The Company, at the time that it acquired the Bank, agreed to assist the
Bank in maintaining levels of net worth required by the regulations in effect at
the time or as they were thereafter in effect so long as it controlled the Bank.
The enforceability of a net worth maintenance agreement of this type is
uncertain. However, under current regulations, a holding company that has
executed a capital maintenance obligation of this type may not divest control of
a thrift if the thrift has a capital deficiency, unless the holding company
either provides the OTS with an agreement to infuse sufficient capital into the
thrift to remedy the deficiency or the deficiency is satisfied. The OTS lifted
this net worth maintenance stipulation in June 1995, at the
24
<PAGE> 28
request of the Company, since laws and regulations have been enacted which
govern prompt corrective action measures when the capitalization of a thrift is
deficient.
The Company is prohibited from issuing any bond, note, lien, guarantee, or
indebtedness of any kind pledging its utility assets or credit for or on behalf
of a subsidiary which is not engaged in or does not support the business of the
regulated public utility. As a result, there are limitations on the Company's
ability to assist the Bank in maintaining levels of capital required by
applicable regulations.
The Company also stipulated in connection with the acquisition of the Bank
that dividends paid by the Bank to the Company would not exceed 50 percent of
the Bank's cumulative net income after the date of acquisition, without approval
of the regulators. In addition, the Company agreed that the Bank would not at
any time declare a dividend that would reduce the Bank's regulatory net worth
below minimum regulatory requirements in effect at the time of the acquisition
or thereafter.
In June 1995, the Bank requested the OTS lift the dividend stipulation,
since laws and regulations have been enacted since the Company's acquisition of
the Bank, in conjunction with FIRREA and FDICIA, which govern capital
distributions and prompt corrective action measures when the capitalization of a
thrift is deficient. In July 1995, the OTS terminated these stipulations such
that capital distributions by the Bank are now governed by the laws and
regulations governing all thrifts. In 1995, the Bank declared and paid $500,000
in cash dividends to the Company.
Under terms of the definitive sale agreement with Norwest Corporation, the
Bank is limited in the amount of dividends payable to the Company through the
closing date of the sale to $375,000 per quarter through June 30, 1996 and up to
$3.5 million in the third quarter of 1996, dependant upon the timing of the
closing date of the sale.
ITEM 2. PROPERTIES
The information appearing in Part I, Item 1, pages 2 and 18 in this report
is incorporated herein by reference.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
25
<PAGE> 29
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The principal markets on which the common stock of the Company is traded
are the New York Stock Exchange and the Pacific Stock Exchange. At March 15,
1996, there were 25,400 holders of record of common stock. The market price of
the common stock was $16 1/4 as of March 15, 1996. Prices shown are those as
quoted by the Wall Street Journal in the consolidated transaction reporting
system.
COMMON STOCK PRICE AND DIVIDEND INFORMATION
<TABLE>
<CAPTION>
1995 1994 DIVIDENDS PAID
------------------ ------------------ -----------------
HIGH LOW HIGH LOW 1995 1994
------- ------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Fiscal Quarter
First............................... $15 1/4 $13 5/8 $19 3/8 $15 3/4 $0.205 $0.195
Second.............................. 14 7/8 13 5/8 18 5/8 15 0.205 0.195
Third............................... 16 3/4 14 18 1/4 17 1/2 0.205 0.205
Fourth.............................. 18 3/8 14 7/8 17 5/8 13 3/4 0.205 0.205
------ ------
$0.820 $0.800
====== ======
</TABLE>
See Holding Company Matters and Note 13 of the Notes to Consolidated
Financial Statements for a discussion of limitations on the Bank's ability to
make capital distributions to the Company.
26
<PAGE> 30
ITEM 6. SELECTED FINANCIAL DATA
CONSOLIDATED SELECTED FINANCIAL STATISTICS
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1995 1994 1993 1992 1991
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Operating revenues................... $ 563,502 $ 599,553 $ 539,105 $ 534,390 $ 565,010
Operating expenses................... 505,090 510,863 461,423 448,815 498,753
---------- ---------- ---------- ---------- ----------
Operating income..................... $ 58,412 $ 88,690 $ 77,682 $ 85,575 $ 66,257
========== ========== ========== ========== ==========
Income from continuing operations.... $ 2,654 $ 23,524 $ 13,751 $ 32,214 $ 18,291
Income (loss) from discontinued
operations, net of tax (1)......... (17,536) 2,777 1,655 (14,553) (32,466)
---------- ---------- ---------- ---------- ----------
Net income (loss).................... $ (14,882) $ 26,301 $ 15,406 $ 17,661 $ (14,175)
========== ========== ========== ========== ==========
Net income (loss) applicable to
common stock....................... $ (15,189) $ 25,791 $ 14,665 $ 16,610 $ (15,500)
========== ========== ========== ========== ==========
Total assets at year end............. $1,532,527 $1,453,582 $1,362,861 $1,265,380 $1,268,321
========== ========== ========== ========== ==========
Capitalization at year end
Common equity...................... $ 356,050 $ 348,556 $ 335,117 $ 329,444 $ 327,149
Preferred and preference stocks.... -- 4,000 8,058 15,316 22,574
Trust originated preferred
securities...................... 60,000 -- -- -- --
Long-term debt..................... 607,945 678,263 568,600 589,883 464,042
---------- ---------- ---------- ---------- ----------
$1,023,995 $1,030,819 $ 911,775 $ 934,643 $ 813,765
========== ========== ========== ========== ==========
Common stock data
Return on average common equity.... (4.1)% 7.6% 4.4% 5.1% (4.6)%
Earnings (loss) per share
Continuing operations........... $ 0.10 $ 1.09 $ 0.63 $ 1.51 $ 0.83
Discontinued operations......... (0.76) 0.13 0.08 (0.70) (1.59)
---------- ---------- ---------- ---------- ----------
Earnings (loss) per share.......... $ (0.66) $ 1.22 $ 0.71 $ 0.81 $ (0.76)
========== ========== ========== ========== ==========
Dividends paid per share........... $ 0.82 $ 0.80 $ 0.74 $ 0.70 $ 1.05
Payout ratio....................... N/A 66% 104% 86% N/A
Book value per share at year end... $ 14.55 $ 16.38 $ 15.96 $ 15.99 $ 15.88
Market value per share at year
end............................. $ 17.63 $ 14.13 $ 16.00 $ 13.75 $ 10.63
Market value per share to book
value per share................. 121% 86% 100% 86% 67%
Common shares outstanding at year
end (000)....................... 24,467 21,282 20,997 20,598 20,598
Number of common shareholders at
year end........................ 25,133 20,765 21,851 22,943 24,396
</TABLE>
- ---------------
(1) Contribution from Financial Services Segment, including 1995 estimated loss
on disposal.
27
<PAGE> 31
NATURAL GAS OPERATIONS
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1995 1994 1993 1992 1991
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Sales................................ $ 524,914 $ 560,207 $ 503,789 $ 506,937 $ 493,647
Transportation....................... 38,588 39,061 34,361 27,190 21,201
Other................................ -- 285 955 263 50,162
---------- ---------- ---------- ---------- ----------
Operating revenue.................... 563,502 599,553 539,105 534,390 565,010
Net cost of gas purchased............ 227,456 249,922 212,290 214,293 276,954
---------- ---------- ---------- ---------- ----------
Operating margin..................... 336,046 349,631 326,815 320,097 288,056
Expenses
Operations and maintenance......... 187,969 178,310 169,921 159,954 154,370
Depreciation and amortization...... 62,492 57,284 55,088 52,277 47,140
Other.............................. 27,173 25,347 24,124 22,291 20,289
---------- ---------- ---------- ---------- ----------
Operating income..................... $ 58,412 $ 88,690 $ 77,682 $ 85,575 $ 66,257
========== ========== ========== ========== ==========
Contribution to consolidated net
income (loss)...................... $ 2,654 $ 23,524 $ 13,751 $ 32,214 $ 18,291
========== ========== ========== ========== ==========
Total assets at year end............. $1,357,034 $1,277,727 $1,194,679 $1,103,794 $1,106,917
========== ========== ========== ========== ==========
Net gas plant at year end............ $1,137,750 $1,035,916 $ 954,488 $ 906,420 $ 854,254
========== ========== ========== ========== ==========
Construction expenditures............ $ 166,183 $ 141,390 $ 113,903 $ 102,517 $ 76,871
========== ========== ========== ========== ==========
Cash flow, net
From operating activities.......... $ 97,754 $ 84,074 $ 50,437 $ 81,457 $ 93,925
From investing activities.......... (163,718) (141,547) (116,246) (103,065) (96,588)
From financing activities.......... 71,056 61,422 67,488 (7,792) 27,351
---------- ---------- ---------- ---------- ----------
Net change in cash................... $ 5,092 $ 3,949 $ 1,679 $ (29,400) $ 24,688
========== ========== ========== ========== ==========
Total throughput (thousands of
therms)
Sales.............................. 805,884 881,868 850,557 825,521 885,255
Transportation..................... 1,016,011 914,791 725,023 651,141 509,478
---------- ---------- ---------- ---------- ----------
Total throughput................... 1,821,895 1,796,659 1,575,580 1,476,662 1,394,733
========== ========== ========== ========== ==========
Weighted average cost of gas
purchased ($/therm)................ $ 0.21 $ 0.30 $ 0.29 $ 0.26 $ 0.26
Customers at year end................ 1,029,000 980,000 932,000 897,000 870,000
Employees at year end................ 2,383 2,359 2,318 2,285 2,243
Degree days -- actual................ 2,084 2,427 2,470 2,261 2,470
Degree days -- ten year average...... 2,326 2,387 2,401 2,375 2,419
</TABLE>
28
<PAGE> 32
DISCONTINUED OPERATIONS -- FINANCIAL SERVICES
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1995 1994 1993 1992 1991
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Interest income...................... $ 132,877 $ 118,434 $ 132,325 $ 165,678 $ 213,991
Interest expense..................... 73,300 59,790 75,076 111,917 158,788
---------- ---------- ---------- ---------- ----------
Net interest income.................. 59,577 58,644 57,249 53,761 55,203
Provision for credit losses.......... (8,149) (7,230) (6,212) (14,129) (12,058)
---------- ---------- ---------- ---------- ----------
Net interest income after credit loss
provision.......................... 51,428 51,414 51,037 39,632 43,145
Net loss from real estate
operations......................... (196) (612) (910) (15,286) (50,477)
Noninterest income (expense)......... (37,086) (36,738) (40,231) (34,073) (29,822)
Impairment of excess of cost over net
assets acquired.................... (11,823) -- -- -- --
Income tax (expense) benefit......... (5,528) (6,391) (6,345) (91) 8,754
---------- ---------- ---------- ---------- ----------
Net income (loss) before cumulative
effect of accounting change........ (3,205) 7,673 3,551 (9,818) (28,400)
Cumulative effect of change in method
of accounting for income taxes..... -- -- 3,045 -- --
---------- ---------- ---------- ---------- ----------
Net income (loss).................... $ (3,205) $ 7,673 $ 6,596 $ (9,818) $ (28,400)
========== ========== ========== ========== ==========
Contribution to consolidated net
income (loss)...................... $ (17,536) $ 2,777 $ 1,655 $ (14,553) $ (32,466)
========== ========== ========== ========== ==========
Total assets at year end............. $1,775,019 $1,816,321 $1,751,419 $2,237,734 $2,356,057
========== ========== ========== ========== ==========
Interest-earning assets at year
end................................ $1,646,659 $1,675,368 $1,582,720 $2,022,121 $2,152,494
========== ========== ========== ========== ==========
Interest-bearing liabilities at year
end................................ $1,579,176 $1,629,419 $1,546,158 $2,058,663 $2,164,402
========== ========== ========== ========== ==========
Cash flow, net
From operating activities.......... $ 20,821 $ 30,643 $ 38,863 $ 4,984 $ 19,033
From investing activities.......... 25,750 (109,197) 460,069 139,110 316,303
From financing activities.......... (50,743) 83,261 (511,910) (94,768) (317,704)
---------- ---------- ---------- ---------- ----------
Net change in cash................. $ (4,172) $ 4,707 $ (12,978) $ 49,326 $ 17,632
========== ========== ========== ========== ==========
Average yield on loans............... 8.90% 8.58% 9.25% 10.14% 10.95%
Average yield on debt securities..... 6.85 6.20 5.93 7.15 8.74
Average yield on cash equivalents.... 6.05 4.31 3.09 3.54 5.60
Average earning asset yield.......... 8.08 7.45 7.28 8.32 9.56
Average cost of deposits............. 4.17 3.59 3.99 5.09 6.77
Average cost of borrowings........... 6.36 5.00 4.69 6.95 7.35
Average cost of funds (net of
capitalized and transferred
interest and cost of hedging
activities)........................ 4.66 3.90 4.14 5.58 7.03
Interest rate spread................. 3.42 3.55 3.14 2.74 2.53
Net yield on interest-earning
assets............................. 3.62 3.69 3.15 2.70 2.47
</TABLE>
29
<PAGE> 33
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Company is principally engaged in the business of purchasing,
transporting, and distributing natural gas to residential, commercial, and
industrial customers in geographically diverse portions of Arizona, Nevada, and
California. The Company also engaged in financial services activities through
PriMerit Bank, a wholly owned subsidiary. In January 1996, the Company signed a
definitive agreement to sell PriMerit. The sale is expected to be finalized in
the third quarter of 1996, following receipt of shareholder and various
governmental approvals and satisfaction of other customary closing conditions.
Due to the intended sale of PriMerit during 1996, the financial services
activities are considered discontinued operations for consolidated financial
reporting purposes. See additional discussion of the sale below.
In November 1995, the Company entered into a definitive agreement to
acquire Northern Pipeline Construction Co. (NPL), a full-service underground gas
pipeline contractor, for $24 million. NPL provides local gas distribution
companies with installation, replacement, and maintenance services for
underground natural gas distribution systems. The agreement is a stock-for-stock
exchange in which 100 percent of the stock of NPL will be acquired in exchange
for common stock of the Company. The acquisition is anticipated to be completed
during the first half of 1996.
During 1995, the gas segment contributed income of $2.6 million, while
discontinued operations-financial services experienced a $17.5 million loss,
resulting in a total net loss of $14.9 million.
CAPITAL RESOURCES AND LIQUIDITY
The capital requirements and resources of the Company generally are
determined independently for the natural gas operations and financial services
segments. Each business activity is generally responsible for securing its own
financing sources.
Liquidity refers to the ability of an enterprise to generate adequate
amounts of cash to meet its cash requirements. General factors that could
significantly affect capital resources and liquidity in future years include
inflation, growth in the economy, changes in income tax laws, the level of
natural gas prices, interest rates, and changes in the ratemaking policies of
regulatory commissions.
Inflation, as measured by the Consumer Price Index for all urban consumers
averaged 2.5 percent in 1995, 2.7 percent in 1994, and 2.7 percent in 1993. See
separate discussions for impact of inflation on natural gas operations and
discontinued operations -- financial services activities.
The Company follows a common stock dividend policy which states that the
Company will pay common stock dividends at a prudent level that is within the
normal dividend payout range for its respective businesses, and that the
dividend will be established at a level considered sustainable in order to
minimize business risk and maintain a strong capital structure throughout all
economic cycles. The Company's quarterly common stock dividend was 20.5 cents
per share throughout 1995. The last change was on September 1, 1994, and
resulted in a 1 cent, or five percent, increase from the previous level.
During 1995, the Company received $500,000 in cash dividends from the Bank.
The Company is not dependent upon such dividends to meet the gas segment's cash
requirements.
Cash inflows from operating activities increased $13.7 million from 1994,
primarily due to the change in the unrecovered purchased gas cost account from
an amount receivable to an amount payable to customers. Cash outflows from
investing activities increased $22.2 million from 1994. This change is
attributed to construction expenditures related to the upgrade and expansion of
the Company's transmission and distribution facilities. Cash flows from
financing activities increased $9.6 million, a result of the issuance of common
stock, preferred securities, and long-term debt, offset somewhat by repayment of
short-term debt.
30
<PAGE> 34
Securities ratings issued by nationally recognized ratings agencies provide
a method for determining the credit worthiness of an issuer. The Company's debt
ratings are significant since long-term debt constitutes a significant portion
of the Company's capitalization. These debt ratings are a factor considered by
lenders when determining the cost of debt for the Company (i.e., the better the
rating, the lower the cost to borrow funds). Management has undertaken to
improve its credit ratings with the various agencies.
In September 1995, Duff & Phelps upgraded the Company's long-term unsecured
debt from BB+ to BBB-. Duff & Phelps debt ratings range from AAA (highest credit
quality) to DD (defaulted debt obligation). The Duff & Phelps rating of BBB-
indicates that the Company's credit quality is considered sufficient for prudent
investment.
In February 1995, Standard and Poor's (S&P) reaffirmed the Company's
unsecured long-term debt rating at BBB-. S&P debt ratings range from AAA
(highest rating possible) to D (obligation is in default). According to S&P, the
BBB- rating indicates the debt is regarded as having an adequate capacity to pay
interest and repay principal.
In November 1994, Moody's upgraded the Company's unsecured long-term debt
rating from Ba1 to Baa3. Moody's debt ratings range from Aaa (best quality) to C
(lowest quality). Moody's applies a Baa3 rating to obligations which are
considered medium grade obligations, i.e., they are neither highly protected nor
poorly secured.
A security rating is not a recommendation to buy, sell, or hold a security,
and it is subject to revision or withdrawal at any time by the assigning rating
organization. Each rating should be evaluated independently of any other rating.
See separate discussions of Capital Resources and Liquidity for the natural
gas operations and discontinued operations -- financial services segments.
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
CONTRIBUTION TO NET INCOME
YEAR ENDED DECEMBER 31,
--------------------------------
1995 1994 1993
-------- ------- -------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Continuing operations -- natural gas operations.............. $ 2,654 $23,524 $13,751
Discontinued operations -- financial services................ (17,536) 2,777 1,655
-------- ------- -------
Net income (loss)............................................ $(14,882) $26,301 $15,406
======== ======= =======
</TABLE>
1995 vs. 1994
Loss per share for the year ended December 31, 1995 was $0.66, a $1.88
decline from earnings per share of $1.22 recorded for the year ended December
31, 1994. The loss was composed of per share earnings of $0.10 from natural gas
operations and a per share loss of $0.76 from discontinued operations. Average
shares outstanding increased by 2.1 million shares between years primarily
resulting from a 2.1 million share public offering in May 1995. See separate
discussions for an analysis of these changes. Dividends paid in 1995 were $0.82
per share reflecting the first full year of the dividend increase authorized by
the Board in 1994.
1994 vs. 1993
Earnings per share for the year ended December 31, 1994, were $1.22, a
$0.51 increase from earnings per share of $0.71 recorded for the year ended
December 31, 1993. Earnings per share were composed of per share earnings of
$1.09 from natural gas operations and $0.13 per share earnings from discontinued
operations. Average shares outstanding increased by 349,000 shares between
years. Dividends paid increased $0.06 to $0.80 per share, the result of the
Board's decision to increase quarterly dividends. See separate discussions for
an analysis of these changes.
31
<PAGE> 35
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Recently issued accounting standards include SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of," which the Company adopted January 1, 1996, and SFAS No. 123, "Accounting
for Stock-Based Compensation." See Note 1 of the Notes to Consolidated Financial
Statements for a discussion of the impact of these new standards.
CONTINUING OPERATIONS
NATURAL GAS OPERATIONS
The Company is engaged in the business of purchasing, transporting, and
distributing natural gas in portions of Arizona, Nevada, and California. Its
service areas are geographically as well as economically diverse. The Company is
the largest distributor in Arizona, selling and transporting natural gas in most
of southern, central, and northwestern Arizona, including the Phoenix and Tucson
metropolitan areas. The Company is also the largest distributor and transporter
of natural gas in Nevada, and serves the Las Vegas metropolitan area and
northern Nevada. In addition, the Company distributes and transports natural gas
in portions of California, including the Lake Tahoe area in northern California
and high desert and mountain areas in San Bernardino County.
As of December 31, 1995, the Company had approximately 1,029,000
residential, commercial, industrial, and other customers, of which 605,000
customers were located in Arizona, 317,000 in Nevada, and 107,000 in California.
Residential and commercial customers represented over 99 percent of the
Company's customer base. During 1995, the Company added 49,000 customers, a five
percent increase, of which 22,000 customers were added in Arizona, 25,000 in
Nevada, and 2,000 in California. These additions are largely attributable to
continued population growth in the Company's service areas. Customer growth over
the past three years averaged five percent annually. Based on current
commitments from builders, the Company expects customer growth to approximate
five percent in 1996. During 1995, 57 percent of operating margin was earned in
Arizona, 32 percent in Nevada, and 11 percent in California. This pattern is
consistent with prior years and is expected to continue.
Total gas plant increased from $1.2 billion to $1.6 billion, or at an
annual rate of eight percent, during the three-year period ended December 31,
1995. The increase is attributed to the investment in new transmission and
distribution plant in Arizona, Nevada, and California to meet the demand from
the Company's growing customer base.
CAPITAL RESOURCES AND LIQUIDITY
The growth of the Company has required capital resources in excess of the
amount of cash flow generated from operating activities (net of dividends paid).
During 1995, capital expenditures were $166 million. Cash flow from operating
activities (net of dividends) provided $78 million, or approximately 47 percent,
of the required capital resources pertaining to these construction expenditures.
The remainder was provided from net external financing activities.
In October 1995, the Securities and Exchange Commission declared effective
a $270 million shelf registration statement filed by the Company. This
registration statement replaced a $300 million shelf registration statement
which became effective in October 1994. Under the new registration statement,
the Company may offer, up to the registered amount, any combination of debt
securities, preferred stock, depositary shares, common stock, and preferred
securities.
During 1995, the Company obtained external financing from a number of
sources. In January 1995, term loan facilities totaling $165 million were
refinanced with a new $200 million term loan facility. See Note 6 of Notes to
Consolidated Financial Statements for further discussion. In May 1995, the
Company completed an offering of 2.1 million primary shares of common stock. The
net proceeds from this offering were $28.5 million after deducting underwriting
discounts, commissions, and expenses. In October 1995, Southwest Gas Capital I
(the Trust), a subsidiary of the Company, completed an offering of 2.4 million
9.125% Trust Originated
32
<PAGE> 36
Preferred Securities. The Trust was formed for the sole purpose of issuing
preferred securities and investing the proceeds thereof in an equivalent amount
of subordinated debt of the Company. The net proceeds from the offering were
$57.7 million after deducting underwriting discounts, commissions, and expenses.
The proceeds from these various financings were used to repay short-term
borrowings and finance utility construction.
The Company currently estimates that construction expenditures for its
natural gas operations for the three-year period ending December 31, 1998 will
be approximately $470 million. It is currently estimated that cash flow from
operating activities (net of dividends) will fund approximately one-half of the
gas operation's total construction expenditures for the three-year period ending
December 31, 1998. A portion of the construction expenditure funding will be
provided by $36 million of funds held in trust from the 1993 Clark County,
Nevada, Series A issue and 1993 City of Big Bear Lake, California, Series A
issue industrial development revenue bonds (IDRB). The remaining cash
requirements are expected to be provided by external financing sources. The
timing, types, and amounts of these additional external financings will be
dependent on a number of factors, including conditions in the capital markets,
timing and amounts of rate relief, and growth factors in the Company's service
areas. These external financings may include the issuance of both debt and
equity securities, bank and other short-term borrowings, and other forms of
financing.
Natural gas, labor, and construction are the categories most significantly
impacted by inflation. Changes to the Company's cost of gas are generally
recovered through purchased gas adjustment (PGA) mechanisms and do not
significantly impact net earnings. Labor is a component of the cost of service,
and construction costs are the primary component of rate base. In order to
recover increased costs, and earn a fair return on rate base, general rate cases
are filed by the Company, when deemed necessary, for review and approval by its
regulatory authorities. Regulatory lag, that is, the time between the date
increased costs are incurred and the time such increases are recovered through
the ratemaking process, can impact earnings. See Rates and Regulatory
Proceedings for discussion of recent rate case proceedings.
The Company's rate schedules in all of its service areas contain PGA
clauses which permit the Company to adjust its rates as the cost of purchased
gas changes. The PGA mechanism allows the Company to change the gas cost
component of the rates charged to its customers to reflect increases or
decreases in the price expected to be paid to its suppliers and companies
providing upstream pipeline transportation service. In addition, the Company
uses this mechanism to either refund amounts overcollected or charge for amounts
undercollected as compared to the price paid by the Company for natural gas
during the period since the last PGA rate change went into effect. Generally,
the Company's tariffs provide for annual adjustment dates for changes in
purchased gas costs. However, the Company may request to adjust its rates more
often than once each year, if conditions warrant. These changes have no
significant impact on the Company's profit margin.
While the changes relating to PGA have no significant net income impact,
the Company's cash flow can be impacted. At December 31, 1994, the Company had a
purchased gas cost asset of $15.2 million, reflecting payments to suppliers and
pipelines in excess of rates paid by customers during the year. However, gas
prices decreased dramatically, leading to an overcollection from customers of
$32.8 million at December 31, 1995, or a $48 million change during the
twelve-month period. The Company filed for PGA adjustments in five of its rate
jurisdictions during the last half of 1995 to lower the gas cost component of
rates charged in customer bills. The rates were also designed to refund the PGA
overcollected balance within one year, with the exception of northern and
southern Nevada, where a two-year period was approved. The aggregate amount of
33
<PAGE> 37
these decreases on an annual basis was $55.9 million. The following table shows
the most recent PGA adjustments authorized by rate jurisdiction (thousands of
dollars):
<TABLE>
<CAPTION>
ANNUALIZED
JURISDICTION REVENUE ADJUSTMENT PERCENTAGE EFFECTIVE MONTH
- ----------------------------------------------- ------------------ ---------- ---------------
<S> <C> <C> <C>
Arizona:
Central and Southern......................... $(20,900) (17)% August 1995
California:
Southern..................................... $(13,100) (21)% October 1995
Nevada:
Northern and Southern........................ $(21,900) (13)% November 1995
</TABLE>
In February 1996, the Company filed for additional annualized PGA decreases
of $9.7 million in southern Nevada and $3.9 million in northern Nevada.
RESULTS OF NATURAL GAS OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1995 1994 1993
-------- -------- --------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Gas operating revenues..................................... $563,502 $599,553 $539,105
Net cost of gas............................................ 227,456 249,922 212,290
-------- -------- --------
Operating margin......................................... 336,046 349,631 326,815
Operations and maintenance expense......................... 187,969 178,310 169,921
Depreciation and amortization.............................. 62,492 57,284 55,088
Taxes other than income taxes.............................. 27,173 25,347 24,124
-------- -------- --------
Operating income......................................... 58,412 88,690 77,682
Other income (expense), net................................ (1,565) (1,110) (13,891)
-------- -------- --------
Income before interest and income taxes.................. 56,847 87,580 63,791
Net interest deductions.................................... 53,354 49,461 41,832
Income tax expense......................................... 839 14,595 8,208
-------- -------- --------
Contribution to consolidated net income (loss)........... $ 2,654 $ 23,524 $ 13,751
======== ======== ========
</TABLE>
1995 vs. 1994
Contribution to consolidated net income decreased $20.9 million from 1994.
The decrease was primarily attributed to a decrease in operating margin between
periods. Increased operating costs and net interest deductions also contributed
to the decrease in gas segment contribution.
Operating margin decreased $13.6 million, or four percent, during 1995
compared to 1994. Record-breaking warm weather throughout the Company's service
territories for much of the 1995 heating seasons was the primary factor
influencing the change. Temperatures in the Southwest were significantly above
normal in January, February, November and December, the Company's prime heating
months. As a result, operating margin was approximately $28 million less than
would be expected if normal weather had been experienced. However, record
customer growth and rate relief in southern Arizona and California partially
mitigated the negative impact of warmer weather, contributing an additional $15
million of operating margin between years. During 1995, the Company added 49,000
new customers, an increase of 5 percent, and expects similar growth in 1996
based on commitments for new service.
Operations and maintenance expenses increased $9.7 million, or five
percent, reflecting increases in labor and maintenance costs, including the
incremental expenses associated with meeting the needs of the Company's growing
customer base.
34
<PAGE> 38
Depreciation expense and taxes other than income taxes increased $7
million, or nine percent, primarily due to an increase in average gas plant in
service of $130 million, or nine percent. This is attributable to capital
expenditures for the upgrade of existing operating facilities and the expansion
of the system to accommodate customer growth.
Net interest deductions increased $3.9 million, or eight percent, in 1995,
after deducting interest costs associated with discontinued operations. The
change is attributed to an overall increase in average debt outstanding during
1995 of six percent, which consisted of a $70 million net increase in average
long-term debt offset by a $27 million decrease in average short-term debt. The
increase in long-term debt is attributed to the drawdown of IDRB funds
previously held in trust and replacement of the $165 million term facilities
with a new $200 million term loan facility. The proceeds from the common stock
issuance in May 1995 and the preferred securities issuance in October 1995 are
the primary factors for the decrease in average short-term debt. Higher interest
rates on variable-rate debt also contributed to the increase in net interest
deductions.
1994 vs. 1993
Contribution to consolidated net income was $23.5 million, an increase of
$9.8 million from 1993, the result of increased operating margin, partially
offset by increased operations and maintenance expenses, depreciation expense,
and general taxes. The recognition of the Arizona pipe replacement program
disallowances during 1993 also contributed to the change.
Operating margin increased $22.8 million, or seven percent, during 1994
compared to 1993. This increase was primarily due to annualized rate relief
totaling $9.5 million in the Arizona, southern California, and federal rate
jurisdictions. The balance of the increase in margin is attributed to customer
growth and weather. Increased demand for natural gas, through the addition of
48,000 customers, directly benefitted margin. Differences in heating demand
between periods also positively impacted the change in margin, since weather
more closely approximated normal in 1994 compared to 1993's warmer than normal
conditions.
Operations and maintenance expenses increased $8.4 million, or five
percent, reflecting a general increase in labor costs, increased costs of
materials and contractor services related to maintenance and other operating
expenses. These increases are attributable to the incremental costs of providing
service to the Company's steadily growing customer base.
Depreciation expense and taxes other than income taxes increased $3.4
million, or four percent, primarily due to an increase in average gas plant in
service of $80 million, or six percent. This is attributable to capital
expenditures for the upgrade of existing operating facilities and the expansion
of the system to accommodate customer growth.
Other expenses for 1993 include the Arizona pipe replacement program
disallowances. See Arizona Pipe Replacement Program Disallowances herein for
additional information.
Net interest deductions increased $7.6 million, or 18 percent, in 1994.
Average debt outstanding during 1994 increased 13 percent compared to 1993, and
consisted of a $38 million increase in average long-term debt, net of funds held
in trust, and a $41 million increase in average short-term debt. The increase in
debt is attributed primarily to borrowings for construction expenditures and
operating activities as well as the drawdown of the IDRB funds previously held
in trust. Higher interest rates on the variable-rate term loan facilities and
short-term debt accounted for $2.7 million of the increase in net interest
deductions.
Arizona Pipe Replacement Program Disallowances. In August 1990, the ACC
issued its opinion and order on the Company's 1989 general rate increase
requests applicable to the Company's Central and Southern Arizona Divisions.
Among other things, the order stated that $16.7 million of the total capital
expenditures incurred as part to the Company's Central Arizona Division pipe
replacement program were disallowed for ratemaking purposes and all costs
incurred as part of the Company's Southern Arizona Division Pipe Replacement
program were excluded from the rate case and rate consideration was deferred to
the Company's next general rate application, which was filed in November 1990.
35
<PAGE> 39
The Company pursued various legal avenues seeking relief from the decision.
Ultimately, the Arizona Court of Appeals issued a Mandate ordering the Company
to comply with the ACC opinion and order. In December 1993, the Company wrote
off $15.9 million in gross plant related to the central and southern Arizona
pipe replacement program disallowances. The impact of these disallowances, net
of accumulated depreciation, tax benefits, and other related items, was a
noncash reduction to 1993 net income of $9.3 million, or $0.44 per share.
In addition, as part of the July 1994 settlement related to a southern
Arizona general rate case, the Company agreed to write off an additional $3.2
million of gross plant in service related to the pipe replacement program. The
settlement also established a disallowance formula to be used in future rate
cases for expenditures related to defective materials and/or installation. The
impact of both Arizona disallowances, net of accumulated depreciation, tax
benefits, and other related items, was a noncash reduction to net income of $9.6
million, or $0.45 per share, $9.3 million of which was recognized in December
1993. The Company believes this settlement effectively resolves all financial
issues associated with currently challenged Arizona pipe replacement programs,
that it has adequately provided for future disallowances and does not anticipate
further material effects on results of operations as a result of gross plant
disallowances related to these pipe replacement programs.
RATES AND REGULATORY PROCEEDINGS
California
The Company filed a general rate application in January 1994 to increase
annual margin by $1.1 million for its southern and northern California rate
jurisdictions effective January 1995. In December 1994, the CPUC approved a
settlement agreement effective January 1995 authorizing a $1.1 million increase
in margin. The settlement, which is in effect through 1998, suspends the supply
adjustment mechanism (SAM) previously utilized in California. SAM was a
mechanism by which actual margin was adjusted to the margin authorized in the
Company's current tariff. The Company is now able to retain all margin generated
from additional volumes sold, but is also at risk for reductions in margin
resulting from lower than projected sales volumes. In addition, the settlement
suspends required annual attrition filings for southern California, but retains
attrition adjustments in northern California for certain safety-related
improvements. A safety-related operational attrition was filed in November 1995
related to northern California. The filing was approved effective January 1996,
authorizing a $223,000 increase in annual margin.
Nevada
In December 1995, the Company filed general rate cases with the PSCN
seeking approval to increase revenues by $15.8 million, or 12 percent, annually
for its southern Nevada rate jurisdiction and $5 million, or 10 percent,
annually for its northern Nevada rate jurisdiction. The Company is seeking
recovery of increased operating and maintenance costs, construction-related
financing, tax, insurance, and depreciation expenses associated with its
expanding customer base. The Company is also proposing changes in its current
rate design to reflect ongoing restructuring in the natural gas industry and to
remain competitive with third-party providers of service to large customers.
Rate relief is expected to become effective in the third quarter of 1996.
Arizona
In October 1993, the Company filed a rate application with the ACC seeking
approval to increase annual revenues by $10 million, or 9.3 percent, for its
southern Arizona jurisdiction. In July 1994, the ACC approved a settlement
agreement of the southern Arizona general rate case which specified a $4.3
million, or 3.9 percent, rate increase which became effective July 1994. The
Company also agreed not to file another general rate request for its southern
Arizona jurisdiction before November 1996.
The Company anticipates filing for general rate relief in both southern and
central Arizona rate jurisdictions in late 1996. The amount to be requested has
yet to be determined. In Arizona, it takes approximately one year from the time
of filing to receive a final rate order.
36
<PAGE> 40
FERC
In October 1992, Paiute filed a general rate case with the FERC requesting
approval to increase revenues by $6.8 million annually. Paiute sought recovery
of increased costs associated with its capacity expansion project that was
placed into service in February 1993. Interim rates reflecting the increased
revenues became effective in April 1993, which were subject to refund until a
final order was issued. In January 1995, the FERC approved a settlement
authorizing a $4.3 million increase in revenue. Refunds of approximately $5
million, including interest, were made to customers in March 1995. These refunds
were fully reserved as of December 31, 1994.
Paiute intends to file a new general rate case in the second quarter of
1996. Under FERC rules, rates would be expected to go into effect, subject to
refund, six months from the date of filing.
DISCONTINUED OPERATIONS -- FINANCIAL SERVICES SEGMENT
In January 1996, the Company reached an agreement to sell PriMerit Bank to
Norwest Corporation for approximately $175 million in cash. The sale is expected
to be finalized in the third quarter of 1996, following receipt of shareholder
and various governmental approvals and satisfaction of other customary closing
conditions. Due to the intended sale of PriMerit, the financial services segment
is considered discontinued operations for consolidated financial reporting
purposes. The following Bank-related information and disclosures present the
Bank as a stand-alone entity, and are presented for purposes of additional
analysis. See Note 13 of the Notes to Consolidated Financial Statements for the
Bank's stand-alone financial information.
The separate stand-alone financial results and disclosures reported for the
Bank on a going-concern basis differ from the results and disclosures reported
for the Bank as a discontinued operation. See Note 12 of the Notes to
Consolidated Financial Statements for reconciliations of Bank stand-alone
financial information to the amounts shown as discontinued operations in the
consolidated financial statements. In 1996, while the Company will continue, as
required, to disclose the ongoing operating results of the Bank through the
close of the proposed transaction, those amounts will not be realized or
recognized by the Company in its consolidated financial statements, consistent
with the terms of the sales agreement.
The Bank recorded a net loss of $3.2 million for the year ended December
31, 1995 compared to net income of $7.7 million and $6.6 million for the years
ended December 31, 1994 and 1993, respectively. The 1995 net loss was
attributable to recording $11.8 million in goodwill impairment as a result of
the pending sale of the Bank to Norwest. Bank income from core banking
operations in 1995 was $11.9 million. The Bank's 1994 income from core banking
operations was $11.3 million compared to $7.9 million in 1993.
FINANCIAL AND REGULATORY CAPITAL
At December 31, 1995, recorded stockholder's equity was $173.6 million
compared to $166.4 million at December 31, 1994. Stockholder's equity increased
$7.2 million compared to December 31, 1994, as a result of the increase in
unrealized gains, after tax, on debt securities available for sale partially
offset by a net loss of $3.2 million and cash dividends of $500,000 paid to the
Company during 1995. During 1995, the Bank's regulatory capital levels and
ratios decreased under each of the three fully phased-in FDICIA capital
standards. The decrease was primarily due to a decrease in the amount of
goodwill and real estate investments includable in regulatory capital.
As discussed in Note 13 of the Notes to Consolidated Financial Statements,
as of December 31, 1995 and 1994, the Bank exceeded all three fully phased-in
minimum capital requirements under the regulatory capital regulations and is
considered "well capitalized" under FDICIA.
During 1993, the Bank achieved "well capitalized" status through a
combination of increased capital from net income and unrealized gains from debt
securities, and the reduction of assets and goodwill through the Arizona sale.
It is management's intent to maintain and improve the level of capital through
earnings and the stabilization of the asset base. The Bank maintained its "well
capitalized" status throughout 1994 and 1995.
Under SFAS No. 115, unrealized gains and losses, net of tax, on securities
available for sale are recorded as an adjustment to stockholder's equity. Under
OTS regulations in 1993, this component of equity was included as regulatory
capital under all three capital measures. In 1994, the OTS and other federal
banking regulators issued regulations excluding this component from regulatory
capital. Approximately $8.8 million of
37
<PAGE> 41
unrealized gain was includable in capital for 1993, whereas, in 1994 and 1995,
no such gain (or loss) was included in regulatory capital.
DEPOSIT PREMIUMS
The deposit accounts of savings associations, including those of PriMerit,
are insured to the maximum extent permitted by law by the FDIC through the SAIF.
The deposit accounts of commercial banks are separately insured by the FDIC
through the bank insurance fund (BIF). Commercial banks and savings associations
are separately assessed annual deposit insurance premiums. For savings
associations, the deposit premiums range from 23 to 31 cents per $100 of
deposits and, under current requirements, will remain at that level until the
SAIF is capitalized at 1.25 percent of insured deposits. The SAIF is not
expected to reach this level of capitalization for several years. The BIF has
reached the 1.25 percent capitalization level. As a result, the FDIC reduced the
deposit insurance premiums paid by most commercial banks insured by BIF to a
floor of $100. This regulatory change has given commercial banks a competitive
advantage over savings associations and has placed additional pressure on the
SAIF.
A number of plans have been proposed in Congress to deal with the
undercapitalization of the SAIF. Several proposals provide for a one-time
special assessment, estimated to approximate 75 to 79 basis points, on
SAIF-insured deposits to fully capitalize the SAIF to 1.25 percent of insured
deposits and require federally chartered thrifts, like the Bank, to change to a
bank charter. These proposals would subsequently reduce annual premiums to
levels similar to those of BIF-insured commercial banks and eventually merge the
BIF and SAIF insurance funds. A change to a bank charter, under current law,
would require recapture of the Bank's tax bad debt reserve. Proposals to deal
with this issue include a "fresh start" approach, whereby thrifts would not need
to recapture reserves established prior to December 31, 1987. The Bank is unable
to predict if these proposals, or other proposals, will ultimately be approved
by Congress.
Assuming a one-time special assessment and change in charter requirement
was approved by Congress and became law in 1996, and was immediately charged
against results of operations, the one-time assessment and tax bad debt
recapture would, most likely, have a material impact on the Bank's 1996 results
of operations. However, management believes the Bank would continue to be
classified as "well-capitalized" under fully phased-in FDICIA capital rules. In
addition, the Bank would not face any liquidity issues as a result of a one-time
assessment.
CAPITAL RESOURCES AND LIQUIDITY
Liquidity is defined as the Bank's ability to have sufficient cash reserves
on hand and unencumbered assets, which can be sold or utilized as collateral for
borrowings at a reasonable cost, or with minimal losses. The Bank's debt
security portfolio provides the Bank with adequate levels of liquidity so that
the Bank is able to meet any unforeseeable cash outlays and regulatory liquidity
requirements.
Potential liquidity demands may include funding loan commitments, deposit
withdrawals, and other funding needs. In order to achieve sufficient liquidity
for the Bank without taking a large liquid or illiquid position and avoiding
funding concentrations, the Bank has taken the following actions: 1) maintaining
lines of credit with authorized brokers/dealers; 2) managing the debt security
portfolio to ensure that maturities meet liquidity needs; 3) limiting investment
or lending activities at certain times; and 4) establishing maximum borrowing
limits for meeting liquidity needs.
The OTS has issued regulations regarding liquidity requirements which state
that the Bank is required to maintain an average daily balance of liquid assets
equal to at least five percent of its liquidity base (as defined in the OTS
Regulations) during the preceding calendar month. The Bank is also required to
maintain an average daily balance of short-term liquid assets equal to at least
one percent of its liquidity base as defined in the regulations. Throughout
1995, the Bank exceeded both regulatory liquidity requirements. For the month of
December 1995, the Bank's liquidity ratios were 11.9 percent and 6.5 percent,
respectively. The Bank's liquidity ratio is substantially higher than the
regulatory requirement due to the Bank's increasing level of transaction
accounts. The regulatory requirement is aimed at a more traditional savings
institution which has a higher level of certificate of deposit accounts versus
transaction accounts.
38
<PAGE> 42
Borrowings, in the form of reverse repurchase agreements, decreased from
$282 million at December 31, 1994 to $141 million at December 31, 1995. During
1995, the Bank repaid $107 million in long-term borrowings, $18.7 million in
short-term borrowings, and $15.2 million in flex repurchase agreements.
The Bank has adequate levels of liquidity and unencumbered assets to meet
its day-to-day operational needs and to meet the regulatory requirements for
liquidity. The daily operational liquidity needs of the Bank in 1995 were
primarily met through $494 million of repayments on loans and debt securities,
$118 million of borrowings from the FHLB, $38 million of loan sales, and $26
million in deposit growth.
The Bank's borrowing capacity is a function of the availability of its
readily marketable, unencumbered assets and the Bank's financial condition.
Secured borrowings may be obtained from the FHLB in the form of advances and
from authorized broker/dealers in the form of reverse repurchase agreements. At
December 31, 1995, the Bank maintained in excess of $311 million of unencumbered
assets, with a market value of $313 million, which could be borrowed against, or
sold, to increase liquidity levels.
The primary management objective of the investment portfolio is to invest
the excess funds of the Bank. This includes ensuring that the Bank maintains
adequate levels of liquidity so it is able to meet any unforeseeable cash
outlays. This task is accomplished by active investment in securities that
provide the greatest return, for a given price and credit risk, in order to
maximize the total return to the Bank.
The secondary management objective of the investment portfolio is to serve
as the Bank's primary short-term tool to manage the IRR exposure of the
institution. The Bank's asset/liability management objective generally requires
a trade-off between achieving the highest profitability in terms of net interest
income, while maintaining acceptable levels of IRR. To accomplish these
objectives, management has designated the majority of the investment portfolio
as available for sale. This enables management the flexibility to change the
composition of the investment portfolio to quickly adjust the IRR exposure and
to take advantage of interest rate changes in the markets.
As of December 31, 1995, the Bank's debt security portfolio was composed of
securities with a fair value of $486 million (amortized cost of $485 million)
with a yield of 7.16 percent compared to a debt security portfolio with a fair
value of $629 million (amortized cost of $646 million) yielding 6.79 percent at
December 31, 1994.
During 1995, the debt security portfolio balance declined by $145 million.
The decline in the portfolio is primarily the result of sales, maturities, and
principal repayments during 1995.
The Bank's assets and liabilities consist primarily of monetary assets
(cash, cash equivalents, debt securities, and loans receivable) and liabilities
(savings deposits and borrowings) which are, or will be converted into a fixed
amount of dollars in the ordinary course of business regardless of changes in
prices. Monetary assets lose purchasing power due to inflation, but this is
offset by gains in the purchasing power of liabilities, as these obligations are
repaid with inflated dollars.
The level and movement of interest rates is of much greater significance.
Inflation is but one factor that can cause interest rate volatility and changes
in interest levels. The results of operations of the Bank are dependent upon its
ability to manage such movements. See Risk Management -- Interest Rate Risk
Management herein for additional discussion.
RISK MANAGEMENT
The financial services industry has certain risks. In order to be
successful and profitable, in an increasingly volatile and competitive
marketplace, the Bank must accept some forms of risk and manage these risks in a
safe and sound manner. Generally, transactions that the Bank enters into require
the Bank to accept some measure of credit and interest rate risk, and utilize
equity capital. The Bank has established certain guidelines in order to manage
the Bank's assets and liabilities. These guidelines will help ensure that the
risks taken and consumption of capital are optimized to achieve maximum
profitability, while minimizing risks to equity and the federal deposit
insurance fund.
39
<PAGE> 43
Interest Rate Risk (IRR) Management
For a complete discussion and additional disclosure of the Bank's methods
and tools for measuring and managing its IRR, see Note 13 of Notes to
Consolidated Financial Statements.
At December 31, 1995, the Bank had financial assets of $1.7 billion with a
weighted average yield of 7.70 percent, and financial liabilities of $1.6
billion with a weighted average rate of 4.64 percent. The Bank's cumulative
one-year static gap was a negative $60 million, or 3.5 percent of financial
assets. The Bank's financial assets and financial liabilities are presented
according to their frequency of repricing, and scheduled and expected maturities
in the following table, also known as a static gap analysis (thousands of
dollars):
STATIC GAP AS OF DECEMBER 31, 1995
<TABLE>
<CAPTION>
REPRICING SENSITIVITY AT
DECEMBER 31, 1995
------------------------------------
PERCENT OF TOTAL YIELD/ WITHIN 1-5 OVER 5
TOTAL BALANCE RATE 1 YEAR YEARS YEARS
---------- ---------- ----- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
FINANCIAL ASSETS
Cash and cash equivalents(1)... 7.0% $ 119,750 3.60% $ 119,750 $ -- $ --
Debt securities available for
sale(2)...................... 24.9 422,421 7.06 312,769 100,558 9,094
Debt securities held to
maturity(2).................. 3.8 64,254 7.79 50,874 10,022 3,358
Loans receivable:
Loans receivable held for
sale....................... 0.3 5,855 7.96 5,855 -- --
Adjustable-rate real
estate(3)
Construction and land...... 4.1 69,082 10.02 68,846 77 159
Other real estate.......... 14.6 247,311 7.53 232,546 14,765 --
Fixed-rate real estate(4).... 29.5 501,211 8.01 79,603 238,441 183,167
Consumer, commercial and all
other(4)................... 15.2 258,787 9.66 139,485 101,933 17,369
FHLB stock(5).................. 0.6 11,057 4.90 11,057 -- --
----- ---------- ----- ---------- -------- --------
Total financial
assets.............. 100.0% 1,699,728 7.70% $1,020,785 $465,796 $213,147
===== ===== ---------- -------- --------
Nonfinancial assets............ 75,291
----------
Total assets............... $1,775,019
==========
FINANCIAL LIABILITIES
Deposits:
Interest-bearing demand and
money market deposits(6)... 20.4% $ 322,847 3.12% $ 322,847 $ -- $ --
Certificates of deposit(1)... 49.2 776,660 5.34 552,586 203,918 20,156
Savings deposits(6).......... 4.3 67,641 2.29 67,641 -- --
Noninterest-bearing demand
deposits(7)................ 6.3 98,923 -- 52,173 20,541 26,209
Borrowings:
Advances from FHLB(1)........ 10.4 164,400 6.68 35,000 126,000 3,400
Securities sold under
agreements to
repurchase(8).............. 8.9 140,710 6.10 140,710 -- --
Other(10).................... 0.5 7,995 7.80 7,995 -- --
----- ---------- ----- ---------- -------- --------
Total financial
liabilities......... 100.0% 1,579,176 4.64% 1,178,952 350,459 49,765
===== ===== ---------- -------- --------
Impact of hedging-fixed(9)..... -- 98,200 (55,050) (43,150)
---------- -------- --------
Nonfinancial liabilities....... 22,284
Stockholder's equity........... 173,559
----------
Total liabilities and
stockholder's equity.... $1,775,019
==========
Maturity gap................... $ (59,967) $ 60,287 $120,232
========== ======== ========
Cumulative gap................. $ (59,967) $ 320 $120,552
========== ======== ========
Cumulative gap as a percent of
financial assets............. (3.5)% --% 7.1%
========== ======== ========
</TABLE>
Note: Loans receivable exclude allowance for credit losses, discount reserves,
deferred loan fees, loans in process, and accrued interest on loans.
40
<PAGE> 44
STATIC GAP ASSUMPTIONS AS OF DECEMBER 31, 1995
(1) Based on the contractual maturity or term to next repricing of the
instrument(s).
(2) Maturity sensitivity is based upon characteristics of underlying loans.
Portions represented by adjustable-rate securities are included in the
"Within 1 Year" category, as underlying loans are subject to interest rate
adjustment at least semiannually or annually. Portions represented by
fixed-rate securities are based on contractual maturity, projected
repayments, and projected prepayments of principal of the underlying loans.
(3) Adjustable rate loans are included in each respective category depending on
the term to next repricing and projected repayments and prepayments of
principal.
(4) Maturity sensitivity is based upon contractual maturity, and projected
repayments and prepayments of principal.
(5) FHLB stock has no contractual maturity. The Bank receives quarterly
dividends on all shares owned and the balance is therefore included in the
"Within 1 Year" category. The amount of such dividends is not fixed and
varies quarterly.
(6) Interest-bearing demand deposits, money market deposits, and savings
deposits may be subject to daily interest rate adjustment and withdrawal on
demand, and are therefore included in the "Within 1 Year" category.
(7) Noninterest-bearing demand deposits have no contractual maturity, and are
included in each repricing category based on the Bank's historical attrition
of such accounts.
(8) Floating-rate reverse repurchase agreements are included in the "Within 1
Year" category. Principal repayments of flexible reverse repurchase
agreements are based on the projected timing of construction or funding of
the underlying project.
(9) Hedging consisted of fixed rate interest rate swaps as of December 31, 1995.
While the static gap analysis is a useful asset/liability management tool,
it does not fully assess IRR. Static gap analysis does not address the effects
of customer options (such as early withdrawal of time deposits, withdrawal of
deposits with no stated maturity, and mortgagors' options to prepay loans) and
Bank strategies (such as delaying increases in interest rates paid on certain
interest-bearing demand and money market deposit accounts) on the Bank's net
interest income, net income, and market value of the Bank's assets and
liabilities. In addition, the static gap analysis assumes no changes in the
spread relationships between market rates on interest-sensitive financial
instruments (basis risk), or in yield curve relationships. Therefore, a static
gap analysis is only one tool with which management analyzes IRR, and must be
reviewed in conjunction with other asset/liability management reports.
Credit Risk Management
Management has also established certain guidelines and criteria in order to
manage the credit risk of the Bank's debt security portfolios, including
concentration limits, credit rating; and geographic distribution requirements.
The following table presents the credit quality of the debt security portfolios:
<TABLE>
<CAPTION>
AT DECEMBER 31, 1995 AT DECEMBER 31, 1994
RATING: PERCENTAGE OF PORTFOLIO PERCENTAGE OF PORTFOLIO
-------------------------------------- ----------------------- -----------------------
<S> <C> <C>
AAA................................... 93.0% 91.2%
AA.................................... 2.5 2.7
A..................................... 1.0 1.0
BBB................................... -- 1.3
Other................................. 3.5 3.8
----- -----
Total................................. 100.0% 100.0%
===== =====
</TABLE>
41
<PAGE> 45
Loan Impairment. On January 1, 1995, the Bank adopted SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan," and SFAS No. 118,
"Accounting by Creditors for Impairment of a Loan -- Income Recognition and
Disclosures." SFAS No. 114 requires the measurement of loan impairment to be
based on the present value of expected future cash flows discounted at the
loan's original effective interest rate or the fair value of the underlying
collateral on collateral-dependent loans. SFAS No. 118 allows a creditor to use
existing methods for recognizing interest income on impaired loans.
Upon adoption of SFAS No. 114, in the first quarter of 1995, $2.9 million
of in-substance foreclosed assets were reclassified on the Bank's consolidated
statement of financial condition from foreclosed real estate to loans receivable
as SFAS No. 114 eliminated the in-substance designation. No other financial
statement impact resulted from the Bank's adoption of SFAS No. 114.
In general, under SFAS No. 114, interest income on impaired loans will
continue to be recognized by the Bank on the accrual basis of accounting, unless
the loan is greater than 90 days delinquent with respect to principal or
interest, or the loan has been partially or fully charged-off. Interest on loans
greater than 90 days delinquent is generally recognized on a cash basis.
Interest income on loans which have been fully or partially charged-off is
generally recognized on a cost-recovery basis; that is, all proceeds from the
loan payments are first applied as a reduction to principal before any income is
recorded.
OTS regulations require the Bank to classify certain assets into one of
three categories -- "substandard," "doubtful," and "loss." An asset which does
not currently warrant classification as substandard but which possesses
weaknesses or deficiencies deserving close attention is considered a criticized
asset and is designated as "special mention." The Bank designated $35.8 million
of its assets as "special mention" at December 31, 1995.
The following table sets forth the amounts of the Bank's classified assets
and ratio of classified assets to total assets, net of specific reserves and
charge-offs, as of the dates indicated (thousands of dollars):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------
1995 1994 1993 1992 1991
------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
Substandard assets:
Loans......................................... $30,351 $29,591 $37,886 $55,727 $ 66,839
Foreclosed real estate (net).................. 3,402 7,631 9,707 24,488 14,875
Loans to facilitate........................... -- -- -- 80 760
Real estate held for investment............... 1,111 1,191 2,166 1,616 24,587
Investments................................... -- 21,972 29,509 -- --
Doubtful assets................................. -- -- -- -- --
Loss assets..................................... -- -- -- -- --
------- ------- ------- ------- --------
Total classified assets......................... $34,864 $60,385 $79,268 $81,911 $107,061
======= ======= ======= ======= ========
Ratio of classified assets to total assets...... 1.96% 3.32% 4.53% 3.66% 4.54%
======= ======= ======= ======= ========
</TABLE>
The Bank's "substandard" assets decreased from $60 million at December 31,
1994 to $35 million at December 31, 1995, primarily as a result of the upgrade
and paydowns of an investment security from substandard to special mention,
payoffs and paydowns of real estate loans, and the disposition of foreclosed
real estate. Assets classified as "substandard" are inadequately protected by
the current net worth or paying capacity of the obligor or the collateral
pledged, if any. Foreclosed real estate decreased $4.2 million during 1995,
principally as a result of sales. It is the Bank's practice to charge-off all
assets which it considers to be "loss." As a result, none of the Bank's assets,
net of charge-offs, were classified as "loss" at December 31, 1995.
The upgrade of the privately issued $20.2 million investment security from
"substandard" to "special mention" during the second quarter of 1995 was the
result of the stabilization of delinquencies of the security's underlying loans
and the market values of collateral supporting such loans, and management's
analysis of the credit enhancement of the security versus loss estimates on the
underlying loans. The Bank continues to
42
<PAGE> 46
receive scheduled monthly payments of principal and interest on this security.
At December 31, 1995, the balance of this security totaled $16.9 million and is
included in special mention assets.
Special mention assets increased from $32.2 million at December 31, 1994 to
$35.8 million at December 31, 1995. This increase was caused, primarily by the
change in classification of the investment security from substandard to special
mention, partially offset by a $3 million reclassification to substandard of a
construction loan and paydowns of California residential loans, commercial real
estate loans, and commercial loans.
The current level of the Bank's classified assets reflects significant
improvement from the prior two years. Aggressive management of the resolution of
these assets along with some stabilization within the economy contributed to the
success in reducing the classified asset portfolio. Although progress has been
positive, the Bank is unable to predict at this time what level, if any, of
these assets may subsequently be charged-off or may result in actual losses.
As a result of the Bank's internal review process, the allowance for
estimated credit losses on loans decreased from $17.7 million at December 31,
1994, to $16.4 million at December 31, 1995. During 1995, the Bank established
provisions for estimated credit losses totaling $8.3 million, of which $8.1
million related to the Bank's loan, foreclosed real estate, and debt security
portfolio and $162,000 was related to its real estate investment portfolio. In
1994, the Bank established provisions for estimated credit losses totaling $7.4
million, of which $163,000 related to the Bank's real estate investment
portfolio and $7.2 million related to its loan, foreclosed real estate
portfolio, and debt security portfolio.
The Bank's loan portfolio is concentrated primarily in Nevada, California,
and Arizona. The following table summarizes the geographic concentrations of the
Bank's loan portfolios at December 31, 1995 (thousands of dollars):
LOANS BY REGION
<TABLE>
<CAPTION>
COMMERCIAL CONSTRUCTION
RESIDENTIAL MORTGAGE CONSUMER AND LAND COMMERCIAL TOTAL
----------- ---------- -------- ------------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Nevada........................ $453,472 $162,454 $188,225 $63,463 $60,978 $ 928,592
California.................... 92,889 4,576 990 476 -- 98,931
Arizona....................... 30,584 5,407 11,825 -- 146 47,962
Other......................... 264 -- 187 -- -- 451
-------- -------- -------- ------- ------- ----------
Total......................... $577,209 $172,437 $201,227 $63,939 $61,124 $1,075,936
======== ======== ======== ======= ======= ==========
</TABLE>
At December 31, 1995, 32 percent or $18.5 million of the Bank's outstanding
commercial secured loan portfolio consisted of loans to borrowers in the gaming
industry, with additional unfunded commitments of $9.9 million. These loans are
generally secured by real estate, machinery, and equipment. The Bank's portfolio
of loans, collateralized by real estate, consists principally of real estate
located in Nevada, California, and Arizona. Collectibility is, therefore,
somewhat dependent on the economies and real estate values of these areas and
industries.
43
<PAGE> 47
The following table sets forth by geographic location the amount of
classified assets at December 31, 1995 (thousands of dollars):
CLASSIFIED ASSETS BY GEOGRAPHIC LOCATION
<TABLE>
<CAPTION>
CONSTRUCTION NON- INVESTMENTS
MORTGAGE AND LAND MORTGAGE FORECLOSED IN
LOANS LOANS LOANS REAL ESTATE REAL ESTATE TOTAL
-------- ------------ -------- ----------- ----------- -------
<S> <C> <C> <C> <C> <C> <C>
Nevada............................. $17,369 $3,578 $4,734 $1,393 $1,111 $28,185
California......................... 3,754 94 -- 1,708 -- 5,556
Arizona............................ 822 -- -- 301 -- 1,123
------- ------ ------ ------ ------ -------
Total.............................. $21,945 $3,672 $4,734 $3,402 $1,111 $34,864
======= ====== ====== ====== ====== =======
</TABLE>
Classified construction and land loans include committed but undisbursed
loan amounts.
The following table sets forth by type of collateral, the amount of
classified assets at December 31, 1995 (thousands of dollars):
CLASSIFIED ASSETS BY TYPE OF LOAN
<TABLE>
<CAPTION>
FORECLOSED INVESTMENTS
LOANS REAL ESTATE IN REAL ESTATE
------- ----------- --------------
<S> <C> <C> <C>
Single-family residential................................ $ 5,162 $1,859 $ --
Commercial and multi-family mortgage..................... 16,783 693 781
Construction/land........................................ 3,672 336 330
Consumer................................................. 797 514 --
Other.................................................... 3,937 -- --
------- ------ ------
Total.................................................... $30,351 $3,402 $1,111
======= ====== ======
</TABLE>
The largest substandard loan at December 31, 1995 was an $8.1 million
multi-family real estate loan in Nevada. In addition, the Bank had four other
substandard loans at December 31, 1995, in excess of $1 million: two hotel
loans, one multi-family loan, and a shopping center loan, all located in Nevada.
The largest parcel of foreclosed real estate owned by the Bank at December
31, 1995, was a $460,000 single-family residence located in California.
Substandard real estate held for investment includes a $780,000 Nevada
branch facility whose operations were consolidated with another branch in
Nevada. This branch facility was formerly included in premises and equipment.
The following table presents the Bank's net charge-off experience for loans
receivable, debt securities, and foreclosed real estate by loan type (thousands
of dollars):
<TABLE>
<CAPTION>
NET CHARGE-OFFS
----------------------------
1995 1994 1993
------ ------ ------
<S> <C> <C> <C>
Single-family residential (SFR).................................. $ 585 $ 827 $ 916
Commercial and multi-family mortgage............................. 186 959 2,275
Construction/land................................................ 376 1,297 2,248
Nonmortgage...................................................... 5,964 2,739 1,750
Debt securities.................................................. 2,077 -- --
------ ------ ------
Net charge-offs........................................ $9,188 $5,822 $7,189
====== ====== ======
</TABLE>
The $186,000 of commercial mortgage charge-offs for the year ended December
31, 1995, were comprised principally of one apartment complex and one
hotel/motel property totaling $161,000, both located
44
<PAGE> 48
in Nevada. Construction and land losses in 1995 consisted primarily of four
California loans totaling $483,000 offset by sales of $123,000 on a
single-family construction property also located in California. Nonmortgage loan
charge-offs during 1995 were principally comprised of $2.6 million in
charge-offs from the corporate loan portfolio, $2.5 million of losses related to
installment loans, $390,000 of signature line charge-offs, and $362,000 in
checking account charge-offs. SFR charge-offs for 1994 and 1993 consisted
primarily of California-based loans and foreclosed real estate.
During the second quarter of 1995, the Bank transferred $4.4 million of its
allowance for estimated credit losses affiliated with loans to separate
allowances for credit losses affiliated with foreclosed real estate and debt
securities. Of this amount, $1.3 million was transferred to the foreclosed real
estate allowance for losses and $3.1 million was transferred to the allowance
for losses on debt securities. Prior to the second quarter, the evaluation of
the adequacy of the Bank's allowance for estimated credit losses affiliated with
loans receivable incorporated estimates for losses in the foreclosed real estate
and debt security portfolios, but were not deemed material enough to be
segregated as separate allowances. Additionally, prior to the second quarter, no
credit losses had been experienced in the debt security portfolio. Losses in the
foreclosed real estate portfolio subsequent to foreclosure had been accounted
for as loan losses. Based upon management's review and the recent performance of
the debt security, the loss allowance was eliminated at December 31, 1995.
45
<PAGE> 49
RESULTS OF FINANCIAL SERVICES OPERATIONS
The Bank's net income depends in large part on the difference, or interest
rate spread, between the yield it earns from its loan and debt security
portfolios and the rates it pays for deposits and borrowings.
The following table reflects, for the periods indicated, the components of
net interest income of the Bank, setting forth average assets, liabilities, and
equity; interest income on interest-earning assets and interest expense on
interest-bearing liabilities; average yields on interest-earning assets and
interest-bearing liabilities; and net interest income (thousands of dollars):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------------------------
1995 1994 1993
------------------------------- ------------------------------- -------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST YIELD BALANCE INTEREST YIELD BALANCE INTEREST YIELD
---------- -------- ------- ---------- -------- ------- ---------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Interest-earning assets
Cash equivalents.......... $ 43,611 $ 2,639 6.05% $ 56,380 $ 2,432 4.31% $ 42,787 $ 1,321 3.09%
Debt securities held to
maturity................ 89,899 6,798 7.56 73,520 4,919 6.69 425,141 26,909 6.33
Debt securities available
for sale................ 484,567 32,562 6.72 556,781 34,165 6.14 542,264 30,395 5.61
Loans receivable.......... 1,013,218 90,217 8.90 886,702 76,080 8.58 790,082 73,106 9.25
FHLB stock................ 12,959 661 5.10 16,916 838 4.95 16,475 594 3.61
---------- -------- ---- ---------- -------- ---- ---------- -------- ----
Total interest-earning
assets.................... 1,644,254 132,877 8.08 1,590,299 118,434 7.45 1,816,749 132,325 7.28
-------- ---- -------- ---- -------- ----
Noninterest-earning assets
Real estate held for sale
or development.......... 4,683 10,785 26,132
Premises and equipment,
net..................... 21,555 22,236 28,807
Other assets.............. 37,249 39,502 56,443
Excess of cost over net
assets acquired......... 63,799 67,632 73,972
---------- ---------- ----------
Total assets................ $1,771,540 $1,730,454 $2,002,103
========== ========== ==========
Liabilities and
Stockholder's Equity
Interest-bearing liabilities
Deposits.................. $1,246,388 51,938 4.17 $1,229,515 44,116 3.59 $1,443,628 57,643 3.99
Securities sold under
agreements to
repurchase.............. 175,618 10,889 6.20 222,620 11,024 4.95 305,123 13,132 4.30
Advances from FHLB........ 142,523 9,191 6.45 73,510 3,543 4.82 38,897 2,147 5.52
Notes payable............. 8,066 658 8.16 8,203 635 7.74 14,229 1,170 8.22
Unsecured senior notes.... -- -- -- -- -- -- 13,777 1,021 7.41
---------- -------- ---- ---------- -------- ---- ---------- -------- ----
Total interest-bearing
liabilities............... 1,572,595 72,676 4.62 1,533,848 59,318 3.87 1,815,654 75,113 4.14
Cost of hedging
activities................ 624 .04 485 .03 24 --
-------- ---- -------- ---- -------- ----
Cost of funds............... 73,300 4.66 59,803 3.90 75,137 4.14
-------- ---- -------- ---- -------- ----
Noninterest-bearing
liabilities and
stockholder's equity
Other liabilities and
accrued expenses........ 22,004 21,625 22,914
---------- ---------- ----------
Total liabilities........... 1,594,599 1,555,473 1,838,568
Total stockholder's
equity.................... 176,941 174,981 163,535
---------- ---------- ----------
Total liabilities and
equity.................... $1,771,540 $1,730,454 $2,002,103
========== ========== ==========
Capitalized and transferred
interest.................. -- -- 13 -- 61 --
-------- ---- -------- ---- -------- ----
Net interest income......... $ 59,577 3.42% $ 58,644 3.55% $ 57,249 3.14%
======== ==== ======== ==== ======== ====
Net yield on
interest-earning assets... 3.62% 3.69% 3.15%
==== ==== ====
</TABLE>
- ---------------
Note: Loans receivable include accrued interest and loans on nonaccrual, and are
net of undisbursed funds, allowances for estimated credit losses,
discounts, and deferred loan fees.
46
<PAGE> 50
The following table shows, for the periods indicated, the effects of the
two primary determinants of the Bank's net interest income: interest rate spread
and the relative amounts of interest-sensitive assets and liabilities. The table
also shows the extent to which changes in interest rates and changes in the
volumes of interest-sensitive assets and liabilities have affected the Bank's
interest income and expense for the periods indicated. Changes from period to
period are attributed to: (i) changes in rate (change in weighted average
interest rate multiplied by prior period average portfolio balance); (ii)
changes in volume (change in average portfolio balance multiplied by prior
period rate); and (iii) net or combined changes in rate and volume. Any changes
attributable to both rate and volume that cannot be segregated have been
allocated proportionately between the two factors.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------
1995 COMPARED TO 1994 1994 COMPARED TO 1993
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO CHANGES IN DUE TO CHANGES IN
-------------------------- -----------------------------
VOLUME RATE NET VOLUME RATE NET
------- ------ ------- -------- ------- --------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME ON:
Cash equivalents........................ $ (264) $ 471 $ 207 $ 496 $ 615 $ 1,111
Debt securities held to maturity........ 1,187 692 1,879 (23,620) 1,630 (21,990)
Debt securities available for sale...... (5,901) 4,298 (1,603) 831 2,939 3,770
Loans receivable........................ 7,343 6,794 14,137 7,336 (4,362) 2,974
Dividends on FHLB stock................. (203) 26 (177) 16 228 244
------- ------- ------- -------- ------- --------
Total interest income.............. 2,162 12,281 14,443 (14,941) 1,050 (13,891)
------- ------- ------- -------- ------- --------
INTEREST EXPENSE ON:
Deposits................................ 612 7,210 7,822 (8,035) (5,492) (13,527)
Securities sold under agreements to
repurchase............................ (2,918) 2,783 (135) (4,755) 2,647 (2,108)
Advances from FHLB...................... 4,152 1,496 5,648 1,628 (232) 1,396
Notes payable........................... -- 23 23 (470) (65) (535)
Unsecured senior notes.................. -- -- -- (1,021) -- (1,021)
------- ------- ------- -------- ------- --------
Total interest expense............. 1,846 11,512 13,358 (12,653) (3,142) (15,795)
Cost (benefit) of hedging activity...... 105 34 139 730 (269) 461
------- ------- ------- -------- ------- --------
Cost of funds........................... 1,951 11,546 13,497 (11,923) (3,411) (15,334)
Capitalized and transferred interest.... (13) -- (13) (12) (36) (48)
------- ------- ------- -------- ------- --------
Net interest income................ $ 198 $ 735 $ 933 $ (3,030) $ 4,425 $ 1,395
======= ======= ======= ======== ======= ========
</TABLE>
1995 vs. 1994
The Bank recorded a net loss of $3.2 million for the year ended December
31, 1995, compared to net income of $7.7 million for the year ended December 31,
1994. The decrease in net income was principally due to the goodwill impairment
of $11.8 million in 1995. Core earnings from Banking operations increased from
$11.3 million at December 31, 1994 to $11.9 million at December 31, 1995,
primarily due to increased net interest margin.
The higher interest-earning asset base is the result of the Bank's strategy
of offering loans tied to market rates held in the portfolio. The increase in
the average yield on interest-earning assets is the result of increased loan and
security yields as a result of a large portion of the asset portfolio's
adjustable-rate attributes and new originations at higher rates, which partially
offset the increased cost in interest-bearing liabilities.
The following summarizes the significant effects of these factors:
(i) Interest on cash equivalents increased due to the higher yield
which was a result of the higher interest rates during the year.
47
<PAGE> 51
(ii) The average balance on debt securities held to maturity and the
average yield were higher in 1995 due to the purchase of higher yielding
securities late in 1994. The income on debt securities available for sale
increased due to increased rates on adjustable-rate securities offsetting
most of the decrease in balances due to paydowns on securities, maturities
and sales.
(iii) Total loan originations for 1995 were $525 million compared to
originations of $466 million for 1994. The increase in loan originations
for 1995 was due to the growth in the Las Vegas real estate market. The
average yield on loans increased as a result of an increase in market
interest rates resulting in higher rates on adjustable-rate mortgage loans.
(iv) Dividends on FHLB stock decreased as a result of stock sales and
the higher interest rate environment in 1995.
(v) The increase in the cost of savings was due to a slight increase
in balances combined with the higher interest rate environment.
(vi) The decrease in interest on securities sold under agreements to
repurchase was due to net repayments of borrowings during the year, largely
offset by an increase in the rate paid.
(vii) The increase in the average balance for FHLB advances was due to
the new borrowings during the year. The increase in the cost of these
advances was due to higher interest rates on the new borrowings.
The Bank's cost of hedging activities increased principally as a result of
the increased outstanding balance of interest rate swaps of $98.2 million
(notional amount) in 1995 compared to $72.5 million (notional amount) of
interest rate swaps in 1994.
The net gain on sale of loans increased $843,000 from $247,000 in 1994 to
$1.1 million in 1995, due to higher prices received on loans sold and
implementation of SFAS No. 122. The loans sold were $46 million in 1994 and $38
million in 1995. Net gains on the sale of debt securities increased from a net
gain of $34,000 in 1994 to $970,000 in 1995, primarily due to the sale of CMO
residuals to take advantage of favorable market conditions, eliminate an area of
possible regulatory concern due to the volatile aspects of the securities, and
enhance the credit quality of the investment portfolio. In January 1994, the
Bank sold its credit card portfolio and recognized a gain of $1.7 million ($1.1
million, net of charge-offs).
The Bank's high effective tax rate of 238 percent in 1995 was primarily the
result of impairment of goodwill associated with the anticipated sale to Norwest
Corporation, which is not tax deductible.
1994 vs. 1993
The Bank recorded net income of $7.7 million for the year ended December
31, 1994, compared to net income of $6.6 million for the year ended December 31,
1993. The increase in net income was principally due to an improved net interest
margin, along with increased operational efficiency.
The lower interest-earning asset base is the result of the Bank's strategy
of reducing its total asset size. The increase in the average yield on
interest-earning assets is the result of the repricing of interest-sensitive
loans and debt securities, repayment of lower yielding loans and debt
securities, and the replacement of such loans and debt securities with higher
yielding originations and purchases.
The following summarizes the significant effects of these factors:
(i) Interest on cash equivalents increased due to the higher yield
which was a result of higher interest rates and increased volume during the
year.
(ii) Debt securities, in total, decreased principally as a result of
the sale of $334 million to fund the transfer of the Arizona-based deposit
liabilities in 1993 (Arizona sale) and paydowns within the portfolio,
offset partially by purchases of $296 million. The decrease in average
balance of debt securities also resulted in a decrease of the interest on
debt securities. As the Arizona sale did not occur until the last half of
1993, the average balance of the debt securities was higher in 1993. The
increase in the yield was
48
<PAGE> 52
due to sales of lower coupon securities in 1993 and to the purchase of
higher yielding debt securities in 1994.
(iii) The average loans receivable portfolio increased principally due
to a decrease in loan payoffs from 1994 compared to 1993, partially offset
by decreased loan originations. Total loan originations for 1994 were $466
million compared to originations of $500 million for 1993. The decline in
loan originations for 1994 was due to a rising interest rate environment
and a corresponding decline in refinancing activity. The rise in interest
rates also slowed down the prepayments within the Bank's mortgage loan
portfolio. The average yield on loans declined as a result of lower
interest rates on newly funded adjustable-rate mortgage loans.
(iv) Dividends on FHLB stock increased as a result of a higher
declared dividend rate in 1994.
(v) The average balance for deposits decreased as a result of the
Arizona sale of $321 million in 1993. The average balance of deposits was
higher in 1993 because the sale occurred in the last half of the year. The
decrease in the cost of savings was due to the lower interest rate
environment.
(vi) The decrease in interest on securities sold under agreements to
repurchase was due to net repayments of borrowings during the year,
partially offset by an increase in the cost.
(vii) The increase in the average balance for FHLB advances was due to
new borrowings during the year, partially offset by repayment of advances.
The decrease in the cost of these advances was due to lower interest rates
on the new borrowings versus the higher rates on these advances paid off.
(viii) Interest on notes payable declined primarily as a result of the
repayment of $10.4 million in the third quarter of 1993.
(ix) Interest on unsecured senior notes declined as a result of the
pay-off of the $25 million balance in the third quarter of 1993.
The Bank's cost of hedging activities increased principally as a result of
an increase in the notional amount of interest rate swaps outstanding of $72.5
million in 1994 compared to $7.5 million in 1993.
Provisions for estimated credit losses increased in 1994 versus 1993 as a
result of management's evaluation of the adequacy of the allowances for
estimated credit losses. See Risk Management -- Credit Risk Management herein.
The net gain on sale of loans decreased $1.5 million from $1.7 million in
1993 to $247,000 in 1994, due to a decrease in the amount of loans sold from $78
million in 1993 to $46 million in 1994. Net gains on the sale of debt securities
decreased from a net gain of $8 million in 1993 to $34,000 in 1994, primarily
due to the sale in 1993 of $361 million in debt securities, of which $334
million were sold to fund the Arizona sale. In January 1994, the Bank sold its
credit card portfolio and recognized a gain of $1.7 million ($1.1 million net of
charge-offs). Other income decreased principally due to a legal settlement of
$1.2 million received in 1993, while legal fees of $810,000 were incurred in
1994 associated with a Las Vegas apartment complex which the Bank built.
General and administrative expenses decreased $4.8 million, or 10 percent,
in 1994. This decrease was due to the general and administrative expenses
associated with the Arizona operations which were incurred in 1993 until the
sale in the third quarter of that year, which were not incurred in 1994 along
with increases in efficiency and focus on cost reduction.
The Bank's effective tax rate was 45.4 percent in 1994 primarily as a
result of goodwill amortization.
49
<PAGE> 53
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
SOUTHWEST GAS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1995 1994
---------- ----------
<S> <C> <C>
ASSETS
Utility plant
Gas plant..................................................................... $1,579,665 $1,428,941
Less: accumulated depreciation................................................ (474,891) (433,429)
Acquisition adjustments....................................................... 6,298 6,729
Construction work in progress................................................. 26,678 33,675
---------- ----------
Net utility plant (Note 2).................................................. 1,137,750 1,035,916
---------- ----------
Other property and investments.................................................. 35,128 34,195
---------- ----------
Current assets
Cash and cash equivalents..................................................... 11,168 6,076
Accounts receivable, net of allowances (Note 3)............................... 38,186 57,905
Accrued utility revenue....................................................... 43,900 47,533
Deferred purchased gas costs (Note 4)......................................... -- 15,219
Deferred tax benefit (Note 10)................................................ 17,089 --
Prepaids and other current assets............................................. 31,386 36,589
Net assets of discontinued operations (Note 12)............................... 175,493 175,855
---------- ----------
Total current assets................................................... 317,222 339,177
---------- ----------
Deferred charges and other assets (Note 4)...................................... 42,427 44,294
---------- ----------
Total assets.................................................................... $1,532,527 $1,453,582
========== ==========
CAPITALIZATION AND LIABILITIES
Capitalization
Common stock, $1 par (authorized -- 30,000,000 shares; issued and
outstanding -- 24,467,499 and 21,281,717 shares)............................ $ 26,097 $ 22,912
Additional paid-in capital.................................................... 312,631 273,217
Retained earnings............................................................. 17,322 52,427
---------- ----------
Total common equity.................................................... 356,050 348,556
Preferred stock (Note 5)...................................................... -- 4,000
Company-obligated mandatorily redeemable preferred securities of the Company's
subsidiary, Southwest Gas Capital I, holding solely $61.8 million principal
amount of 9.125% subordinated notes of the Company due 2025 (Note 5)........ 60,000 --
Long-term debt, less current maturities (Note 6).............................. 607,945 678,263
---------- ----------
Total capitalization................................................... 1,023,995 1,030,819
---------- ----------
Commitments and contingencies (Note 8)
Current liabilities
Current maturities of long-term debt (Note 6)................................. 120,000 5,000
Short-term debt (Note 7)...................................................... 37,000 92,000
Accounts payable.............................................................. 41,864 48,965
Customer deposits............................................................. 21,406 22,893
Accrued taxes................................................................. 29,116 42,936
Deferred taxes (Note 10)...................................................... -- 6,943
Accrued interest.............................................................. 11,107 12,064
Deferred purchased gas costs (Note 4)......................................... 32,776 --
Other current liabilities..................................................... 36,942 23,762
---------- ----------
Total current liabilities.............................................. 330,211 254,563
---------- ----------
Deferred income taxes and other credits
Deferred income taxes and investment tax credits (Note 10).................... 138,893 130,175
Other deferred credits (Note 4)............................................... 39,428 38,025
---------- ----------
Total deferred income taxes and other credits.......................... 178,321 168,200
---------- ----------
Total capitalization and liabilities............................................ $1,532,527 $1,453,582
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
50
<PAGE> 54
SOUTHWEST GAS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Gas operating revenues..................................... $563,502 $599,553 $539,105
Net cost of gas............................................ 227,456 249,922 212,290
-------- -------- --------
Operating margin......................................... 336,046 349,631 326,815
-------- -------- --------
Operating expenses:
Operations and maintenance............................... 187,969 178,310 169,921
Depreciation and amortization............................ 62,492 57,284 55,088
Taxes other than income taxes............................ 27,173 25,347 24,124
-------- -------- --------
Total operating expenses......................... 277,634 260,941 249,133
-------- -------- --------
Operating income........................................... 58,412 88,690 77,682
-------- -------- --------
Other income and (expenses):
Net interest deductions.................................. (53,354) (49,461) (41,832)
Preferred securities distributions (Note 5).............. (913) -- --
Other income (deductions), net........................... (652) (1,110) (13,891)
-------- -------- --------
Total other income and (expenses)................ (54,919) (50,571) (55,723)
-------- -------- --------
Income from continuing operations before income taxes...... 3,493 38,119 21,959
Income tax expense (Note 10)............................... 839 14,595 8,208
-------- -------- --------
Income from continuing operations.......................... 2,654 23,524 13,751
-------- -------- --------
Discontinued operations (Note 12):
Income (loss) from discontinued segment, net of tax
expense (benefit) of $(2,306), $3,127 and $3,051...... (4,513) 2,777 1,655
Loss on disposal of discontinued segment, including
tax expense of $9,900................................. (13,023) -- --
-------- -------- --------
Net income (loss) from discontinued operations............. (17,536) 2,777 1,655
-------- -------- --------
Net income (loss).......................................... (14,882) 26,301 15,406
Preferred/preference stock dividend requirements........... 307 510 741
-------- -------- --------
Net income (loss) applicable to common stock............... $(15,189) $ 25,791 $ 14,665
======== ======== ========
Earnings per share from continuing operations.............. $ 0.10 $ 1.09 $ 0.63
Earnings (loss) per share from discontinued operations..... (0.76) 0.13 0.08
-------- -------- --------
Earnings (loss) per share of common stock (Note 11)........ $ (0.66) $ 1.22 $ 0.71
======== ======== ========
Average number of common shares outstanding................ 23,167 21,078 20,729
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
51
<PAGE> 55
SOUTHWEST GAS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net income............................................ $ (14,882) $ 26,301 $ 15,406
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization...................... 62,492 57,284 55,088
Deferred income taxes.............................. (15,314) (9,178) 16,736
Changes in current assets and liabilities
Accounts receivable.............................. 19,719 (6,487) 5,426
Accrued utility revenue.......................... 3,633 (1,300) (1,744)
Unrecovered purchased gas costs.................. 47,995 9,014 (33,571)
Accounts payable................................. (7,101) (2,811) 1,676
Accrued taxes.................................... (13,820) 11,594 (7,101)
Other current assets and liabilities............. 3,661 6,681 11,967
Other.............................................. (205) 649 (6,850)
Undistributed (income) loss from discontinued
operations....................................... 11,576 (7,673) (6,596)
--------- --------- ---------
Net cash provided by operating activities.......... 97,754 84,074 50,437
--------- --------- ---------
CASH FLOW FROM INVESTING ACTIVITIES:
Construction expenditures............................. (166,183) (141,390) (113,903)
Other................................................. 2,465 (157) (2,343)
--------- --------- ---------
Net cash used in investing activities.............. (163,718) (141,547) (116,246)
--------- --------- ---------
CASH FLOW FROM FINANCING ACTIVITIES:
Issuance of common stock.............................. 44,844 4,773 6,790
Issuance of trust originated preferred securities..... 57,713 -- --
Reacquisition of preferred/preference stocks.......... (4,000) (4,058) (7,258)
Dividends paid........................................ (19,575) (17,411) (16,139)
Issuance of long-term debt............................ 49,407 73,000 21,909
Retirement of long-term debt.......................... (2,285) (648) (3,392)
Issuance (repayment) of short-term debt............... (55,000) 6,000 66,000
Other................................................. (48) (234) (422)
--------- --------- ---------
Net cash provided from financing activities........ 71,056 61,422 67,488
--------- --------- ---------
Change in cash and temporary cash investments......... 5,092 3,949 1,679
Cash at beginning of period........................... 6,076 2,127 448
--------- --------- ---------
Cash at end of period................................. $ 11,168 $ 6,076 $ 2,127
========= ========= =========
Supplemental information:
Interest paid, net of amount capitalized.............. $ 52,741 $ 55,167 $ 48,594
========= ========= =========
Income taxes, net of refunds.......................... $ 20,413 $ 3,574 $ 15,151
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
52
<PAGE> 56
SOUTHWEST GAS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
---------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
------ ------- ---------- -------- --------
<S> <C> <C> <C> <C> <C>
DECEMBER 31, 1992.............................. 20,598 $22,228 $262,296 $ 44,920 $329,444
Common stock issuances......................... 399 399 6,429 6,828
Net income..................................... 15,406 15,406
Dividends declared
Preferred: $9.50 per share................... (513) (513)
Second preference: $3.00 per share........... (228) (228)
Common: $0.76 per share...................... (15,820) (15,820)
------ ------- -------- -------- --------
DECEMBER 31, 1993.............................. 20,997 22,627 268,725 43,765 335,117
Common stock issuances......................... 285 285 4,488 4,773
Net income..................................... 26,301 26,301
Dividends declared
Preferred: $9.50 per share................... (437) (437)
Second preference: $3.00 per share........... (73) (73)
Common: $0.81 per share...................... (17,125) (17,125)
Redemption of second preference stock.......... 4 (4) --
------ ------- -------- -------- --------
DECEMBER 31, 1994.............................. 21,282 22,912 273,217 52,427 348,556
Common stock issuances......................... 3,185 3,185 41,659 44,844
Issuance costs, preferred securities........... (2,287) (2,287)
Net loss....................................... (14,882) (14,882)
Dividends declared
Preferred: $9.50 per share................... (307) (307)
Common: $0.82 per share...................... (19,826) (19,826)
Redemption of preferred stock.................. 42 (90) (48)
------ ------- -------- -------- --------
DECEMBER 31, 1995.............................. 24,467* $26,097 $312,631 $ 17,322 $356,050
====== ======= ======== ======== ========
</TABLE>
- ---------------
* At December 31, 1995, 1.5 million common shares were registered and available
for issuance under provisions of the Employee Investment Plan and the
Company's Dividend Reinvestment and Stock Purchase Plan.
The accompanying notes are an integral part of these statements.
53
<PAGE> 57
SOUTHWEST GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation. The Company follows generally accepted accounting
principles (GAAP) in all of its businesses, which requires the use of estimates
made by management for the preparation of financial statements. Accounting for
the Company's gas utility operations conforms with GAAP as applied to regulated
companies and as prescribed by federal agencies and the commissions of the
various states in which the utility operates.
Consolidation. The accompanying financial statements are presented on a
consolidated basis and include the accounts of Southwest Gas Corporation and its
wholly owned subsidiaries, excluding PriMerit Bank. All significant intercompany
balances and transactions have been eliminated. In January 1996, management
reached an agreement to sell PriMerit Bank, which constituted the financial
services segment of the business. For consolidated financial reporting purposes,
the financial services segment is classified as discontinued operations.
Reclassifications. The financial statements for prior years have been
reclassified to conform to the current year presentation of the Bank as
discontinued operations. Additional reclassifications have also been made to
prior years amounts to conform to the current year presentation.
Net Utility Plant. Net utility plant includes gas plant at original cost,
less the accumulated provision for depreciation and amortization, plus the
unamortized balance of acquisition adjustments. Original cost includes
contracted services, material, payroll and related costs such as taxes and
benefits, general and administrative expenses, and an allowance for funds used
during construction less contributions in aid of construction.
Deferred Purchased Gas Costs. The Company is authorized by the various
regulatory authorities having jurisdiction to adjust its billing rates for
changes in the cost of gas purchased. The difference between the current cost of
gas purchased and the cost of gas recovered in billed rates is deferred.
Generally, these deferred amounts are recovered or refunded within one year.
Income Taxes. The Company uses the asset and liability method of
accounting for income taxes. Under the asset and liability method, deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in the period that includes the enactment
date.
Investment tax credits (ITC) related to gas utility operations are deferred
and amortized over the life of related fixed assets.
Gas Operating Revenues. Revenues are recorded when customers are billed.
Customer billings are based on monthly meter reads and are calculated in
accordance with applicable tariffs. The Company also recognizes accrued utility
revenues for the estimated amount of services rendered between the meter-reading
dates in a particular month and the end of such month.
Depreciation and Amortization. Depreciation is computed on the
straight-line remaining life method at composite rates considered sufficient to
amortize costs over estimated service lives, including components which adjust
for salvage value and removal costs, as approved by the appropriate regulatory
agency. When plant is retired from service, the original cost of plant,
including costs of removal, less salvage, is charged to the accumulated
provision for depreciation. Acquisition adjustments are amortized as ordered by
regulatory bodies at the date of acquisition, which periods approximate the
remaining estimated life of the acquired properties. Costs related to refunding
utility debt and debt issuance expenses are deferred and amortized over the
weighted average lives of the new issues.
54
<PAGE> 58
SOUTHWEST GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Allowance for Funds Used During Construction (AFUDC). AFUDC represents the
cost of both debt and equity funds used to finance utility construction. AFUDC
is capitalized as part of the cost of utility plant. The Company capitalized
$1.2 million, $805,000, and $470,000 of AFUDC related to natural gas utility
operations for each of the years ended December 31, 1995, 1994, and 1993,
respectively. The debt portion of AFUDC is reported in the consolidated
statements of income as an offset to net interest deductions and the equity
portion is reported as other income. Utility plant construction costs, including
AFUDC, are recovered in authorized rates through depreciation when completed
projects are placed into operation, and general rate relief is requested and
granted.
Earnings Per Common Share. Earnings per common share are calculated based
on the weighted average number of shares outstanding during the period.
Cash Flows. For purposes of reporting consolidated cash flows, cash and
cash equivalents include cash on hand and financial instruments with a maturity
of three months or less, but excludes funds held in trust for industrial
development revenue bonds.
New Accounting Standards. Effective for fiscal years beginning January 1,
1996, Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of," requires the review of long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. The adoption of this standard will not have a material impact on
the Company's current financial condition or results of operations.
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation." This new standard permits the
continued use of accounting methods prescribed by Accounting Principles Board
(APB) Opinion No. 25, "Accounting for Stock Issued to Employees," or use of the
fair value based method of accounting as encouraged by the statement. The
adoption of this standard will not have a material impact on the Company's
current financial condition or results of operations.
NOTE 2 -- UTILITY PLANT
Net utility plant as of December 31, 1995 and 1994 was as follows
(thousands of dollars):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1995 1994
---------- ----------
<S> <C> <C>
Gas plant:
Storage................................................. $ 14,546 $ 14,252
Transmission............................................ 143,989 140,281
Distribution............................................ 1,206,503 1,077,425
General................................................. 179,378 164,018
Other................................................... 35,249 32,965
---------- ----------
1,579,665 1,428,941
Less: accumulated depreciation............................ (474,891) (433,429)
Acquisition adjustment, net............................... 6,298 6,729
Construction work in progress............................. 26,678 33,675
---------- ----------
Net gas utility property................................ $1,137,750 $1,035,916
========== ==========
</TABLE>
Depreciation expense on gas plant was $62 million, $56.5 million, and $54
million during the years ended December 31, 1995, 1994, and 1993, respectively.
55
<PAGE> 59
SOUTHWEST GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2 -- UTILITY PLANT (CONTINUED)
Leases and Rentals. The Company leases a portion of its corporate
headquarters office complex in Las Vegas and the LNG facilities on its northern
Nevada system. The leases provide for initial terms which expire in 1997 and
2003, respectively, with optional renewal terms available at the expiration
dates. The rental payments are $3.1 million annually, and $4.6 million in the
aggregate over the remaining initial term for the Las Vegas facility, and $6.7
million annually and $50 million in the aggregate for the LNG facilities.
Rentals included in operating expenses with respect to these leases
amounted to $9.8 million in each of the three years in the period ended December
31, 1995. Both of these leases are accounted for as operating leases and are
treated as such for regulatory purposes. Other operating leases of the Company
are immaterial individually and in the aggregate.
NOTE 3 -- RECEIVABLES AND RELATED ALLOWANCES
The Company's business activity with respect to gas utility operations is
conducted with customers located within the three-state region of Arizona,
Nevada, and California. At December 31, 1995, approximately 59 percent of the
gas utility customers were in Arizona, 31 percent in Nevada, and 10 percent in
California. While the Company seeks to minimize its credit risk related to
utility operations by requiring security deposits for new customers, certain
customer accounts are ultimately not collected. Provisions for uncollectible
accounts are recorded monthly, as needed, and are included in the ratemaking
process as a cost of service. Activity in the allowance for uncollectibles is
summarized as follows (thousands of dollars):
<TABLE>
<CAPTION>
ALLOWANCE FOR
UNCOLLECTIBLES
--------------
<S> <C>
Balance, December 31, 1992.............................................. $ 1,507
Additions charged to expense.......................................... 1,460
Accounts written off, less recoveries................................. (1,284)
-------
Balance, December 31, 1993.............................................. 1,683
Additions charged to expense.......................................... 1,445
Accounts written off, less recoveries................................. (1,575)
-------
Balance, December 31, 1994.............................................. 1,553
Additions charged to expense.......................................... 1,295
Accounts written off, less recoveries................................. (1,621)
-------
Balance, December 31, 1995.............................................. $ 1,227
=======
</TABLE>
NOTE 4 -- REGULATORY ASSETS AND LIABILITIES
The Company's natural gas operations are subject to the regulation of the
Arizona Corporation Commission, the Public Service Commission of Nevada, the
California Public Utilities Commission, and the Federal Energy Regulatory
Commission. The Company's accounting policies conform to generally accepted
accounting principles applicable to rate-regulated enterprises and reflect the
effects of the ratemaking process. Such effects concern mainly the time at which
various items enter into the determination of net income in accordance with the
principle of matching costs with related revenues.
56
<PAGE> 60
SOUTHWEST GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4 -- REGULATORY ASSETS AND LIABILITIES (CONTINUED)
The following table represents existing regulatory assets and liabilities
(thousands of dollars):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1994
-------- -------
<S> <C> <C>
SUMMARY OF REGULATORY ASSETS AND LIABILITIES
Assets
SFAS No. 109 -- Income taxes, net............................. $ 13,211 $14,991
Unamortized premium on reacquired debt........................ 10,848 11,582
Deferred purchased gas costs.................................. -- 15,219
Other......................................................... 15,686 22,144
-------- -------
39,745 63,936
Liabilities
Supplier and other rate refunds due customers................. (4,844) (7,966)
Deferred purchased gas costs.................................. (32,776) --
Other......................................................... (3,389) (4,348)
-------- -------
Net regulatory assets (liabilities)............................. $ (1,264) $51,622
======== =======
</TABLE>
NOTE 5 -- PREFERRED STOCK, PREFERENCE STOCK, AND PREFERRED SECURITIES
In December 1995, the Company redeemed all remaining outstanding $100
Cumulative Preferred Stock, 9.5% Series. Scheduled annual mandatory redemption
requirements were 8,000 shares, or $800,000 per year, through 1999. After the
1995 annual mandatory redemption requirement was satisfied, the Company
exercised its option to redeem an additional 8,000 shares at par. The remaining
24,000 shares were redeemed at $102 per share, plus accrued and unpaid
dividends. The stock was redeemed because other less costly financing options
were available.
During 1994, the Company redeemed, as required, the remaining shares of its
Second Preference Stock, Third Series. The dividend rate on Second Preference
Stock was cumulative and varied from 3 to 16 percent, based on a formula tied to
operating results with respect to the gas distribution system purchased from
Arizona Public Service Company. During 1993 and 1994, the dividend rate was 3
percent.
Preferred Securities of Southwest Gas Capital I. In October 1995,
Southwest Gas Capital I (the Trust), a consolidated wholly owned subsidiary of
the Company, issued $60 million of 9.125% Trust Originated Preferred Securities
(the Preferred Securities). In connection with the Trust's issuance of the
Preferred Securities and the related purchase by the Company of all of the
Trust's common securities (the Common Securities), the Company issued to the
Trust $61.8 million principal amount of its 9.125% Subordinated Deferrable
Interest Notes, due 2025 (the Subordinated Notes). The sole assets of the Trust
are and will be the Subordinated Notes. The interest and other payment dates on
the Subordinated Notes correspond to the distribution and other payment dates on
the Preferred Securities and Common Securities. Under certain circumstances, the
Subordinated Notes may be distributed to the holders of the Preferred Securities
and holders of the Common Securities in liquidation of the Trust. The
Subordinated Notes are redeemable at the option of the Company on or after
December 31, 2000, at a redemption price of $25 per Subordinated Note plus
accrued and unpaid interest. In the event that the Subordinated Notes are
repaid, the Preferred Securities and the Common Securities will be redeemed on a
pro rata basis at $25 per Preferred Security and Common Security plus
accumulated and unpaid distributions. The Company's obligations under the
Subordinated Notes, the Declaration of Trust (the agreement under which the
Trust was formed), the guarantee of payment of certain distributions, redemption
payments and liquidation payments with respect to the Preferred Securities to
the extent the Trust has funds available therefor and the indenture governing
the Subordinated
57
<PAGE> 61
SOUTHWEST GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5 -- PREFERRED STOCK, PREFERENCE STOCK, AND PREFERRED SECURITIES
(CONTINUED)
Notes, including the Company's agreement pursuant to such indenture to pay all
fees and expenses of the Trust, other than with respect to the Preferred
Securities and Common Securities, taken together, constitute a full and
unconditional guarantee on a subordinated basis by the Company of payments due
on the Preferred Securities. As of December 31, 1995, 2.4 million Preferred
Securities were outstanding.
The Company has the right to defer payments of interest on the Subordinated
Notes by extending the interest payment period at any time for up to 20
consecutive quarters (each, an Extension Period). If interest payments are so
deferred, distributions will also be deferred. During such Extension Period,
distributions will continue to accrue with interest thereon (to the extent
permitted by applicable law) at an annual rate of 9.125% per annum compounded
quarterly. There could be multiple Extension Periods of varying lengths
throughout the term of the Subordinated Notes. If the Company exercises the
right to extend an interest payment period, the Company shall not during such
Extension Period (i) declare or pay dividends on, or make a distribution with
respect to, or redeem, purchase or acquire or make a liquidation payment with
respect to, any of its capital stock, or (ii) make any payment of interest,
principal or premium, if any, on or repay, repurchase, or redeem any debt
securities issued by the Company that rank pari passu with or junior to the
Subordinated Notes; provided, however, that restriction (i) above does not apply
to any stock dividends paid by the Company where the dividend stock is the same
as that on which the dividend is being paid. The Company has no present
intention of exercising its right to extend the interest payment period.
NOTE 6 -- LONG-TERM DEBT
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------
1995 1995 1994 1994
CARRYING MARKET CARRYING MARKET
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- --------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C>
Debentures--
9% Series A, due 2011......................................... $ 26,890 $ 27,663 $ 27,557 $ 26,386
9% Series B, due 2011......................................... 31,213 32,110 31,913 30,557
8 3/4% Series C, due 2011..................................... 18,353 18,881 19,261 18,587
9 3/8% Series D, due 2017..................................... 120,000 126,150 120,000 118,650
10% Series E, due 2013........................................ 23,069 23,963 23,079 23,541
9 3/4% Series F, due 2002..................................... 100,000 117,600 100,000 102,897
Unamortized discount.......................................... (6,209) -- (6,723) --
-------- -------- -------- --------
313,316 346,367 315,087 320,618
-------- -------- -------- --------
Term-loan facilities and other debt............................. 200,000 200,000
-------- --------
Industrial development revenue bonds--
Variable-rate bonds
Series due 2028............................................. 50,000 50,000
Less funds held in trust.................................... (32,942) (38,510)
-------- --------
17,058 11,490
-------- --------
Fixed-rate bonds
7.30% 1992 Series A, due 2027............................... 30,000 31,560 30,000 30,338
7.50% 1992 Series B, due 2032............................... 100,000 106,500 100,000 102,550
6.50% 1993 Series A, due 2033............................... 75,000 75,000 75,000 71,807
Unamortized discount........................................ (3,757) -- (3,865) --
Less funds held in trust.................................... (3,672) -- (44,449) --
-------- --------
197,571 156,686
-------- --------
727,945 683,263
Less current maturities....................................... 120,000 5,000
-------- --------
$607,945 $678,263
======== ========
</TABLE>
58
<PAGE> 62
SOUTHWEST GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 6 -- LONG-TERM DEBT (CONTINUED)
In January 1995, the Company finalized a $200 million term-loan facility
with a group of banks. This facility was utilized to refinance existing loans
and short-term notes payable which were classified as long-term debt at December
31, 1994. The $200 million facility provides for a revolving period through
January 1999 at which time any amounts borrowed under the agreement become
payable on demand. Direct borrowing options provide for the payment of interest
at either the LIBOR or certificate of deposit rate, plus a margin based on the
Company's credit rating, or the prime rate. In addition to direct borrowing
options, a letter of credit is available to provide credit support for the
issuance of commercial paper. During 1995, the average cost of this facility was
6.86 percent.
Prior to obtaining the $200 million facility, the Company had two term-loan
facilities totaling $165 million. The first facility was a Restated and Amended
Credit Agreement dated April 1990 in the amount of $125 million. The average
cost of this facility during 1994 was 4.99 percent. The second term loan was a
$40 million Bridge Term Loan Facility (Bridge Loan) which was used to refinance
a $40 million Amended and Restated Domestic Credit Agreement in August 1994.
During 1994, the average interest rate for the Bridge Loan and the Amended and
Restated Domestic Credit Agreement was 5.26 percent.
The interest rate on the variable rate industrial development revenue bonds
is established on a weekly basis and averaged 4.80 percent during 1995 and 3.85
percent during 1994. At the option of the Company, the interest period can be
converted from a weekly rate to a daily-term or variable-term rate.
The fair value of the term-loan facilities approximates carrying value.
Market values for the debentures and fixed-rate IDRB were determined based on
dealer quotes using trading records for December 31, 1995 and 1994, as
applicable, and other secondary sources which are customarily consulted for data
of this kind. The carrying value of the IDRB Series due 2028 was used as the
estimate of fair value based upon the variable interest rate of the bonds.
Requirements to retire long-term debt at December 31, 1995 for the next
five years are expected to be $5 million, $5 million, $11 million, $211 million,
and $11 million, respectively. Upon completion of the sale of PriMerit Bank, the
Company intends to use the proceeds to retire indebtedness of the Company. In
the consolidated balance sheet, $120 million of long-term debt is shown as
current maturities.
NOTE 7 -- SHORT-TERM DEBT
The Company has an agreement with several banks for committed credit lines
which aggregate $150 million at December 31, 1995. The agreement provides for
the payment of interest at competitive market rates. The lines of credit also
require the payment of a commitment fee based on the long-term debt rating of
the Company. The committed credit lines have no compensating balance
requirements and expire in July 1996. Short-term borrowings at December 31, 1995
and 1994 were $37 million and $92 million, respectively. The weighted average
interest rates on these borrowings were 6.64 percent at December 31, 1995 and
6.36 percent at December 31, 1994.
NOTE 8 -- COMMITMENTS AND CONTINGENCIES
Pending Acquisition. In November 1995, the Company entered into a
definitive agreement to acquire Northern Pipeline Construction Co. (NPL), a
full-service underground gas pipeline contractor, for $24 million. NPL provides
local gas distribution companies with installation, replacement and maintenance
services for underground natural gas distribution systems. The agreement is a
stock-for-stock exchange in which 100 percent of the stock of NPL will be
acquired in exchange for common stock of the Company. The acquisition is
anticipated to be completed during the first half of 1996.
59
<PAGE> 63
SOUTHWEST GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 8 -- COMMITMENTS AND CONTINGENCIES (CONTINUED)
Legal Proceedings. The Company has been named as defendant in various
legal proceedings. The ultimate dispositions of these proceedings are not
presently determinable; however, it is the opinion of management that no
litigation to which the Company is subject will have a material adverse impact
on its financial position or results of operations.
NOTE 9 -- EMPLOYEE POSTRETIREMENT BENEFITS
The Company has a qualified retirement plan covering the employees of its
natural gas operations segment. The plan is noncontributory with defined
benefits, and covers substantially all employees. It is the Company's policy to
fund the plan at not less than the minimum required contribution nor more than
the tax deductible limit. Plan assets are held in a master trust whose
investments consist of common stock, corporate bonds, government obligations,
real estate, a mutual fund investing in foreign stocks, an insurance company
contract, and cash or cash equivalents.
The plan provides that an employee may earn benefits for a period of up to
30 years and will be vested after 5 years of service. Retirement plan costs were
$6.8 million in 1995, $7.8 million in 1994, and $6.6 million in 1993.
The following table sets forth the plan's funded status and amounts
recognized on the Company's consolidated balance sheets and statements of
income.
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1995 1994
--------- ---------
(THOUSANDS OF DOLLARS)
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested benefits of
$(111,035) and $(86,800), respectively..................... $(119,340) $ (93,225)
========= =========
Projected benefit obligation for service rendered to date.... $(167,414) $(136,157)
Market value of plan assets.................................. 169,524 130,497
--------- ---------
Projected benefit obligation less than (in excess of)
assets.................................................. 2,110 (5,660)
Unrecognized net transition obligation being amortized
through 2004............................................... 6,652 7,489
Unrecognized net loss (gain)................................. (8,669) (2,010)
Unrecognized prior service cost.............................. 466 523
--------- ---------
Prepaid retirement plan asset included in the Consolidated
Balance Sheets............................................. $ 559 $ 342
========= =========
Assumptions used to develop pension obligations were:
Discount rate.............................................. 7.25% 8.25%
Long-term rate of return on assets......................... 9.00% 8.75%
Rate of increase in compensation levels.................... 4.75% 5.50%
</TABLE>
60
<PAGE> 64
SOUTHWEST GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 9 -- EMPLOYEE POSTRETIREMENT BENEFITS (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1995 1994 1993
-------- -------- -------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Net retirement plan costs include the following components:
Service cost.................................................. $ 7,153 $ 7,805 $ 6,339
Interest cost................................................. 11,084 10,164 9,213
Actual return on plan assets.................................. (35,557) 254 (8,853)
Net amortization and deferrals................................ 24,136 (10,440) (67)
-------- -------- -------
Net periodic retirement plan cost............................... $ 6,816 $ 7,783 $ 6,632
======== ======== =======
</TABLE>
In addition to the basic retirement plan, the Company has a separate
unfunded supplemental retirement plan which is limited to certain officers. The
plan is noncontributory with defined benefits. Senior officers who retire with
ten years or more of service with the Company are eligible to receive benefits.
Other officers who retire with 20 years or more of service with the Company are
eligible to receive benefits. Plan costs were $2 million in 1995, $2 million in
1994, and $1.5 million in 1993. The accumulated benefit obligation of the plan
was $14.9 million, including vested benefits of $13.9 million, at December 31,
1995. The Company also has an unfunded retirement plan for directors not covered
by the employee retirement plan. The cost and liability for this plan are not
significant.
The Company has a deferred compensation plan for all officers and members
of the Board. The plan provides the opportunity to defer from a minimum of
$2,000 up to 50 percent of annual compensation. The Company matches one-half of
amounts deferred up to six percent of an officer's annual salary. Payments of
compensation deferred, plus interest, commence upon the participant's retirement
in equal monthly installments over 10, 15, or 20 years, as determined by the
Company. Deferred compensation earns interest at a rate determined each January.
The interest rate represents 150 percent of Moody's Seasoned Corporate Bond
Index.
The Employees' Investment Plan (401k) provides for purchases of the
Company's common stock or certain other investments by eligible employees
through deductions of up to 16 percent of base compensation, subject to IRS
limitations. The Company matches one-half of amounts deferred up to six percent
of an employee's annual compensation. The cost of the plan was $2.3 million in
1995, $2.6 million in 1994, and $1.9 million in 1993.
The Company provides postretirement benefits other than pensions (PBOP) to
its qualified retirees for health care, dental, and life insurance. In December
1990, the FASB issued SFAS No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions." The statement requires the Company to account for
PBOP on an accrual basis rather than reporting these benefits on a pay-as-you-go
basis. The Company adopted SFAS No. 106 in January 1993. The PSCN, CPUC, and
FERC have approved the use of SFAS No. 106 for ratemaking purposes, subject to
certain conditions, including funding. The Company did not receive approval to
recover PBOP costs on an accrual basis in its Arizona rate jurisdictions, but
was authorized to continue to recover the pay-as-you-go costs for ratemaking
purposes. The Company began funding the non-Arizona portion of the PBOP
liability in 1994. Plan assets are combined with the pension plan assets in a
master trust.
61
<PAGE> 65
SOUTHWEST GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 9 -- EMPLOYEE POSTRETIREMENT BENEFITS (CONTINUED)
The following table sets forth the PBOP funded status and amounts
recognized on the Company's consolidated balance sheets and statements of
income.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------
1995 1994
---------------- -----------------
(THOUSANDS OF DOLLARS)
<S> <C> <C>
Accumulated postretirement benefit obligation
(APBO)
Retirees..................................... $(15,030) $(13,348)
Fully eligible actives....................... (1,956) (1,639)
Other active participants.................... (6,182) (4,524)
-------- --------
Total..................................... (23,168) (19,511)
Market value of plan assets.................... 1,647 697
APBO in excess of plan assets.................. (21,521) (18,814)
-------- --------
Unrecognized transition obligation............. 14,738 15,605
Unrecognized prior service cost................ -- --
Unrecognized loss.............................. 3,003 175
-------- --------
Accrued postretirement benefit liability....... $ (3,780) $ (3,034)
======== ========
Assumptions used to develop postretirement
benefit obligations were:
Discount rate................................ 7.25% 8.25%
Medical inflation............................ 9% graded to 5% 10% graded to 5%
Salary increases............................. 4.75% 5.50%
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1995 1994 1993
------ ------ ------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Net periodic postretirement benefit costs include the
following components:
Service cost........................................... $ 399 $ 473 $ 346
Interest cost.......................................... 1,562 1,472 1,394
Actual return on plan assets........................... (286) -- --
Net amortization and deferrals......................... 1,061 911 867
------ ------ ------
Net periodic postretirement benefit cost................. $2,736 $2,856 $2,607
====== ====== ======
</TABLE>
The Company makes fixed contributions, based on age and years of service,
to retiree spending accounts for the medical and dental costs of employees who
retire after 1988. The Company pays up to 100 percent of the medical coverage
costs for employees who retired prior to 1989. The medical inflation assumption
in the table above applies to the benefit obligations for pre-1989 retirees
only. This inflation assumption was estimated at ten percent in 1995 and
decreases one percent per year until 1997 and one-half of one percent per year
until 2003, at which time the average annual increase is projected to be five
percent. A one percent increase in these assumptions would change the
accumulated postretirement benefit obligation by approximately $900,000 at
December 31, 1995. Future annual benefit costs would increase $130,000.
62
<PAGE> 66
SOUTHWEST GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 10 -- INCOME TAXES
Income tax expense (benefit) consists of the following (thousands of
dollars):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1995 1994 1993
-------- -------- -------
<S> <C> <C> <C>
Current:
Federal........................................... $ 13,588 $16,481 $ 8,531
State............................................. 1,985 2,701 1,194
-------- ------- -------
15,573 19,182 9,725
-------- ------- -------
Deferred:
Federal........................................... (13,752) (4,441) (2,140)
State............................................. (982) (146) 623
-------- ------- -------
(14,734) (4,587) (1,517)
-------- ------- -------
Total income tax expense....................... $ 839 $14,595 $ 8,208
======== ======= =======
</TABLE>
Deferred income tax expense (benefit) consists of the following significant
components (thousands of dollars):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1995 1994 1993
-------- ------- -------
<S> <C> <C> <C>
Deferred federal and state:
Property-related items............................. $ 4,921 $ 2,441 $ 815
Purchased gas cost adjustments..................... (16,488) (5,531) 3,804
Self insurance..................................... (885) 1,161 (691)
All other deferred................................. (1,414) (1,782) (4,596)
-------- ------- -------
Total deferred federal and state................ (13,866) (3,711) (668)
-------- ------- -------
Deferred investment tax credit, net.................. (868) (876) (849)
-------- ------- -------
Total deferred income tax benefit............... $(14,734) $(4,587) $(1,517)
======== ======= =======
</TABLE>
The consolidated effective income tax rate for the period ended December
31, 1995 and the two prior periods differs from the federal statutory income tax
rate. The sources of these differences and the effect of each are summarized as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1995 1994 1993
----- ---- ----
<S> <C> <C> <C>
Federal statutory income tax rate........................... 35.0% 35.0% 35.0%
Net state tax liability................................... 9.0 4.3 6.1
Property-related items.................................... 24.1 2.1 5.2
Tax credits............................................... (22.7) (2.3) (3.9)
Tax exempt interest....................................... (13.8) -- (0.8)
Effect of Internal Revenue Service examination............ -- -- (5.2)
Corporate-owned life insurance............................ (12.5) (1.4) (0.2)
All other differences..................................... 4.9 0.6 1.2
----- ---- ----
Consolidated effective income tax rate...................... 24.0% 38.3% 37.4%
===== ==== ====
</TABLE>
63
<PAGE> 67
SOUTHWEST GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 10 -- INCOME TAXES (CONTINUED)
Deferred tax assets and liabilities consist of the following (thousands of
dollars):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1995 1994
-------- --------
<S> <C> <C>
Deferred tax assets:
Deferred income taxes for future amortization of ITC................. $ 13,256 $ 13,784
Employee benefits.................................................... 5,306 2,813
Regulatory balancing accounts........................................ 12,411 --
Other................................................................ 3,017 6,429
Valuation allowance.................................................. -- --
-------- --------
33,990 23,026
-------- --------
Deferred tax liabilities:
Property-related items, including accelerated depreciation........... 101,133 95,026
Property-related items previously flowed-through..................... 26,467 28,776
Unamortized ITC...................................................... 19,874 20,741
Regulatory balancing accounts........................................ -- 9,048
Debt-related costs................................................... 4,462 4,941
Other................................................................ 3,858 1,612
-------- --------
155,794 160,144
-------- --------
Net deferred tax liabilities........................................... $121,804 $137,118
======== ========
Current.............................................................. $(17,089) $ 6,943
Noncurrent........................................................... 138,893 130,175
-------- --------
Net deferred tax liabilities........................................... $121,804 $137,118
======== ========
</TABLE>
Prior to 1981, federal income tax expense for the gas segment was reduced
to reflect additional depreciation and other deductions claimed for income tax
purposes (flow-through method). Subsequently, deferred taxes have been provided
for all differences between financial book and taxable income (normalization
method) in all jurisdictions. The various utility regulatory authorities have
consistently allowed the recovery of previously flowed-through income tax
benefits on property related items by means of increased federal income tax
expense in determining cost of service for ratemaking purposes.
For regulatory and financial reporting purposes, the Company has deferred
recognition of investment tax credits (ITC) by amortizing the benefit over the
depreciable lives of the related properties.
64
<PAGE> 68
SOUTHWEST GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 11 -- QUARTERLY FINANCIAL DATA (UNAUDITED)
CONSOLIDATED QUARTERLY FINANCIAL DATA
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- -------- ------------ -----------
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
1995
Operating revenues................................ $203,521 $122,189 $ 91,433 $ 146,359
Operating income (loss)........................... 36,829 (2,873) (9,215) 33,671
Income (loss) from continuing operations.......... 14,449 (9,951) (13,353) 11,509
Income (loss) from discontinued operations........ 196 610 522 (18,864)
Net income (loss)................................. 14,645 (9,341) (12,831) (7,355)
Net income (loss) applicable to common stock...... 14,550 (9,436) (12,926) (7,377)
Earnings (loss) per share from continuing
operations*..................................... 0.67 (0.44) (0.56) 0.47
Earnings (loss) per share from discontinued
operations*..................................... 0.01 0.03 0.02 (0.77)
Earnings (loss) per share per common share*....... 0.68 (0.41) (0.54) (0.30)
1994
Operating revenues................................ $207,369 $108,407 $ 92,245 $ 191,532
Operating income (loss)........................... 47,519 (4,251) (8,302) 53,725
Income (loss) from continuing operations.......... 21,734 (10,735) (11,911) 24,436
Income (loss) from discontinued operations........ 976 954 746 101
Net income (loss)................................. 22,710 (9,781) (11,165) 24,537
Net income (loss) applicable to common stock...... 22,571 (9,919) (11,303) 24,442
Earnings (loss) per share from continuing
operations*..................................... 1.03 (0.52) (0.57) 1.15
Earnings (loss) per share from discontinued
operations*..................................... 0.04 0.05 0.03 --
Earnings (loss) per share per common share*....... 1.07 (0.47) (0.54) 1.15
1993
Operating revenues................................ $182,449 $100,306 $ 84,291 $ 172,059
Operating income (loss)........................... 34,454 (1,404) (8,534) 53,166
Income (loss) from continuing operations.......... 14,692 (7,106) (11,445) 17,610
Income (loss) from discontinued operations........ 2,434 (5,966) 4,101 1,086
Net income (loss)................................. 17,126 (13,072) (7,344) 18,696
Net income (loss) applicable to common stock...... 16,920 (13,275) (7,538) 18,558
Earnings (loss) per share from continuing
operations*..................................... 0.70 (0.35) (0.57) 0.85
Earnings (loss) per share from discontinued
operations*..................................... 0.12 (0.29) 0.20 0.05
Earnings (loss) per share per common share*....... 0.82 (0.64) (0.37) 0.90
</TABLE>
- ---------------
* The sum of quarterly earnings (loss) per average common share may not equal
the annual earnings (loss) per share due to the ongoing change in the weighted
average number of common shares outstanding.
The demand for natural gas is seasonal, and it is management's opinion that
comparisons of earnings for the interim periods do not reliably reflect overall
trends and changes in the Company's operations. Also, the timing of general rate
relief can have a significant impact on earnings for interim periods. See MD&A
for additional discussion of the Company's operating results.
65
<PAGE> 69
SOUTHWEST GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 12 -- DISCONTINUED OPERATIONS -- FINANCIAL SERVICES ACTIVITIES
In January 1996, the Company entered into a definitive agreement to sell
PriMerit Bank (the Bank), a wholly owned subsidiary, to Norwest Corporation
(Norwest) for approximately $175 million in cash. The intended use of the
proceeds will be to reduce outstanding long-term debt. The sale is expected to
be finalized in the third quarter of 1996, following receipt of shareholder and
various governmental approvals and satisfaction of other customary closing
conditions.
The Company estimates that the disposition of the Bank will result in a net
loss of approximately $13 million, which includes a pretax book loss of
approximately $3.1 million plus income taxes estimated at $9.9 million. The
income tax expense results from the Company's tax basis in the Bank being lower
than its book basis. The net loss is reported as loss on disposal of
discontinued segment in the 1995 consolidated financial statements.
Due to the pending sale of the Bank, the results of operations and net
assets of the financial services activities have been classified as discontinued
operations in the consolidated financial statements of the Company as of
December 31, 1995. Comparative consolidated financial statements of the Company
presented for previous years have been reclassified to reflect the financial
services activities as discontinued operations.
Income Statement Presentation. The amounts shown as discontinued
operations in the Consolidated Statements of Income consist of the income (loss)
from the Bank's stand-alone income statements adjusted for corporate carrying
costs allocated to the Bank to properly reflect the contribution of the
financial services activities to consolidated net income (loss). (See Note 13 of
the Notes to Consolidated Financial Statements for the complete stand-alone
financial statements of the Bank.) Included in the discontinued operations
amount shown in the consolidated income statement for 1995 is an accrual
relating to a proposed Savings Association Insurance Fund (SAIF) assessment
($7.2 million after tax) and a reversal of the goodwill impairment recorded by
the Bank. The estimated goodwill impairment recorded by the Bank is replaced in
the consolidated statements of income with the Company's loss on disposal
calculation.
A reconciliation of the Bank's stand-alone net income to the discontinued
operations and contribution to net income (loss) shown in the consolidated
statements of income for each of the three years in the period ended December
31, 1995 follows (thousands of dollars):
<TABLE>
<CAPTION>
1995 1994 1993
-------- ------- -------
<S> <C> <C> <C>
Stand-alone net income (loss) of PriMerit Bank................... $ (3,205) $ 7,673 $ 6,596
Goodwill impairment recorded by the Bank in 1995 arising from the
sale to Norwest................................................ 11,823 -- --
Allocation of corporate carrying costs, principally interest, net
of tax......................................................... (5,961) (4,896) (4,941)
SAIF accrual recorded in 1995 for consolidated purposes, net of
tax............................................................ (7,170) -- --
-------- ------- -------
Amount reported as discontinued operations..................... (4,513) 2,777 1,655
Accrual for estimated loss on disposal, net of tax............... (13,023) -- --
-------- ------- -------
Discontinued operations contribution to consolidated
net income (loss).................................... $(17,536) $ 2,777 $ 1,655
======== ======= =======
</TABLE>
Balance Sheet Presentation. The amounts shown as net assets of
discontinued operations in the Consolidated Balance Sheets represent the
Company's ownership of 100 percent of the common equity of the Bank. For years
prior to 1995, the Company's investment equaled the stand-alone equity of the
Bank (excluding the unrealized gain (loss) relating to securities covered by
SFAS No. 115). For 1995, the net assets of discontinued operations equals the
estimated realizable value to the Company of the net assets of the Bank. (See
the table below for a reconciliation of Bank's equity to the net assets of
discontinued operations as
66
<PAGE> 70
SOUTHWEST GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 12 -- DISCONTINUED OPERATIONS -- FINANCIAL SERVICES ACTIVITIES (CONTINUED)
shown on the consolidated balance sheet of the Company.) An accrual for the
anticipated loss on disposal, including taxes, is included in other accrued
liabilities in the consolidated balance sheet of the Company.
A reconciliation of the stand-alone equity of the Bank to the net assets of
discontinued operations shown in the consolidated balance sheets as of December
31, 1995 and 1994 follows (thousands of dollars):
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Stand-alone equity of PriMerit............................. $173,559 $166,388
Goodwill impairment recorded by the Bank in 1995........... 11,823 --
Eliminate SFAS No. 115 adjustment.......................... (1,409) 9,467
SAIF accrual recorded in 1995 for consolidated purposes,
net of tax............................................... (7,170) --
Other, net of tax.......................................... (1,310) --
-------- --------
Net assets of discontinued operations............ $175,493 $175,855
======== ========
</TABLE>
67
<PAGE> 71
SOUTHWEST GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 13 -- PRIMERIT BANK
PRIMERIT BANK
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1995 1994
---------- ----------
<S> <C> <C>
ASSETS
Cash and due from banks............................................. $ 46,759 $ 35,262
Cash equivalents.................................................... 72,991 88,660
Debt securities available for sale, at fair value................... 422,421 529,400
Debt securities held to maturity (fair value of $63,675 and
$99,403).......................................................... 64,254 101,880
Loans receivable held for sale (fair value of $6,032 and $2,135).... 5,855 2,114
Loans receivable, net of allowance for estimated losses of $16,353
and $17,659....................................................... 1,070,081 936,037
Real estate acquired through foreclosure, net of allowance for
estimated losses of $267 and $0................................... 3,136 7,631
Real estate held for sale or development, net of allowance for
estimated losses of $863 and $476................................. 247 771
Premises and equipment, net......................................... 20,282 21,666
FHLB stock, at cost................................................. 11,057 17,277
Income tax benefit.................................................. 1,358 4,055
Other assets........................................................ 6,622 5,928
Excess of cost over net assets acquired, net of impairment allowance
of $11,823 and $0................................................. 49,956 65,640
---------- ----------
Total assets.............................................. $1,775,019 $1,816,321
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Deposits............................................................ $1,266,071 $1,239,949
Securities sold under agreements to repurchase...................... 140,710 281,935
Advances from FHLB.................................................. 164,400 99,400
Notes payable....................................................... 7,995 8,135
Deferred income taxes............................................... 2,971 --
Other liabilities and accrued expenses.............................. 19,313 20,514
---------- ----------
Total liabilities......................................... 1,601,460 1,649,933
---------- ----------
Commitments and contingencies
STOCKHOLDER'S EQUITY:
Common stock, $1.00 par value; authorized -- 100,000 shares;
issued and outstanding -- 56,629 shares........................ 57 57
Additional paid-in capital........................................ 160,442 160,442
Unrealized gain (loss), net of tax, on debt securities available
for sale....................................................... 1,409 (9,467)
Retained earnings................................................. 11,651 15,356
---------- ----------
Total stockholder's equity................................ 173,559 166,388
---------- ----------
Total liabilities and stockholder's equity................ $1,775,019 $1,816,321
========== ==========
</TABLE>
See accompanying notes to PriMerit financial statements.
68
<PAGE> 72
SOUTHWEST GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 13 -- PRIMERIT BANK (CONTINUED)
PRIMERIT BANK
CONSOLIDATED STATEMENTS OF OPERATIONS
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Interest income............................................ $132,877 $118,434 $132,325
Interest expense........................................... 73,300 59,790 75,076
-------- -------- --------
Net interest income........................................ 59,577 58,644 57,249
Provision for estimated credit losses...................... (8,149) (7,230) (6,212)
-------- -------- --------
Net interest income after provision for estimated credit
losses................................................... 51,428 51,414 51,037
-------- -------- --------
Net loss from real estate operations....................... (196) (612) (910)
-------- -------- --------
Noninterest income (loss):
Gain on sale of loans.................................... 1,167 598 1,835
Loss on sale of loans.................................... (77) (351) (84)
Net gain on sale of debt securities...................... 970 34 7,973
Gain (loss) on secondary marketing hedging activities.... (120) 389 (968)
Loss on sale -- Arizona branches......................... -- -- (6,262)
Loan related fees........................................ 1,455 1,165 1,025
Deposit related fees..................................... 7,589 6,788 6,397
Gain on sale of credit card receivables.................. -- 1,689 --
Other income............................................. 186 319 2,133
-------- -------- --------
Total noninterest income......................... 11,170 10,631 12,049
-------- -------- --------
General and administrative expenses........................ 44,395 43,508 48,296
Amortization of excess of cost over net assets acquired.... 3,861 3,861 3,984
Impairment of excess of cost over net assets acquired...... 11,823 -- --
-------- -------- --------
Income before income taxes................................. 2,323 14,064 9,896
Income tax expense......................................... 5,528 6,391 6,345
-------- -------- --------
Net income (loss) before cumulative effect of accounting
change................................................... (3,205) 7,673 3,551
Cumulative effect of change in method of accounting for
income taxes............................................. -- -- 3,045
-------- -------- --------
Net income (loss).......................................... $ (3,205) $ 7,673 $ 6,596
======== ======== ========
</TABLE>
See accompanying notes to PriMerit financial statements.
69
<PAGE> 73
SOUTHWEST GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 13 -- PRIMERIT BANK (CONTINUED)
PRIMERIT BANK
CONSOLIDATED STATEMENTS OF CASH FLOWS
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).......................................... $ (3,205) $ 7,673 $ 6,596
Adjustments to net income (loss) to reconcile to net cash
provided by operating activities
Cumulative effect of change in method of accounting for
income taxes.......................................... -- -- (3,045)
Depreciation and amortization............................ 3,819 3,918 4,511
Provisions for estimated losses.......................... 8,311 7,393 7,222
Net gains on sales of loans, servicing, and credit card
receivables........................................... (1,090) (1,936) (1,751)
Proceeds from sales of trading debt securities........... -- 5,074 --
Net gains on sales of debt securities.................... (970) (34) (7,973)
Loss (gain) on secondary marketing hedging activities.... 120 (389) 968
Dividends on FHLB stock.................................. (661) (838) (594)
Amortization of deferred fees............................ (3,649) (4,194) (3,424)
Amortization of premiums, discounts and deferred gains... 4,249 2,265 3,291
Amortization of excess of cost over net assets
acquired.............................................. 3,861 3,861 3,984
Impairment of excess of cost over net assets acquired.... 11,823 -- --
Loss on sale of Arizona branches......................... -- -- 6,262
Increase (decrease) in income taxes payable.............. (891) 6,837 (2,013)
Deferred income tax provision............................ 702 1,098 12,478
(Increase) decrease in other assets...................... (421) (650) 1,964
Increase (decrease) in other liabilities................. (1,177) 565 10,387
--------- --------- ---------
Net cash provided by operating activities........... 20,821 30,643 38,863
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities and principal repayments of debt
securities............................................ 150,990 291,747 293,788
Purchase of debt securities.............................. -- (296,349) (113,078)
Proceeds from sales of debt securities available for
sale.................................................. 3,118 -- 360,853
Proceeds from sales of debt securities held to
maturity.............................................. 4,420 -- --
Proceeds from sale of FHLB stock......................... 6,951 -- 902
Principal repayments of loans............................ 343,218 311,236 330,033
Loan originations........................................ (524,849) (466,260) (516,642)
Proceeds from sales of loans and loan servicing rights
and credit card receivables........................... 38,407 46,090 78,353
Proceeds (payment) for termination of secondary marketing
hedges................................................ (120) 389 (968)
Proceeds from sales of real estate held for
development........................................... 1,035 4,294 1,926
Expenditures for real estate held for development........ (675) (1,140) (3,211)
Proceeds from sales of real estate acquired through
foreclosure........................................... 6,145 4,048 22,916
Proceeds from sale of Arizona assets and services........ -- -- 6,718
Net change to premises and equipment..................... (2,890) (3,252) (1,521)
--------- --------- ---------
Net cash provided by (used in) investing activities...... 25,750 (109,197) 460,069
--------- --------- ---------
</TABLE>
See accompanying notes to PriMerit financial statements.
70
<PAGE> 74
SOUTHWEST GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 13 -- PRIMERIT BANK (CONTINUED)
PRIMERIT BANK
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
1995 1994 1993
----------- ----------- ------------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from deposits................................ $ 5,378,949 $ 4,872,023 $ 9,933,585
Sale and assumption of Arizona deposit liabilities.... -- -- (320,902)
Payments for maturing deposits........................ (5,352,827) (4,839,926) (10,026,400)
Proceeds from securities sold under agreements to
repurchase.......................................... 684,428 281,333 1,499,893
Repayment of securities sold under agreements to
repurchase.......................................... (825,653) (258,439) (1,617,711)
Proceeds from other borrowings........................ 118,000 31,900 65,000
Repayment of other borrowings......................... (53,140) (3,630) (45,375)
Dividends paid to Southwest........................... (500) -- --
----------- ----------- ------------
Net cash provided by (used in) financing
activities................................... (50,743) 83,261 (511,910)
----------- ----------- ------------
Net increase (decrease) in cash and cash equivalents.... (4,172) 4,707 (12,978)
Cash and cash equivalents at the beginning of the
year.................................................. 123,922 119,215 132,193
----------- ----------- ------------
Cash and cash equivalents at December 31................ $ 119,750 $ 123,922 $ 119,215
=========== =========== ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid (received) during the year for:
Interest, net of amount capitalized................... $ 23,305 $ 14,521 $ 18,291
Income taxes, net..................................... $ 5,717 $ (1,517) $ (4,103)
</TABLE>
See accompanying notes to PriMerit financial statements.
71
<PAGE> 75
SOUTHWEST GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 13 -- PRIMERIT BANK (CONTINUED)
Note A -- Summary of Significant Accounting Policies
----------------------------------------------------
Business
PriMerit Bank and subsidiaries (the Bank), a wholly owned subsidiary of
Southwest Gas Corporation (Southwest or the Company), operates in the thrift
industry as a federal savings bank with membership in the Federal Home Loan Bank
(FHLB) system. The Bank's deposit accounts are insured by the Savings
Association Insurance Fund, a division of the Federal Deposit Insurance
Corporation, up to the maximum permitted by law.
The Bank is engaged in retail and commercial banking. The Bank's principal
business is to attract deposits from the general public and to make loans. The
loans may be secured by real estate or other collateral for borrowers to
purchase, construct, refinance, or improve such collateral.
Revenues are derived from interest income on single-family residential
loans; debt securities; commercial, construction, and corporate loans; consumer
loans, and to a lesser extent, deposit and loan related fees. The Bank occupies
facilities at 25 locations in Nevada, of which 17 are located in southern Nevada
and 8 are in northern Nevada.
The Bank follows generally accepted accounting principles (GAAP) as applied
to the banking and thrift industries. The application of GAAP requires the use
of management estimates which are periodically reviewed. Actual results may
differ from those estimates used.
Sale of Bank/Impairment of Goodwill
In January 1996, Southwest entered into a definitive agreement to sell the
Bank to Norwest Corporation for approximately $175 million in cash, subject to
regulatory and stockholder approval. The sale is anticipated to close in the
third quarter of 1996. The Bank recorded an $11.8 million impairment loss in
1995 on its excess of cost over net assets acquired (goodwill) originating from
Southwest's acquisition of the Bank in 1986. The impairment loss is based upon
the difference between the purchase price compared to the Bank's projected
equity on the closing date and will be adjusted in future periods for changes in
the estimated projected closing equity. The Bank will record no goodwill
amortization expense in 1996 as a result of the pending acquisition and related
impairment loss.
The separate stand-alone financial results and disclosures reported for the
Bank on a going-concern basis differ from the results and disclosures reported
for the Bank as a discontinued operation. See Note 12 of the Notes to
Consolidated Financial Statements for reconciliations of Bank stand-alone
financial information to the amounts shown as discontinued operations in the
consolidated financial statements. In 1996, while Southwest will continue, as
required, to disclose the ongoing operating results of the Bank through the
close of the proposed transaction, those amounts will not be realized or
recognized by Southwest in its consolidated financial statements, consistent
with the terms of the sales agreement.
Sale of Arizona Branch Operations
In May 1993, the Bank signed a Definitive Agreement with World Savings and
Loan Association (World) of Oakland, California, whereby World agreed to acquire
the Bank's Arizona branch operations, including all related deposit liabilities
of approximately $321 million (Arizona sale). The transaction was approved by
the appropriate regulatory authorities and closed in August 1993. During 1993,
the Bank recorded a write-off of $5.9 million in goodwill and $367,000 in other
net costs related to the Bank's Arizona operations included in Loss on
sale -- Arizona branches in the Bank's Statements of Operations.
Excess of Cost Over Net Assets Acquired
Excess of cost over net assets acquired (goodwill) arose from Southwest's
acquisition of the Bank in 1986 and from the Bank's acquisition of a thrift
institution in 1988. The goodwill which arose from the acquisition of a thrift
institution in 1988 was written-off in conjunction with the Arizona sale in
1993. Goodwill related to
72
<PAGE> 76
SOUTHWEST GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 13 -- PRIMERIT BANK (CONTINUED)
Southwest's acquisition of the Bank in 1986 was being amortized to expense over
a 25 year period using the straight-line method prior to the impairment loss
described above.
Principles of Consolidation
The accompanying financial statements consolidate the accounts of the Bank
and all of its subsidiaries. All material intercompany transactions and accounts
have been eliminated.
Principles of Statements of Cash Flows
For purposes of reporting cash flows, cash and cash equivalents include
cash on hand, amounts due from banks, and federal funds sold. Generally, federal
funds are sold for one business day. In addition, the Bank considers all debt
securities with maturities of three months or less to be cash equivalents. The
statements of cash flows present gross cash receipts and disbursements from
lending and deposit gathering activities.
Debt Securities
On December 31, 1993, the Bank adopted SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." The statement requires
classification of investments in debt and equity securities into one of three
categories: held to maturity, available for sale, or trading. At the time of
purchase, the Bank designates a security into one of these three categories.
Debt securities classified as held to maturity are those which the Bank has
the positive intent and ability to hold to maturity. These securities are
carried at cost adjusted for the amortization of the related premiums or
accretion of the related discounts into interest income using methods
approximating the level-yield method or a method based on principal repayments
over the actual lives of the underlying loans. The Bank has the ability and it
is its policy to hold the debt securities so designated until maturity. The
Bank's current accounting policy states that no security with a remaining
maturity greater than 25 years may be designated as held to maturity.
Securities classified as available for sale are those which the Bank
intends to hold for an indefinite period and may be sold in response to changes
in market interest rates, changes in the security's prepayment risk, the Bank's
need for liquidity, changes in the availability and yield of alternative
investments, and other asset/liability management needs. Securities classified
as available for sale are stated at fair value in the Bank's Statements of
Financial Condition. Changes in fair value are reported net of tax as a separate
component of stockholder's equity. At December 31, 1995, the Bank recorded a
$1.4 million unrealized gain, net of tax, on $422 million of debt securities
available for sale. Subsequent gains or losses are recorded into income when
these securities are sold.
Trading securities are those which are bought and held principally for the
purpose of selling them in the near term. Trading securities include MBS held
for sale in conjunction with mortgage banking activities. Trading securities are
measured at fair value with changes in fair value included in earnings. At
December 31, 1995 and 1994, no securities were designated as trading securities.
In November 1995, the Financial Accounting Standards Board (FASB) issued a
Special Report, "A Guide to Implementation of Statement 115 on Accounting for
Certain Investments in Debt and Equity Securities" (the Special Report). The
Special Report allowed a one-time opportunity, until December 31, 1995, for
institutions to reassess the appropriateness of their designations of all
securities and transfer debt securities from their held-to-maturity portfolio
before calendar year-end 1995, without calling into question their intent to
hold other debt securities to maturity in the future. The Bank reassessed its
securities designations in light of the Special Report guidance and made no
reclassifications.
73
<PAGE> 77
SOUTHWEST GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 13 -- PRIMERIT BANK (CONTINUED)
Loans Receivable
Real estate loans are recorded at cost, net of the undisbursed loan funds,
loan discounts, unearned interest, deferred loan fees and provisions for
estimated credit losses. Interest on loans receivable is generally credited to
income when earned.
Fees are charged for originating and in some cases, for committing to
originate loans. In accordance with SFAS No. 91, "Accounting for Nonrefundable
Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct
Costs of Leases," loan origination and commitment fees, offset by certain direct
origination costs, are being deferred, and the net amounts amortized as an
adjustment of the related loans' yields over the contractual lives thereof.
Unamortized fees are recognized as income upon the sale or payoff of the loan.
Unearned interest, premiums and discounts on consumer installment, and
equity and property improvement loans are amortized to income over the
contractual lives of the loans using a method which approximates the level-yield
method.
On January 1, 1995, the Bank adopted SFAS No. 114, "Accounting by Creditors
for Impairment of a Loan," and SFAS No. 118, "Accounting by Creditors for
Impairment of a Loan -- Income Recognition and Disclosures." SFAS No. 114
requires the measurement of loan impairment to be based on the present value of
expected future cash flows discounted at the loan's original effective interest
rate or the fair value of the underlying collateral on collateral-dependent
loans. SFAS No. 118 amends SFAS No. 114 to allow a creditor to use existing
methods for recognizing interest income on impaired loans. The Bank's initial
adoption of these statements on January 1, 1995 did not have a material impact
on its financial position or results of operations.
Mortgage Banking Activities
The Bank's accounting policy designates all fixed-rate interest-sensitive
assets with maturities greater than or equal to 25 years (which possess normal
qualifying characteristics required for sale) as held for sale or available for
sale, along with single-family residential loans originated for specific sales
commitments. Fixed-rate interestsensitive assets with maturities less than 25
years, and all adjustable-rate interest-sensitive assets continue to be held for
investment unless designated as held for sale or available for sale at the time
of origination or purchase.
Gains and losses on loan and debt security sales are determined using the
specific identification method. Gains and losses are recognized to the extent
that sales proceeds exceed or are less than the cost basis of the loans and debt
securities. Loans sold with servicing retained have included a normal servicing
fee to be earned by the Bank as income over the life of the loan. Loans held for
sale may be securitized into mortgage-backed securities and designated as
trading securities.
In May 1995, the FASB issued SFAS No. 122, "Accounting for Mortgage
Servicing Rights." The statement eliminates the previous distinction between
purchased and originated mortgage servicing rights. The statement requires an
allocation of the cost basis of a mortgage loan between the mortgage servicing
rights and the loan when mortgage loans are sold or securitized and the
servicing is retained. The Bank adopted SFAS No. 122 effective April 1, 1995. As
a result of implementation, pretax earnings increased $344,000 ($224,000, after
tax). The amount of mortgage servicing rights capitalized during 1995 was
$486,000, including $109,000 in allocated costs for loans subject to definitive
sales agreements. Amortization for the year was $33,000.
The servicing rights are being amortized over their estimated lives using a
method approximating a level yield method. The book value of capitalized
mortgage servicing rights at December 31, 1995 was $350,000. As all servicing
rights capitalized during the year have been on new loan originations and no
significant change in
74
<PAGE> 78
SOUTHWEST GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 13 -- PRIMERIT BANK (CONTINUED)
interest rates or servicing rights' values have occurred, fair value is
estimated to approximate book value at December 31, 1995.
Real Estate Acquired Through Foreclosure
Real estate acquired through foreclosure is stated at the lower of cost or
fair value less costs to sell. In 1994, real estate acquired through foreclosure
included loans foreclosed in-substance, representing loans accounted for as
foreclosed property even though actual foreclosure had not occurred. Although
the collateral underlying these loans had not been repossessed, the borrower had
little or no equity in the collateral at its current estimated fair value.
Proceeds for repayment were expected to come only from the operation or sale of
the collateral, and it was doubtful the borrower would rebuild equity in the
collateral or repay the loan by other means in the foreseeable future. Included
in real estate acquired through foreclosure is $2.9 million of loans foreclosed
in-substance at December 31, 1994. Upon adoption of SFAS No. 114 in the first
quarter of 1995, $2.9 million of in-substance foreclosed assets were
reclassified on the Bank's Consolidated Statement of Financial Condition from
real estate acquired through foreclosure to loans receivable as SFAS No. 114
eliminated the in-substance designation. No other financial statement impact
resulted from the Bank's adoption of SFAS No. 114. Write downs to fair value,
disposition gains and losses, and operating income and costs are charged to the
allowance for estimated credit losses.
Allowance for Estimated Credit Losses
On a routine basis, management evaluates the adequacy of the allowances for
estimated losses on loans, investments, and real estate and establishes
additions to the allowances through provisions to expense. The Bank utilizes a
comprehensive internal asset review system and valuation allowance methodology.
Valuation allowances are established for each of the loan and real estate
portfolios for estimated losses. A number of factors are taken into account in
determining the adequacy of the level of allowances including management's
review of the extent of existing risks in the portfolios and of prevailing and
anticipated economic conditions, actual loss experience, delinquencies, regular
reviews of the quality of the loan, investment, and real estate portfolios and
examinations by regulatory authorities.
Charge-offs are recorded on specific assets when it is determined that the
fair or net realizable value of an asset is below the carrying value. When a
loan is foreclosed, the asset is written down to fair value less costs to sell
based on a current appraisal of the subject property.
While management uses currently available information to evaluate the
adequacy of allowances and to estimate identified losses for charge-off,
ultimate losses may vary from current estimates. Adjustments to estimates are
charged to earnings in the period in which they become known.
Premises and Equipment
Depreciation and amortization of premises and equipment are provided using
the straight-line method over the estimated useful lives of the various classes
of assets. Maintenance and repairs are charged to expense as incurred. Major
expenditures for renewals and betterments are capitalized and depreciated over
their estimated useful lives.
Interest Rate Exchange Agreements
The derivative financial instruments approved for the Bank to use to hedge
its exposure to interest rate risk (IRR) include: interest rate swaps, interest
rate caps, interest rate collars, interest rate futures, and put and call
options. These instruments are used only to hedge asset and liability portfolios
and are not used for
75
<PAGE> 79
SOUTHWEST GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 13 -- PRIMERIT BANK (CONTINUED)
speculative purposes. Premiums, discounts, and fees associated with interest
rate exchange agreements are amortized to expense on a straight-line basis over
the contractual lives of the agreements. The net interest received or paid is
reflected in interest expense as a cost of hedging. Gains or losses resulting
from the early cancellation of agreements hedging assets and liabilities which
remain outstanding are deferred and amortized over the remaining contractual
lives. Gains or losses are recognized in the current period if the hedged asset
or liability is retired.
Income Taxes
The Bank files a consolidated federal income tax return with Southwest.
Income taxes for the Bank are provided for on a separate return basis. On
January 1, 1993, the Bank adopted SFAS No. 109, "Accounting for Income Taxes."
SFAS No. 109 supersedes Accounting Principles Board Opinion (APB) No. 11 and
SFAS No. 96. The statement utilizes the liability method for recognition and
measurement of income taxes and allows recognition of deferred tax assets. SFAS
No. 109 generally eliminates on a prospective basis, APB No. 23 exceptions,
including the tax bad debt reserve of savings and loan institutions. Under SFAS
No. 109, no deferred taxes are provided on bad debt reserves arising prior to
December 31, 1987, unless it becomes apparent that those differences will
reverse in the foreseeable future. Deferred taxes are provided on bad debt
reserves arising after December 31, 1987. The Bank adopted SFAS No. 109 on a
prospective basis, with the cumulative effect of this accounting change
amounting to a reduction of financial statement tax liability of $3 million in
1993.
Pension Plan
It is the policy of the Bank to reflect in the projected benefit obligation
all benefit improvements to which the Bank is committed as of the current
valuation date. The Bank uses the market value of assets to determine pension
expense and amortizes the increases in prior service costs over the expected
future service of active participants as of the date such costs are first
recognized.
Reclassifications
Certain reclassifications have been made to conform the prior years with
the current year presentation.
Note B -- Fair Value of Financial Instruments
---------------------------------------------
Fair value estimates of financial instruments were made at a discrete point
in time based on relevant market information and other information about the
financial instruments. Because no active market exists for a significant portion
of the Bank's financial instruments, fair value estimates were based on
judgments regarding current economic conditions, risk characteristics of various
financial instruments, prepayment assumptions, future expected loss experience,
and other factors. These estimates are subjective in nature and involve
uncertainties and matters of significant judgment and therefore cannot be
considered as precise. Changes in assumptions could significantly affect the
estimates.
The fair value estimates are disclosed based on existing on- and
off-balance sheet financial instruments, without attempting to estimate the
value of existing and anticipated future customer relationships and the value of
assets and liabilities that were not considered financial instruments.
Significant assets and liabilities that were not considered financial assets or
liabilities include the Bank's retail branch network; deferred tax assets and
liabilities; furniture, fixtures, and equipment; and goodwill.
The Bank intends to hold a significant portion of its assets and
liabilities to their stated maturities. Therefore, the Bank does not intend to
realize any significant differences between carrying value and fair value
76
<PAGE> 80
SOUTHWEST GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 13 -- PRIMERIT BANK (CONTINUED)
through sale or other disposition. No attempt should be made to adjust
stockholder's equity to reflect the following fair value disclosures.
Fair value estimates, methods, and assumptions are set forth below for the
Bank's financial instruments as of December 31 (thousands of dollars):
<TABLE>
<CAPTION>
1995 1994
----------------------- -----------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
ASSETS
Cash and due from banks....................... $ 46,759 $ 46,759 $ 35,262 $ 35,262
Cash equivalents.............................. 72,991 72,991 88,660 88,660
Debt securities available for sale............ 422,421 422,421 529,400 529,400
Debt securities held to maturity.............. 64,254 63,675 101,880 99,403
Loans receivable held for sale................ 5,855 6,050 2,114 2,135
Loans receivable, net......................... 1,070,081 1,093,972 936,037 897,723
Federal Home Loan Bank stock.................. 11,057 11,057 17,277 17,277
Originated mortgage servicing rights.......... 350 350 -- --
LIABILITIES
Deposits...................................... 1,266,071 1,267,516 1,239,949 1,238,127
Securities sold under agreements to
repurchase................................. 140,710 140,886 281,935 282,155
Advances from FHLB............................ 164,400 171,166 99,400 97,565
Notes payable................................. 7,995 8,020 8,135 8,174
</TABLE>
<TABLE>
<CAPTION>
1995 1994
-------------------- -------------------
FAIR FAIR
COMMITMENT VALUE COMMITMENT VALUE
---------- ------- ---------- ------
<S> <C> <C> <C> <C>
OFF-BALANCE SHEET
Outstanding commitments to originate loans.......... $ 86,891 $ 137 $ 46,387 $ (420)
Commercial and other letters of credit.............. 4,824 25 707 6
Interest rate swaps................................. 98,200 (4,865) 72,450 2,986
Loan servicing rights............................... 397,572 4,366 415,097 4,958
Outstanding firm commitments to sell loans and
MBS.............................................. 7,475 (61) 2,544 (2)
Outstanding master commitments to sell loans........ 10,500 (2) 116,097 (14)
Outstanding commitments to builders................. -- -- 10,543 (33)
</TABLE>
The fair value of cash and due from banks, cash equivalents, and FHLB stock
was estimated as the carrying value. This was based upon the short-term nature
of the instruments and in the case of FHLB stock, the book value represents the
price at which the FHLB will redeem the stock. The fair value of debt securities
held to maturity, debt securities available for sale, and loans receivable held
for sale was estimated using direct broker quotes and quoted market prices, with
the exception of privately issued debt securities and collateralized mortgage
obligation (CMO) residuals. Privately issued debt securities were valued based
on the estimated fair value of the underlying loans. CMO residuals were valued
using the discounted estimated future cash flows from these investments. The
fair value for securities sold under agreements to repurchase and notes payable
was estimated by discounting the future cash flows using market and dealer
quoted rates available to the Bank for debt with the same remaining maturities
and characteristics. The fair value for advances from FHLB was estimated using
the quoted cost to prepay the advances.
77
<PAGE> 81
SOUTHWEST GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 13 -- PRIMERIT BANK (CONTINUED)
Fair values for loans receivable were estimated for portfolios of loans
with similar financial characteristics. Loans were segregated by type, such as
commercial, commercial real estate, residential mortgage, installment, and other
consumer. Each loan category was further segregated into fixed- and
adjustable-rate interest terms. Fair value for single-family residential loans
was estimated by discounting the estimated future cash flows from these
instruments using quoted market rates and dealer prepayment assumptions. Fair
value for commercial mortgage, construction, land, and other commercial loans
was derived by discounting the estimated future cash flows from these
instruments using the rate that loans with similar maturity and underwriting
characteristics would be made on December 31, 1995 or 1994, as applicable. Fair
value for consumer loans was estimated using dealer quotes for securities backed
by similar collateral. The book value for the allowance for estimated credit
losses was used as the fair value estimate for credit losses within the entire
loan portfolio. Originated servicing rights capitalized during the year have
been on new loan originations. These new loan originations have had no
significant adverse changes in interest rates or servicing rights values during
the year. Fair value of originated servicing rights is estimated to approximate
book value at December 31, 1995.
The fair value of commitments to originate loans was estimated by
calculating a theoretical gain or loss on the sale of funded loans considering
the difference between current levels of interest rates and the committed loan
rates. Letters of credit were valued based on fees currently charged for similar
agreements. The fair value of interest rate swaps was determined by using
various dealer quotes. The fair value for loan servicing rights originated prior
to 1995 was estimated based upon dealer and market quotes for the incremental
price paid for loans sold servicing released, adjusted for the age of the
portfolio and the type of loan. Outstanding firm and master commitments to
purchase and sell loans and debt securities were valued based on the market and
dealer quotes to terminate or fill the commitments.
The fair value of demand, savings, and money market deposits was estimated
at book value as reported in the financial statements since it represents the
amount payable on demand. The fair value of fixed maturity deposits was
estimated using the rates currently offered by the Bank for deposits with
similar remaining maturities. The fair value of deposits does not include an
estimate of the long-term relationship value of the Bank's deposit customers or
the benefit that results from the low cost funding provided by deposit
liabilities compared to the cost of borrowing funds in the market.
Note C -- Cash Equivalents
--------------------------
Cash equivalents are stated at cost, which approximates fair value, and
include the following (thousands of dollars):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1995 1994
------- -------
<S> <C> <C>
Securities purchased under resale agreements....... $67,789 $77,657
Federal funds sold................................. 5,202 11,003
------- -------
$72,991 $88,660
======= =======
</TABLE>
Securities purchased under resale agreements of $67.8 million at December
31, 1995 and $77.7 million at December 31, 1994 matured within 12 days and 11
days, respectively, and called for delivery of the same securities. The
collateral for these agreements consisted of debt securities which at December
31, 1995 and 1994 were held on the Bank's behalf by its safekeeping agents for
various investment bankers. The securities purchased under resale agreements
represented 39 percent of the Bank's stockholder's equity at December 31, 1995
and 47 percent at December 31, 1994.
78
<PAGE> 82
SOUTHWEST GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 13 -- PRIMERIT BANK (CONTINUED)
The average amount of securities purchased under resale agreements
outstanding during the years ended December 31, 1995 and 1994 were $31.5 million
and $36.2 million, respectively. The maximum amount of resale agreements
outstanding at any month end was $73.2 million during 1995 and $77.7 million
during 1994.
Note D -- Debt Securities Held to Maturity and Debt Securities Available for
------------------------------------------------------------------
Sale
----
Debt securities held to maturity are stated at amortized cost. The yields
are computed based upon amortized cost. The amortized cost, estimated fair
values, and yields of debt securities held to maturity are as follows (thousands
of dollars):
<TABLE>
<CAPTION>
TOTAL TOTAL ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
DECEMBER 31, 1995 COST GAINS LOSSES VALUE YIELD
----------------------------------------- --------- ---------- ---------- --------- -----
<S> <C> <C> <C> <C> <C>
Corporate issue MBS...................... $ 43,964 $ 68 $ 964 $43,068 7.99%
U.S. Treasury securities................. 20,290 317 -- 20,607 7.37%
-------- ---- ------ ------- ----
Total.......................... $ 64,254 $385 $ 964 $63,675 7.79%
======== ==== ====== ======= ====
DECEMBER 31, 1994
-----------------
Corporate issue MBS...................... $ 60,922 $ 50 $2,292 $58,680 7.25%
U.S. Treasury securities................. 40,958 -- 235 40,723 8.01%
-------- ---- ------ ------- ----
Total.......................... $101,880 $ 50 $2,527 $99,403 7.55%
======== ==== ====== ======= ====
</TABLE>
The following schedule of the expected maturity of debt securities held to
maturity is based upon dealer prepayment expectations and historical prepayment
activity (thousands of dollars):
<TABLE>
<CAPTION>
EXPECTED/CONTRACTUAL MATURITY
-------------------------------------------------------
AFTER AFTER AFTER
ONE YEAR FIVE YEARS TEN YEARS
BUT BUT BUT
WITHIN WITHIN WITHIN WITHIN TOTAL
ONE FIVE TEN TWENTY AMORTIZED
DECEMBER 31, 1995 YEAR YEARS YEARS YEARS COST
--------------------------------------- ------- -------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
Corporate issue MBS.................... $11,360 $27,853 $4,596 $155 $43,964
U.S. Treasury securities............... 20,290 -- -- -- 20,290
------- ------- ------ ---- -------
Total........................ $31,650 $27,853 $4,596 $155 $64,254
======= ======= ====== ==== =======
</TABLE>
Debt securities available for sale are stated at fair value. The yields are
computed based upon amortized cost. The amortized cost, estimated fair values,
and yields of debt securities available for sale are as follows (thousands of
dollars):
<TABLE>
<CAPTION>
TOTAL TOTAL ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
DECEMBER 31, 1995 COST GAINS LOSSES VALUE YIELD
--------------------------------------- --------- ---------- ---------- --------- -----
<S> <C> <C> <C> <C> <C>
GNMA -- MBS............................ $ 5,615 $ 318 $ -- $ 5,933 8.27%
FHLMC -- MBS........................... 234,955 4,417 446 238,926 7.45%
FNMA -- MBS............................ 96,220 602 1,928 94,894 7.07%
CMO.................................... 67,042 28 711 66,359 5.50%
Corporate issue MBS.................... 16,420 22 133 16,309 7.25%
-------- ------ ------ -------- ----
Total........................ $420,252 $5,387 $3,218 $422,421 7.06%
======== ====== ====== ======== ====
</TABLE>
79
<PAGE> 83
SOUTHWEST GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 13 -- PRIMERIT BANK (CONTINUED)
<TABLE>
<CAPTION>
TOTAL TOTAL ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
DECEMBER 31, 1994 COST GAINS LOSSES VALUE YIELD
---------------------------------------- --------- ---------- ---------- --------- -----
<S> <C> <C> <C> <C> <C>
GNMA -- MBS............................. $ 6,564 $ 70 $ 237 $ 6,397 8.29%
FHLMC -- MBS............................ 307,082 745 6,931 300,896 6.64%
FNMA -- MBS............................. 112,892 154 3,938 109,108 7.11%
CMO..................................... 92,097 928 4,645 88,380 5.92%
Corporate issue MBS..................... 20,225 11 719 19,517 7.24%
Obligations of U.S. Government
corporations and agencies............. 5,105 -- 3 5,102 5.83%
-------- ------ ------- -------- ----
Total......................... $543,965 $1,908 $16,473 $529,400 6.65%
======== ====== ======= ======== ====
</TABLE>
The following schedule reflects the expected maturity of MBS and CMO and
the contractual maturity of all other debt securities available for sale. The
expected maturity of MBS and CMO are based upon dealer prepayment expectations
and historical prepayment activity, and can change based upon a number of
factors, including the level of market interest rates (thousands of dollars).
<TABLE>
<CAPTION>
EXPECTED/CONTRACTUAL MATURITY
-----------------------------------------------------------------
AFTER AFTER AFTER
ONE YEAR FIVE YEARS TEN YEARS
BUT BUT BUT
WITHIN WITHIN WITHIN WITHIN TOTAL
ONE FIVE TEN TWENTY ESTIMATED
DECEMBER 31, 1995 YEAR YEARS YEARS YEARS FAIR VALUE
---------------------------- -------- -------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C>
GNMA--MBS................... $ 1,375 $ 3,780 $ 778 $ -- $ 5,933
FHLMC--MBS.................. 60,947 148,188 25,625 4,166 238,926
FNMA--MBS................... 14,808 46,644 22,346 11,096 94,894
CMO......................... 24,400 41,661 298 -- 66,359
Corporate issue MBS......... 3,027 10,855 1,661 766 16,309
-------- -------- ------- ------- --------
Total............. $104,557 $251,128 $50,708 $16,028 $422,421
======== ======== ======= ======= ========
</TABLE>
Proceeds, gains, and losses from the sales of debt securities are
summarized as follows (thousands of dollars):
<TABLE>
<CAPTION>
1995 SALES 1994 SALES 1993 SALES
----------------------------- ----------------------------- ------------------------------
PROCEEDS GAINS (LOSSES) PROCEEDS GAINS (LOSSES) PROCEEDS GAINS (LOSSES)
-------- ----- -------- -------- ----- -------- -------- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Held to maturity.... $4,420 $ -- $ -- $ -- $-- $ -- $ -- $ -- $ --
Available for
sale.............. 3,118 970 -- -- -- -- 360,853 8,317 (344)
Trading............. -- -- -- 5,074 56 (22) -- -- --
------ ---- ---- ------ --- ---- -------- ------ -----
Total............... $7,538 $970 $ -- $5,074 $56 $(22) $360,853 $8,317 $(344)
====== ==== ==== ====== === ==== ======== ====== =====
</TABLE>
In 1991, the Bank purchased $10 million of adjustable-rate MBS issued by
the Resolution Trust Corporation. The securities were rated AA by Standard &
Poor's (S&P) and Aa2 by Moody's on the dates of issuance and purchase. When the
Bank implemented SFAS No. 115 on December 31, 1993, these securities were
designated as held to maturity. The securities were still rated AA and Aa2 at
that time. The loans underlying the securities were affected by high delinquency
and foreclosure rates, and higher than anticipated losses on the ultimate
disposition of real estate acquired through foreclosure. This resulted in rating
agency downgrades of the securities beginning in July 1994, and substantial
deterioration in the amount of the loss absorption capacity provided by credit
enhancement features. At December 31, 1994, the securities were performing
according to their contractual terms, and all realized losses from the
disposition of foreclosed real
80
<PAGE> 84
SOUTHWEST GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 13 -- PRIMERIT BANK (CONTINUED)
estate were being absorbed by credit enhancement features of the securities. In
April 1995, S&P and Moody's lowered their ratings on the securities to the below
investment grade ratings of BB and Ba3, respectively. As a result of this
deterioration, the Bank determined that the securities should be considered
"other than temporarily" impaired under the provisions of SFAS No. 115. A pretax
loss of $1.9 million was recorded as a credit-related charge-off through the
valuation allowance for debt securities in the second quarter. In June 1995, the
Bank sold these securities. No additional loss was recorded at the time of sale.
Also during the second quarter of 1995, the Bank sold a $1.5 million
security from its available for sale portfolio at a loss of $181,000. The
security was a privately issued MBS whose credit rating was downgraded by
Moody's to Baa3 in April 1995. As a result of the downgrade, the Bank sold the
security and recorded the loss as a credit related charge-off to the general
valuation allowance for debt securities.
In 1993, the Bank sold $334 million of MBS to effect the sale of
Arizona-based deposit liabilities to World and to maintain the Bank's IRR
position. The sale of the securities resulted in a gain of $7.4 million ($4.9
million after tax) included in gain on sale of debt securities in the Statements
of Operations for 1993.
Note E -- Loans Receivable and Loans Receivable Held for Sale
-------------------------------------------------------------
Loans receivable held for investment, recorded at amortized cost, are
summarized as follows (thousands of dollars):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1995 1994
---------- ----------
<S> <C> <C>
Loans collateralized by real estate:
Conventional single-family residential.................. $ 529,076 $ 489,649
FHA and VA insured single-family residential............ 40,939 33,823
Commercial mortgage..................................... 178,507 178,076
Construction and land................................... 137,728 90,992
---------- ----------
886,250 792,540
Commercial secured........................................ 57,647 40,349
Commercial unsecured...................................... 4,678 2,317
Consumer installment:
Automobile.............................................. 59,540 43,279
Recreational vehicle, marine, and mobile home........... 98,186 76,181
Consumer unsecured........................................ 7,128 6,570
Equity and property improvement........................... 29,216 26,054
Deposit accounts.......................................... 2,392 2,659
---------- ----------
1,145,037 989,949
---------- ----------
Undisbursed proceeds...................................... (68,646) (41,702)
Allowance for estimated credit losses..................... (16,353) (17,659)
Premiums.................................................. 9,314 5,969
Deferred fees............................................. (5,362) (4,999)
Accrued interest.......................................... 6,091 4,479
---------- ----------
(74,956) (53,912)
---------- ----------
Loans receivable held for investment...................... $1,070,081 $ 936,037
========== ==========
</TABLE>
81
<PAGE> 85
SOUTHWEST GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 13 -- PRIMERIT BANK (CONTINUED)
Loans receivable held for sale are stated at the lower of aggregate cost or
market and are summarized as follows:
Loans collateralized by single-family residential real estate (thousands of
dollars):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1995 1994
------ ------
<S> <C> <C>
Conventional................................ $2,071 $ 508
FHA and VA insured.......................... 3,079 1,606
------ ------
5,150 2,114
Small Business Administration (SBA)......... 705 --
------ ------
Loans receivable held for sale.............. $5,855 $2,114
====== ======
</TABLE>
Additional loan information (thousands of dollars):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1995 1994
-------- --------
<S> <C> <C>
Average portfolio yield at end of year......................... 8.34% 8.11%
Principal balance of loans serviced for others (including
$58,424 and $67,871 of loans serviced for MBS owned by the
Bank)........................................................ $430,100 $415,097
Adjustable-rate real estate loans.............................. $316,393 $286,868
Outstanding commitments to originate loans..................... $ 86,891 $ 46,387
Unused lines of credit......................................... $ 68,176 $ 57,180
Standby letters of credit...................................... $ 4,824 $ 707
Outstanding commitments to builders............................ $ -- $ 10,543
</TABLE>
Many of the Bank's adjustable-rate loans contain limitations as to both the
amount the interest rate can change at each repricing date (periodic caps) and
the maximum rate the loan can be repriced to over the lifetime of the loan
(lifetime caps). At December 31, 1995, periodic caps in the adjustable loan
portfolio ranged from 25 basis points to 500 basis points. Lifetime caps ranged
from 9.75 to 22 percent.
Outstanding commitments to originate loans represent agreements to
originate real estate secured loans to customers at specified rates of interest.
Commitments generally expire in 30 to 60 days and may require payment of a fee.
Some of the commitments are expected to expire without being drawn upon,
therefore the total commitments do not necessarily represent future cash
requirements.
The Bank has designated portions of its portfolio of residential real
estate loans and SBA loans as held for sale. These loans are carried at the
lower of aggregate cost, market, or sales commitment price. In January 1994, the
Bank sold its credit card portfolio held for sale and recorded a gain of
approximately $1.7 million ($1.1 million net of charge-offs).
At December 31, 1995, 32 percent or $18.5 million of the Bank's outstanding
commercial secured loan portfolio consisted of loans to borrowers in the gaming
industry, with additional unfunded commitments of $9.9 million. These loans are
generally secured by real estate, machinery, and equipment. The Bank's portfolio
of loans, collateralized by real estate, consists principally of real estate
located in Nevada, California, and Arizona. Collectibility is, therefore,
somewhat dependent on the economies and real estate values of these areas and
industries.
The Bank's loan approval process is intended to assess both: (i) the
borrower's ability to repay the loan by determining whether the borrower meets
the Bank's established underwriting criteria, and (ii) the adequacy of the
proposed security by determining whether the appraised value of the security
property is sufficient for the proposed loan.
82
<PAGE> 86
SOUTHWEST GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 13 -- PRIMERIT BANK (CONTINUED)
It is the general policy of the Bank not to make single-family residential
loans when the loan-to-value ratio exceeds 80 percent unless the loans are
insured by private mortgage insurance, FHA insurance or VA guarantee.
Residential tract construction loans are generally underwritten with a
stabilized loan-to-value ratio of less than 85 percent, while commercial income
property loans are generally underwritten with a ratio less than or equal to 75
percent.
Interest payments received on impaired loans are recorded as interest
income unless collection of the remaining recorded investment is in doubt, in
which case payments received are recorded as reductions of principal. Interest
income recognized on impaired loans during the year ended December 31, 1995
consisted of $2.8 million using an accrual basis of accounting and $21,000 using
a cash basis of accounting. The average balance outstanding of impaired loans
for the year ended December 31, 1995 was $23.9 million, while at December 31,
1995, the outstanding impaired loan balance was $25.3 million.
Premiums on loans primarily represent premiums paid to dealers for
originating consumer installment loans for the Bank. Prepayments of the loans
can adversely affect the yield of the installment portfolio should the unearned
premium be uncollectible from the dealer due to the contractual terms of the
dealer agreement or the credit worthiness of the dealer.
Note F -- Allowances for Estimated Credit Losses
------------------------------------------------
Activity in the allowances for losses on loan, debt securities, and real
estate is summarized as follows (thousands of dollars):
<TABLE>
<CAPTION>
INVESTMENTS
LOANS IN REAL
RECEIVABLE ESTATE TOTAL
---------- ----------- --------
<S> <C> <C> <C>
Balance at 12/31/92........................................ $17,228 $ 1,463 $ 18,691
Provisions for estimated losses.......................... 6,212 1,010 7,222
Charge-offs.............................................. (9,812) (1,538) (11,350)
Recoveries............................................... 2,623 -- 2,623
------- ------- --------
Balance at 12/31/93........................................ 16,251 935 17,186
Provisions for estimated losses.......................... 7,230 163 7,393
Charge-offs.............................................. (7,887) (1,412) (9,299)
Recoveries............................................... 2,065 790 2,855
------- ------- --------
Balance 12/31/94........................................... $17,659 $ 476 $ 18,135
======= ======= ========
</TABLE>
<TABLE>
<CAPTION>
LOANS RECEIVABLE
------------------ FORECLOSED INVESTMENTS
DEBT IMPAIRED OTHER REAL IN REAL
SECURITIES LOANS LOANS ESTATE ESTATE TOTAL
---------- -------- ------- ---------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance at 12/31/94*............... $ -- $ 3,038 $14,621 $ -- $ 476 $ 18,135
Provisions for estimated
losses........................ 2,077 2,908 2,838 326 162 8,311
Charge-offs...................... (2,077) (2,908) (5,716) (395) (139) (11,235)
Recoveries....................... -- 35 1,537 336 364 2,272
------- ------- ------- ----- ----- --------
Balance at 12/31/95................ $ -- $ 3,073 $13,280 $ 267 $ 863 $ 17,483
======= ======= ======= ===== ===== ========
</TABLE>
- ---------------
* Allowance for estimated loss balances for impaired and other loans at December
31, 1994 have been reclassified to reflect adoption of SFAS No. 114.
83
<PAGE> 87
SOUTHWEST GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 13 -- PRIMERIT BANK (CONTINUED)
Included in the "other loans" category are charge-offs, net of recoveries,
of $585,000 for single-family residential loans and $3.3 million for consumer
loans. These are considered homogeneous pools of loans that are excluded from
the definition of impaired loans for evaluation under SFAS No. 114.
The Bank establishes allowances for estimated credit losses by portfolio
through charges to expense. On a regular basis, management reviews the level of
allowances which have been provided against the portfolios. Adjustments are made
thereto in light of the level and trends of problem loans, portfolio growth, and
current economic conditions.
Write-downs to fair value, disposition gains and losses, and operating
income and costs affiliated with real estate acquired through foreclosure are
charged to the allowance for estimated credit losses.
Note G -- Premises and Equipment
--------------------------------
Premises and equipment are summarized as follows (thousands of dollars):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1995 1994
------- -------
<S> <C> <C>
Land.................................................. $ 3,435 $ 4,066
Buildings and leasehold improvements.................. 19,130 18,381
Furniture, fixtures, and equipment.................... 28,899 26,970
------- -------
51,464 49,417
Less: Accumulated depreciation and amortization....... 31,182 27,751
------- -------
Premises and equipment, net......................... $20,282 $21,666
======= =======
</TABLE>
The Bank leases certain of its facilities under noncancelable operating
lease agreements. The more significant of these leases have terms expiring
between 1996 and 2029 and provide for renewals subject to certain escalation
clauses. The following is a schedule of net future minimum rental payments under
various operating lease agreements that have initial or remaining noncancelable
lease terms in excess of one year as of December 31, 1995 (thousands of
dollars):
<TABLE>
<CAPTION>
TOTAL MINIMUM TOTAL MINIMUM NET MINIMUM
LEASE PAYMENTS SUBLEASE RECEIPTS LEASE PAYMENTS
--------------- ----------------- --------------
<S> <C> <C> <C>
Year Ending December 31:
1996............................ $ 5,632 $ 2,739 $ 2,893
1997............................ 5,558 2,240 3,318
1998............................ 5,128 1,824 3,304
1999............................ 4,468 1,516 2,952
2000............................ 4,293 961 3,332
Thereafter........................ 45,513 1,300 44,213
------- ------- -------
$70,592 $10,580 $60,012
======= ======= =======
</TABLE>
Net rental expense was approximately $2.5 million in 1995, $2.7 million in 1994,
and $3.1 million in 1993.
84
<PAGE> 88
SOUTHWEST GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 13 -- PRIMERIT BANK (CONTINUED)
Note H -- Deposits
------------------
Deposits are summarized as follows (thousands of dollars):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1995 1994
---------- ----------
<S> <C> <C>
Interest-bearing demand and money market deposits........... $ 322,847 $ 313,949
Noninterest-bearing demand deposits......................... 98,923 69,294
Savings deposits............................................ 67,641 78,876
---------- ----------
Total transaction accounts........................ 489,411 462,119
---------- ----------
Certificates of deposit:
$100,000................................................. 605,321 608,872
$100,000................................................. 171,339 168,958
---------- ----------
Total certificates of deposit............................... 776,660 777,830
---------- ----------
$1,266,071 $1,239,949
========== ==========
Average annual interest rate at end of year................. 4.19% 3.97%
========== ==========
</TABLE>
The above balance includes $5.9 million deposited by the State of Nevada
that is collateralized by single-family residential loans and debt securities
with a fair value of approximately $6.3 million at December 31, 1995. There were
no brokered deposits at December 31, 1995 and 1994.
Interest expense on deposits for the years ended December 31, is summarized
as follows (thousands of dollars):
<TABLE>
<CAPTION>
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Interest-bearing demand and money market deposits..... $10,327 $ 8,740 $ 8,578
Savings deposits...................................... 1,718 2,135 2,364
Certificates of deposit............................... 39,893 33,241 46,701
------- ------- -------
Total interest expense on deposits.......... $51,938 $44,116 $57,643
======= ======= =======
</TABLE>
Certificates of deposit maturity schedule (thousands of dollars):
<TABLE>
<CAPTION>
CERTIFICATES MATURING ON OR PRIOR TO DECEMBER 31,
------------------------------------------------------------------
INTEREST RATE CATEGORY 1996 1997 1998 1999 2000 THEREAFTER
-------------------------- -------- -------- ------- ------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
2.99% and lower........... $ 8,199 $ 36 $ 12 $ 12 $ 15 $ 6
3.00% to 3.99%............ 10,194 7 -- -- -- --
4.00% to 4.99%............ 279,124 8,831 1,795 24 -- 92
5.00% to 5.99%............ 212,653 47,565 22,667 10,232 10,843 7,483
6.00% to 6.99%............ 7,338 41,076 5,561 20,807 12,316 12,442
7.00% to 7.99%............ 35,013 5,714 15 15,350 369 212
8.00% to 8.99%............ 74 -- -- -- 148 --
9.00% and over............ -- 36 399 -- -- --
-------- -------- ------- ------- ------- -------
$552,595 $103,265 $30,449 $46,425 $23,691 $20,235
======== ======== ======= ======= ======= =======
</TABLE>
85
<PAGE> 89
SOUTHWEST GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 13 -- PRIMERIT BANK (CONTINUED)
Note I -- Securities Sold Under Agreements to Repurchase
--------------------------------------------------------
The Bank sells securities under agreements to repurchase (reverse
repurchase agreements). Reverse repurchase agreements are treated as borrowings
and are reflected as liabilities in the Bank's Statements of Financial
Condition. Reverse repurchase agreements are summarized as follows (thousands of
dollars):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1995 1994
-------- --------
<S> <C> <C>
Balance at year end............................................ $140,710 $281,935
Accrued interest payable at year end........................... 1,417 3,335
Daily average amount outstanding during year................... 175,618 222,620
Maximum amount outstanding at any month end.................... 282,374 281,935
Weighted average interest rate during the year................. 6.20% 4.95%
Weighted average interest rate on year-end balances............ 6.10% 6.37%
</TABLE>
All agreements are collateralized by MBS and U.S. Treasury notes and
require the Bank to repurchase identical securities as those which were sold.
The securities collateralizing the agreements are reflected as assets with a
carrying value of $473,000 less than the borrowing amount and a weighted average
maturity of 1.34 years. Agreements were transacted with the following dealers:
Morgan Stanley & Co., Inc.; Lehman Brothers; and Bear Stearns. Reverse
repurchase agreements are collateralized as follows (thousands of dollars):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------
1995 1994
-------------------- --------------------
BOOK FAIR BOOK FAIR
VALUE VALUE VALUE VALUE
-------- -------- -------- --------
<S> <C> <C> <C> <C>
MBS........................................ $120,181 $120,181 $258,477 $258,477
U.S. Treasury notes........................ 20,056 20,373 40,428 40,191
-------- -------- -------- --------
$140,237 $140,554 $298,905 $298,668
======== ======== ======== ========
</TABLE>
At December 31, 1995, borrowings of $37.1 million were outstanding in
accordance with a long-term agreement executed with one dealer. The agreement,
which allows for a maximum borrowing of $300 million with no minimum, matures in
July 2000. The interest rate on the borrowings is adjusted monthly based upon a
spread over or under the one month London Interbank Offering Rate (LIBOR),
dependent upon the underlying collateral.
The Bank is also party to a separate flexible reverse repurchase agreement
(flex repo) totaling $4.4 million with an average rate of 8.86 percent at
December 31, 1995. A flex repo represents a long-term fixed-rate contract to
borrow funds through a primary dealer, collateralized by MBS with a flexible
repayment schedule. The principal balance of the Bank's flex repo agreement is
expected to mature in July 1996.
86
<PAGE> 90
SOUTHWEST GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 13 -- PRIMERIT BANK (CONTINUED)
Note J -- Borrowings
--------------------
Borrowings are summarized as follows (thousands of dollars):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1995 1994
-------- --------
<S> <C> <C>
Advances from FHLB...................... $164,400 $ 99,400
Notes payable........................... 7,995 8,135
-------- --------
$172,395 $107,535
======== ========
</TABLE>
Borrowings coupon interest rates are as follows:
<TABLE>
<CAPTION>
1995 1994
------------- -------------
<S> <C> <C>
Advances from FHLB.................................... 4.40% - 8.23% 4.30% - 8.23%
Notes payable......................................... 8.50% 8.20% - 8.50%
</TABLE>
Principal payments on borrowings at December 31, 1995 are due as follows
(thousands of dollars):
<TABLE>
<CAPTION>
ADVANCES
INTEREST FROM NOTES
RATE FHLB PAYABLE
------------- -------- -------
<S> <C> <C> <C>
12 months........................................ 4.40% - 8.50% $ 35,000 $7,995
24 months........................................ 5.92% - 8.23% 26,000 --
36 months........................................ 5.01% - 5.89% 25,000 --
48 months........................................ 8.23% 25,000 --
60 months........................................ 7.38% - 7.52% 50,000 --
72 months........................................ 7.52% 3,400 --
-------- ------
$164,400 $7,995
-------- ------
Weighted average effective interest rate......... 6.68% 7.80%
======== ======
</TABLE>
Borrowings are collateralized as follows (thousands of dollars):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1995 1994
-------- --------
<S> <C> <C>
MBS....................................... $ 14,002 $ 13,971
Real estate loans......................... 382,407 171,673
-------- --------
$396,409 $185,644
======== ========
</TABLE>
In 1994, the FHLB established a financing availability for the Bank which
currently totals 25 percent of the Bank's assets with terms up to 360 months.
All borrowings from the FHLB must be collateralized by mortgages or securities.
87
<PAGE> 91
SOUTHWEST GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 13 -- PRIMERIT BANK (CONTINUED)
Note K -- Income Taxes
----------------------
The Bank utilizes the accrual basis of accounting for tax purposes. Under
the Internal Revenue Code, the Bank is allowed a special bad debt deduction
(unrelated to the amount of losses charged to earnings) based on a percentage of
taxable income (currently eight percent). Under SFAS No. 109, no deferred taxes
are provided on tax bad debt reserves arising prior to December 31, 1987, unless
it becomes apparent that these differences will reverse in the foreseeable
future. At December 31, 1995, the tax bad debt reserves not expected to reverse
are $16.9 million, resulting in a retained earnings benefit of $5.9 million.
Income tax expense (benefit) consists of the following (thousands of
dollars):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1995 1994 1993
------ ------ -------
<S> <C> <C> <C>
Current
Federal............................................... $4,818 $5,276 $(6,051)
State................................................. 8 17 (82)
------ ------ -------
4,826 5,293 (6,133)
------ ------ -------
Deferred
Federal............................................... 702 997 12,632
State................................................. -- 101 210
Tax rate change....................................... -- -- (364)
------ ------ -------
702 1,098 12,478
------ ------ -------
Total income tax expense...................... $5,528 $6,391 $ 6,345
====== ====== =======
</TABLE>
The components of the net deferred income tax expense resulting from timing
differences in the recognition of revenue and expense for financial reporting
purposes in different accounting periods than for income tax purposes are as
follows (thousands of dollars):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1995 1994 1993
------- ------ -------
<S> <C> <C> <C>
Deferred loan fees/costs............................... $ 603 $1,068 $ (186)
Installment sales revenue.............................. (177) (503) (288)
Provisions for credit losses........................... (1,203) (31) (934)
Book versus tax real estate income..................... 1,393 376 12,846
Book versus tax depreciation........................... (444) (420) (263)
CMO residuals -- principal amortization................ 350 473 827
Delinquent interest.................................... 592 (92) 611
FHLB stock dividends................................... (558) 251 54
Other deferred income.................................. 111 18 169
Other expense and loss provisions not deductible until
paid................................................. 35 (42) 6
Tax rate change........................................ -- -- (364)
------- ------ -------
Deferred income tax expense.................. $ 702 $1,098 $12,478
======= ====== =======
</TABLE>
88
<PAGE> 92
SOUTHWEST GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 13 -- PRIMERIT BANK (CONTINUED)
The income tax benefit (payable) reported on the Bank's Statements of
Financial Condition include the following asset (liability) components
(thousands of dollars):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1995 1994
------- ------
<S> <C> <C>
Current:
Federal....................................... $ 1,352 $ 452
State......................................... 6 16
------- ------
1,358 468
------- ------
Deferred:
Federal....................................... (2,965) 3,587
State......................................... (6) --
------- ------
(2,971) 3,587
------- ------
Income tax benefit (payable)............... $(1,613) $4,055
======= ======
</TABLE>
At December 31, the net deferred tax asset (liability) is comprised of the
following items (thousands of dollars):
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Deferred tax assets:
Allowance for estimated credit losses........................ $ 5,834 $ 6,198
Debt securities available for sale (SFAS No. 115)............ -- 5,098
Real estate held for sale.................................... 4,240 5,267
Delinquent interest.......................................... 445 1,038
Compensation/pension......................................... 549 483
CMO residuals................................................ -- 351
Other........................................................ 44 260
-------- --------
Total deferred tax assets............................ 11,112 18,695
-------- --------
Deferred tax liabilities:
Tax bad debt reserve......................................... (1,215) (2,887)
Debt securities available for sale (SFAS No. 115)............ (759) --
Loan fees/costs.............................................. (5,951) (5,188)
Installment sales............................................ (1,263) (1,441)
Depreciation................................................. (419) (1,063)
FHLB stock................................................... (1,528) (2,087)
Other........................................................ (2,948) (2,442)
-------- --------
Total deferred tax liabilities....................... (14,083) (15,108)
-------- --------
Total net deferred tax assets (liabilities)........ $ (2,971) $ 3,587
======== ========
</TABLE>
No valuation allowance has been recorded for deferred tax assets as all
assets are expected to be realized through the terms of the tax sharing
agreement with the Company.
89
<PAGE> 93
SOUTHWEST GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 13 -- PRIMERIT BANK (CONTINUED)
The effective tax rates in 1995, 1994, and 1993 differ from the federal
statutory tax rate of 35 percent. The sources of these differences and the
effect of each are summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1995 1994 1993
----- ---- ----
<S> <C> <C> <C>
Computed "expected" tax provision............................. 35.0% 35.0% 35.0%
Increase (reduction) in taxes resulting from:
Bad debt deduction.......................................... (34.7)% -- --
Goodwill amortization, impairment, and write-offs........... 236.3% 9.6% 34.9%
Tax rate change............................................. -- -- (3.7)%
Other....................................................... 1.4% 0.8% (2.1)%
----- ---- ----
Effective tax rate....................................... 238.0% 45.4% 64.1%
===== ==== ====
</TABLE>
The provisions for income taxes related to the gain on sale of loans and
debt securities were $721,000 in 1995, $98,000 in 1994, and $3.4 million in
1993.
Note L -- Regulatory Matters
----------------------------
Regulatory Capital
The Bank is subject to various capital adequacy requirements under a
uniform framework administered by the Federal banking agencies. Specific capital
guidelines require the Bank to maintain minimum amounts and ratios as set forth
below.
The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA)
required the federal banking agencies to adopt regulations implementing a system
of progressive constraints as capital levels decline at banks and savings
institutions. The federal banking agencies have enacted uniform "prompt
corrective action" rules which classify banks and savings institutions into one
of five categories based upon capital adequacy, ranging from "well capitalized"
to "critically undercapitalized." Banks become subject to prompt corrective
action when their ratios fall below the "adequately capitalized" status. A
reconciliation of stockholder's equity, as shown in the Bank's Statements of
Financial Condition, to the FDICIA capital standards and the Bank's resulting
ratios are set forth in the table below (thousands of dollars):
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1994
---------------------------------------- ----------------------------------------
TOTAL TIER 1 TIER 1 TOTAL TIER 1 TIER 1
RISK-BASED RISK-BASED LEVERAGE RISK-BASED RISK-BASED LEVERAGE
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Stockholder's equity............... $173,559 $173,559 $ 173,559 $166,388 $166,388 $ 166,388
Capital adjustments:
Nonsupervisory goodwill.......... (38,287) (38,287) (38,287) (40,376) (40,376) (40,376)
Supervisory goodwill............. (23,492) (23,492) (23,492) (18,661) (18,661) (18,661)
Goodwill impairment allowance.... 11,823 11,823 11,823 -- -- --
Real estate investment and
mortgage servicing rights...... (1,283) (367) (367) (1,325) (194) (194)
Unrealized loss (gain), net of
tax on debt securities
available for sale............. (1,409) (1,409) (1,409) 9,467 9,467 9,467
General loan loss reserves....... 12,542 -- -- 11,512 -- --
-------- -------- ---------- -------- -------- ----------
Regulatory capital................. $133,453 $121,827 $ 121,827 $127,005 $116,624 $ 116,624
======== ======== ========== ======== ======== ==========
Regulatory capital ratio........... 13.35% 12.19% 7.07% 13.88% 12.75% 6.62%
Adequately capitalized required
ratio............................ 8.00% 4.00% 4.00% 8.00% 4.00% 4.00%
-------- -------- ---------- -------- -------- ----------
Excess............................. 5.35% 8.19% 3.07% 5.88% 8.75% 2.62%
======== ======== ========== ======== ======== ==========
Asset base......................... $999,560 $999,560 $1,724,306 $914,812 $914,812 $1,760,801
======== ======== ========== ======== ======== ==========
</TABLE>
90
<PAGE> 94
SOUTHWEST GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 13 -- PRIMERIT BANK (CONTINUED)
- ------------------------------------
As of December 31, 1995 and 1994, PriMerit Bank exceeded the adequately
capitalized ratios and was categorized as "well capitalized."
The decline in the Bank's risk-based capital ratios over prior year-end is
principally the result of the change in the amount of allowable supervisory
goodwill includable in capital and an increase in the risk-weighted asset base
caused by a higher level of real estate and commercial loans replacing
mortgage-backed securities, partially offset by year-to-date net income,
excluding goodwill amortization and impairment, of $12.5 million. At December
31, 1995, under fully phased-in capital rules applicable to the Bank at July 1,
1996, the Bank would have exceeded the "adequately capitalized" fully phased-in,
total risk-based, tier 1 risk-based, and tier 1 leverage ratios by $53.2
million, $81.6 million, and $52.6 million, respectively.
The Office of Thrift Supervision (OTS) regulation requiring institutions
with IRR exposure classified as "above normal" to reduce their risk-based
capital has been indefinitely delayed. As measured by both the Bank's model and
the OTS model, the Bank has a "normal" classification of interest rate risk as
defined in the delayed regulation. Had the regulation been implemented, no
capital deduction would have been required during any period presented.
Other Regulatory and Contractual Matters
The Company, at the time that it acquired the Bank, stipulated in an
agreement with the Federal Home Loan Bank Board (predecessor to the OTS) that it
would assist the Bank in maintaining levels of regulatory capital required by
the regulations in effect at the time or as they were amended thereafter and
limited dividends from the Bank to specified amounts, so long as it controlled
the Bank. In July 1995, upon the request of the Company, the OTS terminated
these stipulations, such that capital distributions by the Bank and
capitalization of the Bank are now governed by the laws and regulations
governing all other thrifts. During 1995, the Bank paid the Company $500,000 in
cash dividends.
Under the terms of the definitive sale agreement with Norwest, the Bank is
limited in the amount of dividends payable to the Company through the closing
date of the sale of $375,000 per quarter through June 30, 1996 and up to $3.5
million in the third quarter of 1996, dependant upon the timing of the closing
date of the sale.
The deposit accounts of savings associations, including those of PriMerit,
are insured to the maximum extent permitted by law by the FDIC through the SAIF.
The deposit accounts of commercial banks are separately insured by the FDIC
through the bank insurance fund (BIF). Commercial banks and savings associations
are separately assessed annual deposit insurance premiums. For savings
associations, the deposit premiums range from 23 to 31 cents per $100 of
deposits and, under current requirements, will remain at that level until the
SAIF is capitalized at 1.25 percent of insured deposits. The SAIF is not
expected to reach this level of capitalization for several years. Under current
assessments, a number of plans have been proposed in Congress to deal with the
undercapitalization of the SAIF. Several proposals provide for a one-time
special assessment estimated to approximate 75 to 79 basis points, on
SAIF-insured deposits to fully capitalize the SAIF to 1.25 percent of insured
deposits. These proposals would subsequently reduce annual premiums to levels
similar to those of BIF-insured commercial banks and eventually merge the BIF
and SAIF insurance funds.
Assuming a one-time special assessment was approved by Congress and became
law in 1996, and was immediately charged against results of operations, the
one-time assessment would approximate $10 million, pretax, for the Bank.
Management believes the Bank would continue to be classified as
"well-capitalized" under fully phased-in FDICIA capital rules and would not face
any liquidity issues as a result of such a one-time assessment.
91
<PAGE> 95
SOUTHWEST GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 13 -- PRIMERIT BANK (CONTINUED)
Note M -- Employee Benefits
---------------------------
Pension Plan/Employees' 401(k) Plan
The Bank maintains a defined benefit pension plan for substantially all of
its employees. The Bank's policy is to fund the pension expense accrued for each
year but not less than the minimum required contribution nor more than the tax
deductible limit. Commencing April 1994, the pension plan was curtailed.
Employees hired on or after that date will not be able to participate in the
pension plan, while existing employees will not be able to increase benefits
under the pension plan through additional service with the Bank. The Bank offers
all its eligible employees participation in the Employees' 401(k) plan of
PriMerit Bank. The 401(k) plan provides for purchases of certain investment
vehicles by eligible employees through annual payroll deductions of up to 15
percent of base compensation. The cost and liability of both plans are not
material.
Other Benefits
The Bank has contractual obligations with selected officers of the Bank
which require payment to the officers of additional one time compensation should
a change of control (as defined) of the Bank occur and additional one time
compensation to the officers if their employment is terminated subsequent to the
change of control. These contingent obligations total approximately $3 million
at December 31, 1995.
Note N -- Asset/Liability Management
------------------------------------
Asset/Liability Management is a unified process for managing the structure
and mix of the Bank's balance sheet and off-balance sheet financial instruments
to provide for optimum levels of net interest income while maintaining prudent
levels of IRR and liquidity. The Bank's Board of Directors has established
written policies governing the management of the Bank's IRR that include defined
acceptable levels of IRR and acceptable tools for the management of IRR within
these levels. Also included in the Board's written policies are defined
acceptable classes and uses of derivative financial instruments as tools in the
management of the Bank's IRR.
IRR in general is one of several inherent risks of the financial services
industry. Profitable operation of the Bank depends in part on prudent acceptance
and successful management of IRR. There are two general forms of IRR, both of
which derive from future changes in interest rates: the risk that future levels
of net interest income will be reduced, and the risk that the Bank's net market
value will be reduced.
IRR results from (a) timing differences in the maturity and/or repricing of
the Bank's assets, liabilities, and off-balance sheet contracts; (b) the
exercise of options embedded in the Bank's financial instruments and accounts,
such as prepayments of loans before scheduled maturity, caps on amounts of
interest rate movement permitted for adjustable-rate loans, and the withdrawals
of funds on deposit with and without stated terms to maturity; and (c) changes
in the spread relationships between lending and funding interest rates, referred
to as basis risk.
Traditional measures of IRR have focused on that portion of the risk
resulting from timing differences in the maturity and/or repricing of assets,
liabilities, and off-balance sheet contracts, and are usually expressed in the
form of a static gap report. The "gap" for a given period is positive when
repricing and maturing assets exceed repricing and maturing liabilities within
that period. The gap for a given period is negative when repricing and maturing
liabilities exceed repricing and maturing assets within that period. A positive
or negative cumulative gap may indicate in a general way how the Bank's net
interest income should respond to interest rate fluctuations. A positive
cumulative gap for a given period would generally mean that rising interest
rates would be reflected in financial assets sooner than in financial
liabilities, resulting in higher net
92
<PAGE> 96
SOUTHWEST GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 13 -- PRIMERIT BANK (CONTINUED)
interest income. A negative cumulative gap for a given period might result in
higher net interest income over that period if interest rates declined.
At December 31, 1995 and 1994, the Bank's one-year cumulative static gap
was $(60) million and $(145) million, respectively, or negative 3.5 percent and
negative 8.4 percent of total financial assets.
While providing a rough measure of IRR as it relates to expected future
levels of net interest income, gap has a number of drawbacks; including that it
is a static, point-in-time measurement, it does not capture the effects of basis
risk, and it does not capture risk that varies either asymmetrically or
nonproportionately with changes in interest rates. Because of these limitations
and weaknesses, the Bank uses a dynamic simulation model as its primary method
of measuring potential risks to future levels of net interest income. The
simulation model captures not only gap repricing and maturity mismatches, but
also the effects of basis risk, embedded customer and contractual options, and
the effects of prepayments of assets and resulting funds reinvestment risk.
Through selective variation of a number of modeling assumptions and possible
interest rate changes, management is able to more completely assess the sources
and size of potential risk and optimize the Bank's balance sheet size and
structure and/or utilize derivative financial instruments to minimize such
risks.
As compared to the IRR profile of a typical commercial bank, the Bank's IRR
profile is comparatively longer-term in nature. Whereas static gap measures and
net interest income simulation usually focus on potential IRR effects over a
one-year horizon, indicators of the level of IRR inherent in the Bank's current
balance sheet and off-balance sheet contracts over the entire maturity spectrum
can be measured through market value analysis. The Bank maintains a market
valuation model to facilitate such analysis.
The Bank's market valuation model computes the net present value of
discounted future cash flows for each category of the Bank's assets,
liabilities, and derivative financial instruments. In this type of analysis, net
present values of discounted future cash flows are used as a proxy for actual
market values, since factors unrelated to current and projected future levels of
interest rates can have significant effects on actual market values.
The theoretical market value of the Bank's stockholder's equity can be
derived from the net market values of the Bank's assets, liabilities, and
derivative financial instruments. This theoretical market value of stockholder's
equity is known as Net Portfolio Value (NPV) under OTS regulations. By analyzing
the behavior of the Bank's NPV under varying assumptions as to changes in the
general level of interest rates, management is further able to optimize the
Bank's balance sheet mix and devise strategies using derivative financial
instruments and on balance sheet strategies to mitigate potential adverse
effects of interest rate fluctuations on future net interest income levels.
The Bank's Board of Directors' written policy governing management of the
Bank's IRR sets forth maximum allowable levels for changes in the Bank's NPV
under specific assumed changes in the general level of interest rates. Under the
policy, the maximum allowable change in the Bank's NPV for an immediate and
sustained interest rate change of 200 basis points (2.00 percent) is a decline
of 30.0 percent. The Bank's estimates of its Net Portfolio Values were
significantly within this limit for each quarter of 1995 and 1994. The following
table sets forth management's estimates of the Bank's NPV as of December 31,
1995 and 1994, and under simulated 200 basis point changes in interest rates
(thousands of dollars):
<TABLE>
<CAPTION>
CHANGE IN ESTIMATED NPV PERCENT CHANGE ESTIMATED NPV PERCENT CHANGE
INTEREST RATES DECEMBER 31, 1995 IN NPV DECEMBER 31, 1994 IN NPV
- ------------------- ----------------- -------------- ----------------- --------------
<S> <C> <C> <C> <C>
+ 200 basis points $137,558 (11.08)% $102,192 (28.55)%
-0- $154,702 -- $143,020 --
- - 200 basis points $148,661 (3.90)% $155,585 8.79%
</TABLE>
93
<PAGE> 97
SOUTHWEST GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 13 -- PRIMERIT BANK (CONTINUED)
The financial instruments approved by the Bank's Board of Directors for use
in managing the Bank's IRR include the Bank's debt security portfolio,
borrowings from the FHLB and other sources, interest rate swaps, interest rate
caps, interest rate collars, interest rate futures, and put and call options.
These financial instruments provide effective methods of reducing the impact of
changes in interest rates on the Bank's net interest income and NPV. The Bank
also actively manages its retail and wholesale funding sources to minimize its
cost of funds and provide stable funding sources for its loan and investment
portfolios. Management's use of particular financial instruments is based on a
complete analysis of the Bank's current IRR exposure and the projected effect of
a proposed strategy on the Bank's IRR exposure.
The Bank is exposed to IRR through the issuance of fixed-rate loan
commitments. Fixed-rate loan commitments represent firm commitments to originate
loans secured by real estate to specific borrowers at predetermined interest
rates. Fixed-rate loan commitments generally expire in 30 to 60 days. The Bank
generally receives a fee for these types of commitments. Many of the commitments
are expected to expire without fully being drawn upon; therefore, the total
commitments do not necessarily represent future cash requirements.
The Bank hedges IRR on fixed-rate loan commitments expected to be sold in
the secondary market and the inventory of loans held for sale through a
combination of commitments from permanent investors, optional delivery
commitments, and mandatory forward contracts. Outstanding firm commitments to
sell loans represent agreements to sell loans to a third party at a specified
price on a specified date. These commitments are used to hedge loans for sale
and to hedge outstanding commitments to originate loans. Outstanding master
commitments to sell loans represent agreements to sell a stated volume of loans
to a third party within a specified period of time without regard to price.
Master commitments are entered in order to ensure availability of a buyer for
loans meeting specified underwriting criteria and to maximize the sales price at
the time a firm commitment is executed. Related hedging gains and losses are
recognized at the time gains and losses are recognized on the related loans. See
Note B -- Fair Value of Financial Instruments for commitments outstanding and
their estimated fair values.
At December 31, 1995 and 1994, the Bank had issued and held interest rate
swap agreements as a hedge to convert certain fixed-rate permanent loans into
variable-rate instruments. The interest rate swap agreements require the Bank to
make fixed payments on nonamortizing notional balances, and in turn, the Bank
receives variable interest payments based on the six month LIBOR on these same
balances. If the balances of the loans on the Bank's balance sheet that are
related to the interest rate swap were to decline below the nominal amounts of
the interest rate swaps, the excess portions of the interest rate swaps would be
marked to market, and the resulting gains or losses included in the Bank's
income.
The following table presents the notional amounts of interest rate swaps
outstanding, unrealized gains and losses of the interest rate swaps, the
weighted average interest rates payable and receivable, and the remaining terms
(thousands of dollars):
<TABLE>
<CAPTION>
DECEMBER 31, 1995
FIXED RATE VARIABLE RATE NOTIONAL UNREALIZED UNREALIZED
MATURITY PAID RECEIVED AMOUNT GAIN LOSS
- ----------------- ---------- ------------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C>
1 - 3 Years 6.70% 5.94% $21,400 $-- $ (516)
3 - 5 Years 6.83 5.95 33,650 84 (1,470)
5 - 10 Years 7.00 5.93 43,150 -- (2,963)
---- ---- ------- --- -------
6.87% 5.94% $98,200 $84 $(4,949)
==== ==== ======= === =======
</TABLE>
94
<PAGE> 98
SOUTHWEST GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 13 -- PRIMERIT BANK (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1994
FIXED RATE VARIABLE RATE NOTIONAL UNREALIZED UNREALIZED
MATURITY PAID RECEIVED AMOUNT GAIN LOSS
- ----------------- ---------- ------------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C>
1 - 3 Years 6.70% 5.56% $21,400 $ 652 $
3 - 5 Years 7.22 5.66 26,150 833 --
5 - 10 Years 6.88 5.76 24,900 1,506 (5)
---- ---- ------- ------ ---
6.95% 5.66% $72,450 $2,991 $(5)
==== ==== ======= ====== ===
</TABLE>
The notional amounts of interest rate swaps do not represent amounts
exchanged by the parties and, thus, are not a measure of the Bank's exposure
through its use of derivatives. The amounts exchanged are determined by
reference to the notional amounts and the interest rates.
The Bank is exposed to credit-related losses in the event of nonperformance
by counterparties to off-balance sheet financial contracts, but does not expect
any counterparties to fail to meet their obligations. The Bank performs credit
analyses on all counterparties, and its credit exposure at any given time is
limited to the value of off-balance sheet contracts that have become favorable
to the Bank and have unrealized gains on that date. The Bank generally uses only
highly rated Wall Street investment firms as counterparties to its off-balance
sheet financial contacts, but because of the different business emphasis of each
of the firms, adverse economic changes or conditions are not likely to produce
similar adverse changes to the credit risk of all of the Bank's counterparties
to the same extent.
No interest rate swaps matured or were terminated during 1995, 1994 or
1993. The interest rate swap agreements at December 31, 1995 are collateralized
with MBS with a fair value of $6.5 million. The net expense on interest rate
swaps of $624,000, $485,000 and $24,000 in 1995, 1994 and 1993, respectively,
are included in interest expense as a cost of hedging activities in the Bank's
Statements of Operations.
Note O -- Legal Proceedings
---------------------------
The Bank has been named as defendant in various legal proceedings. The
ultimate dispositions of these proceedings are not presently determinable;
however, it is the opinion of management, based upon the advice of counsel, it
is unlikely that any litigation to which the Bank or any of its subsidiaries is
subject will have a material adverse impact on the Bank's financial condition or
results of operations.
95
<PAGE> 99
SOUTHWEST GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 13 -- PRIMERIT BANK (CONTINUED)
Note P -- Quarterly Financial Data (Unaudited)
----------------------------------------------
<TABLE>
<CAPTION>
QUARTER ENDED
-------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 YEAR ENDED
--------- ------- ------------ ------------ ----------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C>
1995
Interest income.................. $33,211 $32,801 $ 33,394 $ 33,471 $132,877
Interest expense................. 18,429 18,347 18,503 18,021 73,300
Provision for estimated credit
losses......................... 1,364 2,035 1,604 3,146 8,149
Net income (loss)................ 1,678 2,102 2,015 (9,000) (3,205)
1994
Interest income.................. $28,045 $29,124 $ 29,894 $ 31,371 $118,434
Interest expense................. 14,049 14,200 14,867 16,674 59,790
Provision for estimated credit
losses......................... 1,434 2,275 1,493 2,028 7,230
Net income....................... 2,189 2,176 1,977 1,331 7,673
1993
Interest income.................. $35,997 $34,976 $ 31,881 $ 29,471 $132,325
Interest expense................. 22,240 20,906 17,267 14,663 75,076
Provision for estimated credit
losses......................... 1,123 1,180 2,742 1,167 6,212
Net income (loss) before
cumulative effect.............. 609 (4,717) 5,341 2,318 3,551
Cumulative effect of change in
method of accounting for income
taxes.......................... 3,045 -- -- -- 3,045
Net income (loss)................ 3,654 (4,717) 5,341 2,318 6,596
</TABLE>
96
<PAGE> 100
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders,
Southwest Gas Corporation:
We have audited the accompanying consolidated balance sheets of Southwest
Gas Corporation (a California corporation, hereinafter referred to as the
Company) and subsidiaries as of December 31, 1995 and 1994, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three years in the period ended December 31, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Company and its
subsidiaries as of December 31, 1995 and 1994, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1995 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Las Vegas, Nevada
February 7, 1996
97
<PAGE> 101
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) Identification of Directors. The names of the members of the Board of
Directors, the principal occupation of each member and his or her employer for
the last five years or longer, and the principal business of the corporation or
other organization, if any, in which such occupation or employment is carried
on, follow.
RALPH C. BATASTINI
Former President, Vice Chairman and Chief Financial Officer
The Dial Corp (Formerly The Greyhound Corporation)
Director Since: 1992
Board Committees: Audit (Chairman), Pension Plan Investment
Mr. Batastini, 66, received his undergraduate degree from Illinois State
University and his M.B.A. degree in finance from the University of Chicago. He
joined The Greyhound Corporation in 1957 and retired in 1984 as vice chairman
and chief financial officer. At the time of his retirement Mr. Batastini headed
the Greyhound financial group of companies involved in capital equipment
leasing, computer leasing, reinsurance, money orders, mortgage insurance, and
real estate. He subsequently served as president of Batastini & Co. from 1985 to
1990. He currently is the president of the Barrow Neurological Foundation and
has been a director of PriMerit Bank since 1992.
MANUEL J. CORTEZ
President and Chief Executive Officer
Las Vegas Convention and Visitors Authority
Director Since: 1991
Board Committees: Nominating and Compensation, Pension Plan Investment
Mr. Cortez, 57, served four terms (1977-1990) on the Clark County
Commission and is a former chairman of the Commission. He has been active on
various boards, including the Environmental Quality Policy Review Board, the Las
Vegas Valley Water District Board of Directors and the University Medical Center
Board of Trustees, and served as chairman of the Liquor and Gaming Licensing
Board and the Clark County Sanitation District. He has also held leadership
roles with numerous civic and charitable organizations such as Boys and Girls
Clubs of Clark County, Lied Discovery Children's Museum, and Boys Town.
Currently, Mr. Cortez holds professional memberships in the American Society of
Association Executives, the Professional Convention Managers Association, the
International Association of Convention and Visitors Bureaus, and the American
Society of Travel Agents. He has been a director of PriMerit Bank since 1991.
LLOYD T. DYER
Retired President and Chief Executive Officer
Harrah's
Director Since: 1978
Board Committees: Executive, Nominating and Compensation
Mr. Dyer, 68, obtained a degree in banking and finance from the University
of Utah prior to his employment with Harrah's, a hotel/gaming corporation with
its principal facilities in Reno and Lake Tahoe, in 1957. He was elected
president and chief operating officer of Harrah's in 1975, and elected president
and chief executive officer in 1978. He remained in those positions with
Harrah's until his retirement in April 1980.
98
<PAGE> 102
Mr. Dyer has been a director of PriMerit Bank since 1986. He is also a trustee
of the William F. Harrah Trusts.
KENNY C. GUINN
Chairman of the Board
Southwest Gas Corporation and PriMerit Bank
Director Since: 1981
Board Committees: Executive (Chairman), Nominating and Compensation
Mr. Guinn, 59, was appointed President and Chief Operating Officer of
Southwest Gas Corporation in 1987, Chairman and Chief Executive Officer in 1988
and was elected Chairman of the Board of Directors in 1993. Mr. Guinn is
actively involved in numerous business, charitable, and civic activities. He is
past chairman of the Las Vegas Metropolitan Police Fiscal Affairs Committee and
past chairman of the Board of Trustees for the University of Nevada, Las Vegas
Foundation. In May 1994 he was appointed Interim President of the University of
Nevada, Las Vegas and served in this capacity for approximately one year. He is
also a director for Oasis Residential, Inc., Boyd Gaming Corporation, and Del
Webb Corporation. Mr. Guinn was elected a director of PriMerit Bank in 1980 and
has served as Chairman of the Board of Directors of PriMerit since 1987.
THOMAS Y. HARTLEY
President and Chief Operating Officer
Colbert Golf Design and Development
Director Since: 1991
Board Committees: Audit, Nominating and Compensation
Mr. Hartley, 62, obtained his degree in business from Ohio University in
1955, and was employed in various capacities by Deloitte Haskins & Sells from
1959 until his retirement as an area managing partner in 1988. Mr. Hartley is
actively involved in numerous business and civic activities. He is chairman of
the University of Nevada, Las Vegas Foundation and president of the Las Vegas
Founders Club. He has also held executive positions with the Nevada Development
Authority, the Las Vegas Founders Golf Foundation, the Las Vegas Chamber of
Commerce, and the Boulder Dam Area Council of the Boy Scouts of America. He is a
director of Rio Hotel and Casino, Inc., Sierra Health Services, Inc. and has
been a director of PriMerit Bank since 1991.
MICHAEL B. JAGER
Private Investor
Director Since: 1989
Board Committees: Audit, Pension Plan Investment
Mr. Jager, 64, obtained a degree in petroleum geology from Stanford
University in 1955. After a four-year employment with the Richfield Oil
Corporation as a petroleum geologist, he joined the Frank H. Ayres & Son
Construction Company and was involved in the construction of subdivisions and
homes in southern California until 1979. Since that time he has consulted in the
single family residential development industry, and owns and manages a number of
businesses in Oregon and Nevada. He has been a director of PriMerit Bank since
1989.
99
<PAGE> 103
LEONARD R. JUDD
Former President, Chief Operating Officer, and Director
Phelps Dodge Corporation
Director Since: 1988
Board Committees: Audit, Nominating and Compensation (Chairman)
Mr. Judd, 57, former president, chief operating officer, and director of
Phelps Dodge Corporation, joined Phelps Dodge in 1963 and worked at that
company's operations in Arizona, New Mexico and New York City. He was elected to
the Phelps Dodge board of directors in 1987, became president of Phelps Dodge
Mining Company in 1988 and became president and chief operating officer of
Phelps Dodge in 1989. He remained in those positions until November 1991. Mr.
Judd is a member of various professional organizations and is active in numerous
civic groups. He serves as a director of the Kasler Holding Company, the Montana
College of Mineral Science and Technology Foundation, and has been a director of
PriMerit Bank since 1988.
JAMES R. LINCICOME
Retired Executive Vice President and General Manager,
Government Electronics Group, Motorola Corporation
Director Since: 1987
Board Committees: Audit, Executive, Nominating and Compensation
Mr. Lincicome, 70, was employed by Motorola in its Communications Division
in 1950. After progressing through positions in that Division, he transferred to
the Government Electronics Group, where from 1979 until his retirement in 1987,
he was General Manager responsible for various national defense, space
exploration and other government related programs. Mr. Lincicome is a member of
various professional organizations and is past Chairman of the Arizona State
University Engineering Advisory Council, Junior Achievement of Central Arizona,
the Phoenix Urban League, United for Arizona, and the Valley of the Sun United
Way. He has held a number of leadership roles in other civic and charitable
organizations in Arizona, including the Research Committee of the Arizona Town
Hall and Board Member of the Goldwater Institute, and was vice chairman of the
Government Division of the Electronic Industries Association in 1986. He has
been a director of PriMerit Bank since 1988.
MICHAEL O. MAFFIE
President and Chief Executive Officer
Southwest Gas Corporation
Director Since: 1988
Board Committees: Executive
Mr. Maffie, 48, joined the company in 1978 as Treasurer after seven years
with Arthur Andersen & Co. He was named Vice President/Finance and Treasurer in
1982, Senior Vice President and Chief Financial Officer in 1984, Executive Vice
President in 1987, President and Chief Operating Officer in 1988, and President
and Chief Executive Officer in 1993. He has been a director of PriMerit Bank
since 1993. He received his undergraduate degree in accounting and his M.B.A.
degree in finance from the University of Southern California. A member of
various professional organizations, he serves as a board member of the United
Way of Nevada, Nevada School of the Arts, Boys and Girls Clubs of Las Vegas, a
trustee of the Las Vegas Symphony Orchestra, the University of Nevada, Las Vegas
Foundation, and the Nevada Development Authority. He also serves as a
Commissioner on the State of Nevada Commission on Substance Abuse Education,
Prevention, Enforcement and Treatment, and is a former president of the Allied
Arts Council. He is a director of the Pacific Coast Gas Association and a former
director of the American Gas Association.
100
<PAGE> 104
CAROLYN M. SPARKS
Co-Founder
International Insurance Services, Ltd.
Director Since: 1988
Board Committees: Audit, Pension Plan Investment (Chairperson)
Mrs. Sparks, 54, graduated from the University of California at Berkeley in
1963, and with her husband, co-founded International Insurance Services, Ltd.,
in 1966 in Las Vegas. She has served on the University and Community College
System of Nevada Board of Regents since 1984, and in 1991 was elected to a
two-year term as Chairperson of the Board of Regents. Mrs. Sparks is actively
involved with numerous charitable and civic organizations, including founding
chairperson of the University Medical Center Foundation and the Children's
Miracle Network Telethon. She also served on the board for Bishop Gorman High
School and is currently chair of the board for the Las Vegas Center for
Children. She is a director of Showboat, Inc., a hotel/gaming corporation and
has been a director of PriMerit Bank since 1988.
ROBERT S. SUNDT
Retired President
Sundt Corp.
Director Since: 1987
Board Committees: Executive, Pension Plan Investment
Mr. Sundt, 69, has been associated with Sundt Corp. in a variety of
positions since 1948. He was named President of Sundt Corp. in 1983. He is now
retired and has no continuing association with Sundt Corp. He has been a
director of PriMerit Bank since 1988. He is a member of the American Institute
of Constructors, Consulting Constructors Council of America and a life director
of the Associated General Contractors of America. He is a member of the American
Arbitration Association and serves as an arbitrator on disputes concerning the
construction industry. He is past member of the Construction Industry Presidents
Forum. Mr. Sundt is affiliated with a number of community organizations and is
past chairman of the Tucson Metropolitan Chamber of Commerce.
(b) Identification of Executive Officers. The name, age, position and
period position held during the last five years for each of the Executive
Officers of the Company are as follows:
<TABLE>
<CAPTION>
PERIOD
NAME AGE POSITION POSITION HELD
- ----------------------- --- --------------------------------------------------- -------------
<S> <C> <C> <C>
Michael O. Maffie...... 48 President and Chief Executive Officer 1993-Present
President and Chief Operating Officer 1991-1993
Dan J. Cheever......... 40 President and Chief Executive Officer/PriMerit Bank 1992-Present
President and Chief Operating Officer/PriMerit Bank 1991-1992
George C. Biehl........ 48 Senior Vice President and Chief Financial Officer 1991-Present
James F. Lowman........ 49 Senior Vice President/Central Arizona Division 1991-Present
Dudley J. Sondeno...... 43 Senior Vice President/Staff Operations 1993-Present
Vice President/Engineering and Operations Support 1991-1993
L. Keith Stewart....... 55 Senior Vice President/Operations 1993-Present
Senior Vice President/Southern Arizona Division 1992-1993
Senior Vice President/Nevada-California Region 1991-1992
Thomas J. Trimble...... 64 Senior Vice President, General Counsel and
Corporate Secretary 1991-Present
</TABLE>
(c) Identification of Certain Significant Employees.
None.
(d) Family Relationships. None of the Company's Directors or Executive
Officers are related to any other either by blood, marriage or adoption.
101
<PAGE> 105
(e) Business Experience. Information with respect to Directors is
described in (a) above. All Executive Officers have held responsible positions
with the Company for at least five years as described in (b) above.
(f) Involvement in Certain Legal Proceedings.
None.
(g) Item 405 Review. Section 16(a) of the Securities Exchange Act of 1934
requires the Company's officers and directors, and persons who own more than ten
percent of a registered class of the Company's equity securities, to file
reports of ownership and changes in ownership with the Securities and Exchange
Commission (SEC) and the New York Stock Exchange. Officers, directors and
beneficial owners of more than ten percent of any class of equity securities are
required by SEC regulation to furnish the Company with copies of all Section
16(a) forms they file.
The Company has adopted procedures to assist its directors and executive
officers in complying with Section 16(a) of the Securities and Exchange Act of
1934, which includes assisting in the preparation of forms for filing. For 1995,
all the required reports were filed timely.
ITEM 11. EXECUTIVE COMPENSATION
DIRECTORS COMPENSATION
Outside directors receive an annual retainer of $20,000, plus $900 for each
Board or committee meeting attended. Committee chairpersons receive an
additional $500 for each committee meeting attended. The outside directors also
receive an annual retainer of $16,000 and fees for serving on the Board of
Directors of PriMerit Bank. Each director receives a fee of $700 for each Bank
Board or committee meeting attended, and the Bank committee chairpersons also
receive an additional $250 for each committee meeting attended. The Chairman of
the Company's Board, Mr. Guinn, receives an additional $25,000 annually for
serving in that capacity. Directors who are full-time employees of the Company
or its subsidiaries receive no additional compensation for Board service.
Outside directors may defer their compensation until retirement or other
termination of status as a director. Amounts deferred bear interest at 150
percent of the Moody's Seasoned Corporate Rate.
The Company also provides a retirement plan for its outside directors. With
a minimum of ten years of service, an outside director can retire and receive a
benefit equal to the annual retainer, at retirement, for serving on the
Company's Board. Directors who retire before age 65, after satisfying the
minimum service obligation will receive retirement benefits upon reaching age
65.
102
<PAGE> 106
EXECUTIVE COMPENSATION
The following table provides for fiscal years ended December 31, 1993, 1994
and 1995, compensation earned by the Company's Chief Executive Officer and each
of the four other most highly compensated executive officers of the Company.
SUMMARY COMPENSATION TABLE(1)
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
---------------------------------
AWARDS
----------------------- PAYOUTS
RESTRICTED -------
ANNUAL COMPENSATION STOCK LTIP ALL OTHER
NAME AND ------------------------------ OTHER ANNUAL AWARD(S) OPTIONS/ PAYOUTS COMPENSATION($)
PRINCIPAL POSITION YEAR SALARY($) BONUS($)(2) COMPENSATION($) ($)(2)(3)(4) SARS(#) ($)(5) (6)(7)(8)
- ------------------------- ---- --------- ----------- --------------- ------------ -------- ------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Michael O. Maffie........ 1995 408,671 128,270 0 179,246 N/A N/A 40,481
President/C.E.O. 1994 370,616 73,149 0 51,098 N/A N/A 32,898
1993 316,904 48,510 0 48,510 N/A N/A 31,070
Dan J. Cheever........... 1995 255,135 95,000 0 N/A N/A N/A 23,037
President/C.E.O. 1994 226,770 69,913 0 N/A N/A N/A 12,484
PriMerit Bank 1993 208,725 75,000 0 N/A N/A N/A 4,497
Thomas J. Trimble........ 1995 212,367 40,114 0 60,172 N/A N/A 48,153
Senior Vice President/ 1994 209,178 20,413 0 20,413 N/A N/A 39,404
General Counsel/ 1993 206,345 19,219 0 19,219 N/A N/A 38,223
Corporate Secretary
George C. Biehl.......... 1995 197,326 41,448 0 56,523 N/A N/A 12,137
Senior Vice President/ 1994 187,068 25,124 0 16,988 N/A N/A 9,148
Chief Financial Officer 1993 175,449 16,632 0 16,632 N/A N/A 8,732
L. Keith Stewart......... 1995 162,142 30,929 0 46,389 N/A N/A 16,168
Senior Vice President/ 1994 154,712 15,359 0 15,359 N/A N/A 11,650
Operations 1993 144,622 13,861 0 13,861 N/A N/A 11,170
</TABLE>
- ---------------
(1) All compensation reflected in the Summary Compensation Table is reported on
an earned basis for each fiscal year.
(2) Bonuses and performance shares accrued for calendar years 1993, 1994 and
1995 were paid and awarded in 1994, 1995 and 1996, respectively.
(3) Dividends equal to the dividends paid on the Company's Common Stock will
accrue on the performance shares awarded under the long-term component of
the Company's management incentive plan during the restriction period.
(4) Messrs. Maffie, Trimble, Biehl and Stewart were awarded performance shares
(restricted stock) under the Company's management incentive plan. Mr.
Cheever does not participate in the Company's management incentive plan. The
total number of performance shares granted in 1994 and 1995, for calendar
years 1993 and 1994, and their value based on the market price of Company
Common Stock at December 29, 1995 for each individual are as follows:
<TABLE>
<CAPTION>
SHARES VALUE
------ --------
<S> <C> <C>
Mr. Maffie.......................................... 6,457 $113,805
Mr. Trimble......................................... 2,604 45,896
Mr. Biehl........................................... 2,206 38,881
Mr. Stewart......................................... 1,922 33,875
</TABLE>
(5) If the impending sale of the Bank is consummated, the long-term performance
awards under the performance periods described below, or $94,959, will be
paid to Mr. Cheever at least one week prior to closing.
(6) For Messrs. Maffie, Trimble, Biehl and Stewart, the amounts shown in this
column for each year consist of above-market interest on deferred
compensation and matching contributions under the Company's executive
deferral plan. Under the plan, executive officers may defer up to 50 percent
of their annual compensation for payment at retirement or at some other
employment terminating event. Interest on such deferrals is set at 150
percent of the Moody's Seasoned Corporate Rate. As part of the plan, the
103
<PAGE> 107
Company provides matching contributions that parallel the contributions made
under the Company's 401(k) plan, which is available to all Company
employees, equal to one-half of the deferred amount, up to six percent of
their annual salary.
(7) For Mr. Cheever, the amounts shown in this column for each year consist of
matching contributions under the Bank's 401(k) plan, and for 1994 include a
matching contribution under the Bank's executive deferral plan. Under the
Bank's executive deferral plan, Mr. Cheever may defer up to 50 percent of
his annual salary and bonus for payment at retirement or at some other
employment terminating event. Interest on executive plan deferrals is set at
150 percent of the Moody's Seasoned Corporate Rate. For 1994 and the first
two months of 1995, the Bank provided matching contributions equal to the
amount deferred under each plan, up to six percent of Mr. Cheever's annual
salary and bonus. For the remainder of 1995, such matching contributions
were only provided to Mr. Cheever under the provisions of the Bank's
executive deferral plan.
(8) All Other Compensation consists of matching contributions under the
Company's or PriMerit Bank's deferral plans and interest on such deferrals
in excess of 120 percent of the Applicable Federal Long-term [bond] Rate.
The breakdown of such compensation for each named executive officer is as
follows:
<TABLE>
<CAPTION>
INTEREST CONTRIBUTIONS
-------- -------------
<S> <C> <C>
Mr. Maffie.................................... $ 28,239 $12,242
Mr. Cheever................................... 5,920 17,117
Mr. Trimble................................... 41,783 6,370
Mr. Biehl..................................... 6,221 5,916
Mr. Stewart................................... 11,307 4,861
</TABLE>
LONG-TERM INCENTIVE PLAN AWARDS FOR 1995
The following table summarizes the long-term cash incentive awards earned
by Dan Cheever under PriMerit Bank's performance based executive compensation
plan for the three-year performance periods of January 1, 1994 through December
31, 1996 and January 1, 1995 through December 31, 1997. Of the named executive
officers, only Mr. Cheever was eligible to participate in the PriMerit Bank
plan. If the impending sale of the Bank is consummated, the long-term
performance awards under both performance periods will be paid to Mr. Cheever at
least one week prior to closing and the plan will be terminated.
LONG-TERM INCENTIVE PLAN TABLE
<TABLE>
<CAPTION>
NUMBER OF PERFORMANCE ESTIMATED FUTURE PAYOUT UNDER
SHARES, OR OTHER NON-STOCK PRICE-BASED PLANS
UNITS PERIOD UNTIL -----------------------------------
OR OTHER MATURATION THRESHOLD TARGET MAXIMUM
NAME RIGHTS(#) OR PAYOUT ($ OR #) ($ OR #) ($ OR #)
- ---------------------------------- --------- ------------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
Dan Cheever....................... N/A 1994-1996(1) $34,007 $ 34,007 $34,007
Dan Cheever....................... N/A 1995-1997(2) $37,782 $ 37,782 $37,782
</TABLE>
- ---------------
(1) The long-term performance award earned by Mr. Cheever for the first
performance period represents 30 percent or the second year's percentage of
such award. Mr. Cheever earned 20 percent, or $23,170, during the first year
of this performance period. This year's award is not subject to further
adjustment during the performance period, and if the pending sale of the
Bank is consummated, the awards earned through the end of 1995 will be paid
out to Mr. Cheever at least one week prior to closing.
(2) The long-term performance award earned by Mr. Cheever for the second
performance period represents 33 percent or the first year's percentage of
such award. This year's award is not subject to further adjustment during
the performance period, and if the pending sale of the Bank is consummated,
the awards earned through the end of 1995 will be paid out to Mr. Cheever at
least one week prior to closing.
104
<PAGE> 108
BENEFIT PLANS
Southwest Gas Basic Retirement Plan. The named executive officers, except
Mr. Cheever, participate in the Company's non-contributory, defined-benefit
retirement plan, which is available to all employees of the Company and its
subsidiaries (except PriMerit Bank which has a separate plan). Benefits are
based upon an employee's years of service, up to a maximum of 30 years, and the
employee's highest five consecutive years salary within the final 10 years of
service.
SOUTHWEST GAS PENSION PLAN TABLE(1)(2)
<TABLE>
<CAPTION>
YEARS OF SERVICE
ANNUAL -----------------------------------------------------------
COMPENSATION 10 15 20 25 30
- ------------------ ------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
$ 50,000........ $ 8,750 $ 13,125 $ 17,500 $ 21,875 $ 26,250
100,000........ 17,500 26,250 35,000 43,750 52,500
150,000........ 26,250 39,375 52,500 65,625 78,750
200,000........ 35,000 52,500 70,000 87,500 105,000
250,000........ 43,750 65,625 87,500 109,375 131,250
300,000........ 52,500 78,750 105,000 131,250 157,500
350,000........ 61,250 91,875 122,500 153,125 183,750
400,000........ 70,000 105,000 140,000 175,000 210,000
450,000........ 78,750 118,125 157,500 196,875 236,250
500,000........ 87,500 131,250 175,000 218,750 262,500
</TABLE>
- ---------------
(1) Years of service beyond 30 years will not increase benefits under the basic
retirement plan.
(2) For 1996, the maximum annual compensation that can be considered in
determining benefits under the plan is $150,000. For future years the
maximum annual compensation will be adjusted to reflect changes in the cost
of living as established by the Internal Revenue Service.
Compensation covered under the basic retirement plan is based on salary
depicted in the Summary Compensation Table. As of December 31, 1995, the
credited years of service for the named executive officers shown in the Summary
Compensation Table are as follows: Mr. Maffie, 17 years; Mr. Biehl, 10 years;
Mr. Stewart, 11 years; and Mr. Trimble, 9 years.
Amounts shown in the pension plan table are straight-life annuity amounts,
notwithstanding the availability of joint survivorship benefit provisions.
Benefits paid under the basic and supplemental retirement plans are not reduced
by any Social Security benefits received.
Supplemental Retirement Plan. The named executive officers, except Mr.
Cheever, also participate in the Company's supplemental retirement plan. Such
officers with 10 or more years of service may retire at age 55 or older and will
receive benefits under the plan. Such benefits, when added to benefits received
under the basic retirement plan, will equal 60 percent of their highest 12
months of compensation with the Company. The total benefit may be reduced if an
officer retires prior to age 60, depending upon his age and total years of
service with the Company. The cost to the Company for benefits under the
supplemental retirement plan for any one of the named executive officers cannot
be properly allocated or determined because of the overall plan assumptions and
options available.
PriMerit Bank Retirement Income Plan. Mr. Cheever, who is a named
executive officer, participates in the Bank's non-contributory, defined-benefit
retirement plan, which was available to all employees of the Bank and its
subsidiaries. Through March 1994, benefits were based upon an employee's years
of service, up to a maximum of 15 years, and the employee's 60 highest paid
consecutive months of employment with the Bank. Commencing April 1, 1994, the
plan was curtailed. Employees hired on or after that date will not be able to
participate in the plan, while existing employees will not be able to increase
benefits under the plan through additional service with the Bank. Salary changes
for existing employees, however, will continue to affect plan benefits. If the
pending sale of the Bank is consummated, the plan will be merged with the
defined-benefit retirement plan of Norwest.
105
<PAGE> 109
PRIMERIT BANK PENSION PLAN TABLE(1)(2)
<TABLE>
<CAPTION>
YEARS OF SERVICE
ANNUAL ------------------------------
COMPENSATION 5 10 15
----------------------------------------- ------- ------- --------
<S> <C> <C> <C>
$ 50,000................................ $ 5,833 $11,667 $ 17,500
100,000................................ 11,667 23,333 35,000
150,000................................ 17,500 35,000 52,500
200,000................................ 23,333 46,667 70,000
250,000................................ 29,167 58,333 87,500
300,000................................ 35,000 70,000 105,000
</TABLE>
- ---------------
(1) Prior to March 31, 1994, years of service beyond 15 years would not increase
benefits under the plan. With the curtailment of the plan, additional years
of service will no longer increase benefits under the plan.
(2) For 1996, the maximum annual compensation that can be considered in
determining benefits under the Plan is $150,000. For future years, the
maximum annual compensation will be adjusted to reflect changes in the cost
of living as established by the Internal Revenue Service.
Compensation covered under the Bank's retirement plan is based on salary
depicted in the Summary Compensation Table. At the time the plan was curtailed,
Mr. Cheever had five years of service with the Bank. Only future salary changes
will affect Mr. Cheever's benefits under the plan.
Amounts shown in the pension plan table are straight life annuity amounts
notwithstanding the availability of joint survivorship benefit provisions.
Benefits paid under the Bank's retirement and supplemental retirement plans are
not reduced by any Social Security benefits.
PriMerit Bank Supplemental Executive Retirement Plan. Mr. Cheever also
participates in the Bank's supplemental retirement plan. Participation in the
supplemental plan is limited to officers of the Bank selected by the Bank's
Board of Directors. Benefits under the plan, when added to benefits received
under the defined benefit retirement plan, will equal 60 percent of the
participant's average annual salary over the 60 highest paid consecutive months
of service. The total benefit will be reduced if a participant retires prior to
age 65, and with less than 15 years of service with the Bank. The cost to the
Bank for benefits under the supplemental retirement plan for Mr. Cheever cannot
be properly determined because of the overall plan assumptions and options
available. If the pending sale of the Bank is consummated, the plan will be
terminated and Mr. Cheever's accrued benefit, estimated to be $75,000, would be
paid prior to closing.
CHANGE IN CONTROL ARRANGEMENT
PriMerit Bank, during 1994, entered into an agreement with Mr. Cheever that
is designed to support his continued employment with the Bank. Under the terms
of the agreement, Mr. Cheever would be entitled to a lump sum benefit payment of
$500,000 if he is employed by the Bank at the time of a change in control of the
Bank. Such payment would become due and payable only after the occurrence of a
change in control. The agreement also provides that Mr. Cheever would be
entitled to a lump sum deferred compensation benefit equal to 200 percent of his
annual salary if his employment with the Bank is terminated (or his
responsibilities are substantially changed without his consent) within 12
calendar months of a change in control for other than cause, death, disability,
or retirement. The one-year agreement was extended through May 1996.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Directors who served on the Company's Nominating and Compensation
Committee during 1995 were Leonard R. Judd (Chairman), Manuel J. Cortez, Lloyd
T. Dyer, Kenny C. Guinn, Thomas Y. Hartley, and James R. Lincicome. Mr. Guinn
retired as Chairman and Chief Executive Officer of the Company on May 12, 1993,
and retired as a full-time employee of the Company on August 31, 1993. Mr. Guinn
became a member of the Committee after his retirement as an officer of the
Company.
106
<PAGE> 110
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) Not applicable.
(b) The following table discloses all common stock of the Company
beneficially owned by the directors and executive officers of the Company as of
March 1, 1996.
<TABLE>
<CAPTION>
NO. OF SHARES
BENEFICIALLY
DIRECTOR/EXECUTIVE OFFICER OWNED(1)(2)
------------------------------------------ -------------
<S> <C>
Ralph C. Batastini........................ 5,838
Manuel J. Cortez.......................... 1,731
Lloyd T. Dyer............................. 4,141
Kenny C. Guinn............................ 54,332
Thomas Y. Hartley......................... 7,687
Michael B. Jager.......................... 4,861(3)
Leonard R. Judd........................... 2,000
James R. Lincicome........................ 2,000
Michael O. Maffie......................... 33,957(4)
Carolyn M. Sparks......................... 2,343
Robert S. Sundt........................... 5,000
George C. Biehl........................... 14,613(4)
Dan J. Cheever............................ 3,434
L. Keith Stewart.......................... 7,430
Thomas J. Trimble......................... 11,091(4)
Other Executive Officers.................. 23,108
</TABLE>
- ---------------
(1) As of March 1, 1996, the directors and executive officers of the Company
beneficially owned 183,566 shares, which represents less than 1 percent of
the outstanding shares of the Company's Common Stock. No investor owned more
than 5 percent of the outstanding voting stock of the Company as of March 1,
1996.
(2) The Common Stock holdings listed in this column include performance shares
granted to the Company's executive officers under the Company's Management
Incentive Plan for 1993, 1994, and 1995.
(3) Number of shares includes 3,000 shares held in trust for Margaret Jager,
over which Mr. Jager has no control.
(4) Number of shares does not include 6,618 shares held by the Southwest Gas
Corporation Foundation, which is a charitable trust. Messrs. Maffie,
Trimble, and Biehl are trustees of the Foundation but disclaim beneficial
ownership of said shares.
(c) Not applicable.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During 1995, some directors and executive officers of the Company were
depositors of, and had transactions with, PriMerit Bank. These transactions were
on the same terms (including interest rates, repayment terms, and collateral) as
those prevailing at the time for comparable transactions with other persons of
similar credit-worthiness and, in the opinion of the Board of Directors of the
Bank, do not involve more than a normal risk of collectibility or other
unfavorable characteristics.
107
<PAGE> 111
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report on Form 10-K:
(1) The following are included in Part II, Item 8 of this Form:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Consolidated balance sheets................................... 50
Consolidated statements of income............................. 51
Consolidated statements of cash flows......................... 52
Consolidated statements of stockholders' equity............... 53
Notes to consolidated financial statements.................... 54
Report of independent public accountants...................... 97
</TABLE>
(2) All schedules have been omitted because the required information
is either inapplicable or included in the Notes to Consolidated Financial
Statements.
(3) See list of exhibits.
(b) Reports on Form 8-K
The Company filed a Form 8-K, dated November 13, 1995, reporting on
the proposed acquisition of Northern Pipeline Construction Co.
The Company filed a Form 8-K, dated January 8, 1996, reporting on the
agreement to sell PriMerit Bank, a wholly owned subsidiary, to Norwest
Corporation.
The Company filed a Form 8-K, dated February 14, 1996, reporting
summary financial information for the year ended December 31, 1995.
The Company filed a Form 8-K, dated March 5, 1996, disclosing the
adoption of a Rights Agreement.
(c) See Exhibits.
108
<PAGE> 112
LIST OF EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- -------- --------------------------------------------------------------------------------
<C> <S>
2.01(18) Agreement between Southwest Gas Corporation and The Southwest Companies as
sellers and Norwest Corporation as buyer, dated January 8, 1996, regarding sale
of stock or assets of PriMerit Bank.
3.01(2) Restated Articles of Incorporation, as amended.
3.02(11) Amended Bylaws of Southwest Gas Corporation.
4.01(3) Indenture between the Company and Bank of America National Trust and Savings
Association, as successor by merger to Security Pacific National Bank, as
Trustee, dated August 1, 1986, with respect to the Company's 9% Series A and
Series B and 8 3/4% Series C Debentures.
4.02(4) First Supplemental Indenture of the Company to Bank of America National Trust
and Savings Association, as successor by merger to Security Pacific National
Bank, as Trustee, dated as of October 1, 1986, supplementing and amending the
Indenture dated as of August 1, 1986, with respect to the Company's 9%
Debentures, Series A, due 2011.
4.03(4) Second Supplemental Indenture of the Company to Bank of America National Trust
and Savings Association, as successor by merger to Security Pacific National
Bank, as Trustee, dated as of November 1, 1986, supplementing and amending the
Indenture dated as of August 1, 1986, with respect to the Company's 9%
Debentures, Series B, due 2011.
4.04(5) Third Supplemental Indenture of the Company to Bank of America National Trust
and Savings Association, as successor by merger to Security Pacific National
Bank, as Trustee, dated as of December 1, 1986, supplementing and amending the
Indenture dated as of August 1, 1986, with respect to the Company's 8 3/4%
Debentures, Series C, due 2011.
4.05(5) Fourth Supplemental Indenture of the Company to Bank of America National Trust
and Savings Association, as successor by merger to Security Pacific National
Bank, as Trustee, dated as of February 1, 1987, supplementing and amending the
Indenture dated as of August 1, 1986, with respect to the Company's 10%
Debentures, Series D, due 2017.
4.06(6) Fifth Supplemental Indenture of the Company to Bank of America National Trust
and Savings Association, as successor by merger to Security Pacific National
Bank, as Trustee, dated as of August 1, 1988, supplementing and amending the
Indenture dated as of August 1, 1986, with respect to the Company's 9 3/8%
Debentures, Series E, due 2013.
4.07(7) Sixth Supplemental Indenture of the Company to Bank of America National Trust
and Savings Association, as successor by merger to Security Pacific National
Bank, as Trustee, dated as of June 16, 1992, supplementing and amending the
Indenture dated as of August 1, 1986, with respect to the Company's 9 3/4%
Debentures, Series F, due 2002.
4.08(8) Indenture between Clark County, Nevada, and Bank of America Nevada as Trustee,
dated September 1, 1992, with respect to the issuance of $130,000,000 Industrial
Development Revenue Bonds (Southwest Gas Corporation), $30,000,000 1992 Series A
and $100,000,000 1992 Series B.
4.09(10) Indenture between Clark County, Nevada, and Harris Trust and Savings Bank as
Trustee, dated December 1, 1993, with respect to the issuance of $75,000,000
Industrial Development Revenue Bonds (Southwest Gas Corporation), 1993 Series A,
due 2033.
4.10(10) Indenture between City of Big Bear Lake, California, and Harris Trust and
Savings Bank as Trustee, dated December 1, 1993, with respect to the issuance of
$50,000,000 Industrial Development Revenue Bonds (Southwest Gas Corporation
Project), 1993 Series A, due 2028.
4.11(14) Certificate of Trust of Southwest Gas Capital I.
4.12(16) Amended and Restated Declaration of Trust of Southwest Gas Capital I.
4.13(16) Form of Preferred Security (attached as Annex I to Exhibit A to the Amended and
Restated Declaration of Trust of Southwest Gas Capital I included as Exhibit
4.12 hereto).
4.14(15) Form of Guarantee with respect to Preferred Securities.
4.15(17) Southwest Gas Capital I Preferred Securities Guarantee by the Company and Harris
Trust and Savings Bank, dated as of October 31, 1995.
</TABLE>
109
<PAGE> 113
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- -------- --------------------------------------------------------------------------------
<C> <S>
4.16(17) Form of Subordinated Debt Security (included in the First Supplemental Indenture
included as Exhibit 4.18 hereto).
4.17(17) Subordinated Debt Securities Indenture between the Company and Harris Trust and
Savings Bank, dated as of October 31, 1995.
4.18(17) First Supplemental Indenture between the Company and Harris Trust and Savings
Bank, dated as of October 31, 1995, supplementing and amending the Indenture
dated as of October 31, 1995, with respect to the 9.125% Subordinated Debt
Securities.
4.19(12) Form of Deposit Agreement.
4.20(12) Form of Depositary Receipt (attached as Exhibit A to Deposit Agreement included
as Exhibit 4.11 hereto).
4.21(12) Form of Indenture relating to the Senior Debt Securities.
4.22(19) Rights Agreement between the Company and Harris Trust Company, as Rights Agent,
dated as of March 5, 1996.
4.23 The Company hereby agrees to furnish to the SEC, upon request, a copy of any
instruments defining the rights of holders of long-term debt issued by Southwest
Gas Corporation or its subsidiaries.
9.01 Not applicable.
10.01(1) Participation Agreement among the Company and General Electric Credit
Corporation, Prudential Insurance Company of America, Aetna Life Insurance
Company, Merrill Lynch Interfunding, Bank of America through purchase of Valley
Bank of Nevada, Bankers Trust Company and First Interstate Bank of Nevada, dated
as of July 1, 1982.
10.02(1) Lease and Agreement between the Company and Spring Mountain Road Associates,
dated as of June 15, 1982 and amended as of July 1, 1982.
10.03(10) Financing Agreement between the Company and Clark County, Nevada, dated
September 1, 1992.
10.04(10) Financing Agreement between the Company and Clark County, Nevada, dated as of
December 1, 1993.
10.05(10) Project Agreement between the Company and City of Big Bear Lake, California,
dated as of December 1, 1993.
10.06(11) Southwest Gas Corporation Executive Deferral Plan, amended and restated May 10,
1994.
10.07(9) Southwest Gas Corporation Directors Deferral Plan, as amended October 29, 1992.
10.08(10) Southwest Gas Corporation Board of Directors Retirement Plan, amended and
restated effective October 1, 1993.
10.09(11) Southwest Gas Corporation Management Incentive Plan, amended and restated May
10, 1994.
10.10(11) Southwest Gas Corporation Supplemental Retirement Plan, amended and restated as
of May 10, 1994.
10.11(13) Management Contract with PriMerit Bank officer.
10.12(13) $200 million Credit Agreement between the Company, Union Bank of Switzerland, et
al., dated as of January 27, 1995.
10.13 Merger Agreement among the Company and Northern Pipeline Construction Co., dated
as of November 13, 1995.
11.01 Not applicable.
12.01 Not applicable.
13.01 Not applicable.
16.01 Not applicable.
18.01 Not applicable.
21.01 List of subsidiaries of Southwest Gas Corporation.
22.01 Not applicable.
</TABLE>
110
<PAGE> 114
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- -------- --------------------------------------------------------------------------------
<C> <S>
23.01 Consent of Arthur Andersen LLP, Independent Public Accountants.
24.01 Not applicable.
27.01 Financial Data Schedule (filed electronically only).
28.01 Not applicable.
</TABLE>
- ---------------
(1) Incorporated herein by reference to the Company's report on Form 10-K for
the year ended December 31, 1982.
(2) Incorporated herein by reference to the Company's Registration Statement on
Form S-2, No. 2-92938.
(3) Incorporated herein by reference to the Company's Registration Statement on
Form S-3, No. 33-7931.
(4) Incorporated herein by reference to the Company's report on Form 10-K for
the year ended December 31, 1986.
(5) Incorporated herein by reference to the Company's report on Form 10-Q for
the quarter ended March 31, 1987.
(6) Incorporated herein by reference to the Company's report on Form 8-K dated
August 23, 1988.
(7) Incorporated herein by reference to the Company's report on Form 10-Q for
the quarter ended June 30, 1992.
(8) Incorporated herein by reference to the Company's report on Form 10-Q for
the quarter ended September 30, 1992.
(9) Incorporated herein by reference to the Company's report on Form 10-K for
the year ended December 31, 1992.
(10) Incorporated herein by reference to the Company's report on Form 10-K for
the year ended December 31, 1993.
(11) Incorporated herein by reference to the Company's report on Form 10-Q for
the quarter ended June 30, 1994.
(12) Incorporated herein by reference to the Company's Registration Statement on
Form S-3, No. 33-55621.
(13) Incorporated herein by reference to the Company's report on Form 10-K for
the year ended December 31, 1994.
(14) Incorporated herein by reference to the Company's Registration Statement on
Form S-3, No. 33-62143.
(15) Incorporated herein by reference to the Company's Amendment No. 1 to
Registration Statement on Form S-3, No. 33-62143.
(16) Incorporated herein by reference to the Company's report on Form 8-K dated
October 26, 1995.
(17) Incorporated herein by reference to the Company's report on Form 10-Q for
the quarter ended September 30, 1995.
(18) Incorporated herein by reference to the Company's report on Form 8-K dated
January 8, 1996.
(19) Incorporated herein by reference to the Company's report on Form 8-K dated
March 5, 1996.
111
<PAGE> 115
SIGNATURES
Pursuant to the requirements of Section 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
SOUTHWEST GAS CORPORATION
By MICHAEL O. MAFFIE
------------------------------------
Michael O. Maffie, President
(Chief Executive Officer)
Date: March 26, 1996
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ---------------------------------------- --------------------------- ---------------
<S> <C> <C>
GEORGE C. BIEHL Senior Vice President March 26, 1996
- ---------------------------------------- (Chief Financial Officer)
(George C. Biehl)
EDWARD A. JANOV Controller March 26, 1996
- ---------------------------------------- (Chief Accounting Officer)
(Edward A. Janov)
</TABLE>
112
<PAGE> 116
SIGNATURES
Pursuant to the requirements of Section 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ---------------------------------------- -------------------------- ---------------
<S> <C> <C>
RALPH C. BATASTINI Director March 26, 1996
- ----------------------------------------
(Ralph C. Batastini)
MANUEL J. CORTEZ Director March 26, 1996
- ----------------------------------------
(Manuel J. Cortez)
LLOYD T. DYER Director March 26, 1996
- ----------------------------------------
(Lloyd T. Dyer)
KENNY C. GUINN Chairman of the Board of
- ---------------------------------------- Directors March 26, 1996
(Kenny C. Guinn)
THOMAS Y. HARTLEY Director March 26, 1996
- ----------------------------------------
(Thomas Y. Hartley)
MICHAEL B. JAGER Director March 26, 1996
- ----------------------------------------
(Michael B. Jager)
LEONARD R. JUDD Director March 26, 1996
- ----------------------------------------
(Leonard R. Judd)
JAMES R. LINCICOME Director March 26, 1996
- ----------------------------------------
(James R. Lincicome)
MICHAEL O. MAFFIE President and Director
- ---------------------------------------- (Chief Executive Officer) March 26, 1996
(Michael O. Maffie)
CAROLYN M. SPARKS Director March 26, 1996
- ----------------------------------------
(Carolyn M. Sparks)
ROBERT S. SUNDT Director March 26, 1996
- ----------------------------------------
(Robert S. Sundt)
</TABLE>
113
<PAGE> 117
GLOSSARY OF TERMS
<TABLE>
<S> <C>
401k -- The Employees' Investment Plan
ACC -- Arizona Corporation Commission
AFS -- Available-For-Sale
AFUDC -- Allowance for Funds Used During Construction
ARM -- Adjustable-Rate Mortgages
the Bank -- PriMerit Bank
the Board -- Southwest Gas Corporation Board of Directors
CAMEL -- Capital, Assets, Management, Earnings and Liquidity
CMO -- Collateralized Mortgage Obligations
the Company -- Southwest Gas Corporation
CPUC -- California Public Utilities Commission
CRA -- Community Reinvestment Act of 1977
El Paso -- El Paso Natural Gas Company
FASB -- Financial Accounting Standards Board
FDIC -- Federal Deposit Insurance Corporation
FDICIA -- Federal Deposit Insurance Corporation Improvement Act of 1991
FERC -- Federal Energy Regulatory Commission
FHA -- Federal Housing Authority
FHLB -- Federal Home Loan Bank
FHLMC -- Federal Home Loan Mortgage Corporation
FIRREA -- Financial Institutions Reform, Recovery and Enforcement Act
flex repos -- Flexible Reverse Repurchase Agreements
FNMA -- Federal National Mortgage Association
GAAP -- Generally Accepted Accounting Principles
Gas Segment -- Natural Gas Operations Segment
GNMA -- Government National Mortgage Association
IDRB -- Industrial Development Revenue Bonds
IRR -- Interest Rate Risk
ITC -- Investment Tax Credit
Kern River -- Kern River Gas Transmission Company
LDC -- Local Distribution Company
LIBOR -- London Interbank Offering Rate
LNG -- Liquefied Natural Gas
MBS -- Mortgage-Backed Securities
MD&A -- Management's Discussion and Analysis
MMDA -- Money Market Demand Account
NOW -- Negotiable Order of Withdrawal
NPL -- Northern Pipeline Construction Co.
NPV -- Net Portfolio Value
OTS -- Office of Thrift Supervision
Paiute -- Paiute Pipeline Company
Pataya -- Pataya Gas Storage Project
PBOP -- Postretirement Benefits Other Than Pensions
PGA -- Purchased Gas Adjustment
PSCN -- Public Service Commission of Nevada
REMIC -- Real Estate Mortgage Investment Conduits
REO-F -- Real Estate Acquired Through Foreclosure
SAIF -- Savings Association Insurance Fund
SAM -- Supply Adjustment Mechanism
SEC -- Securities and Exchange Commission
SFAS -- Statement of Financial Accounting Standards
SFR -- Single-Family Residential
SoCal -- Southern California Gas Company
VA -- Veterans Administration
</TABLE>
114
<PAGE> 118
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
10.13 Merger Agreement among the Company and Northern Pipeline Construction Co., dated
as of November 13, 1995.
21.01 List of Subsidiaries of Southwest Gas Corporation.
23.01 Consent of Arthur Andersen LLP, Independent Public Accountants.
27.01 Financial Data Schedule (filed electronically only).
</TABLE>
<PAGE> 1
EXHIBIT 10.13
MERGER AGREEMENT
AMONG
SOUTHWEST GAS CORPORATION,
SOUTHWEST GAS CORPORATION OF ARIZONA
AND
NORTHERN PIPELINE CONSTRUCTION CO.
NOEL T. COON, ET UX.
WILLIAM L. JOHNSON, ET UX.
MICHAEL J. KEMPER, ET UX.
DATED AS OF
November 13, 1995
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Recitals.......................................................................... 1
1. Plan of Merger.................................................................... 1
1.1 The Merger............................................................... 1
1.2 Effect of the Merger..................................................... 2
1.3 Consummation of the Merger............................................... 2
1.4 Articles of Incorporation and Bylaws; Directors and Officers............. 2
1.5 Conversion of Securities................................................. 3
1.6 Closing of NPL Transfer Books............................................ 4
1.7 Exchange of Certificates................................................. 4
1.8 Taking of Necessary Action; Further Action............................... 5
1.9 Fair Market Value........................................................ 5
2. Effective Time; Closing........................................................... 7
3. Representations and Warranties of NPL............................................. 7
3.1 Organization, Power, Good Standing, Etc.................................. 7
3.2 Capitalization........................................................... 9
3.3 Authority................................................................ 10
3.4 No Violation............................................................. 11
3.5 Consents and Approvals................................................... 11
3.6 Financial Statements..................................................... 12
3.7 Brokerage................................................................ 13
3.8 Absence of Certain Changes or Events..................................... 13
3.9 Litigation, Etc.......................................................... 14
3.10 Taxes and Tax Returns.................................................... 14
3.11 Employees; Employee Benefit Plans........................................ 15
3.12 Compliance With Applicable Law........................................... 21
3.13 Contracts and Agreements................................................. 21
3.14 Disclosure............................................................... 21
3.15 Title to Property........................................................ 22
3.16 Insurance................................................................ 23
3.17 Powers of Attorney....................................................... 24
4. Representations and Warranties of Southwest....................................... 24
4.1 Corporate Organization................................................... 24
4.2 Authority................................................................ 24
4.3 No Violation............................................................. 25
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C>
4.4 Consents and Approvals.................................................................... 26
4.5 Sufficient Resources...................................................................... 26
4.6 Litigation................................................................................ 27
4.7 Capitalization............................................................................ 28
4.8 SEC Filings............................................................................... 28
4.9 Business Changes.......................................................................... 29
4.10 Financial Statements...................................................................... 29
4.11 Disclosure................................................................................ 30
5. Covenants of the Parties........................................................................... 31
5.1 Current Information....................................................................... 31
5.2 NPL Reports............................................................................... 32
5.3 Regulatory Matters........................................................................ 32
5.4 Further Assurances........................................................................ 33
5.5 Public Announcements...................................................................... 33
5.6 Failure to Fulfill Conditions............................................................. 34
5.7 Tax Matters............................................................................... 34
6. Covenants of NPL................................................................................... 36
6.1 Conduct of the Business of NPL............................................................ 36
6.2 No Solicitation........................................................................... 40
6.3 Access to Management, Properties and Records; Confidentiality............................. 40
6.4 Assignment of Contract Rights............................................................. 42
7. Employees; Employee Benefit Plans.................................................................. 42
7.1 Covenants of NPL.......................................................................... 42
8. Closing Conditions................................................................................. 43
8.1 Conditions to Each Party's Obligations Under This Agreement............................... 43
8.2 Conditions to the Obligations of Southwest Under This Agreement........................... 43
8.3 Conditions to the Obligations of NPL Under This Agreement................................. 45
9. Closing............................................................................................ 46
9.1 Date and Place............................................................................ 46
9.2 NPL's Closing Documents................................................................... 47
9.3 Southwest's Closing Documents............................................................. 47
10. Post-Closing Obligations........................................................................... 47
10.1 Registration of Southwest Common Stock.................................................... 47
10.2 Restrictions on Sale of Acquired Stock.................................................... 54
11. Termination, Amendment and Waiver.................................................................. 56
11.1 Termination............................................................................... 56
</TABLE>
ii
<PAGE> 4
<TABLE>
<S> <C>
11.2 Amendment, Extension and Waiver........................................................... 58
12. Expenses........................................................................................... 58
13. Indemnification.................................................................................... 59
13.1 Indemnification of Southwest.............................................................. 59
13.2 Southwest Indemnification................................................................. 60
13.3 Claims for Indemnity...................................................................... 61
14. Miscellaneous...................................................................................... 63
14.1 Non-Compete Agreements.................................................................... 63
14.2 NPL Promissory Notes to Noel T. Coon...................................................... 64
14.3 Survival.................................................................................. 64
14.4 Notices................................................................................... 64
14.5 Parties in Interest....................................................................... 65
14.6 Entire Agreement.......................................................................... 66
14.7 Counterparts.............................................................................. 66
14.8 Governing Law............................................................................. 66
14.9 Headings.................................................................................. 66
14.10 Enforcement Costs......................................................................... 66
</TABLE>
iii
<PAGE> 5
MERGER AGREEMENT
This Merger Agreement (the "Agreement") is made and entered into as of
the 13th day of November, 1995 by and among Southwest Gas Corporation, a
California corporation ("Southwest"), Southwest Gas Corporation of Arizona, a
Nevada Corporation wholly owned by Southwest (the "Merger Sub"), and Northern
Pipeline Construction Co., a Minnesota corporation ("NPL"), and Noel T. Coon and
Alexa S. Higashi, his wife, William L. Johnson and Judy Johnson, his wife, and
Michael J. Kemper and Frances Kemper, his wife ("NPL Shareholders").
RECITALS
The respective boards of directors of Southwest and NPL have determined
that it is advisable to consummate the Merger described in Section 1 (the
"Merger"), as a result of which all of the outstanding NPL common stock will be
converted into shares of the Common Stock, $1.00 par value per share, of
Southwest ("Southwest Common Stock") and NPL will be owned directly or
indirectly by Southwest; all on the terms and subject to the conditions set
forth in this Agreement.
NOW, THEREFORE, the parties agree as follows:
1. Plan of Merger. The respective boards of directors of Southwest,
Merger Sub and NPL have approved or will approve, by resolutions duly adopted,
the following provisions of this Section 1 as the Plan of Merger required by the
laws of the states of Minnesota and Nevada in connection with the Merger:
1.1 The Merger. At the Effective Time (as defined in Section
1.3), in accordance with this Agreement and applicable law, NPL shall be merged
with and into
<PAGE> 6
the Merger Sub, the separate existence of NPL (except as may be continued by
operation of law) shall cease, and the Merger Sub shall continue as the
surviving corporation under the corporate name possessed by NPL immediately
prior to the Effective Time, subject to Section 1.4 of this Agreement. The
Merger Sub, in its capacity as the corporation surviving the Merger, sometimes
is referred to herein as the "Surviving Corporation."
1.2 Effect of the Merger. The Surviving Corporation shall
possess all the rights, privileges, immunities and franchises, of a public as
well as of a private nature, of each of the Merger Sub and NPL (collectively,
the "Constituent Corporations"); and all property, real, personal, and mixed,
and all debts due on whatever account, including subscriptions to shares, and
all other choses in action, and all and every other interest of or belonging to
or due to each of the Constituent Corporations, shall be taken and deemed to be
transferred to and vested in the Surviving Corporation without further act or
deed; and the Surviving Corporation shall be responsible and liable for all
liabilities and obligations of each of the Constituent Corporations.
1.3 Consummation of the Merger. On the Closing Date, the
parties hereto will cause articles of merger relating to the Merger to be
delivered to the Secretary of State of the states of Minnesota and Nevada, in
such form as required by, and executed in accordance with, the relevant
provisions of applicable law. The Merger shall be effective at such time as such
articles of merger are duly filed by the Secretary of State of the states of
Minnesota and Nevada in accordance with the applicable law (the "Effective
Time").
1.4 Articles of Incorporation and Bylaws; Directors and
Officers. The Articles of Incorporation and Bylaws of the Merger Sub, as in
effect immediately prior to
2
<PAGE> 7
the Effective Time, shall be the Articles of Incorporation (except that such
Articles of Incorporation shall be amended as of the Effective Time to change
the name to NPL) and Bylaws (except that such Bylaws shall be amended as of the
Effective Time to change the name to NPL) of the Surviving Corporation
immediately after the Effective Time and shall thereafter continue to be its
Articles of Incorporation and Bylaws until amended as provided therein and under
the applicable law. The directors of the Merger Sub holding office immediately
prior to the Effective Time shall be the directors of the Surviving Corporation
immediately after the Effective Time. The officers of the Merger Sub holding
office immediately prior to the Effective Time shall sign letters of resignation
on or prior to the Closing. The officers of NPL (except Noel T. Coon) holding
office immediately prior to the Effective Time shall be the officers (holding
the same offices as they held with NPL) of the Surviving Corporation immediately
after the Effective Time.
1.5 Conversion of Securities. At the Effective Time, by virtue
of the Merger and without any action on the part of the Merger Sub, NPL or the
holder of any of the following securities:
(a) All shares of NPL Common Stock issued and outstanding
immediately prior to the Effective Time (other than shares to be
canceled pursuant to Section 1.5[b]) shall automatically be canceled
and extinguished and be converted into and become a right to receive
the number of shares of Southwest Common Stock to be calculated in
accordance with Section 1.9 having a total Fair Market Value of
Southwest Common Stock equal to twenty-four million dollars
($24,000,000). Each NPL Shareholder shall be entitled to receive his
proportionate share of such
3
<PAGE> 8
Southwest Common Stock based upon his percentage ownership interest of
NPL Common Stock at the Effective Time. Cash will be issued in lieu of
fractional shares based on Fair Market Value.
(b) Each share of NPL Common Stock issued and outstanding
immediately prior to the Effective Time and held in the treasury of
NPL or owned by Southwest or the Merger Sub shall automatically be
canceled and extinguished and no payment shall be made with respect
thereto.
(c) Each share of Merger Sub Common Stock, par value $1.00 per
share, issued and outstanding immediately prior to the Effective Time
shall automatically be converted into and become one validly issued,
fully paid and nonassessable share of Common Stock, par value $1.00 per
share, of the Surviving Corporation.
1.6 Closing of NPL Transfer Books. At the Effective Time, the
stock transfer books of NPL shall be closed and no transfer of shares of NPL
Common Stock issued and outstanding immediately prior to the Effective Time
shall thereafter be made. If, after the Effective Time, valid certificates
previously representing such shares are presented to the Surviving Corporation
or the Disbursing Agent (as defined in Section 1.7), they shall be exchanged as
provided in Section 1.7.
1.7 Exchange of Certificates. After the Effective Time, the
Stock Transfer Department of Southwest shall act as Disbursing Agent (the
"Disbursing Agent") in effecting the exchange of Southwest Common Stock for
certificates which, immediately prior to the Effective Time, represented shares
of NPL Common Stock entitled to such exchange pursuant to Section 1.5(a). Upon
the surrender and exchange of a certificate
4
<PAGE> 9
theretofore representing shares of NPL Common Stock, the holder shall be issued
a certificate representing the number of shares of Southwest Common Stock to
which he is entitled pursuant to Section 1.5(a) and the certificate representing
NPL Common Stock shall forthwith be canceled. Until so surrendered and
exchanged, each such certificate shall represent solely the right to receive the
Southwest Common Stock into which the shares of NPL Common Stock it theretofore
represented shall have been converted pursuant to Section 1.5(a), and the
Surviving Corporation shall not be required to issue to the holder thereof the
Southwest Common Stock to which he otherwise would be entitled; provided that
procedures allowing for issuance against lost or destroyed certificates against
receipt of customary and appropriate certifications and indemnities shall be
provided.
1.8 Taking of Necessary Action; Further Action. Southwest and
the Merger Sub, on the one hand, and NPL and NPL Shareholders, on the other
hand, shall use all reasonable efforts to take all such action (including
without limitation action to cause the satisfaction of the conditions of the
other to effect the Merger) as may be necessary or appropriate in order to
effectuate the Merger as promptly as possible. If, at any time after the
Effective Time, any further action is necessary or desirable to carry out the
purposes of this Agreement and to vest the Surviving Corporation with full
possession of all the rights, privileges, immunities and franchises of the
Constituent Corporations, the officers and directors of the Surviving
Corporation are fully authorized in the name of the Constituent Corporations or
otherwise to take, and shall take, all such action.
1.9 Fair Market Value.
5
<PAGE> 10
(a) For purposes of this Agreement, the "Fair Market Value" of
a share of Southwest Common Stock shall be determined as follows:
(i) Upon receipt of all required regulatory approvals
of the Merger, the parties shall as promptly as practicable
make a joint public announcement (the "Public Announcement")
that such regulatory approvals have been obtained.
(ii) The "Fair Market Value" of a share of Southwest
Common Stock shall be the average of the closing prices of the
Southwest Common Stock on the New York Stock Exchange, for the
twenty trading days ending on the trading day which is five
trading days prior to the Closing Date. The closing prices
printed in The Wall Street Journal will be presumed to be
correct in the absence of evidence to the contrary.
(b) Notwithstanding Section 1.9(a):
(i) If the Fair Market Value of a share of Southwest
Common Stock determined as provided in Section 1.9(a) is
greater than $17.50, Noel T. Coon may terminate this Agreement
(on behalf of NPL and NPL Shareholders) by written notice to
Southwest delivered not less than two business days prior to
the Closing Date unless Southwest and Merger Sub notify Noel
T. Coon in writing on or prior to the Closing Date that
Southwest and Merger Sub agree that, for purposes of this
Agreement, the Fair Market Value of a share of Southwest
Common Stock shall be $17.50; and
(ii) If the Fair Market Value of a share of Southwest
Common
6
<PAGE> 11
Stock determined as provided in Section 1.9(a) is less than
$15.00, Southwest may terminate this Agreement by written
notice to Noel T. Coon delivered not less than two business
days prior to the Closing Date unless Noel T. Coon notifies
Southwest in writing on or prior to the Closing Date that he
agrees (on behalf of NPL and NPL Shareholders) that, for
purposes of this Agreement, the Fair Market Value of a share
of Southwest Common Stock shall be $15.00.
(iii) NPL and NPL Shareholders each agree to be bound
by the decision made by Noel T. Coon pursuant to the
provisions of subsections 1.9(b)(i) and (ii) above.
In the event of any termination of this Agreement
pursuant to Section 1.9(b), the parties hereto shall have no
further obligation whatsoever to each other hereunder except
pursuant to those provisions of this Agreement which expressly
survive the termination hereof.
2. Effective Time; Closing. The Merger shall become effective at the
Effective Time.
3. Representations and Warranties of NPL. The "NPL Disclosure
Schedules" shall mean all of the disclosure schedules required by this
Agreement, dated as of the date hereof, which have been delivered by NPL. NPL
hereby represents and warrants to Southwest as follows:
3.1 Organization, Power, Good Standing, Etc.
(a) NPL is a corporation duly organized, validly existing and
in good
7
<PAGE> 12
standing under the laws of the State of Minnesota. NPL has all the
requisite corporate power and authority to own, lease and operate all
of its properties and assets and to carry on its business as currently
conducted. NPL is duly licensed or qualified to do business and is in
good standing in each jurisdiction in which the nature of the business
conducted by it makes such licensing or qualification necessary and
where the failure to be so qualified would, individually or in the
aggregate, have a Material Adverse Effect (as defined below) on NPL.
NPL has heretofore delivered to Southwest correct copies of its
Articles of Incorporation (the "Articles") and its Bylaws as in effect
on the date hereof. As used in this Agreement, the term "Material
Adverse Effect" with respect to a party shall mean any change or effect
that is reasonably likely to be materially adverse to the business,
operations, properties, condition (financial or otherwise), assets or
liabilities of such party taken as a whole.
(b) NPL has no subsidiaries. NPL has no affiliates, other than
other businesses, firms, corporations, partnerships, joint ventures, or
similar organizations which are owned in whole or in part by Noel T.
Coon.
(c) The minute books of NPL contain materially complete and
accurate records of all meetings held and other corporate action taken,
since December 31, 1990, by the company's stockholders and Board of
Directors.
(d) Except as set forth on Disclosure Schedule 3.1(d), NPL
does not own (beneficially or otherwise) any capital stock or other
equity interest in any corporation or other entity.
8
<PAGE> 13
(e) Except as listed on Disclosure Schedule 3.1(e), NPL is not
a party to nor is it or any of its assets bound by any agreement which
relates to any equity interest of NPL in any partnership, joint
venture, or similar enterprise pursuant to which NPL may be required to
transfer funds in respect of any equity interest to, make an investment
in, or guarantee or assume any debt, dividend or other obligation of,
any person, entity, partnership, joint venture or similar enterprise,
or pursuant to which NPL is or is required to become an equity
investor.
(f) Except as specifically disclosed in this Agreement, no
other agreements, either written or oral, exist between NPL and Noel T.
Coon or businesses owned by Noel T. Coon which would require the
transfer of NPL funds or assets.
3.2 Capitalization. The authorized capital stock of NPL
consists of 15,000 shares of common stock, par value $10 per share ("NPL Common
Stock"). As of the date hereof, 5,771 shares of NPL Common Stock (and no shares
of NPL Preferred Stock) were issued and outstanding. No shares of stock are held
in NPL's treasury. All of the issued and outstanding shares of NPL Common Stock
have been duly authorized, validly issued, and are fully paid and nonassessable,
with no personal liability attaching to the ownership thereof. Other than shares
reserved for issuance under the Stock Purchase Agreement (as hereinafter
defined), there are no shares of NPL Common Stock reserved for issuance for any
reason. NPL is not bound by any outstanding subscriptions, options, warrants,
calls, commitments or agreements of any character calling for the transfer,
purchase, or issuance of any shares of its capital stock or any securities
representing the right to
9
<PAGE> 14
purchase or otherwise receive any shares of its capital stock or any securities
convertible into or representing the right to purchase or subscribe for any such
shares except for the obligations of NPL under the Stock Purchase Agreement of
March 7, 1994, as amended (the "Stock Purchase Agreement"), providing for the
possible issuance of up to 1,236 additional shares each to Messrs. Johnson and
Kemper (up to 2,472 in total) in order to implement said Agreement.
Notwithstanding the foregoing, NPL further represents that all of its stock is
now owned by Noel T. Coon and that William L. Johnson and Michael J. Kemper have
an option to purchase up to 15 percent each of the outstanding shares of NPL by
purchasing with promissory notes ("Option Notes") newly issued shares of NPL
from NPL as provided in the Amendment to Stock Purchase Agreement dated November
12, 1995. Immediately prior to the exercise of such option, NPL will issue a
dividend to Noel T. Coon in the form of a promissory note ("Dividend Note") in
the amount equal to (and conditioned upon the execution and delivery of) the
Option Notes. NPL will pay and discharge the Dividend Note by transferring the
Option Notes to Coon. Southwest hereby consents to the exercise of the option,
the foregoing dividend and payment of the Dividend Note as provided above, and
agrees to recognize Messrs. Johnson and Kemper as shareholders of NPL in the
event the option is legally exercised in accordance with its terms on or prior
to the Closing Date.
3.3 Authority. NPL and NPL Shareholders have the requisite
power and authority to execute and deliver this Agreement and to consummate the
transactions contemplated hereby. Assuming the due authorization, execution and
delivery hereof by the other parties hereto, this Agreement constitutes a valid
and binding obligation of NPL
10
<PAGE> 15
and NPL Shareholders, enforceable against them in accordance with its terms.
3.4 No Violation. Except as listed on Disclosure Schedule 3.4,
neither the execution and delivery of this Agreement nor the consummation by NPL
or NPL Shareholders of the transactions contemplated hereby, nor compliance by
NPL or NPL Shareholders with any of the terms or provisions hereof, will (i)
violate any provision of the Articles or Bylaws of NPL, (ii) assuming the
consents and approvals referred to in Section 3.5 hereof are duly obtained,
violate any statute, code, ordinance, rule, regulation, judgment, order, writ,
decree or injunction applicable to NPL, or any of its respective properties or
assets, or (iii) violate, conflict with, result in a breach of any provisions
of, constitute a default (or an event which, with notice or lapse of time, or
both, would constitute a default) under, result in the termination of,
accelerate the performance required by, or result in the creation of any lien,
security interest, charge or other encumbrance upon any of the properties or
assets of NPL, under any of the terms, conditions or provisions of any note,
bond, mortgage indenture, deed of trust, license, lease, agreement or other
instrument or obligation to which NPL is a party, or by which it or any of its
properties or assets may be bound or affected, except with respect to (iii)
above, for such violations, conflicts, breaches, defaults, terminations,
accelerations and encumbrances which would not prevent consummation of the
transactions contemplated hereby and would not have a Material Adverse Effect.
Prior to Closing, NPL and NPL Shareholders shall provide written evidence to
Southwest that NPL has obtained approvals or waivers for all restrictions listed
on Disclosure Schedule 3.4.
3.5 Consents and Approvals. Except for (i) consents and
approvals of,
11
<PAGE> 16
deliveries to, or filings or registrations with the Securities and Exchange
Commission (the "SEC"), the Federal Trade Commission (the "FTC"), the United
States Department of Justice (the "Justice Department"), or other applicable
federal and state governmental authorities and (ii) the consents, approvals,
filings or registrations set forth on Disclosure Schedule 3.4, no consents or
approvals of or filings or registrations with any third party or public body or
authority, except for consents, approvals, filings or registrations where the
failure to obtain such consents or approvals or to make such filings or
registrations would not prevent or delay the Merger or have a Material Adverse
Effect, are necessary in connection with the execution and delivery by NPL and
NPL Shareholders of this Agreement and the consummation of the Merger.
3.6 Financial Statements.
(a) NPL has previously delivered or made available to
Southwest copies of (i) the balance sheets of NPL as of December 31,
1992, 1993 and 1994 respectively, and the related statements of income
and retained earnings and statements of cash flows for each of the
three years ended, respectively, on December 31, 1992, 1993 and 1994,
in each case accompanied by the NPL audit reports of Deloitte & Touche
LLP, independent public accountants, with respect to NPL (the "NPL
1992, 1993 and 1994 Financial Statements" respectively), and (ii) the
unaudited balance sheet of NPL as of July 30, 1995 and the related
unaudited income statement for the seven-month period then ended (the
"July 1995 Financial Statements"). The NPL 1992, 1993 and 1994
Financial Statements referred to herein (including the related notes)
present fairly the financial position of NPL, as
12
<PAGE> 17
of the respective dates set forth therein, and present fairly the
results of the operations and changes in stockholders' equity and cash
flows of NPL for the respective fiscal periods or as of the respective
dates set forth therein.
(b) The NPL 1992, 1993 and 1994 Financial Statements
(including the related notes) have been prepared in accordance with
generally accepted accounting principles consistently applied during
the periods involved. The July 1995 Financial Statements present fairly
the financial position of NPL as of the respective dates set forth
therein, and present fairly the results of the operations of NPL for
the seven months then ended.
(c) The books and records of NPL have been, and are being,
maintained in accordance with applicable legal and accounting
requirements.
3.7 Brokerage. There are no claims for investment banking
fees, brokerage commissions, finder's fees or similar compensation payable by
NPL in connection with the transactions contemplated by this Agreement.
3.8 Absence of Certain Changes or Events. As of the date of
this Agreement, there has not been any material adverse change in the business,
operations, properties, assets or financial condition of NPL, taken as a whole,
from that described in the audited NPL 1994 Financial Statements and, to the
best of NPL's knowledge, no fact or condition existed as of the date hereof that
NPL believes will cause such a material adverse change prior to the Closing
Date. The parties hereto agree that none of the information disclosed in the
July 1995 Financial Statements shall constitute a material adverse change for
purposes of this Agreement.
13
<PAGE> 18
3.9 Litigation, Etc. As of the date of this Agreement, (a)
there are no actions, suits, claims, inquiries, proceedings or investigations
before any court, commission, bureau, regulatory, administrative or governmental
agency, arbitrator, body or authority known to NPL Shareholders or management to
be pending or threatened against NPL which will result in liabilities, including
defense costs, in excess of $1,000 in the aggregate except those listed on
Disclosure Schedule 3.9 and (b) NPL is not subject to any order, judgment or
decree and is not in default with respect to any such order, judgment or decree.
3.10 Taxes and Tax Returns.
(a) The amounts recorded as provisions for taxes in the NPL
July 1995 Financial Statements are sufficient for all material accrued
and unpaid federal, state, county and local taxes, interest and
penalties of NPL, whether or not disputed, for the period ended July
30, 1995, and for all fiscal periods prior thereto. Except as set forth
on Disclosure Schedule 3.10(b), NPL has not been notified of an
Internal Revenue Service examination or of an examination by any state
tax authority. NPL has not granted any waiver of any statute of
limitations with respect to, or any extension of a period for the
assessment of, any Tax (as hereinafter defined). Complete and correct
copies of the income tax returns of NPL for the four years ended
December 31, 1994, as filed with the Internal Revenue Service and all
state and local taxing authorities, together with all related
correspondence and notices, have previously been made available to
Southwest.
(b) Except as set forth on Disclosure Schedule 3.10(b), NPL
has timely
14
<PAGE> 19
and correctly filed all federal, state, county and local tax and other
returns and reports (collectively, "Returns") required by applicable
law to be filed (including without limitation, estimated tax returns,
income tax returns, excise tax returns, sales tax returns, use tax
returns, property tax returns, franchise tax returns, information
returns and withholding, employment and payroll tax returns), and has
paid all taxes, levies, license and registration fees, charges or
withholdings of any nature whatsoever shown by such Returns to be owed,
or which are otherwise due and payable (hereinafter called "Taxes"),
and to the extent any material liabilities for Taxes as of July 30,
1995 have not been fully discharged, full and complete reserves have
been established in the July 1995 Financial Statements. NPL is not in
default in the payment of any Taxes due or payable or any assessments
received in respect thereof except for Taxes which are being contested
in good faith. Except as listed on Disclosure Schedule 3.10(b), no
additional assessments of Taxes which might be payable by NPL are known
to NPL to be proposed, pending or threatened, other than Taxes for
periods for which returns are not yet filed and which have been
accrued.
(c) There are no intercompany tax-sharing agreements to which
NPL is a party.
3.11 Employees; Employee Benefit Plans.
(a) Except as listed on Disclosure Schedule 3.11(a), other
than union contracts, as of the date hereof NPL is not a party to or
bound by or in any manner liable under any contract, arrangement or
understanding (whether written or oral)
15
<PAGE> 20
with respect to the employment or compensation of any officers,
employees or consultants, and consummation of the transactions
contemplated by this Agreement will not (either alone or upon the
occurrence of any additional acts or events) result in payments
(whether of severance pay or otherwise) becoming due from NPL to any
officer or employee other than the existing employment contracts with
Mr. William L. Johnson and Mr. Michael J. Kemper which they each hereby
agree will automatically cancel on December 31, 1996 by mutual
agreement without any penalty or additional compensation, except the
bonuses earned thereunder in 1996 will be paid in 1997 when the audited
1996 financial statements are available to determine NPL's pretax
income. NPL agrees to accrue all costs to be incurred for severance
payments and the Pete Middents award listed on Disclosure Statement
3.11(a) in its 1995 Financial Statements.
(b) Except as listed in Disclosure Schedule 3.11(b), as of the
date hereof, there are not, and there have not been at any time in the
past three years, any actions, suits, claims or proceedings (which have
been served on NPL) before any court, commission, bureau, regulatory,
administrative or governmental agency, arbitrator, body or authority
pending or, to the best of NPL Shareholders' or management's knowledge,
threatened by any employees, former employees or other persons relating
to the employment practices or activities of NPL (except for threatened
actions which have subsequently been resolved).
(c) With respect to all employee benefit plans, NPL represents
and warrants as follows:
16
<PAGE> 21
(i) All employee benefit plans, as defined in Section
3(3) of the Employee Retirement Income Security Act of 1974,
as amended ("ERISA"), and any other pension, bonus, deferred
hospitalization, health and other employee benefit plan,
program or arrangement, whether formal or informal, under
which NPL has any obligation or liability, or under which any
employee or former employee of NPL has any rights to benefits
(the "Benefit Plans") are set forth on Disclosure Schedules
3.11(a) and 3.11(c)(i). All Benefit Plans that are subject to
the funding requirements in Title I, Subtitle B, Part 3 of
ERISA or Section 412 of the Internal Revenue Code of 1986, as
amended (the "Code"), are in compliance with such funding
standards, and no waiver or variance from such funding
requirements has been obtained or applied for under Section
412(d) of the Code. None of the Benefit Plans is subject to
Title IV of ERISA or is a "multi-employer plan," as such term
is defined in Section 3(37) and 4001(a)(3) of ERISA and
Section 414(f) of the Code.
(ii) Except as listed on Disclosure Schedule
3.11(c)(ii), the terms of the Benefit Plans are, and the
Benefit Plans have been administered, in accordance with the
requirements of ERISA, the Code, applicable law and the
respective plan documents. None of the Benefit Plans is under
audit or is the subject of an investigation by the Internal
Revenue Service, the U.S. Department of Labor or any other
federal or state governmental agency. All material reports and
information required to be filed with, or provided to, the
17
<PAGE> 22
United States Department of Labor, Internal Revenue Service,
the Pension Benefit Guaranty Corporation (the "PBGC") and plan
participants and beneficiaries with respect to each Benefit
Plan have been timely filed or provided. With respect to each
Benefit Plan for which an annual report has been filed, no
material change has occurred with respect to the matters
covered by the most recent annual report since the date
thereof.
(iii) NPL is not aware of any facts regarding any
Benefit Plan which is an "employee pension benefit plan" as
defined in Section 3(2) of ERISA (collectively, the "Employee
Pension Benefit Plans") that would present a significant risk
that any Employee Pension Benefit Plan would not be determined
by the appropriate District Director of the Internal Revenue
Service to be "qualified" within the meaning of Section 401(a)
of the Code, or with respect to which any trust maintained
pursuant thereto is not exempt from federal income taxation
pursuant to Section 501 of the Code, or with respect to which
a favorable determination letter could not be issued by the
Internal Revenue Service with respect to each such Employee
Pension Benefit Plan.
(iv) With respect to each Benefit Plan, all
contributions, premiums or other payments due or required to
be made to such plans as of the Effective Time have been or
will be made or accrued as required by the respective plan
documents.
(v) To the best of NPL's knowledge, there are not
now, nor have
18
<PAGE> 23
there been, any "prohibited transactions", as such term is
defined in Section 4975 of the Code or Section 406 of ERISA,
involving NPL or any officer, director or employee of NPL with
respect to the Benefit Plans that could subject NPL or any
other party in interest to the penalty or tax imposed under
Section 502(I) of ERISA and Section 4975 of the Code.
(vi) As of the date hereof, no claim, lawsuit,
arbitration or other action (which has been served on NPL) has
been instituted, asserted or, to the best of NPL Shareholders'
or management's knowledge, threatened by or on behalf of any
Benefit Plan or by any employee alleging a breach or breaches
of fiduciary duty or violations of other applicable state or
federal law with respect to such Benefit Plan, which could
result in liability on the part of NPL or any Benefit Plan
under ERISA or any other law, nor is there any basis known to
NPL Shareholders or management for successful prosecution of
such a claim, and Southwest will be notified promptly in
writing of any such threatened or pending claim arising
between the date hereof and the Closing.
(vii) Except as may be required by the Consolidated
Omnibus Budget and Reconciliation Act of 1985, as amended
("COBRA"), no Benefit Plan which is an employee welfare
benefit plan (within the meaning of Section 3(1) of ERISA)
provides for continuing benefits or coverage for any
participant or beneficiary of a participant after such
participant's termination of employment nor does NPL have any
current or projected liability under
19
<PAGE> 24
any such plans.
(viii) NPL has not maintained or contributed to, and
does not currently maintain or contribute to, any severance
pay plan under which any employees of NPL, other than union
employees, are entitled to any benefits. All payments (other
than regular wages and vacation pay) made to employees of NPL
coincident with or in connection with termination of
employment from January 1, 1993 to the date hereof, are
disclosed on Disclosure Schedule 3.11(c)(viii).
(ix) Except as otherwise provided in this Agreement,
no individual will accrue or receive any additional benefits,
service, or accelerated rights to payment or vesting of
benefits under any Benefit Plan as a result of the
transactions contemplated by this Agreement.
(x) NPL has to the extent relevant complied in all
material respects with all of the requirements of COBRA.
(xi) All amendments required to bring all Benefit
Plans into conformity with any of the applicable provisions of
ERISA and the Code have been duly adopted or will be duly
adopted as of the Closing Date, subject to further revisions
that may be required by the Internal Revenue Service.
(xii) No individual will accrue or receive from NPL
any payments, benefits, services or accelerated rights to
payment or vesting of benefits, or otherwise receive any other
rights, which would constitute a "parachute payment" as
defined in Section 280G(b)(2) of the Code as a result of or in
20
<PAGE> 25
connection with the transactions contemplated by this
Agreement.
3.12 Compliance With Applicable Law.
(a) NPL holds all licenses, certificates, franchises, permits
and other governmental authorizations ("Permits") necessary for the
lawful conduct of its business and such Permits are in full force and
effect, and NPL is in all respects complying therewith, except where
the failure to possess or comply with such Permits would not have a
Material Adverse Effect on NPL.
(b) Except as set forth on Disclosure Schedule 3.12(b), NPL is
and for the past three years has been in compliance with all foreign,
federal, state and local laws, statutes, ordinances, rules, regulations
and orders applicable to the operation, conduct or ownership of its
business or properties except for any noncompliance which is not
reasonably likely to have in the aggregate a Material Adverse Effect on
NPL.
3.13 Contracts and Agreements. Except as listed on Disclosure
Schedule 3.13, as of the date hereof, and except with respect to existing lease
agreements and borrowings in the ordinary course: (a) NPL is not a party to or
bound by any commitment, contract, agreement or other instrument which involves
or could involve aggregate future payments by NPL of more than $50,000; and (b)
no commitment, contract, agreement or other instrument, other than NPL's charter
documents, to which NPL is a party or by which it is bound, limits the freedom
of NPL to compete in any line of business or with any person.
3.14 Disclosure. To the knowledge of NPL, no representation or
warranty
21
<PAGE> 26
regarding NPL contained in this Agreement, and no statement contained in the
Disclosure Schedules delivered by NPL hereunder, contains any untrue statement
of a material fact or omits to state a material fact necessary in order to make
a statement herein or therein, in light of the circumstances under which it was
made, not misleading.
3.15 Title to Property.
(a) Real Property. Disclosure Schedule 3.15(a) contains a
description of all interests in real property, whether owned, leased or
otherwise claimed, including a list of all leases of real property, in
which NPL has or claims an interest as of the date hereof and any
guarantees of any such leases by NPL. Each such lease is legal, valid
and binding as between NPL and the other party or parties thereto, and
the occupant is a tenant or possessor in good standing thereunder, free
of any material default or breach whatsoever and quietly enjoys the
premises provided for therein. NPL does not own any real property on
the date hereof. All real property and fixtures material to the
business, operations or financial condition of NPL are in good
condition and repair, ordinary wear and tear excepted.
(b) Environmental Matters. Except as listed on Disclosure
Schedule 3.15(b), the real property leased by NPL on the date hereof
did not contain any underground storage tanks, asbestos,
ureaformaldehyde, uncontained polychlorinated biphenyls, or, except
for materials which are ordinarily used in office buildings and office
equipment such as janitorial supplies and do not give rise to financial
liability therefor under the hereafter defined Environmental Laws,
releases of hazardous substances as such terms may be defined by all
applicable federal, state
22
<PAGE> 27
or local environmental protection laws and regulations ("Environmental
Laws"). As of the date hereof, (i) no part of any such real property
has been listed or, to the knowledge of NPL, proposed for listing on
the National Priorities List pursuant to the Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA") or on
a registry or inventory of inactive hazardous waste sites maintained by
any state, and (ii) no notices have been received alleging that NPL was
a potentially responsible person under CERCLA or any similar statute,
rule or regulation. NPL knows of no material violation of law,
regulation, ordinance (including, without limitation, laws, regulations
and ordinances with respect to hazardous waste, zoning, environmental,
city planning or other similar matters) relating to its respective
properties. NPL Shareholders agree to reimburse the Surviving
Corporation for any reasonable remediation expenses incurred or claims
made at all the sites listed in Disclosure Schedule 3.15(b) prior to
the first anniversary of the Closing Date in accordance with the
deductible and maximum set forth in Section 13.1(d).
3.16 Insurance. Disclosure Schedule 3.16 contains a true and
complete list and a brief description (including name of insurer, agent,
coverage and expiration date) of all insurance policies in force on the date
hereof with respect to the business and assets of NPL (other than insurance
policies under which NPL is named as a loss payee or additional insured). NPL is
in compliance with all of the material provisions of all insurance policies.
Each such policy is outstanding and in full force and effect and, except as set
forth on Disclosure Schedule 3.16, NPL is the sole beneficiary of such policies
except for
23
<PAGE> 28
additional insureds. All premiums and other payments due under any such policy
have been paid or accrued.
3.17 Powers of Attorney. Except as listed on Disclosure
Schedule 3.17, NPL has no powers of attorney outstanding other than those issued
pursuant to the requirements of regulatory authority.
4. Representations and Warranties of Southwest. Southwest hereby
represents and warrants to NPL as follows:
4.1 Corporate Organization.
(a) Southwest is a corporation duly organized, validly
existing and in good standing under the laws of the State of
California. Southwest has all the requisite power and authority to own,
lease and operate all of its properties and assets and to carry on its
business as it is currently conducted, and is duly licensed or
qualified to do business and is in good standing in each jurisdiction
in which the nature of the business conducted by it makes such
licensing or qualification necessary and where failure to be so
qualified would not, individually or in the aggregate, have a Material
Adverse Effect on Southwest.
(b) Merger Sub is a corporation duly organized, validly
existing and in good standing under the laws of the State of Nevada and
authorized to do business in the State of Arizona.
4.2 Authority.
(a) Southwest has full corporate power and authority to
execute and deliver this Agreement and, subject to applicable
regulatory approvals, to
24
<PAGE> 29
consummate the transactions contemplated hereby. The execution and
delivery of this Agreement and consummation of the transactions
contemplated hereby have been duly and validly approved by the Board of
Directors of Southwest. This Agreement has been duly and validly
executed and delivered by Southwest and, assuming the due
authorization, execution and delivery thereof by the other parties
hereto, constitutes valid and binding obligations of Southwest,
enforceable against it in accordance with the terms of the Agreement.
(b) Southwest as the sole shareholder of Merger Sub will cause
it to take any and all action necessary and appropriate to carry out
its obligations under this Agreement.
(c) Merger Sub has full corporate power and authority to
execute and deliver this Agreement and, subject to applicable
regulatory approvals, to consummate the transactions contemplated
hereby. The execution and delivery of this Agreement and consummation
of the transactions contemplated hereby have been or will be duly and
validly approved by the Board of Directors of Merger Sub. This
Agreement has been duly and validly executed and delivered by Merger
Sub and, assuming the due authorization, execution and delivery
thereof, by the other parties hereto, constitutes valid and binding
obligations of Merger Sub, enforceable against it in accordance with
the terms of the Agreement.
4.3 No Violation. Neither the execution and delivery of this
Agreement nor the consummation by Southwest or Merger Sub of the transactions
contemplated hereby, nor compliance by Southwest or Merger Sub with any of the
terms hereof, will (i) violate
25
<PAGE> 30
any provision of the Articles of Incorporation or Bylaws of Southwest or Merger
Sub, or (ii) assuming that the consents and approvals referred to in Section 4.4
are duly obtained, violate any statute, code, ordinance, rule, regulation,
judgment, order, writ, decree or injunction applicable to Southwest or Merger
Sub or any of their properties or assets, or (iii) violate, conflict with,
result in the breach of any provisions of, constitute a default (or an event
which, with notice or lapse of time, or both, would constitute a default) under,
result in the termination of, accelerate the performance required by, or result
in the creation of any lien, security interest, charge or other encumbrance upon
any of the respective properties or assets of Southwest or Merger Sub under, any
of the terms, conditions or provisions of any note, bond, mortgage, indenture,
deed of trust, license, lease, agreement or other instrument or obligation to
which Southwest or Merger Sub is a party, or by which they or their respective
properties or assets may be bound or affected, except with respect to (iii)
above, for such violations, conflicts, breaches, defaults, terminations,
accelerations or encumbrances which in the aggregate will not prevent or delay
the consummation of the transactions contemplated hereby.
4.4 Consents and Approvals. Except for consents and approvals
of or filings or registrations with the SEC, the FTC, the Justice Department and
other applicable federal and state governmental authorities, no consents or
approvals of or filings or registrations with any third party or any public body
or authority are necessary in connection with the execution and delivery by
Southwest or Merger Sub of this Agreement.
4.5 Sufficient Resources. Southwest will have available at the
Closing sufficient common stock to enable it lawfully to satisfy its payment
obligations pursuant to
26
<PAGE> 31
this Agreement subject to approval by the California Public Utilities
Commission. Upon issuance as provided in this Agreement, the Southwest Common
Stock will be duly and validly issued, fully paid and nonassessable and will be
owned by the NPL Shareholders free and clear of any liens or encumbrances.
Southwest has and will have sufficient management and financial resources to
make reasonable efforts to obtain the required regulatory approvals for the
Merger. On the date of this Agreement, there is no pending or, to the knowledge
of Southwest, threatened legal or governmental proceeding against Southwest or
any subsidiary or affiliate thereof which would affect Southwest's ability to
obtain any of the required regulatory approvals or satisfy any of the other
conditions required to be satisfied in order to consummate the transactions
contemplated by this Agreement. Southwest will promptly notify NPL if any of the
representations contained in this Section 4.5 ceases to be true and correct.
4.6 Litigation. No action, suit, counterclaim or other
litigation, investigation or proceeding to which Southwest or any of its
subsidiaries is a party is pending, or is known by the executive officers of
Southwest or any of its subsidiaries to be threatened, against Southwest or any
of its subsidiaries before any court or governmental or administrative agency,
domestic or foreign which would be reasonably expected to result in any
liabilities which would delay or prevent the consummation of the Merger. Except
as disclosed herein or the Southwest Reports (as hereinafter defined),
(i) There are no legal, administrative, arbitration
or other proceedings or claims pending or, to the best of
Southwest's knowledge, threatened against Southwest, nor is
Southwest subject to any existing judgment which
27
<PAGE> 32
would materially affect the consolidated financial condition
or results of operations of Southwest;
(ii) Southwest has not received any inquiry from an
agency of the federal or of any state or local government
about the transactions contemplated hereby, or about any
violation or possible violation of any law, regulation or
ordinance materially affecting its businesses or assets.
4.7 Capitalization. Southwest is authorized to issue thirty
million (30,000,000) shares of Southwest Common Stock, $1.00 par value. As of
November 1, 1995, there were twenty-four million three hundred twenty thousand
two hundred eighty-eight (24,320,288) shares of Southwest Common Stock issued
and outstanding, and no other outstanding rights to purchase any common stock of
Southwest existed except under the Southwest Dividend Reinvestment and Stock
Purchase Plan, Employees' Investment Plan and Management Incentive Plan.
4.8 SEC Filings. Southwest has provided the NPL Shareholders
with true and correct copies of (i) Southwest's Annual Report on Form 10-K for
the fiscal year ended December 31, 1994; (ii) Southwest's Annual Report to
Stockholders for the fiscal year ended December 31, 1994; (iii) Southwest's
proxy statement for its 1995 Annual Meeting of Shareholders; (iv) Southwest's
Quarterly Reports on Form 10-Q for the fiscal quarters ended March 31, 1995,
June 30, 1995 and September 30, 1995; and (v) any other filings made with the
SEC pursuant to the Securities Exchange Act of 1934 (the "1934 Act") since
January 1, 1995. Between the date hereof and the Closing Date, Southwest will
provide to the NPL Shareholders true and correct copies of all further filings
made with the SEC
28
<PAGE> 33
pursuant to the 1934 Act, as well as all reports or other communications sent to
Southwest's shareholders generally as soon as reasonably available. All of the
foregoing reports, filings, statements and communications are hereinafter
collectively referred to as the "Southwest Reports." None of the Southwest
Reports, when filed or sent, did or will contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary to make the statements made therein, in light of the circumstances
under which they were made, not misleading.
4.9 Business Changes. Except as set forth herein or in the
Southwest Reports, since September 30, 1995, there has not been:
(i) Any material adverse change in the consolidated
working capital, financial condition, assets, liabilities
(whether absolute, accrued, contingent or otherwise), or
operating profits, of Southwest or any material adverse change
in the business of Southwest taken as a whole;
(ii) Any damage, destruction or loss (whether or not
covered by insurance) materially and adversely affecting the
business of Southwest taken as a whole; or
(iii) Any termination of any material permit or
material license issued to Southwest or to any of its
employees or agents upon which a material portion of
Southwest's business is dependent.
4.10 Financial Statements.
(a) The consolidated financial statements of Southwest
included within the Southwest Reports fairly present the consolidated
financial position of
29
<PAGE> 34
Southwest and the consolidated results of its operations at the dates
and for the periods to which they apply; such statements have been
prepared in conformity with generally accepted accounting principles,
applied on a consistent basis throughout the periods involved, and such
financial statements comply with all applicable provisions of
Regulation S-X of the SEC. The interim consolidated financial
statements presented in such Reports include all adjustments (subject
only to normal recurring year-end adjustments) necessary for a fair
presentation of Southwest's consolidated financial position and
consolidated results of operations as of the dates and for the periods
presented therein.
(b) On September 30, 1995, Southwest had no material
liabilities (whether absolute, accrued, contingent or otherwise) which
were required to be reflected in and disclosed on its balance sheets at
that date or in the notes thereto pursuant to Regulation S-X of the SEC
or in accordance with generally accepted accounting principles,
consistently applied but were not so reflected. Except as set forth
herein and/or the Southwest Reports, since September 30, 1995,
Southwest has incurred no material liabilities (whether absolute,
accrued, contingent or otherwise) in addition to those reflected in or
disclosed on such balance sheets or the related notes, except
liabilities incurred in the ordinary course of its business.
(c) Southwest's books, records and system of internal
accounting controls comply in all material respects with Section 13(b)
of the 1934 Act as in effect on the date hereof.
4.11 Disclosure. To the knowledge of Southwest, no
representation or
30
<PAGE> 35
warranty made by Southwest in this Agreement and no certification furnished or
to be furnished by Southwest to NPL pursuant to this Agreement, contains any
untrue statement of a material fact or omits to state a material fact necessary
to make the statements contained herein or therein in the light of the
circumstances under which it was made, not misleading.
5. Covenants of the Parties.
5.1 Current Information.
(a) No later than ten (10) days after the date of this
Agreement, NPL (on the one hand) and Southwest (on the other hand)
shall each designate an individual acceptable to the other party (a
"Designated Representative" and, together, the "Designated
Representatives") to be the primary point of contact between the
parties. During the period from the date of their designation to the
Closing, the Designated Representatives or their representatives shall
confer on a regular basis so that Southwest is kept advised as to the
general status of the ongoing operations of NPL. Without limiting the
foregoing, NPL agrees to confer with Southwest's Designated
Representative regarding any proposed significant changes to NPL's
management policies and objectives. NPL will promptly notify
Southwest's Designated Representative or his or her representatives of
any material change in the normal course of business or in the
operation of the properties of NPL or of any governmental complaints,
investigations or hearings (or communications indicating that the same
may be contemplated) or the institution or the threat of any litigation
involving NPL, and will keep Southwest's Designated
31
<PAGE> 36
Representative or his or her representatives fully informed of such
events and the progress of any already existing litigation.
(b) Southwest shall immediately notify NPL's Designated
Representative if it appears that there has occurred any change in its
financial or other condition or any other event that will or may affect
Southwest's ability to complete the Merger.
5.2 NPL Reports. As soon as reasonably available, but in no
event more than 20 calendar days after the end of each accounting month, NPL
will deliver to Southwest its monthly financial reports. As soon as reasonably
available, but in no event more than 120 days after the end of the 1995 fiscal
year, NPL will deliver to Southwest its annual audited financial statements.
5.3 Regulatory Matters.
(a) The parties hereto will cooperate with each other and use
all reasonable efforts to prepare all necessary documentation, to
effect all necessary filings and to obtain all necessary permits,
consents, approvals and authorizations of all third parties and
governmental bodies necessary to consummate the transactions
contemplated by this Agreement including, without limitation, those
that may be required from the SEC, the FTC, the Justice Department and
other federal and state regulatory authorities. Southwest and NPL will
each have the right to review reasonably in advance all information
relating to themselves and any of their respective subsidiaries,
together with any other information reasonably requested, which appears
in any filing made with or written material submitted to any
governmental body in connection with the transactions contemplated by
this
32
<PAGE> 37
Agreement. The parties hereto agree to attempt to keep confidential any
and all proprietary information which may be of value to their
competition.
(b) Southwest and NPL shall furnish each other with all
reasonable information concerning themselves, their subsidiaries,
directors, officers and stockholders and such other matters as may be
necessary or advisable in connection with any statement or application
made by or on behalf of Southwest or NPL, or any of Southwest's
subsidiaries to any governmental body in connection with the Merger and
the other transactions, applications or filings contemplated by this
Agreement.
(c) Southwest and NPL will promptly furnish each other with
copies of written communications received by or delivered to any
governmental body in respect of the transactions contemplated hereby.
5.4 Further Assurances. Subject to the terms and conditions
herein provided, each of the parties hereto agrees to use all reasonable efforts
to take, or cause to be taken, all action and to do, or cause to be done, all
things necessary, proper or advisable under applicable laws and regulations to
consummate and make effective the transactions contemplated by this Agreement.
In case that at any time after the Closing any further action is necessary or
desirable to carry out the purposes of this Agreement, the proper officers and
directors of Southwest and NPL shall take all necessary actions, subject to the
terms and conditions of this Agreement.
5.5 Public Announcements. The parties will cooperate and
consult with each other in the development and distribution of all news releases
and other public
33
<PAGE> 38
information disclosures with respect to this Agreement or any of the
transactions contemplated hereby, except as may be otherwise limited by law.
5.6 Failure to Fulfill Conditions. In the event that either
Southwest or NPL determines that a condition to its obligation to consummate the
transactions contemplated hereby cannot be, or is not likely to be, fulfilled on
or prior to May 15, 1996, it will promptly notify the other party.
5.7 Tax Matters.
(a) Return Preparation; Tax Payments.
(i) NPL shall prepare, or cause to be prepared, and
shall file, or cause to be filed, any required NPL tax returns
(including amendments thereto) for all taxable periods prior
to and including the Closing Date. NPL shall consult with
Southwest regarding the preparation and filing of such returns
and Southwest shall be afforded the opportunity to review such
returns within a reasonable time prior to the due date for the
filing thereof. NPL shall not file any such tax returns
without the prior consent of Southwest, which consent shall
not be unreasonably withheld or delayed. NPL shall also
provide Southwest with copies of such returns in the form
actually filed and copies of all backup documentation.
Southwest shall be responsible for the preparation
and filing of any tax returns of NPL for all taxable periods
beginning after the Closing Date.
(ii) As soon as practicable after the filing of these
returns, but in no event later than April 1, 1996, for the
1995 return, and within four months
34
<PAGE> 39
of the Closing Date for the 1996 return, NPL or Surviving
Corporation shall pay to NPL Shareholders, in cash, 46 percent
of their share of the Subchapter S taxable income for such
periods as reflected on the applicable Internal Revenue
Service Form 1120S and related Schedule K-1.
(iii) Southwest hereby consents to and approves the
change by NPL from the cash to the accrual method for tax
reporting purposes, effective with the tax year beginning
January 1, 1996, and the filing with the I.R.S. of whatever
documents are required for such change.
(b) Tax Audits and Litigation.
(i) Representation Prior to Closing Date. Prior to
the Closing Date, NPL shall conduct and control the
representation of NPL with respect to any audit or
administrative or judicial proceeding concerning any tax items
or taxable period of NPL, including, without limitation, the
sole right to contest or concede any tax item, provided,
however, that NPL shall first obtain the consent of Southwest
with respect to any settlement or concession, which consent
shall not be unreasonably withheld or delayed, and shall
afford the opportunity, at Southwest's request, for Southwest
to participate fully in all settlement or concession
discussions relating to any taxable periods ending on or prior
to Closing.
(ii) Representation After Closing Date. For any
taxable period ending on or before the Closing, Noel T. Coon
shall be entitled, at his option and at his expense, to
conduct and exercise sole control over the
35
<PAGE> 40
representation of NPL with respect to any audit or
administrative or judicial proceedings, including, without
limitation, the sole right to contest or concede any tax
items, provided, however, that Noel T. Coon shall first obtain
the consent of Southwest with respect to any settlement or
concession, which consent shall not be unreasonably withheld
or delayed, and shall afford Southwest the opportunity, at its
request, to participate fully in all settlement or concession
discussions.
(c) Tax Workpapers. At the time of closing, NPL will provide
Southwest copies of all tax returns, associated workpapers, documents,
memoranda and correspondence prepared by NPL's tax preparers and made
available to NPL for the tax period ended September 30, 1987 and for
each tax period thereafter through the tax period ending with the
closing of this Agreement.
6. Covenants of NPL.
6.1 Conduct of the Business of NPL. During the period from the
date hereof to the Closing, except as otherwise permitted or required hereunder,
NPL will conduct the business of NPL and will engage in transactions only in the
ordinary course and consistent with the past practice and with prudent business
practice, except with the written consent of Southwest (which will not be
unreasonably withheld, delayed or conditioned). For this purpose the parties
shall use the most expeditious means of communication available. During such
period, NPL will use its reasonable efforts in accordance with good business
practice to preserve the business organization of NPL, to keep available to it
and to Southwest the present services of the valued employees of NPL,
36
<PAGE> 41
and to preserve for itself and for Southwest the goodwill of the customers of
NPL and others with whom business relationships exist. In addition, without
limiting the generality of the foregoing, NPL agrees that from the date hereof
to the Closing, except as otherwise consented to or approved by Southwest in
writing (which consent or approval shall not be unreasonably withheld, delayed
or conditioned) or as permitted or required by this Agreement or as required by
law (in which case NPL shall notify Southwest in writing), NPL will not:
(a) Change any provisions of NPL's Articles or Bylaws;
(b) Change the number of shares of authorized or issued
capital stock of NPL or issue, or grant any option, warrant, call,
commitment, subscription, right to purchase or agreement of any
character relating to the authorized or issued capital stock of NPL, or
any securities convertible into shares of such stock, or split, combine
or reclassify any shares of its capital stock, or declare, set aside or
pay any dividend, or other distributions (whether in cash, stock or
property or any combination thereof) in respect of the capital stock of
NPL, or redeem or otherwise acquire any shares of such capital stock
except as permitted by Section 6.1(m) and except for the issuance of
additional shares and the declaration and payment of a dividend in the
form of a Dividend Note in connection with the exercise of stock
options by Messrs. Johnson and Kemper under the Stock Purchase
Agreement dated March 7, 1994, as amended by Amendment to Stock
Purchase Agreement dated November 12, 1995;
(c) Grant any severance or termination pay to or enter into or
amend any
37
<PAGE> 42
employment agreement with, or increase the amount of payments or fees
to, any of the employees, officers or directors of NPL except for (i)
the payments to Messrs. Sutton and Maple listed on Schedule
3.11(c)(viii), (ii) severance payments under union agreements, (iii)
miscellaneous other severance payments not known, but not to exceed a
total of $10,000, (iv) normal salary increases, such as merit,
promotion, etc., consistent with past practice;
(d) Except as listed on Disclosure Schedule 6.1(d), make any
capital expenditures, including any capitalizable lease obligations, in
amounts individually in excess of (i) $100,000 or (ii) $250,000 in the
aggregate, other than expenditures necessary to maintain existing
assets in good repair;
(e) Make or engage in any financing-related transactions other
than (i) scheduled principal and interest payments on long-term debt,
capital lease obligations, equipment leases, and the note payable to
the current stockholder, (ii) transactions necessary to finance,
consistent with past practices and with prudent business practices,
capital expenditures made in accordance with the provisions of Section
6.1(d) hereof, and (iii) borrowings and payments under the working
capital lines of credit, in the ordinary course of business. Scheduled
principal and interest payments are listed on Disclosure Schedule
6.1(e).
(f) Make application for the opening of, or open, any new
offices involving a lease in excess of one year;
(g) Acquire assets other than those necessary to the conduct
of its business in the ordinary course;
38
<PAGE> 43
(h) Sell, transfer, assign, encumber or otherwise dispose of
assets other than has been customary in the ordinary course of
business;
(i) Engage or participate in any material transaction or incur
or sustain any obligation which would result in a cost to NPL,
individually or cumulatively of more than $10,000 (a "Material
Obligation") except for transactions which are in the ordinary course
of business consistent with past practices and with prudent business
practices and which are of similar kinds and involve similar amounts;
(j) Make any contributions to any Benefit Plans except in such
amounts and at such times as consistent with past practice;
discretionary or excess contributions are not permitted;
(k) Increase the number of full-time equivalent employees of
NPL from July 31, 1995 except as consistent with past practice;
(l) Make or grant any safety or other bonuses to any employee
or shareholder, except for bonuses payable to Mr. Johnson or Mr. Kemper
under their existing respective employment contracts and other bonuses
consistent with past practices;
(m) Make or grant any distributions to any shareholder other
than customary salary and related benefits except the following:
(i) Bonuses to Mr. Johnson and Mr. Kemper in
accordance with their existing respective employment
contracts;
(ii) Distributions to NPL Shareholders sufficient for
the payment of their 1995 and 1996 federal and state income
taxes on the taxable income
39
<PAGE> 44
of NPL;
(iii) A distribution to Noel T. Coon as a bonus for
1995, computed as fifty percent (50%) of the amount by which
the 1995 pretax income of NPL determined in accordance with
generally accepted accounting principles consistently applied
exceeds four million dollars ($4,000,000), said bonus not to
exceed six hundred thousand dollars ($600,000); and
(iv) The Dividend Note to Noel T. Coon and the
transfer of the Option Notes in payment of the Dividend Note
to Noel T. Coon in connection with the exercise of the Johnson
and Kemper option exercises as described in Section 3.2.
(n) Agree to do any of the foregoing.
6.2 No Solicitation. During the term hereof, neither NPL nor
any of its directors, shareholders, officers, representatives, agents or other
persons controlled by any of them, shall, directly or indirectly, encourage or
solicit, or hold discussions or negotiations with, or provide any information
to, any person, entity or group other than Southwest concerning any merger, sale
of substantial assets not in the ordinary course of business, sale of shares of
capital stock or similar transactions involving NPL. NPL will promptly
communicate to Southwest the terms of any proposal that it may receive in
respect of any such transaction.
6.3 Access to Management, Properties and Records;
Confidentiality.
(a) NPL shall permit Southwest reasonable access to the
properties of NPL, and shall disclose and make available to Southwest
all books, papers and
40
<PAGE> 45
records relating to the assets, stock, ownerships, properties,
obligations, operations and liabilities of NPL, including but not
limited to, all books of account (including the general ledger), tax
records, budgets, forecasts, minute books of directors' and
stockholders' meetings, organizational documents, bylaws, material
contracts and agreements, internal audit reports, filings with any
regulatory authority, company work papers and supporting documents,
accountants' work papers, litigation files, plans affecting employees,
and any other business activities or prospects in which Southwest may
have a reasonable interest, in each case during normal business hours
and upon reasonable notice. Between the signing of this Agreement and
the Closing, the parties shall cooperate in accordance with the
Memorandum of Mr. Johnson dated November 3, 1995 which is attached
hereto as Exhibit A.
(b) All information furnished by NPL to Southwest or the
representatives or affiliates of either pursuant to, or in any
negotiation in connection with, this Agreement shall be treated as the
sole property of NPL, until consummation of the Merger and, if the
Merger shall not occur, Southwest and its affiliates, agents and
advisers shall destroy or return to NPL, as appropriate, all documents
or other materials containing, reflecting or referring to such
information, and shall keep confidential all such information and shall
not disclose or use such information for competitive purposes. Any
destruction or return shall be certified in writing to the appropriate
party. The obligation to keep such information confidential shall not
apply to any information which Southwest can establish by convincing
evidence was already in its possession (subject to no obligations of
confidentiality) prior to
41
<PAGE> 46
the disclosure thereof by NPL; was then generally known to the public;
becomes known to the public other than as a result of actions by
Southwest or by its directors, officers or employees or agents; or was
disclosed to Southwest or to its directors, officers or employees,
solely by a third party not bound by any obligation of confidentiality.
6.4 Assignment of Contract Rights. NPL shall obtain any
consents, waivers or revisions necessary to allow Merger Sub to accede to all of
the rights of NPL under all existing real property and personal property leases,
lines of credit, governmental licenses, permits and other contracts. Any costs
associated with obtaining such consents, waivers and revisions shall be borne by
NPL.
7. Employees; Employee Benefit Plans.
7.1 Covenants of NPL.
(a) Prior to Closing, NPL shall deliver or make available to
Southwest complete and correct copies (if any) of (i) the most recent
Internal Revenue Service determination letter relating to each Employee
Pension Benefit Plan intended to be tax qualified under Sections 401(a)
and 501(a) of the Code, (ii) the most recent annual report (Form 5500
Series) and accompanying schedules of each Benefit Plan, filed with the
Internal Revenue Service or an explanation of why such annual report is
not required, (iii) the most current summary plan description for each
Benefit Plan, and (iv) the most recent audited financial statements of
each Benefit Plan.
(b) Except as otherwise provided in this Agreement, NPL shall
not
42
<PAGE> 47
establish, amend or terminate any Benefit Plan without the prior
consultation and approval of Southwest.
8. Closing Conditions.
8.1 Conditions to Each Party's Obligations Under This
Agreement. The respective obligations of each party under this Agreement to
consummate the Merger shall be subject to the fulfillment at or prior to the
Closing of the following conditions:
(a) All necessary regulatory or governmental approvals and
consents required to consummate the transactions contemplated hereby
shall have been obtained and shall remain in full force and effect and
all statutory or regulatory waiting periods in respect thereof shall
have expired.
(b) No party hereto shall be subject to any order, decree or
injunction of a court or agency of competent jurisdiction which enjoins
or prohibits the consummation of the Merger.
(c) Any applicable pre-merger/acquisition notification
provisions of Section 7A of the Clayton Act shall have been complied
with by the parties hereto, and no other statutory or regulatory
requirements with respect to the Clayton Act shall be applicable. There
shall be no pending or threatened proceedings with respect to this
Agreement or the Merger under any applicable antitrust law.
8.2 Conditions to the Obligations of Southwest under this
Agreement. The obligations of Southwest under this Agreement shall be further
subject to the satisfaction, at or prior to the Closing, of the following
conditions, any one or more of which may be waived by Southwest:
43
<PAGE> 48
(a) Each of the obligations or covenants of NPL required to be
performed by them at or prior to the Closing pursuant to the terms of
this Agreement shall have been duly performed and complied with in all
material respects and each of the representations and warranties of NPL
contained in this Agreement shall be true and correct in all material
respects as of the date hereof and as of the Closing as though made at
and as of the Effective Time (except as to any representation or
warranty that specifically relates to an earlier date, which shall be
true and correct as of such earlier date), provided, however, that if
any representation or warranty has proved untrue or incorrect in any
material respect and the damage or loss resulting from such failure can
be reduced to a dollar amount to which Noel T. Coon and Southwest
agree, then such representation or warranty shall, for purposes of this
closing condition, be deemed to be true and correct in all material
respects at Closing, and the total Fair Market Value of the Southwest
Common Stock to be delivered hereunder shall be reduced by such agreed
amount.
(b) Any consents, waivers, clearances, approvals and
authorizations of regulatory or governmental bodies or third parties
that are necessary in connection with the consummation of the
transactions contemplated hereby shall have been obtained, and none of
such consents, waivers, clearances, approvals or authorizations shall
contain any term or condition that would have a Material Adverse Effect
on NPL or Southwest or the Surviving Corporation. For purposes of
Section 8 hereof, any "approval" which contains any of the foregoing
unacceptable terms or conditions shall be deemed to be a regulatory
"denial."
44
<PAGE> 49
(c) Southwest shall have received an opinion, dated the date
of the Closing, from Squire, Sanders & Dempsey and/or Arnold R.
Madigan, counsel to NPL, substantially to the effect set forth in
Exhibit B hereto.
(d) Since the date of this Agreement, there shall have been no
material adverse change in the overall financial condition, business or
results of operations of NPL taken as a whole. Normal seasonal
variations are deemed not to be such a material adverse change.
(e) Except as otherwise requested, the directors of NPL shall
have resigned effective on or prior to the Closing.
(f) NPL shall have furnished Southwest with such certificates
of NPL officers and such other documents to evidence fulfillment of the
conditions set forth in this Section 8.2 as Buyer may reasonably
request.
8.3 Conditions to the Obligations of NPL Under This Agreement.
The obligations of NPL under this Agreement shall be further subject to the
satisfaction, at or prior to the Closing, of the following conditions, any one
or more of which may be waived by Noel T. Coon on behalf of NPL and NPL
Shareholders:
(a) Each of the obligations of Southwest required to be
performed by it at or prior to the Closing pursuant to the terms of
this Agreement shall have been duly performed and complied with in all
material respects.
(b) Each of the representations and warranties of Southwest
contained in this Agreement shall be true and correct in all material
respects as of the date of this Agreement and as of the Closing as
though made at and as of the Closing
45
<PAGE> 50
except as to any representation or warranty which specifically relates
to an earlier date, which shall be true and correct as of such earlier
date, except in the case of such representations and warranties, where
the failure to be true would not have a Material Adverse Effect on
Southwest.
(c) NPL shall have received an opinion, dated the date of the
Closing, from Thomas J. Trimble, General Counsel to Southwest,
substantially to the effect set forth in Exhibit C hereto.
(d) Southwest shall have furnished NPL with such certificates
of its officers or others and such other documents to evidence
fulfillment of the conditions set forth in this Section 8.3 as NPL may
reasonably request.
(e) NPL shall have received the opinion of Deloitte & Touche
LLP that the merger qualifies as a tax-free reorganization under
Section 368(a)(2)(D) of the Code and the Regulations thereunder.
(f) Since the date of this Agreement, there shall have been no
material adverse change in the overall financial condition, business or
results of operations of Southwest taken as a whole. Normal seasonal
variations are deemed not to be such a material adverse change.
9. Closing.
9.1 Date and Place. The closing of the Merger (the "Closing")
shall take place on the last day of the four or five week accounting period of
NPL, as applicable, during which all of the conditions to the obligations of the
parties hereunder, other than those to be performed at Closing, have been
satisfied or waived (the "Closing Date");
46
<PAGE> 51
provided, however, that if the Closing Date in accordance with the foregoing
provisions of Section 9.1 would be less than five trading days prior to the end
of such accounting period, the Closing Date shall be the last day of the next
succeeding four or five week accounting period of NPL, as applicable. All
actions taken at the Closing shall be deemed to have occurred simultaneously at
the Effective Time. The Closing shall take place at the offices of Southwest in
Las Vegas, Nevada, or at such other place as the parties hereto may mutually
agree.
9.2 NPL's Closing Documents. At the Closing, NPL shall deliver
to Southwest:
(a) One or more stock certificates registered in the name(s)
of NPL Shareholders representing all of the issued and outstanding
shares of NPL Capital Stock, duly endorsed on behalf of NPL
Shareholders;
(b) Such other documents and instruments as required by
Section 8 to be delivered by NPL or NPL Shareholders.
9.3 Southwest's Closing Documents. At the Closing, Southwest
and Merger Sub shall deliver to NPL Shareholders:
(a) The Purchase Price of twenty-four million dollars
($24,000,000), payable in Southwest's Common Stock as provided for in
this Agreement; and
(b) Such other documents and instruments as required by
Section 8 to be delivered by Southwest.
10. Post-Closing Obligations.
10.1 Registration of Southwest Common Stock.
47
<PAGE> 52
(a) As soon as practicable after the Closing Date, but in no
event more than 30 days thereafter, Southwest shall (i) file a Form S-3
registration statement pursuant to the Securities Act of 1933, as
amended (the "Securities Act"), under Rule 415 thereunder, that
includes all shares of Southwest Common Stock acquired by the NPL
Shareholders in the Merger ("Acquired Stock"); (ii) file a request for
exemption under Section 359-f(2) of the Fraudulent Practices Act
("Martin Act") with the Bureau of Investor Protection and Securities,
Department of Law, State of New York; and (iii) take such other action
as may be necessary to register or qualify the offer and sale of the
Acquired Stock in any other state in which its Common Stock does not
qualify as an "exempt security." Southwest agrees that it will use
reasonable efforts to cause the Form S-3 registration statement to be
declared effective by the SEC and the request for exemption to be
granted by the Department of Law of the State of New York and to
complete any other action which may be necessary to register or qualify
the offer and sale of the Acquired Stock as provided in clause (iii)
above. All expenses (exclusive of underwriting discounts and
commissions and expenses for registration or licensing of the NPL
Shareholders as a broker-dealer, dealer, salesperson, agent or
associated person, if any, and fees and expenses of counsel for the NPL
Shareholders) incurred in connection with such registration, request
for exemption and actions shall be borne by Southwest. No transferee of
the Acquired Stock shall be entitled to the rights and benefits of this
Section 10.1, except transferees under Section 10.2(a)(ii).
(b) It shall be a condition precedent to the obligations of
Southwest to file
48
<PAGE> 53
a registration statement or to register any securities pursuant to
Section 10.1(a) that the NPL Shareholders furnish Southwest such
undertakings as may be required by the Securities Act and other
applicable law to permit the registration statement to be filed in
accordance with Rule 415 under the Securities Act, and such information
regarding the NPL Shareholders, the Acquired Stock, the intended
method(s) of disposition of such securities and such other information
(other than information known to Southwest with respect to contractual
arrangements between the NPL Shareholders and Southwest) as, in the
reasonable opinion of counsel to Southwest, is necessary to enable
Southwest to cause such registration statement to be properly prepared
and filed in accordance with applicable laws and to obtain acceleration
of the effective date thereof. All underwriting discounts and
commissions and expenses for registration or licensing of the NPL
Shareholders as a broker-dealer, dealer salesperson, agent or
associated person under state blue sky or securities laws, if any,
shall be borne by the NPL Shareholders.
(c) Southwest agrees that it will keep each NPL Shareholder
advised in writing as to the completion of any registrations or
qualifications pursuant to this Section 10.1 and will, at its expense:
(i) use reasonable efforts to keep such registrations and
qualifications effective under the Securities Laws until such time as
the Acquired Stock can be sold by the NPL Shareholders within the
applicable volume limitation of Rule 144(e) or without any volume
limitation in compliance with Rule 144(k), whichever first occurs (the
"Restriction Lapse Date"); and (ii) furnish such number of prospectuses
and other documents incident thereto as any NPL
49
<PAGE> 54
Shareholder from time to time may reasonably request. If, in the
opinion of counsel to Southwest, the Form S-3 registration statement
filed pursuant to Section 10.1(a) cannot be maintained in effect until
the Restriction Lapse Date, then, not later than twenty (20) days prior
to the expiration of the effectiveness of such Form S-3 registration
statement, Southwest shall file another Form S-3 registration statement
covering the remaining Acquired Stock, and shall use reasonable efforts
to cause such registration statement to be declared effective and
maintained in effect until the Restriction Lapse Date. In connection
therewith, Southwest shall take the same actions with respect to such
new registration statement and the registration and qualification of
the remaining Acquired Stock under the Securities Laws as was required
hereunder with respect to the original Form S-3 registration statement
and the original registration and qualification of the Acquired Stock.
(d) If, at any time during the effectiveness of a Form S-3
registration statement filed hereunder, Southwest shall notify the NPL
Shareholders that the prospectus contained therein contains an untrue
statement of material fact or omits to state a material fact necessary
to make the statements made therein not misleading, each NPL
Shareholder agrees not to sell any of the Acquired Stock pursuant to
such Form S-3 registration statement thereafter until such time as
Southwest notifies the NPL Shareholders that such material misstatement
or omission has been corrected through the filing of an appropriate
supplement to such prospectus, the filing and effectiveness of an
amendment to such registration statement, or the filing of a document
incorporated by reference therein. Southwest
50
<PAGE> 55
shall use its reasonable efforts to file any such required
supplement, amendment (and to have any such amendment declared
effective) or such document as promptly as practicable; provided,
however, that such filing may be delayed during any period of time that
the executive officers and directors of Southwest have been asked to
refrain from selling, offering to sell or otherwise disposing of any
shares of its Common Stock or contracting to sell or otherwise
disposing of any securities convertible into or exercisable or
exchangeable for Common Stock.
(e) To the extent permitted by law, Southwest will indemnify
and hold harmless each NPL Shareholder, any underwriter (as defined in
the Securities Act) for any such NPL Shareholder and each person, if
any, who controls such NPL Shareholder or underwriter within the
meaning of the Securities Act or the 1934 Act (collectively, the "NPL
Indemnified Parties") against any losses, claims, damages, or
liabilities (joint or several) to which they or any of them may become
subject under the Securities Act, the 1934 Act or any other federal or
state law (the "Securities Laws"), insofar as such losses, claims,
damages, or liabilities (or actions in respect thereof) arise from or
are based upon any of the following statements, omissions or violations
(collectively, a "Violation"): (i) any untrue statement or alleged
untrue statement of a material fact contained in such registration
statement, including any preliminary prospectus or final prospectus
contained therein or any amendments or supplements thereto; (ii) the
omission or alleged omission to state therein a material fact required
to be stated therein, or necessary to make the statements therein not
misleading; or (iii) any violation or alleged violation by
51
<PAGE> 56
Southwest of the Securities Laws; and Southwest will reimburse such NPL
Indemnified Parties for any legal or other expenses reasonably incurred
by them in connection with investigating or defending any such loss,
claim, damage, liability or action; provided, however, that the
indemnity agreement contained in this Section 10.1(e) shall not apply
to amounts paid in settlement of any such loss, claim, damage,
liability or action if such settlement is effected without the consent
of Southwest (which consent shall not be unreasonably withheld), nor
shall Southwest be liable in any case for any such loss, claim, damage,
liability, or action to the extent that it arises from or is based upon
a Violation which occurs in reliance upon and in conformity with
written information furnished expressly for use in connection with such
registration by any such NPL Indemnified Parties.
(f) To the extent permitted by law, each NPL Shareholder will
indemnify and hold harmless Southwest, each of its directors, each of
its officers who have signed the registration statement, each person,
if any, who controls Southwest within the meaning of the Securities
Act, any underwriter within the meaning of the Securities Act or the
1934 Act for Southwest, any person who controls such underwriter, and
any other person or entity selling securities in such registration
statement, if any (the "Other Selling Stockholders") or any of such
Other Selling Stockholders' directors, officers, partners, general
partners or any person who controls such Other Selling Stockholders
(collectively, the "Southwest Indemnified Parties") against any losses,
claims, damages or liabilities (joint or several) to which any such
Southwest Indemnified Parties may become subject under the Securities
52
<PAGE> 57
Laws, insofar as such losses, claims, damages or liabilities (or
actions in respect thereto) arise from or are based upon any Violation,
in each case to the extent (and only to the extent) that such Violation
occurs in reliance upon and in conformity with written information
furnished by such NPL Shareholder in connection with such registration;
and such NPL Shareholder will reimburse any legal or other expenses
reasonably incurred by any Southwest Indemnified Parties in connection
with investigating or defending any such loss, claim, damage,
liability, or action; provided, however, that the indemnity agreement
contained in this Section 10.1(f) shall not apply to amounts paid in
settlement of any such loss, claim, damage, liability or action if such
settlement is effected without the consent of such NPL Shareholder,
which consent shall not be unreasonably withheld.
(g) Promptly after receipt by any party entitled to
indemnification under this Section 10.1 (an "Indemnified Party") of
notice of the commencement of any action (including any governmental
action ), such Indemnified Party will, if a claim in respect thereof is
to be made under this Section 10.1 against any party required to
indemnify such Indemnified Party (an "Indemnifying Party"), notify the
Indemnifying Party in writing of the commencement thereof and the
Indemnifying Party shall have the right to participate in, and, to the
extent the Indemnifying Party so desires, jointly with any other
Indemnifying Party similarly noticed, to assume the defense thereof
with counsel mutually satisfactory to the parties; provided, however,
that an Indemnified Party shall have the right to retain its own
counsel, with the fees and expenses to be paid by the Indemnifying
Party, if representation of such
53
<PAGE> 58
Indemnified Party by the counsel retained by the Indemnifying Party
would be inappropriate due to actual or potential differing interests
between such Indemnified Party and any other party represented by such
counsel in such proceeding. The failure to notify an Indemnifying Party
within a reasonable time of the commencement of any such action, to the
extent prejudicial to its ability to defend such action, shall relieve
such Indemnifying Party of any liability to the Indemnified Party under
this Section 10.1, but the omission to so notify the Indemnifying Party
will not relieve it of any liability that it may have to any
Indemnified Party otherwise than under this Section 10.1.
10.2 Restrictions on Sale of Acquired Stock.
(a) For a period of two years from the Closing Date, Noel T.
Coon agrees that he will not sell, dispose of or otherwise transfer
more shares of Acquired Stock than he would be permitted to sell under
the volume limitations of Rule 144 of the Securities Act as in effect
on the date hereof, assuming that such volume limitation provisions of
Rule 144 would be fully applicable to sales of Acquired Stock by Noel
T. Coon for the duration of such two-year period. Notwithstanding the
foregoing, to the extent permitted by applicable law, (i) Noel T. Coon
shall be permitted to sell any amount of Acquired Stock held by him if
(A) the most recent closing per share price of Southwest Common Stock
prior to such sale as reported by the principal exchange on which such
Common Stock is listed shall be less than $10 or (B) if Southwest
publicly announces a plan or other agreement or arrangement providing
for the merger of Southwest with or into another entity, the
acquisition or other sale
54
<PAGE> 59
of all or substantially all of the assets of Southwest (except for
PriMerit Bank) by another entity or any other reorganization or
business combination in which the Acquired Stock will be converted into
cash or the securities of another person (collectively, an
"Acquisition"); provided that if any Acquisition is submitted to a vote
of the stockholders of Southwest, Noel T. Coon agrees to vote any
shares of Acquired Stock he holds on the record date for determining
stockholders entitled to vote on the Acquisition on a pro-rata basis
with all other shareholders; and (ii) Noel T. Coon shall be permitted
to transfer Acquired Stock by donation to any trust, foundation or
charitable organization so long as such entity agrees to be bound by
the provisions of Sections 10.2(b) and (c) hereof, in which event any
sales of Acquired Stock by such entities shall be aggregated with any
sales by Noel T. Coon in determining compliance herewith.
(b) Noel T. Coon agrees not to sell, either directly or
indirectly, during any three-month period more than 240,000 shares of
Acquired Stock to any one person or group, other than a broker-dealer
who acquires the Acquired Stock for resale to any other person or group
in a transaction which would not violate these provisions. Unless he
has actual knowledge to the contrary, Noel T. Coon shall be entitled to
rely upon a written representation from a purchaser that it is not
acquiring the Acquired Stock in concert with any other person or with a
view to resale in violation of these restrictions.
(c) The Acquired Stock acquired by Noel T. Coon shall bear the
following legend:
55
<PAGE> 60
THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON
TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED OR
RESOLD EXCEPT AS PERMITTED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED, AND APPLICABLE STATE SECURITIES LAWS, PURSUANT TO
REGISTRATION OR EXEMPTION. THESE SECURITIES ARE FURTHER
SUBJECT TO RESTRICTIONS ON TRANSFER SET FORTH IN THAT CERTAIN
MERGER AGREEMENT DATED AS OF NOVEMBER 13,1995.
(d) The Acquired Stock acquired by William L. Johnson and
Michael J. Kemper shall bear the following legend:
THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON
TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED OR
RESOLD EXCEPT AS PERMITTED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED, AND APPLICABLE STATE SECURITIES LAWS, PURSUANT TO
REGISTRATION OR EXEMPTION THEREFROM.
This legend shall also appear on any Acquired Stock
transferred by either Mr. Johnson or Mr. Kemper to a family trust or
foundation.
11. Termination, Amendment and Waiver.
11.1 Termination. This Agreement may be terminated at any time
prior to the Closing, whether before or after approval of the Merger by the
governmental agencies:
(a) By mutual written consent of Southwest and Noel T. Coon
(on behalf of NPL and NPL Shareholders);
(b) By either Southwest or Noel T. Coon (on behalf of NPL and
NPL Shareholders) if all pre-closing conditions are not satisfied on or
prior to May 15, 1996, unless (i) the failure of such occurrence shall
be due to the failure of the party
56
<PAGE> 61
seeking to terminate this Agreement to perform or observe its
agreements and conditions set forth herein to be performed or observed
by such party at or before the Closing; or (ii) Southwest and Noel T.
Coon (on behalf of NPL and NPL Shareholders) mutually agree to extend
the time;
(c) By Southwest (i) if at the time of such termination there
shall have been a material adverse change in the financial condition,
business or operations of NPL taken as a whole from that set forth in
the audited financial statements for the year ended December 31, 1994,
it being understood that any of the matters set forth in NPL's
Disclosure Schedules as of the date of this Agreement are not deemed to
be a material adverse change for purposes of this paragraph (c); or
(ii) if there shall have been any material breach of any covenant of
NPL hereunder and such breach shall not have been remedied within 45
days after receipt by NPL of notice in writing from Southwest
specifying the nature of such breach and requesting that it be
remedied;
(d) By Noel T. Coon (on behalf of NPL and NPL Shareholders)
(i) if at the time of such termination there shall have been a material
adverse change in the financial condition, business or result of
operations of Southwest taken as a whole from that set forth in the
audited financial statements for the year ended December 31, 1994; of
(ii) if there shall have been any material breach of any covenant of
Southwest hereunder and such breach shall have not been remedied within
45 days after receipt by Southwest of notice in writing from NPL
specifying the nature of such breach and requesting that it be
remedied.
57
<PAGE> 62
11.2 Amendment, Extension and Waiver. Subject to applicable
law, at any time prior to the consummation of the Merger, the parties may (a)
amend this Agreement, (b) extend the time for the performance of any of the
obligations or other acts of any other party hereto, (c) waive any inaccuracies
in the representations and warranties of any other party contained herein or in
any document delivered pursuant hereto, or (d) waive compliance with any of the
agreements or conditions contained herein. This Agreement may not be amended
except by an instrument in writing signed on behalf of each of the parties
hereto. Any agreement on the part of a party hereto to any extension or waiver
shall be valid only if set forth in an instrument in writing signed on behalf of
such party, but such waiver or failure to insist on strict compliance with such
obligation, covenant, agreement or condition shall not operate as a waiver of,
or estoppel with respect to, any subsequent or other failure.
12. Expenses.
(a) All expenses incurred by or on behalf of NPL in connection
with the negotiation, authorization, preparation, execution and
consummation of this Agreement (including the costs of complying with
any covenants or conditions to Closing) and the transactions
contemplated hereby (other than expenses incurred in connection with
the operation of NPL in the ordinary course which would have been
incurred notwithstanding the transactions contemplated hereby or
thereby), including, without limitation, all fees and expenses of
agents, representatives, accountants, investment bankers and counsel
employed by NPL shall be borne solely by Noel T. Coon, except that NPL
may pay up to $240,000 in 1995 and up
58
<PAGE> 63
to $160,000 in 1996 based on services rendered on the basis of the
usual and customary hourly rates previously charged by its attorneys
and accountants.
(b) All expenses incurred by or on behalf of Southwest in
connection with the negotiation, authorization, preparation, execution
and consummation of this Agreement and the transactions contemplated
hereby and thereby, including, without limitation, all fees and
expenses of agents, representatives, accountants, investment bankers
and counsel employed by Southwest, shall be borne solely by Southwest.
13. Indemnification.
13.1 Indemnification of Southwest. NPL Shareholders shall
indemnify Southwest and its officers, directors and subsidiaries from and
against all claims, losses, damages, costs, assessments, judgments, awards,
liabilities and expenses (including, without limitation, reasonable costs and
expenses of litigation, and, to the extent permitted by law, reasonable
attorneys' fees) incurred by Southwest or its officers, directors, agents or
subsidiaries by reason of:
(a) The untruthfulness or inaccuracy of any of the
representations or warranties of NPL or the breach of any obligations
of NPL contained in this Agreement.
(b) Any judgments, fines, penalties, settlement payments,
settlement costs and attorneys' fees and expenses and interest related
thereto entered, paid or incurred by NPL after July 31, 1995 in
connection with any currently existing but undisclosed actions, suits,
claims, inquiries, proceedings or investigations before
59
<PAGE> 64
any court, commission, bureau, regulatory, administrative or
governmental agency, arbitrator body or authority in excess of $10,000
in the aggregate and not reimbursed by insurance.
(c) Any liability of NPL, other than liabilities for benefits
or contributions payable under or pursuant to Benefit Plans provided
the existence of such liabilities does not violate any representation
or warranty in Section 4.12(c) which is attributable to facts existing,
or actions taken (or omissions occurring) prior to the Closing, which
liability arises under ERISA due to (i) the acts or omissions of NPL
with respect to the Benefit Plans or (ii) the acts or omissions of
fiduciaries of the Benefit Plans to whom NPL is obligated to provide
indemnification by contract or otherwise.
(d) The aggregate liability of NPL Shareholders, if any, shall
be limited to a maximum of one million two hundred thousand dollars
($1,200,000) and the NPL Shareholders shall only be liable to the
extent that indemnifiable amounts hereunder exceed, in the aggregate,
two hundred forty thousand dollars ($240,000). The NPL Shareholders'
share of any liability shall be in proportion to their respective NPL
stock ownership at Closing and may be paid either in cash or in
Southwest stock valued at the same price as at the Closing.
13.2 Southwest's Indemnification. Southwest shall indemnify
NPL and NPL Shareholders from and against all claims, losses, damages, costs,
assessments, judgments, awards, liabilities and expenses (including, without
limitation, costs and expenses of litigation and, to the extent permitted by
law, reasonable attorneys' fees)
60
<PAGE> 65
incurred by NPL or NPL Shareholders by reason of the untruthfulness or
inaccuracy of any of Southwest's representations or warranties or the breach of
any Southwest obligations contained in this Agreement.
13.3 Claims for Indemnity.
(a) Making of Claims for Indemnity. A claim for indemnity
under this Agreement may be made by the indemnified party any time
prior to one year after the Closing. Except for a claim for fraud, a
claim for indemnity under this Agreement shall be the exclusive remedy
of any indemnified party against any indemnifying party with respect to
any claims, losses, damages, costs, assessments, judgments, awards,
liabilities and expenses which arise out of or in any way relate to any
act or omission in connection with the negotiation, execution, delivery
or performance of this Agreement. Notwithstanding the foregoing, an
indemnified party may pursue any available legal proceedings to enforce
the obligation of an indemnifying party if such indemnifying party
refuses or fails to perform such obligation, but the recovery in any
such proceedings shall be limited to amounts which the indemnified
party would have been entitled to be paid by the indemnifying party
hereunder, together with the costs and expenses of such enforcement
proceeding as provided in Section 14.10 hereof.
In the event that any such claim is made within such
prescribed period, the indemnity relating to such claim shall survive
until such claim is resolved. Claims not made within the applicable
period shall not be indemnified hereunder. Each written notice of a
claim for indemnity shall set forth in reasonable detail the basis
61
<PAGE> 66
upon which such claim for indemnity is made.
(b) Conduct of Lawsuits. In the event that any person or
entity not a party to this Agreement shall make any demand or claim or
file or threaten to file any lawsuit, which demand, claim or lawsuit
may result in any loss, cost or expense subject to indemnification
under this Agreement, then the indemnified party shall provide written
notice of such demand, claim or lawsuit to the indemnifying party as
soon as is reasonably practicable but, in any event, within five (5)
days after discovery or receipt of such demand, claim or lawsuit (but
failure to notify within such time period shall not rescind or revoke
the indemnifying party's obligation to indemnify but shall only reduce
the amount of the indemnification to the extent that the indemnifying
party is damaged by such delay), and the indemnifying party shall have
the option, at its cost and expense, to defend itself or to retain
counsel for the indemnified party to defend any such demand, claim or
lawsuit. In the event that the indemnifying party shall fail to respond
to the indemnified party within five days after receipt of such written
notice of any such demand, claim or lawsuit, then the indemnified party
may retain counsel and conduct the defense of such demand, claim or
lawsuit as it may in its reasonable discretion deem proper, at the
reasonable cost and expense of the indemnifying party, subject,
however, to the indemnifying party's right to intervene in such defense
at any time upon the giving of reasonable notice. The indemnified party
shall use its best reasonable efforts to cooperate and assist the
indemnifying party in defending any such demand, claim or lawsuit,
which shall include, but not be limited to, the pursuit of all
cross-
62
<PAGE> 67
claims and counterclaims associated therewith. In effecting the
settlement of any such demand, claim or lawsuit, an indemnified party
shall act in good faith, shall consult with the indemnifying party, and
shall enter into only such settlement as the indemnifying party shall
approve, which approval will not be unreasonably withheld and will be
implied if the indemnifying party does not respond within 15 days of
its receipt of the notice of such settlement offer.
14. Miscellaneous.
14.1 Non-Compete Agreements. Noel T. Coon agrees that he will
not, directly or indirectly, engage in competition with NPL or the Surviving
Corporation in the states where either is now operating or has current plans to
operate at the time of Closing for a period of four years following the Closing.
William L. Johnson and Michael J. Kemper each agrees that he will not, directly
or indirectly, engage in competition with NPL or the Surviving Corporation in
the states where Surviving Corporation is operating at the time William L.
Johnson or Michael J. Kemper, respectively, leaves the employment of the
Surviving Corporation (except for the state of Michigan as to Mr. Johnson) for a
period of two years following termination of his employment. The foregoing
provisions shall apply to competition in any manner whatsoever including but not
limited to, as an employee, independent contractor, consultant, owner, manager,
shareholder, director, officer, principal, agent or trustee of or for any person
or entity engaged in a business the same as or similar to that of NPL or
Surviving Corporation or for their own account. Each NPL Shareholder further
agrees that the foregoing non-competition provisions are reasonable as applied
to him, would not impose any undue hardship on him if in force and is no wider
63
<PAGE> 68
in scope than necessary to afford reasonable protection to Southwest and
Surviving Corporation. This section becomes effective upon the Closing and at
that time supersedes the non-compete agreements contained in the existing
Johnson and Kemper employment agreements.
14.2 NPL Promissory Notes to Noel T. Coon. The outstanding
promissory notes in the approximate amount of $3.9 million from NPL to Noel T.
Coon may be paid off in full by NPL prior to the Closing provided that NPL has
adequate cash and credit to continue its operations in its usual and customary
manner.
14.3 Survival. Subject to Section 13.3, the respective
representations and warranties, covenants and agreements set forth in this
Agreement and all Disclosure Schedules shall survive the Closing.
14.4 Notices. All notices, requests, claims, demands or other
communica tions hereunder shall be in writing and shall be given (and shall be
deemed to have been duly received if so given) by delivery, by registered or
certified mail (return receipt requested) or by cable, telecopier, or telex to
the respective parties as follows:
(a) If to Southwest, to:
Michael O. Maffie
President and Chief Executive Officer
Southwest Gas Corporation
5241 Spring Mountain Road
P.O. Box 98510
Las Vegas, Nevada 89193-8510
Telephone: (702)876-7250
Telecopier: (702)876-7037
64
<PAGE> 69
With a copy to:
Thomas J. Trimble
Senior Vice President/General Counsel
and Corporate Secretary
Southwest Gas Corporation
5241 Spring Mountain Road
P.O. Box 98510
Las Vegas, Nevada 89193-8510
Telephone: (702)876-7189
Telecopier: (702)876-7037
(b) If to NPL, to:
Noel T. Coon
10840 East Candlewood Drive
Scottsdale, Arizona 85255
Telephone: (602)585-9803
With a copy to:
William L. Johnson
12500 Summit Street
Kansas City, Missouri 64145
Telephone: (816)942-6069
or such other address as shall be furnished in writing by any party to the
others in accordance herewith, except that notices of change of address will
only be effective upon receipt.
14.5 Parties in Interest. This Agreement shall be binding upon
and shall inure to the benefit of the parties hereto and their respective
successors and assigns; provided, however, that neither this Agreement nor any
of the rights, interests or obligations hereunder shall be assigned by any party
hereto without the prior written consent of the other parties. Nothing in this
Agreement is intended to confer, expressly
65
<PAGE> 70
or by implication, upon any other person any rights or remedies under or by
reason of this Agreement.
14.6 Entire Agreement. This Agreement, including the documents
and other writings referred to herein or delivered pursuant hereto, contains the
entire agreement and understanding of the parties with respect to its subject
matter. There are no restrictions, agreements, promises, warranties, covenants
or undertakings between the parties other than those expressly set forth herein
or therein. This Agreement supersedes all prior agreements and understandings
between the parties, both written and oral, with respect to its subject matter.
14.7 Counterparts. This Agreement may be executed in one or
more counterparts all of which shall be considered one and the same agreement
and each of which shall be deemed an original.
14.8 Governing Law. This Agreement, in all respects,
including all matters of construction, validity and performance, is governed by
the internal laws of the state of Nevada applicable to contracts executed and
delivered in Nevada by citizens of such state, to be performed wholly within
such state without giving effect to the principles of conflicts of laws thereof.
This Agreement is being delivered in Las Vegas, Nevada.
14.9 Headings. The Section headings contained in this
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement.
14.10 Enforcement Costs. In the event of litigation or other
proceeding to enforce this Agreement, the prevailing party or parties shall be
entitled to recover
66
<PAGE> 71
reasonable costs and attorneys' fees to be set by the court and not by the jury.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement this 13th day of November, 1995.
NORTHERN PIPELINE NPL SHAREHOLDERS
CONSTRUCTION CO.,
a Minnesota corporation
/s/ NOEL T. COON
----------------------------------
Noel T. Coon
By: /s/ WILLIAM L. JOHNSON
------------------------------
William L. Johnson
/s/ ALEXA S. HIGASHI
----------------------------------
Title: Chief Executive Officer Alexa S. Higashi, his wife
Attest: /s/ ROBERT DIGAN /s/ WILLIAM L. JOHNSON
--------------------------- ----------------------------------
Robert Digan William L. Johnson
Title: Assistant Secretary
/s/ JUDY JOHNSON
----------------------------------
Judy Johnson, his wife
/s/ MICHAEL J. KEMPER
----------------------------------
Michael J. Kemper
/s/ FRANCES KEMPER
----------------------------------
Frances Kemper, his wife
SOUTHWEST GAS CORPORATION, a
California corporation
By /s/ MICHAEL O. MAFFIE
-------------------------------
Michael O. Maffie
Title: President and Chief Executive
Officer
67
<PAGE> 72
ATTEST: /s/ THOMAS J. TRIMBLE
---------------------------------
Thomas J. Trimble
TITLE: Senior Vice President/General
Counsel and Corporate Secretary
SOUTHWEST GAS CORPORATION
OF ARIZONA, a Nevada corporation
By: /s/ MICHAEL O. MAFFIE
-------------------------------------
Michael O. Maffie
TITLE: President and Chief Executive
Officer
ATTEST: /s/ THOMAS J. TRIMBLE
---------------------------------
Thomas J. Trimble
TITLE: Senior Vice President/General
Counsel and Corporate Secretary
68
<PAGE> 73
EXHIBIT B
Ladies and Gentlemen:
This firm has acted as counsel for Northern Pipeline Construction Co.,
a Minnesota corporation ("NPL"), and NPL Shareholders in connection with the
proposed acquisition of NPL by Southwest Gas Corporation, a California
corporation ("Southwest"), pursuant to the Merger Agreement between Southwest
and Southwest Gas Corporation of Arizona, a Nevada corporation (the "Merger
Sub"), and NPL and NPL Shareholders dated as of November 13, 1995 (the
"Agreement"). This opinion is delivered to you pursuant to Section 8.2 of the
Agreement. Unless otherwise defined herein, all capitalized terms used in this
opinion shall have the meanings attributed to them in the Agreement.
In our capacity as counsel for NPL and NPL Shareholders and for
purposes of this opinion, we have made those examinations and investigations of
the local and factual matters we deemed advisable, and have examined the
originals, or copies identified to our satisfaction as being true copies of the
originals, of the certificates, documents, corporate records, and other
instruments which we, in our judgment, have considered necessary or appropriate
to enable us to render the opinion expressed below. For these purposes, we have,
without independent investigation or confirmation, relied upon certificates
provided by public officials and officers of NPL as to certain factual matters
including those certificates described below. In the course of our examinations
and investigations we have assumed the genuineness of all signatures on original
documents, and the due execution and delivery of all documents requiring due
execution and delivery for the effectiveness thereof.
Based upon and subject to the foregoing and in reliance thereon, and
subject to the assumptions, exceptions and qualifications set forth herein, it
is our opinion that:
1. NPL is a corporation duly organized, validly existing and
in good standing under the laws of Minnesota, with the corporate powers
and authority to own, lease and operate all of its properties and
assets and to carry on its business as presently being conducted;
2. NPL is duly licensed and qualified to do business as a
foreign corporation and is in good standing in Arizona, Colorado,
Illinois, Kansas, Missouri, Montana, Nebraska, Nevada, New Jersey,
Pennsylvania, Utah, Washington, and Wisconsin and in any other
<PAGE> 74
To _________________
Date
Page 2
jurisdiction in which, to the best of our knowledge after due inquiry,
the nature of the business conducted by it makes such licensing or
qualification necessary and where the failure to be so qualified would,
individually or in the aggregate, have a Material Adverse Effect;
3. NPL has the corporate Power and authority to consummate the
transactions contemplated by the Agreement, and NPL has duly taken all
requisite corporate action to authorize, execute and deliver the
Agreement and perform the transactions contemplated by the Agreement.
The Agreement and appropriate Exhibits thereto have been duly executed
and delivered by NPL and constitute valid, binding and enforceable
obligations of NPL and NPL Shareholders;
4. The authorized capital stock of NPL consists solely of
15,000 shares of Common Stock, par value $10.00 per share, of which
________ shares are issued and outstanding. All shares of the
outstanding capital stock of NPL have been duly authorized and validly
issued and are fully paid and nonassessable. After due inquiry, other
than as described in the Agreement, we are not aware of any
reservations for the issuance of NPL Common Stock or any outstanding
subscriptions, options, warrants, calls, commitments, or agreements of
any character calling for the transfer, purchase, or issuance of any
shares of its Common Stock or any securities representing the right to
purchase or otherwise receive any shares of its Common Stock or any
securities convertible into or representing the right to purchase or
subscribe to any such shares;
5. On the Closing Date and prior to the consummation of the
transactions contemplated by the Agreement, the NPL Shareholders were
the record owners of all of the issued and outstanding shares of NPL's
Common Stock;
6. Neither the execution and delivery by NPL of the Agreement,
nor the consummation of the transactions contemplated thereby, will (i)
constitute a breach or violation of the Articles of Incorporation or
Bylaws of NPL, (ii) violate any statute, code, ordinance, rule,
regulation, judgment, order, writ, decree or injunction, after due
inquiry, known to us to be applicable to NPL, or any of its respective
properties or assets, or (iii) to the best of our knowledge after due
inquiry, violate, conflict with, result in a breach of any provisions
of,
<PAGE> 75
To _________________
Date
Page 3
constitute a default (or an event which, with notice or lapse of time,
or both, would constitute a default) under, result in the termination
of, accelerate the performance required by, or result in the creation
of any lien, security interest, charge or other encumbrance upon any of
the properties or assets of NPL, under any of the terms, conditions, or
provisions of any note, bond, mortgage indenture, deed of trust,
license, lease, agreement or other instrument or obligation to which
NPL is a party, or by which it or any of its properties or assets may
be bound or affected, except where such violations, conflicts,
breaches, defaults, termination, accelerations and encumbrances would
not have a Material Adverse Effect, nor prevent the consummation of the
transactions contemplated by the Agreement.
7. There are no pending or, to the best of our knowledge after
due inquiry, threatened actions, suits, claims inquiries, proceedings
or investigations involving NPL before any court, commission, bureau,
regulatory, administrative or governmental agency, arbitrator, body or
authority that could have a Material Adverse Effect or which affect
NPL's obligations under or purport to affect the legality, validity or
enforceability of the Agreement or the transactions contemplated
thereby;
8. Assuming due authorization of the Merger by all necessary
corporate proceedings on the part of Southwest and Merger Sub and that
Southwest and Merger Sub have taken all action required to be taken by
them prior to the Closing Date, in accordance with the provision of the
Agreement, the Merger will be validly consummated in accordance with
the Agreement and Minnesota law, and each outstanding share of NPL
Common Stock, including shares issued upon exercise of options to
purchase NPL Common Stock which will have been exercised, prior to the
Closing will be converted as provided in the Agreement; and
9. All governmental consents and approvals required to be
obtained by NPL in order to permit the consummation by it of the
Agreement and transactions contemplated thereby have been obtained, and
all filings required to be made by NPL in order to permit such
consummation have been made.
We express no opinion with respect to the laws of any jurisdiction,
other than the United States and Arizona, the general corporate law of the State
of
<PAGE> 76
To _________________
Date
Page 4
Minnesota and with respect to the opinion set forth in paragraph 2 only the laws
of the States of Colorado, Illinois, Kansas, Missouri, Montana, Nebraska,
Nevada, New Jersey, Pennsylvania, Utah, Washington and Wisconsin. The Agreement
is governed by Nevada law and we have assumed with your consent that, to the
extent applicable to our opinions set forth herein, Nevada law is the same as
Arizona law, to the extent Nevada law is controlling.
With respect to our opinion relating to the enforceability of any
agreement or contract, our opinion is qualified in that enforceability may be
limited by the application of bankruptcy, insolvency, reorganization,
moratorium, or similar laws relating to or affecting creditors' rights generally
(including, without limitation, fraudulent conveyance laws), and by general
principles of equity, including, without limitation, concepts of materiality,
reasonableness, good faith and fair dealing and the possible unavailability of
specific performance or injunctive relief, regardless of whether considered in a
proceeding in equity or at law.
This opinion is being delivered to you for your sole use and benefit in
connection with the acquisition of NPL by Southwest pursuant to the Agreement
and may not be relied upon by, nor may copies be delivered to, any other person
without our prior written consent. This opinion is given as of the date hereof
and we assume no obligation to advise you of changes that may hereinafter be
brought to our attention.
Very truly yours,
<PAGE> 1
SOUTHWEST GAS CORPORATION
LIST OF SUBSIDIARIES OF THE REGISTRANT
AT DECEMBER 31, 1995
<TABLE>
<CAPTION>
STATE OF INCORPORATION
SUBSIDIARY NAME OR ORGANIZATION TYPE
- --------------- --------------------
<S> <C>
LNG Energy, Inc. Nevada
Paiute Pipeline Company Nevada
PriMerit Bank Nevada
Southwest Gas Corporation of Arizona Arizona
Southwest Gas Transmission Company Partnership between
Southwest Gas Corporation
and Utility Financial Corp.
Utility Financial Corp. Nevada
</TABLE>
PRIMERIT BANK
SUBSIDIARIES
AT DECEMBER 31, 1995
<TABLE>
<S> <C>
First Nevada, Ltd. Nevada
Home Trustee, Inc. Nevada
Nevada Vistas Corporation Nevada
Nevada High Country II Corp Nevada
Trans-Pacific Funding Corp California
Nevada Karmlco California
Nevada Los Colinas Nevada
Nevada Verdemont California
First Nevada Company Nevada
Nevada Equities, Ltd. Nevada
BSF Trustee, Inc. Nevada
Nevada Laurel Corporation Nevada
Nevada Capital, Ltd. California
PriMerit Investor Services Nevada
Nevada Victorville Corporation California
Nevada Elsinore Corporation California
Nevada La Cresta Corporation California
</TABLE>
Exhibit 21.01
<PAGE> 1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation of our report dated February 7, 1996 included in this Form 10-K,
into Southwest Gas Corporation's previously filed registration statements on
Form S-8 (File No. 33-35737), Form S-8 (File No. 33-58135), Form S-3 (File No.
33-58137) and Form S-3 (File No. 33-62143).
ARTHUR ANDERSEN LLP
Las Vegas, Nevada
March 26, 1996
Exhibit 23.01
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
This schedule contains summary financial information extracted from Southwest
Gas Corporation's Form 10-K for the year ended December 31, 1995, and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1994
<PERIOD-END> DEC-31-1995 DEC-31-1994
<BOOK-VALUE> PER-BOOK PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 1,137,750 1,035,916
<OTHER-PROPERTY-AND-INVEST> 35,128 34,195
<TOTAL-CURRENT-ASSETS> 317,222 339,177
<TOTAL-DEFERRED-CHARGES> 42,427 44,294
<OTHER-ASSETS> 0 0
<TOTAL-ASSETS> 1,532,527 1,453,582
<COMMON> 26,097 22,912
<CAPITAL-SURPLUS-PAID-IN> 312,631 273,217
<RETAINED-EARNINGS> 17,322 52,427
<TOTAL-COMMON-STOCKHOLDERS-EQ> 356,050 348,556
0 3,200
0 0
<LONG-TERM-DEBT-NET> 607,945 678,263
<SHORT-TERM-NOTES> 37,000 92,000
<LONG-TERM-NOTES-PAYABLE> 0 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0 0
<LONG-TERM-DEBT-CURRENT-PORT> 120,000 5,000
0 800
<CAPITAL-LEASE-OBLIGATIONS> 0 0
<LEASES-CURRENT> 0 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 411,532<F1> 325,763<F2>
<TOT-CAPITALIZATION-AND-LIAB> 1,532,527 1,453,582
<GROSS-OPERATING-REVENUE> 563,502 599,553
<INCOME-TAX-EXPENSE> 839 14,595
<OTHER-OPERATING-EXPENSES> 505,090 510,863
<TOTAL-OPERATING-EXPENSES> 505,090 510,863
<OPERATING-INCOME-LOSS> 58,412 88,690
<OTHER-INCOME-NET> (1,565)<F3> (1,110)
<INCOME-BEFORE-INTEREST-EXPEN> 56,847 87,580
<TOTAL-INTEREST-EXPENSE> 53,354 49,461
<NET-INCOME> (14,882)<F4> 26,301<F5>
307 510
<EARNINGS-AVAILABLE-FOR-COMM> (15,189) 25,791
<COMMON-STOCK-DIVIDENDS> 19,826 17,125
<TOTAL-INTEREST-ON-BONDS> 53,354<F6> 49,461<F6>
<CASH-FLOW-OPERATIONS> 97,754 84,074
<EPS-PRIMARY> (0.66)<F7> 1.22<F8>
<EPS-DILUTED> (0.66) 1.22
<FN>
<F1>Includes: trust originated preferred securities of $60,000; current
liabilities, net of current long-term debt maturities and short-term debt, of
$173,211; and deferred income taxes and other deferred credits of $178,321.
<F2>Includes: current liabilities, net of current long-term debt maturities and
short-term debt, of $157,563; and deferred income taxes and other deferred
credits of $168,200.
<F3>Includes distributions related to trust originated preferred securities of
$913.
<F4>Includes income from continuing operations of $2,654 and a loss from
discontinued operations of $17,536. This loss is comprised of a loss from
discontinued operations of $4,513, net of taxes, and a loss from disposal of
discontinued segment of $13,023, including tax expense.
<F5>Includes income from continuing operations of $23,524 and income from
discontinued operations of $2,777.
<F6>Represents interest costs for short and long-term debt net of the cost to
finance utility construction (AFUDC).
<F7>Earnings per share attributed to continuing operations was $0.10, and EPS
attributed to discontinued operations was $(0.76).
<F8>Earnings per share attributed to continuing operations was $1.09, and EPS
attributed to discontinued operations was $0.13.
</FN>
</TABLE>
