<PAGE>
As filed with the Securities and Exchange Commission on October 5, 2000
Registration No. 333- .
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
WESTAR INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
Kansas 7380 48-1092416
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
818 South Kansas Avenue
Topeka, Kansas 66612
(785) 575-6507
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
---------------
Paul R. Geist
President
Westar Industries, Inc.
818 South Kansas Avenue
Topeka, Kansas 66612
(785) 575-6507
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
With copies to:
Richard D. Terrill, Esq. Gary W. Wolf, Esq.
Executive Vice President and Jonathan I. Mark, Esq.
General Counsel Cahill Gordon & Reindel
Western Resources, Inc. Eighty Pine Street
818 South Kansas Avenue New York, New York 10005
Topeka, Kansas 66612 (212) 701-3000
(785) 575-6322
---------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement is declared effective and all
other conditions to the rights offering of Westar Industries common stock have
been satisfied or waived.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
---------------
CALCULATION OF REGISTRATION FEE
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--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Proposed maximum
Title of each class of aggregate offering Amount of
securities to be registered price(1) registration fee
-------------------------------------------------------------------------------
<S> <C> <C>
Common Stock, par value $.01 per
share(2)...................... $100,000,000 $26,400
-------------------------------------------------------------------------------
Preferred Stock Purchase
Rights(3)..................... N/A N/A
</TABLE>
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--------------------------------------------------------------------------------
(1) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(o) of the Securities Act of 1933, as amended.
(2) The shares of common stock offered hereby will be sold upon the exercise of
non-transferable rights being distributed, at no charge, to holders of
common stock of Western Resources, Inc., the parent of registrant.
(3) Each share of common stock will have associated with it one right to
purchase one one-hundredth of a share of the registrant's preferred stock
at a stipulated price in certain circumstances. No separate consideration
will be received for the preferred stock purchase rights.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act or until the Registration Statement shall become effective
on such date as the Commission, acting pursuant to said Section 8(a), may
determine.
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--------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information contained in this prospectus is not complete and may be +
+changed. We may not sell these securities until the registration statement +
+filed with the Securities and Exchange Commission is effective. This +
+prospectus is not an offer to sell these securities and we are not soliciting +
+an offer to buy these securities in any state where the offer or sale is not +
+permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED OCTOBER 5, 2000
PROSPECTUS
. SHARES
WESTAR INDUSTRIES, INC.
COMMON STOCK
Western Resources, Inc. is distributing to the holders of its common stock,
at no charge, non-transferable rights to purchase up to an aggregate of .
shares of Westar Industries' common stock at a cash subscription price of $ .
per share. This prospectus covers the sale of approximately 9.9% of our issued
and outstanding common stock owned by Western Resources upon the exercise of
the rights.
You will receive one right for every . shares of Western Resources common
stock held as of the close of business on . , 2001, the record date. You will
not be entitled to receive any rights unless you are a Western Resources
stockholder at that time.
The rights will expire if they are not exercised by 5:00 p.m., New York City
time, on . , 2001, the expected expiration date of the rights offering.
Western Resources, at its sole discretion, may extend the period for exercising
the rights. Rights which are not exercised by the expiration date will expire
and will have no value. Your exercise of the rights may not be revoked unless
the expiration date is extended for more than thirty days or there is a
material change in the terms of the rights offering. You should carefully
consider whether or not to exercise your rights before the expiration date.
Western Resources will consummate the rights offering only if, among other
things, rights (including rights exercised pursuant to the over-subscription
privilege) for at least . shares of our common stock, representing . % of
our outstanding common stock, are exercised by the final expiration date.
Each share of our common stock has associated with it one right to purchase
one one-hundredth of a share of our preferred stock at a stipulated price in
certain circumstances relating to changes in ownership of Westar Industries
under our shareholder rights agreement.
Prior to the rights offering, there has been no public market for the shares
of our common stock and the subscription price has been set by Western
Resources. Application will be made to have our common stock listed on the
NYSE.
Investment in Westar Industries' common stock involves a high degree of risk.
A discussion of risks you should consider in determining whether to exercise
your rights begins on page 6.
The gross proceeds from the rights offering, assuming all of the rights have
been exercised, will be approximately $ . million, all of which will be
received by Western Resources. Expenses of the rights offering will be paid by
Western Resources and are estimated to be $ . .
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is
a criminal offense.
The Dealer Managers are:
. .
The date of this prospectus is . , 2001
<PAGE>
No person has been authorized by us or Western Resources to give any
information or to make any representation not contained in this prospectus and,
if given or made, such information or representation should not be relied upon
as having been authorized by either us or Western Resources. This prospectus
does not constitute an offer or a solicitation of an offer to buy any
securities other than the shares of our common stock to which it relates
issuable upon exercise of the right or an offer or solicitation to any person
in any jurisdiction where such an offer or solicitation would be unlawful.
Neither the delivery of this prospectus nor any distribution of the securities
offered hereby shall, under any circumstances, imply or create any implication
that there have not been any changes in our affairs or in the information set
forth or incorporated by reference herein subsequent to the date hereof.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Questions and Answers About the Rights Offering.......................... ii
Who Can Help Answer Your Questions....................................... iii
Summary.................................................................. 1
Risk Factors............................................................. 6
Forward-Looking Statements............................................... 14
The Rights Offering...................................................... 15
Use of Proceeds.......................................................... 22
Market Price of Common Stock............................................. 22
Dividend Policy.......................................................... 22
Capitalization........................................................... 23
Dilution................................................................. 23
Selected Consolidated Financial Data..................................... 24
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 25
Business................................................................. 46
Management............................................................... 55
Ownership of Common Stock................................................ 65
Certain Relationships and Related Transactions........................... 66
Description of Westar Industries Capital Stock........................... 70
Plan of Distribution..................................................... 75
Certain Federal Income Tax Consequences.................................. 75
Legal Matters............................................................ 76
Experts.................................................................. 76
Available Information.................................................... 76
Index to Westar Industries' Financial Statements......................... F-1
</TABLE>
Exhibits--ONEOK Financial Statements
A. Audited Consolidated Financial Statements................................ A-1
B. Unaudited Interim Consolidated Financial Statements for the period from
September 1, 1999 through December 31, 1999 ............................ B-1
C. Unaudited Interim Consolidated Financial Statements for the period ended
June 30, 2000............................................................ C-1
i
<PAGE>
QUESTIONS AND ANSWERS ABOUT THE RIGHTS OFFERING
Q: What is a right?
A: Each right entitles its holder to purchase one share of our common stock
at a subscription price of $ . per share through . , 2001, or, if the
subscription period is extended, through such later expiration date. In
addition, each right carries with it an over-subscription privilege.
Q: What is the rights offering?
A: The rights offering is a distribution of rights on a pro rata basis to all
Western Resources stockholders who hold shares of Western Resources common
stock on . , 2001, the record date. "Pro rata" means in proportion to the
number of shares of Western Resources common stock which you and the other
stockholders hold on the record date. Western Resources is distributing
one right for every . shares of its common stock held on the record date.
Q: What is the over-subscription privilege?
A: The over-subscription privilege entitles you, if you exercise your rights
in full, to subscribe for additional shares of our common stock at the
same price. The over-subscription privilege covers shares for which rights
were not exercised. If there are more shares of our common stock available
than the number of over-subscription requests, all over-subscription
requests will be filled in full. If there are more over-subscription
requests than available shares, the available shares will be allocated pro
rata among those holders exercising the over-subscription privilege based
upon the number of rights exercised by them. However, in no event may a
person acquire more than . shares of our common stock, representing 1.0%
of our outstanding common stock, pursuant to his or her exercise of the
over-subscription privilege.
Q: How was the subscription price per share determined?
A: Prior to the rights offering, there has been no public market for our
common stock. Western Resources determined the subscription price based
upon the public market prices for the common stock of Protection One and
ONEOK, our business potential and prospects and other factors deemed
relevant, including providing stockholders with an incentive to exercise
their rights under the rights offering, providing an appropriate initial
public offering discount, providing an appropriate discount for the
conglomerate nature of our businesses and providing an appropriate
discount due to the non-transferability of the rights. In making its
determination, Western Resources did not obtain an independent valuation
of us or our assets. Accordingly, the actual value or resale value of our
common stock may be significantly higher or lower than the subscription
price for the rights.
Q: How do I exercise my rights?
A: You may exercise your rights by completing and signing the enclosed rights
certificate. You must deliver your rights certificate together with full
payment of the subscription price, including the price of any shares to be
acquired by over-subscription, to the Subscription and Information Agent
on or prior to the expiration date. If you use the mail, we recommend that
you use insured, registered mail, return receipt requested.
If you cannot deliver your rights certificate to the Subscription and
Information Agent on time, you may follow the procedures set forth in this
prospectus under the heading "The Rights Offering--Guaranteed Delivery
Procedures."
If you hold your shares of Western Resources common stock through a broker,
custodian bank or other nominee, you must follow the instructions provided
to you by that person.
Q. Will I be charged a sales commission or a fee if I exercise my rights?
A. No. A brokerage commission or a fee will not be charged to rights holders
for exercising their rights. However, if you exercise your rights through
another person such as a broker, custodian bank or other nominee, you will
be responsible for any fees charged by that person.
ii
<PAGE>
Q. Are there any conditions to the completion of the rights offering?
A. Yes. Western Resources will complete the rights offering only if rights for
at least . shares of our common stock, representing . % of our
outstanding common stock (including rights exercised pursuant to the over-
subscription privilege), are exercised by the final expiration date; the
common stock offered hereby shall have been approved for listing on the
NYSE; each of the agreements discussed in "Certain Relationships and
Related Transactions--Our Transactions involving Western Resources" shall
have been executed and delivered; and we are exempt from registration as an
investment company under the Investment Company Act of 1940, as amended.
However, Western Resources may waive any of these conditions.
Q. May I transfer my rights if I do not want to purchase any shares?
A. No. You may not assign or transfer your rights.
Q. Am I required to subscribe in the rights offering?
A. No. You may choose not to exercise your rights.
Q. If I exercise rights in the rights offering, may I cancel or change my
decision?
A. No. Once you have exercised your rights or your over-subscription
privilege, your exercise may not be revoked unless the expiration date is
extended by more than thirty days or a material change in the terms of the
rights offering is made.
Q. If the rights offering is not completed, will my subscription payment be
refunded to me?
A. Yes. The Subscription and Information Agent will hold all funds it receives
in escrow until completion of the rights offering. If the rights offering
is not completed, the Subscription and Information Agent will return
promptly, without interest, all subscription payments. In the event you
choose to exercise your over-subscription privilege, but receive a prorated
amount, you will receive a refund for the shares you do not receive.
Q. What are the material U.S. federal income tax consequences of the rights
offering?
A. For United States federal income tax purposes, the receipt of rights in the
rights offering will be treated as a taxable dividend in an amount equal to
the fair market value of the rights, which we currently estimate to be $ .
per right. The exercise of the rights will not cause you to recognize
taxable income, gain, or loss, and the shares of Westar Industries you
receive from the exercise of those rights will have a basis equal to the
value of the rights on the date of distribution plus the subscription price
paid. In general, if your rights expire unexercised, you will have a
capital loss equal to the value of the rights on the date of distribution.
Utilization of such capital loss is subject to limitations.
Q. What should I do if I have any questions?
A. If you have questions or need assistance, please contact the Subscription
and Information Agent at: . . Banks and brokerage firms please call . .
For a more complete description of the rights offering, see "The Rights
Offering" beginning on page 15.
WHO CAN HELP ANSWER YOUR QUESTIONS
If you have more questions about the rights offering or would like
additional copies of the prospectus, you should contact , the Subscription and
Information Agent for the rights offering, at:
.
Attention: .
Phone Number: .
The dealer managers for the rights offering are:
. .
iii
<PAGE>
SUMMARY
This summary highlights certain information from this document and may not
contain all of the information that is important to you. To understand the
rights offering more fully and for a more complete description of the legal
terms of the rights offering, you should read carefully this entire document
and the Exhibits hereto. This summary does not contain a complete statement of
all material information relating to the matters discussed in this document.
The terms "Westar Industries," "our" and "we" as used in this prospectus
refer to Westar Industries, Inc. and its consolidated subsidiaries unless we
indicate otherwise or the context otherwise requires. The term "Western
Resources" refers to Western Resources, Inc., the parent of Westar Industries.
The term "Protection One" refers to Protection One, Inc., a subsidiary of
Westar Industries, and its subsidiaries. The term "Monitoring" refers to
Protection One Alarm Monitoring, Inc., a wholly owned subsidiary of Protection
One, and its subsidiaries. The term "Protection One Europe" collectively refers
to Protection One International, Inc. and Protection One (UK) plc, both wholly
owned subsidiaries of Westar Industries, and their subsidiaries. The term
"ONEOK" refers to ONEOK, Inc. and its subsidiaries, in which we own a 45%
interest. Unless otherwise indicated, all information in this prospectus gives
effect to the corporate reorganization of Westar Industries described in note 1
to the consolidated financial statements of Westar Industries included
elsewhere in this prospectus.
Westar Industries, Inc.
818 South Kansas Avenue
Topeka, Kansas 66612
(785) 575-6507
We are principally engaged in the monitored security business through
Protection One and Protection One Europe which provide monitored security
services to approximately 1.6 million customers in North America, the United
Kingdom and continental Europe. We own approximately 85% of Protection One and
100% of Protection One Europe. We also own 45% of ONEOK, an Oklahoma based
company that primarily produces, gathers, distributes and trades natural gas.
In addition, we own 40% of Paradigm Direct LLC, a marketing company, minority
interests in international power plants, and other investments which in the
aggregate are not material. Following completion of the rights offering,
assuming full exercise of the rights, approximately 90.1% of our outstanding
capital stock will be owned by Western Resources.
In April 2000, Western Resources announced that its board of directors had
authorized the separation of its electric utilities from us and our
subsidiaries. The rights offering is the initial step in the separation. The
rights offering will result in the creation of a public market for our common
stock and in that respect is essentially an initial public offering of our
common stock. Western Resources believes the public market will better and more
directly value our assets, which are presently valued together with largely
unrelated assets of Western Resources. Western Resources currently intends to
complete the separation through a pro rata distribution of the remaining shares
of our common stock. This distribution would be made to holders of Western
Resources common stock concurrently with the consummation of a transaction
involving a strategic partner for its electric utilities. However, no assurance
can be given as to when or whether any such distribution or separation will
occur or the means thereof. In May 2000, Western Resources announced that its
board of directors had authorized management to explore strategic alternatives
for its regulated electric utilities.
1
<PAGE>
The Rights Offering
The Rights: Western Resources will distribute to holders of
its common stock as of the close of business on
. , 2001, the record date, at no charge, one
non-transferable right for every . shares of
Western Resources common stock owned by such
stockholder. The number of rights distributed to
each stockholder will be rounded down to the
nearest whole number because fractional rights
will not be issued. The rights will be evidenced
by a non-transferable rights certificate.
Basic Subscription Each right will entitle the holder to purchase
Privileges: one share of our common stock for $ . , the per
share subscription price. Each share of our
common stock has associated with it one right to
purchase one one-hundredth of a share of our
preferred stock at a stipulated price in certain
circumstances relating to changes in our
ownership. See "Description of Westar Industries
Capital Stock--Rights Plan."
Over-Subscription Each holder who elects to exercise his or her
Privilege: rights in full may also subscribe for additional
shares at the same subscription price per share.
The number of additional shares available for the
over-subscription privilege will depend on how
many holders exercise their rights. If there are
not enough of our shares available to fully
satisfy all of the over-subscription privilege
requests, the available shares will be
distributed pro rata among rights holders who
exercised their over-subscription privilege based
on the number of rights exercised by them. In the
event you choose to exercise the over-
subscription privilege but receive a prorated
amount, you will receive a refund for the
subscription price of any shares you do not
receive promptly after the expiration of the
rights offering. However, in no event may a
person acquire more than . shares of our common
stock, representing 1.0% of our outstanding
common stock, pursuant to his or her exercise of
the over-subscription privilege.
Conditions to the Rights Western Resources will not consummate the rights
Offering: offering unless the following conditions have
been satisfied: rights for at least . shares of
our common stock, representing . % of our
outstanding common stock (including rights
exercised pursuant to the over-subscription
privilege), are exercised by the final expiration
date; the common stock offered hereby shall have
been approved for listing on the NYSE; we are
exempt from registration as an investment company
under the Investment Company Act of 1940, as
amended (referred to as the Investment Company
Act); and each of the agreements discussed in
"Certain Relationships and Related Transactions--
Our Transactions Involving Western Resources"
shall have been executed and delivered. However,
Western Resources may waive any of these
conditions and choose to proceed with the rights
offering.
Subscription Price: $ . per share.
2
<PAGE>
Record Date: Western Resources stockholders of record as of
the close of business on . , 2001, the record
date, will receive the rights.
Expiration Date: Unexercised rights will expire at 5:00 p.m., New
York City time, on . , 2001, unless Western
Resources decides at its sole discretion to
extend the rights offering until some later time.
Rights Are Non- The rights will be evidenced by non-transferable
Transferable: rights certificates. Only you may exercise your
rights. You may not assign or transfer your
rights.
Procedure for Exercising You may exercise your rights by completing and
Rights: signing your rights certificate. You must deliver
your rights certificate with full payment of the
subscription price, including the price of any
shares to be acquired by over-subscription, to
the Subscription and Information Agent on or
prior to the expiration date. If you use the
mail, we recommend that you use insured,
registered mail, return receipt requested. If you
cannot deliver your rights certificate to the
Subscription and Information Agent on time, you
may follow the procedures set forth under "The
Rights Offering--Guaranteed Delivery Procedures."
Once you have exercised your rights or your over-
subscription privilege, your exercise may not be
revoked unless the expiration date is extended
for more than thirty days or a material change in
the terms of the rights offering is made. Rights
not exercised prior to the expiration of the
rights offering will be void.
How Rights Holders Can
Exercise Rights Through If you hold shares of Western Resources' common
Others: stock through a broker, custodian bank or other
nominee, Western Resources will ask your broker,
custodian bank or other nominee to notify you of
the rights offering. If you wish to exercise your
rights, you will need to have your broker,
custodian bank or other nominee act for you.
How Foreign Stockholders
and Stockholders with APO
or FPO Addresses Can The Subscription and Information Agent will mail
Exercise Rights: rights certificates to you if you are a
stockholder whose address is outside the United
States or if you have an Army Post Office or a
Fleet Post Office address. To exercise your
rights, you must notify the Subscription and
Information Agent on or prior to 11:00 a.m., New
York City time, on . , 2001, and take all other
steps which are necessary to exercise your
rights, on or prior to . , 2001, or your rights
will expire.
Material U.S. Federal
Income Tax Consequences: For United States federal income tax purposes,
the receipt of rights in the rights offering will
be treated as a taxable dividend in an amount
equal to the fair market value of the rights,
which we
3
<PAGE>
currently estimate to be $ . per right. The
exercise of the rights will not cause you to
recognize taxable income, gain, or loss, and the
shares of our common stock you receive from the
exercise of those rights will have a basis equal
to the value of the rights on the date of
distribution plus the subscription price paid. In
general, if your rights expire unexercised, you
will have a capital loss equal to the value of
the rights on the date of distribution.
Utilization of such capital loss is subject to
limitations.
Issuance of Our Common We will issue certificates representing shares
Stock: purchased in the rights offering as soon as
practicable after the expiration of the rights
offering.
Number of Shares of Common
Stock to Be Outstanding
After the Rights Offering: Immediately following the rights offering and
assuming all of the rights have been exercised,
. shares of our common stock will be
outstanding, of which approximately 90.1% will be
owned by Western Resources.
No Recommendation to Rights None of Western Resources, Westar Industries or
Holders: their respective boards of directors or
management makes any recommendation as to whether
or not you should exercise your rights. You
should make your own decision whether to exercise
your rights and, if so, how many rights to
exercise, after reading this prospectus and
consulting with your advisors and based upon your
own assessment of your best interests.
Public Trading Market for
Our Common Stock: Prior to the rights offering, there has been no
public market for our shares of common stock.
Application will be made to have our common stock
listed on the NYSE.
Use of Proceeds: The gross proceeds from the rights offering,
assuming all of the rights have been exercised,
will be approximately $ . million, all of which
will be received by Western Resources. Expenses
of the rights offering will be paid by Western
Resources and are estimated to be $ . .
Risk Factors: You should carefully consider the information set
forth under "Risk Factors" beginning on page 6
and all of the information in this prospectus
before deciding to exercise your rights.
Subscription and . is acting as the Subscription and Information
Information Agent: Agent.
Dealer Managers: . and . are acting as the Dealer Managers.
4
<PAGE>
Summary Consolidated Financial Information
The following table sets forth our summary historical financial data derived
from our audited consolidated financial statements as of and for the three
years ended December 31, 1999, our unaudited consolidated financial statements
as of and for the two years ended December 31, 1996 and our unaudited interim
consolidated financial statements as of and for the six months ended June 30,
2000 and 1999. Such summary information may not be indicative of our future
performance as an independent company. In our opinion, all adjustments, which
are normal and recurring in nature, considered necessary for a fair
presentation have been included in our summary interim consolidated financial
data. The results of operations for the six months ended June 30, 2000 and 1999
are not necessarily indicative of the results to be expected for the entire
fiscal year or any other interim period. The summary financial information
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Risk Factors," and the
consolidated financial statements and the notes thereto included elsewhere in
this prospectus.
<TABLE>
<CAPTION>
As of and for
the
Six Months
As of and for the Year Ended December 31, Ended June 30,
----------------------------------------------------- -------------------
1999 1998 1997 1996 1995 2000 1999
-------- -------- -------- -------- ----- -------- -------
(in millions, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Total revenues.......... $ 606.5 $ 422.4 $ 153.7 $ 10.8 $ 0.1 $ 280.6 $ 297.7
Income (loss) before
extraordinary gain..... (87.6)(1) (35.8)(2) 423.3(3) (18.4) -- 41.8(4) 19.9
Net income (loss)....... (75.9)(1) (34.2)(2) 423.3(3) (18.4) -- 77.7(4) 19.9
Earnings (loss) per
common share--Basic and
diluted(5)
Before extraordinary
gain................... $ (1.25) $ (0.51) $ 6.05 $ (0.26) -- $ 0.60 $ 0.28
Extraordinary gain...... 0.17 0.02 -- -- -- 0.51 --
-------- -------- -------- -------- ----- -------- -------
Earnings (loss) per
common share........... $ (1.08) $ (0.49) $ 6.05 $ (0.26) -- $ 1.11 $ 0.28
Balance Sheet Data:
Current assets.......... 374.1 476.2 246.2 31.9 0.2 180.1 491.3
Total assets............ 3,433.1 3,484.3 2,290.4 1,345.7 2.2 3,327.0 3,598.6
Total long-term debt.... 807.0 927.9 348.3 65.2 -- 652.4 1,037.0
Shareholder's equity.... 2,149.5 1,276.6 1,289.7 425.1 2.0 2,204.9 1,247.8
Book value per common
share(5)............... $ 30.71 $ 18.24 $ 18.42 $ 6.07 $0.03 $ 31.50 $ 17.83
Other Data:
EBITDA(6)............... $ 175.2 $ 117.1 $ 872.6 $ 6.2 -- $ 233.6 $ 162.7
</TABLE>
--------
(1) Includes a $76.2 million pre-tax charge to record impairment for marketable
securities.
(2) Includes a $50.7 million pre-tax charge to record an impairment of equity
investments in international power generation projects.
(3) Includes a $864.3 million pre-tax gain on the sale of Tyco International
Ltd. common stock.
(4) Includes a $91.1 million pre-tax gain on the sale of an equity investment
in a gas compression company and a $24.5 million pre-tax gain on the sale
of investments in paging companies.
(5) Per share amounts assume 70 million outstanding shares of our common stock.
The actual number of our outstanding shares will be the same as the number
of outstanding shares of Western Resources common stock on the record date
for the rights offering, which we estimate will be approximately 70 million
shares.
(6) Earnings before interest, taxes, depreciation and amortization.
5
<PAGE>
RISK FACTORS
You should carefully consider the following risk factors and all other
information contained in this prospectus before exercising your rights.
Investing in our common stock involves a high degree of risk. Any of the
following risks could materially harm our business, operating results and
financial condition and could result in a complete loss of your investment.
RISKS RELATED TO OUR SEPARATION FROM WESTERN RESOURCES
We have no operating history as an independent company.
Prior to the rights offering, we operated as a segment of the broader
corporate organization of Western Resources rather than as a stand-alone
company. Western Resources assisted us by providing capital and by providing
administrative functions through shared services arrangements. Because we have
never been operated as an independent company, we cannot assure you that we
will be able to implement successfully the changes necessary to operate
independently or that we will not incur additional costs operating
independently that will result in losses.
Our historical financial information may not be representative of our results
as a separate company and, therefore, may not be reliable as an indicator of
our historical or future results.
The historical financial information we have included in this registration
statement may not reflect what our results of operations, financial position
and cash flows would have been had we been a stand-alone company during the
periods presented or what our results of operations, financial position and
cash flows will be in the future. This is because our consolidated financial
statements reflect allocations for services, primarily with respect to
corporate overhead, which may not reflect the costs we will incur for similar
services as a stand-alone company. The information also does not reflect
changes we expect to occur in the future as a result of our separation from
Western Resources, including changes in how we fund our operations, taxes and
employee matters.
We will need to find sources of capital.
We have historically relied on Western Resources for our capital needs for
strategic transactions. Our needs for operating funds historically have not
been significant because we operated as a part of Western Resources and because
Protection One and Protection One Europe finance their operations from
operating cash flows. After the rights offering, we do not expect Western
Resources to provide cash injections to finance our operations. We expect to
have adequate cash flow to meet our existing operating requirements following
the rights offering from existing cash balances, the operating cash flow of
Protection One and Protection One Europe, dividends from ONEOK and our other
investments and repayment of amounts owed to us by Western Resources. However,
we can give no assurance as to whether our cash flow will be adequate in the
future. In any event, we will need to find other sources of capital or
financing to make any strategic acquisition or investment. We cannot assure you
that capital or financing would be available to us on acceptable terms or at
all.
We will enter into an agreement with Western Resources providing for the
repayment of an intercompany receivable in the amount of approximately $225
million owed to us by Western Resources. Pursuant to that agreement,
concurrently with the closing of the rights offering, Western Resources will
issue us a demand note for $ . million of the intercompany receivable which
will be repaid no later than the closing of a strategic transaction involving
Western Resources' electric utilities. We will agree to use the balance of the
intercompany receivable to acquire at our option shares of our common stock
owned by Western Resources at a price not less than the subscription price or
shares of common stock or convertible preferred stock of Western Resources not
later than the closing of a strategic transaction involving Western Resources'
electric utilities. In addition, we will agree to use the proceeds in excess of
our operating needs of our asset sales following the rights offering
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to purchase such securities. This agreement will terminate upon the earliest of
the closing of a strategic transaction involving Western Resources' electric
utilities, the secured debt of Western Resources receiving an investment grade
rating from Moody's and Standard & Poors, or the reduction of Western
Resources' unconsolidated debt plus Kansas Gas and Electric Company debt to
$2.5 billion. See "Certain Relationships and Related Transactions--Our
Transactions Involving Western Resources--Allocation Agreement."
We are a holding company and are dependent on our subsidiaries and ONEOK to
meet our payment obligations and requirements for liquidity.
We are a holding company with no significant assets or operations other than
our investments in our subsidiaries and in ONEOK. We conduct all of our
business through our subsidiaries. The ability of our subsidiaries to pay
dividends or to make loans, advances or other payments to us will depend on the
subsidiaries' results of operations, provisions of applicable laws and
contracted restrictions in existing and future instruments governing
indebtedness.
Dividends on our ONEOK stock provide a significant portion of our cash flow
from operations. A decrease or interruption in the dividends paid by ONEOK
would adversely affect our liquidity and ability to continue our operations.
There can be no assurance ONEOK will continue to pay dividends at the current
rate or at all in the future. ONEOK's failure to pay dividends in certain
amounts would result in the termination of a shareholder agreement with ONEOK
unless we agreed otherwise, and we would then be free of certain restrictions
contained in the shareholder agreement. Debt agreements pursuant to which
ONEOK's outstanding long-term and short-term debt has been issued limit
dividends and other distributions on its common stock. Please refer to ONEOK's
Form 10-K, Forms 10-Q and other documents it files with the Securities and
Exchange Commission, or SEC, for further information concerning ONEOK. Such
reports and documents are available at the SEC's public reference rooms and
from the SEC's website. See "Available Information."
Protection One has never paid any cash dividends on its common stock (other
than a special dividend in connection with our acquisition of Protection One in
1997) and does not intend to pay any cash dividends in the foreseeable future.
The ability of Monitoring, the principal operating subsidiary of Protection
One, to pay dividends or make other distributions to Protection One is
restricted by the agreements relating to certain of its indebtedness.
Consequently, we do not have access to the cash flow of Protection One for the
payment of dividends on our capital stock or for our other purposes.
We must maintain our exemption from registration under the Investment Company
Act.
Upon consummation of the rights offering, we will rely on a temporary one
year exemption from registration under the Investment Company Act. Registration
would otherwise be required because of the value and nature of our investment
in ONEOK. Registration under the Investment Company Act would impose
significant restrictions on our operations and adversely affect shareholder
value. While we intend to file an application with the SEC requesting a
permanent exemption from registration under the Investment Company Act, no
assurance can be given that we will receive a permanent exemption following the
expiration of the temporary one-year exemption from registration under the
Investment Company Act. Without a permanent exemption, we would need to take
action to avoid registration. Possible action could include selling a portion
of our investment in ONEOK or exercising our option to purchase an electric
generating facility near Joplin, Missouri from Western Resources and
registering as a holding company under the Public Utility Holding Company Act
of 1935, or PUHCA. Our ability to transfer our investment in ONEOK is
restricted under the terms of a shareholder agreement. Therefore, if we wished
to dispose of all or a portion of our ONEOK investment in order to avoid
registration under the Investment Company Act, such a transaction could be
subject to complex negotiations which could adversely effect our ability to
consummate a disposition and the amount of proceeds we receive upon
consummation.
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If we register under the Public Utility Holding Company Act, we would have
additional restrictions imposed on our business.
If we are unable to obtain a permanent exemption from registration under the
Investment Company Act, we may decide to register as a holding company under
PUHCA. Being subject to regulation under PUHCA would impose a number of
restrictions on our operations. These restrictions include a requirement that
the SEC approve, in advance, securities issuances, sales and acquisitions of
utility assets or of securities of utility companies and acquisitions of
interests in other businesses. PUHCA also limits the ability of registered
holding companies to engage in non-utility ventures and regulates transactions
between various affiliates within the holding company system, including the
provision of services by holding company affiliates to the system's utilities.
Our ability to grow may be affected by certain occurrences.
Our operations and ability to grow may be affected by numerous factors,
including changes in customer requirements, new laws, technological advances,
entry of new competitors and changes in our access to capital. We cannot
predict which, if any, of these or other factors might have a significant
impact in the future, nor can we predict what impact, if any, the occurrence of
these or other events might have on our operations.
RISKS PARTICULAR TO PROTECTION ONE'S BUSINESS
Protection One has experienced net losses which are likely to continue.
Protection One has a history of significant net losses which are expected to
continue. These losses increased in 1999 and the first half of 2000 primarily
due to accelerated amortization of customer accounts and a shorter period for
amortizing goodwill. Losses may be higher in the future as a result of
declining revenues and higher borrowing costs under Protection One's senior
credit facility. There can be no assurance that Protection One will attain
profitable operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Impairment Test."
Protection One's financial reporting is being reviewed by the SEC, which may
lead to a restatement of results.
Protection One has been informed by the Staff of the Division of Corporation
Finance of the SEC that, in its view, there are errors in Protection One's
previously filed financial statements which are material and require a
restatement of results. Protection One disputes these allegations. At present,
neither we nor Protection One is able to predict the outcome of these
disagreements. To date, Protection One's discussions with the Staff of the SEC
have occurred for more than a year and a half and the process of resolving
these matters could extend over a protracted period. Were both we and
Protection One to make the revisions in our financial statements suggested by
the SEC, such revisions would result in a material adverse effect on our and
Protection One's financial position and results of operations. Neither we nor
Protection One can predict what action the Staff may take, including
enforcement action, the impact any action may have on us or our financial
statements, or the effect or timing of any action if taken.
Protection One loses customers over time.
Protection One experiences the loss of accounts, or attrition, as a result
of, among other factors, relocation of customers, adverse financial and
economic conditions, competition from other alarm service companies, and
customer service and operational difficulties. The effects of the gross number
of lost customers have historically been offset by a combination of factors
that has resulted in an overall increase in the number of customers and
revenue, including adding new accounts from customers who move into premises
previously occupied by prior customers in which security alarm systems are
installed, adding accounts for which Protection One obtains a guarantee from
the seller that allows Protection One to "put" back to the seller cancelled
accounts, and
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revenues from price increases and the sale of enhanced services. Protection One
experienced high levels of attrition for the North America segment in 1999.
Quarterly attrition increased in the second quarter of 2000 to 14.6% on an
annualized basis. This percentage is higher than the 11.1% annualized attrition
reported at March 31, 2000, but slightly lower than the 14.8% annualized
attrition as of June 30, 1999. In 2000, Protection One's customer acquisition
strategies have not replaced accounts lost as a result of attrition. This is
due primarily to a move from reliance on a dealer program to generate customer
accounts to reliance on a mix of marketing strategies. If Protection One's new
marketing strategies do not increase the number of new accounts, or if
Protection One is unable to reduce the level of attrition, there could be a
material adverse effect on its business, financial condition and results of
operation.
Protection One has a substantial amount of debt which could constrain its
growth or otherwise adversely affect our investment.
Protection One has, and will likely continue to have, a large amount of
consolidated indebtedness. As of June 30, 2000, Protection One had outstanding
total indebtedness of approximately $664.0 million, an accumulated deficit of
$131.6 million and stockholders' equity of $1.28 billion. Protection One's
ratio of total indebtedness to total capitalization was approximately .34 as of
June 30, 2000.
A large amount of indebtedness could have a negative impact on, among other
things, Protection One's ability to obtain additional financing in the future
for working capital, acquisitions of customer accounts, capital expenditures
and general corporate purposes, Protection One's ability to withstand a
downturn in its business or the economy generally, and Protection One's ability
to compete against other less leveraged companies.
The indentures governing Protection One's long-term indebtedness require
Protection One to satisfy certain financial conditions in order to borrow
additional funds. The most restrictive of these covenants require total debt to
annualized EBITDA for the most recent quarter to be less than 6.0, annualized
EBITDA for the most recent quarter to interest expense to be greater than 2.25,
and senior debt to annualized EBITDA to be less than 4 to 1. Protection One was
in compliance with these covenants for the quarter ended June 30, 2000.
Protection One's ability to comply with these ratios and the tests will be
affected by events outside its control and there can be no assurance that
Protection One will meet those tests. A breach of any of the covenants or
failure to meet the financial ratio tests could result in an event of default
which would allow the lenders to declare all amounts outstanding immediately
due and payable.
Protection One may not be able to replace its credit facility on current
terms.
We provide a portion of Protection One's liquidity needs through an
intercompany $115.0 million senior credit facility which matures on January 2,
2001. As of September 30, 2000, Protection One had borrowed $72.0 million under
this facility. We have advised Protection One that while we would consider an
extension of the facility upon terms reflecting market conditions, we desire
that Protection One replace the facility with other financing. Protection One
has announced that it is considering new sources of financing, including new
credit facilities with third parties and sales of assets. Since the facility
was last renewed, interest rates have increased and market conditions for
comparable borrowers have become more difficult. There is no assurance
Protection One will be able to obtain new financing from third parties on
similar terms with no disruption to its operations or liquidity, or at all.
The credit facility requires that Protection One comply with certain
financial covenants, including a leverage ratio of 5.75 to 1.0 and an interest
coverage ratio of 2.10 to 1.0. At June 30, 2000, these ratios were
approximately 4.2 to 1.0 and 2.7 to 1.0, respectively. The failure to satisfy
these covenants could result in an event of default which would allow us to
declare all amounts outstanding immediately due and payable.
The impact of Protection One class action litigation may be material.
We, Western Resources, Protection One and certain of Protection One's
officers are defendants in a class action litigation pending in the U.S.
District Court for the Central District of California brought on behalf of
shareholders of Protection One. The plaintiffs are seeking unspecified
compensatory damages based on
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allegations that various statements concerning Protection One's financial
results and operations for 1997 and 1998 were false and misleading. There can
be no assurance that this litigation will not have a material adverse impact
on Protection One.
RISKS PARTICULAR TO OUR INVESTMENT IN ONEOK
A shareholder agreement with ONEOK restricts our right to transfer and vote
our ONEOK stock.
We own approximately 45% of the capital stock of ONEOK. Our investment
consists of approximately 7.4% of the outstanding common stock of ONEOK and
shares of convertible preferred stock. The terms of a shareholder agreement
with ONEOK restrict our right to transfer and vote our ONEOK shares. Before we
can transfer shares representing more than 5% of ONEOK's voting securities to
another person (other than by way of a public offering), ONEOK must be given
the opportunity to purchase those shares at a cash purchase price equal to
98.5% of the then current market price for ONEOK's common stock. During the
term of the shareholder agreement, we have agreed to vote our shares,
including for the election of directors, in an agreed upon manner rather than
at our sole discretion. These restrictions may prevent us from realizing the
full benefits of ownership normally associated with owning a substantial stake
in another entity. There can be no assurance as to what effect, if any, these
restrictions may have on the value of our ownership stake in ONEOK.
In addition, on November 26, 2012 and each subsequent annual anniversary,
each of us and ONEOK, on behalf of its shareholders, has the right to buy from
or sell to the other all outstanding shares of ONEOK capital stock
beneficially owned by the selling party (which, in the case of ONEOK, means
its shareholders other than us and our affiliates). ONEOK may exercise its
buy/sell rights immediately upon our registering as a holding company under
PUHCA if ONEOK believes that our regulatory status would place an unreasonable
restriction on the implementation of ONEOK's strategic business plans.
RISKS PARTICULAR TO THIS OFFERING
There has been no prior public market for our common stock, so the trading
price may be less than the subscription price.
There has been no public market for our common stock, and we cannot assure
you that an active public market will develop. The subscription price of $ .
per share is not necessarily indicative of the market price of our common
stock after the rights offering, which price may fall below the subscription
price. We cannot assure you that if a trading market develops in our common
stock, the stock will trade at prices in excess of the subscription price at
any time after the date of this prospectus. Western Resources determined the
subscription price based upon the public market prices for the common stock of
Protection One and ONEOK, our business potential and prospects and other
factors deemed relevant, including providing stockholders with an incentive to
exercise their rights under the rights offering, providing an appropriate
initial public offering discount, providing an appropriate discount for the
conglomerate nature of our business and providing an appropriate discount due
to the non-transferability of the rights. In making its determination, Western
Resources did not obtain an independent valuation of us or our assets.
Accordingly, the actual value or resale value of our common stock may be
significantly higher or lower than the subscription price for the rights.
It is difficult to predict whether an active market for our stock will
develop and be sustained, and the market price of our stock may be volatile.
Prior to the closing of the rights offering you could not purchase our
common stock publicly. We cannot assure you that investors will develop an
interest in our common stock so that a trading market develops or, if a
trading market does develop, how active that trading market will be or whether
it will be sustained. Specific factors that may affect the price and liquidity
of our securities include:
. actual or anticipated fluctuations in our quarterly operating results;
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. operating results that vary from investors' expectations as to our
future financial performance or changes in financial estimates;
. announcements of technological innovations or new services by us or our
competitors;
. announcements by third parties of significant claims or proceedings
against us;
. whether and how any distributions or other dispositions of our common
stock owned by Western Resources will be made;
. whether our stock will continue to qualify for listing on the NYSE;
. the operating and stock price performance of other comparable companies;
and
. the resolution of accounting issues pertaining to Protection One
presently pending before the Staff of the SEC.
Western Resources' voting control after this offering could prevent a change
of control.
Upon closing of the rights offering, Western Resources will have effective
voting control over us since Western Resources will own approximately 90.1% of
the outstanding shares of our common stock, assuming all rights are exercised.
As a result, Western Resources will be able to control the outcome of
substantially all matters submitted to our stockholders for approval, including
the election of directors and any proposed merger, liquidation, transfer or
encumbrance of a substantial portion of our assets, or amendment to our charter
to change our authorized capitalization or otherwise. This concentration of
voting power may also have the effect of delaying or preventing a change of
control even if it would be beneficial to our minority stockholders.
Anti-Takeover Effects of Charter Provisions and Kansas Law.
Certain provisions of Kansas law and our Amended and Restated Articles of
Incorporation and By-laws could delay, impede or make more difficult a merger,
tender offer or proxy contest involving us, even if such events could be
beneficial to the interests of our stockholders. Such provisions could limit
the price that certain investors might be willing to pay in the future for
shares of our common stock. See "Description of Westar Industries Capital
Stock--Certain Anti-Takeover Provisions and Statutes."
The presence of interlocking directors and officers between Western Resources
and us will create potential conflicts of interest.
Some of our directors also are directors, officers or employees of Western
Resources and, in most cases, either own shares or rights to equity securities
of Western Resources. As a result, these individuals have inherent conflicts of
interest when making decisions related to transactions between us and Western
Resources. Western Resources' ability to control us, together with the
potential conflicts of interest of its directors and executive officers who
also serve as our directors, could adversely affect the trading price and
liquidity of our common stock. These factors could limit the price that
investors might be willing to pay for our common stock in the future.
Management personnel serving both Western Resources and us may suffer
competing claims on their time which may place demands on our resources.
Initially, through the shared services agreement with Western Resources, we
will rely on the services of officers and senior management of Western
Resources who will devote their business time and efforts to both Western
Resources and us. The competing claims upon each person's time and energies
could divert his or her attention from our affairs, placing additional demands
on our resources. The efforts of all or any of these individuals may be
insufficient to meet both our needs and those of Western Resources. If we were
deprived of access to key members of our management team or other personnel, or
lose access to such services altogether, our business, prospects, results of
operations and financial condition could be materially adversely affected.
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As previously stated, Western Resources plans on separating us and our
subsidiaries from its electric utilities. We expect to be able to obtain
management and administrative services without the assistance of Western
Resources upon separation, but we do not know what the cost for such services
will be.
We rely on intercompany agreements.
We have entered into certain intercompany agreements with Western Resources
including the shared services agreement and the allocation agreement. Pursuant
to the shared services agreement, Western Resources will provide us with
management and administrative services at various hourly charges and negotiated
fees for a period of . years and thereafter the agreement may be terminated
upon . days' notice by either party. If Western Resources completes its
intended separation of its electric utilities from us and our business, which
Western Resources currently intends to effect through a distribution of the
remaining shares of our common stock held by Western Resources to its common
stockholders, we could experience a loss of these services provided under the
shared services agreement. Such a loss would cause us to seek a new manner of
procuring such services and no assurance can be given that we will be able to
obtain such services on terms at least comparable to the intercompany
agreements with Western Resources. The terms of these intercompany agreements
with Western Resources were negotiated in the context of a parent-subsidiary
relationship. We cannot assure you that the terms of these agreements, or the
related transactions, will be effected on terms at least as favorable to us as
could have been obtained from unaffiliated third parties.
A substantial amount of our common stock will be eligible for future sale or
distribution.
Upon the closing of the rights offering, excluding shares owned by Western
Resources, there will be issued and outstanding . shares of our common stock,
assuming all rights are exercised. All such shares will be freely tradeable
without restriction, except for any shares purchased by our "affiliates" as
defined in Rule 144 under the Securities Act. The . shares owned by Western
Resources will be "restricted securities" as that term is defined in Rule 144.
Such restricted securities will be available for public sale only if registered
under the Securities Act, sold in accordance with Rule 144 or sold or
transferred in transactions otherwise exempt from registration requirements
under the Securities Act. Under Rule 144, a person who is not our affiliate and
who has held restricted securities for a period of one year may sell a limited
number of shares to the public in ordinary brokerage transactions and, after
holding the securities for two years, may freely trade them. Under Rule 144,
affiliates of ours holding restricted securities may only sell all of them
after holding them for one year and only within the parameters of Rule 144
governing the timing, manner and volume of sales of such shares.
Following consummation of the rights offering and assuming all of the rights
are exercised, Western Resources will hold . shares of our common stock which
may not be sold to the public without registration under the Securities Act. We
have entered into a registration rights agreement with Western Resources which
grants to Western Resources registration rights with respect to shares of our
common stock that it holds. These registration rights effectively allow Western
Resources to sell all of its shares of common stock either on demand or upon
the occurrence of certain events and to participate as a selling shareholder in
future public offerings by us.
However, Western Resources currently intends to distribute, on a pro rata
basis, the remaining shares of our common stock it holds to its common
stockholders concurrently with the consummation of a transaction involving a
strategic partner for its electric utilities. The shares of our common stock
distributed by Western Resources would be freely transferable upon such
distribution, other than shares distributed to our affiliates.
In addition, . shares of our common stock are reserved for issuance under
our 2001 Long Term Incentive Compensation and Share Award Plan, our Employee
Stock Purchase Plan and our Short Term Incentive Plan. Following the
consummation of the rights offering, we intend to file registration statements
on Form S-8 under the Securities Act covering the shares reserved for issuance
under some or all of these plans. Any such registration statement will
automatically become effective upon filing.
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We may also issue large amounts of additional common stock in the future in
connection with raising additional capital and in connection with possible
acquisitions. These shares will become available for resale at various dates in
the future.
Sales under Rule 144 may have a depressive effect on the market price of our
common stock due to the potential increased number of publicly held securities.
The timing and amount of sales of common stock made pursuant to other filed
registration statements could also have a negative impact on the market price
of our common stock. Any stock options we issue are likely to be exercised, if
at all, at a time when we otherwise could obtain a price for the sale of our
common stock that is higher than the exercise price per share of such options
or warrants. Any such exercise or the possibility of such exercise may impede
our efforts to obtain additional financing through the sale of additional
securities or make such financing more costly.
We cannot predict the effect, if any, that sales of our common stock, or the
availability of shares for sale, or the distribution of our common stock in the
future, will have on the market price prevailing from time to time.
Nevertheless, sales of significant amounts of our common stock in the public or
private market, or the perception that such sales may occur, or the expectation
that additional shares will be distributed in the future, could adversely
affect prevailing market prices.
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FORWARD-LOOKING STATEMENTS
Certain matters discussed in this prospectus are forward-looking statements.
The Private Securities Litigation Reform Act of 1995 has established that these
statements qualify for safe harbors from liability. Forward-looking statements
may include words like we believe, anticipate, expect or words of similar
meaning. Forward-looking statements describe our future plans, objectives,
expectations or goals. Such statements address future events and conditions
concerning capital expenditures, earnings, restructuring Protection One's
methods of customer acquisition, the administrative and other services provided
by Western Resources to us, litigation, the outcome of accounting issues being
reviewed by the SEC staff, possible corporate restructurings, mergers, and
acquisitions by Western Resources, liquidity and capital resources, compliance
with debt covenants, interest, ability to enter new markets successfully and
capitalize on growth opportunities, and accounting matters. What happens in
each case could vary materially from what we expect because of such things as
future economic conditions; legislative developments; competitive markets;
amendments or revisions to Western Resources' current plans and other
circumstances affecting anticipated operations, revenues and costs.
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THE RIGHTS OFFERING
The Rights
Western Resources will distribute to each holder of Western Resources common
stock who is a record holder on the record date, which is 5:00 p.m., New York
City time, on . , 2001, at no charge, one non-transferable right for every .
shares of Western Resources common stock such holder owns. Western Resources
will round down, to the nearest whole number, the number of rights it
distributes to each stockholder. The rights will be evidenced by non-
transferable rights certificates. Each right will allow you to purchase one
share of our common stock at a price of $ . . If you elect to exercise your
rights in full, you may also subscribe, at the subscription price, for
additional shares of our common stock under your over-subscription privilege,
if there are enough shares available. Western Resources is distributing rights
to purchase approximately 9.9% of our outstanding common stock owned by Western
Resources in the rights offering.
Background and Purpose of the Rights Offering
In April 2000, Western Resources announced that its board of directors had
authorized the separation of its electric utilities from us and our
subsidiaries. The rights offering is the initial step in the separation. The
rights offering will result in the creation of a public market for our common
stock and in that respect is essentially an initial public offering of our
common stock. Western Resources believes the public market will better and more
directly value our assets, which are presently valued together with largely
unrelated assets of Western Resources. Western Resources currently intends to
complete the separation through a pro rata distribution of the remaining shares
of our common stock. This distribution would be made to holders of Western
Resources common stock concurrently with the consummation of the transaction
involving a strategic partner for its electric utilities. However, no assurance
can be given as to whether or when any distribution or separation will occur or
the means thereof. In May 2000, Western Resources announced that its board of
directors had authorized management to explore strategic alternatives for its
regulated electric utilities.
Determination of Subscription Price
Prior to the rights offering, there has been no public market for our common
stock. Western Resources determined the subscription price based upon the
public market prices for the common stock of Protection One and ONEOK, our
business potential and prospects and other factors deemed relevant, including
providing stockholders with an incentive to exercise their rights under the
rights offering, providing an appropriate initial public offering discount,
providing an appropriate discount for the conglomerate nature of our business
and providing an appropriate discount due to the non-transferability of the
rights. In making its determination, Western Resources did not obtain an
independent valuation of us or our assets. Accordingly, the actual value or
resale value of our common stock may be significantly higher or lower than the
subscription price for the rights.
No Fractional Rights
Western Resources will not issue fractional rights, but rather will round
down the number of rights distributed to each stockholder to the nearest whole
number.
You may request that the Subscription and Information Agent divide your
rights certificate into parts. This could be needed, for instance, if you are
the record holder for a number of beneficial holders of Western Resources
common stock. However, the Subscription and Information Agent will not divide
your rights certificate so that you would receive any fractional rights.
Expiration of the Rights Offering
You may exercise your subscription privilege at any time before 5:00 p.m.,
New York City time, on . , 2001, the expiration date for the rights offering.
Western Resources may, in its sole discretion, extend the time for exercising
the rights. If you do not exercise your rights before the expiration date, your
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unexercised rights will be null and void. Western Resources will not be
obligated to honor your exercise of rights if the Subscription and Information
Agent receives the documents relating to your exercise after the rights
offering expires, regardless of when you transmitted the documents, except when
you have timely transmitted the documents under the guaranteed delivery
procedures described below. Western Resources may extend the expiration date by
giving oral or written notice to the Subscription and Information Agent on or
before the scheduled expiration date.
If Western Resources elects to extend the expiration of the rights offering,
Western Resources will issue a press release announcing the extension no later
than 9:00 a.m., New York City time, on the next business day after the most
recently announced expiration date.
Subscription Privileges
Basic Subscription Privilege. Your rights entitle you to the basic
subscription privilege and the over-subscription privilege. With your basic
subscription privilege, you may purchase one share of our common stock per
right, upon delivery of the required documents and payment of the subscription
price of $ . per share. You are not required to exercise all of your rights
unless you wish to purchase shares under your over-subscription privilege. We
will deliver to you certificates representing the shares which you purchased
with your right as soon as practicable after the rights offering has expired.
Full Exercise of Rights. You may exercise your over-subscription privilege
only if you exercise your rights in full. To determine if you have fully
exercised your rights, we will consider only the rights held by you in the same
capacity. For example, suppose that you were granted rights with respect to
shares of Western Resources common stock which you own individually and shares
of Western Resources common stock which you own collectively with your spouse.
If you wish to exercise your over-subscription privilege with respect to the
rights you own individually, but not with respect to the rights you own
collectively with your spouse, you only need to fully exercise those rights you
own individually. You would not have to subscribe for any shares with respect
to rights owned collectively with your spouse to exercise your individual over-
subscription privilege.
When you complete the portion of your rights certificate to exercise your
over-subscription privilege, you will be representing and certifying that you
have fully exercised your subscription privileges as to shares of our common
stock which you hold in that capacity. You must exercise your over-subscription
privilege at the same time you exercise your rights in full.
If you own shares of Western Resources common stock through your broker,
custodian bank or other nominee holder who will exercise your subscription
privilege on your behalf, you must follow the instructions provided to you by
that person. Your broker, custodian bank or other nominee holder may also
disclose to us other information received from you.
Over-Subscription Privilege. In addition to your basic subscription
privilege, you may subscribe for additional shares of our common stock, upon
delivery of the required documents and payment of the subscription price of
$ . per share, before the expiration of the rights offering. You may only
exercise your over-subscription privilege if you exercised your rights in full
and you will only receive shares of our common stock in fulfillment of your
over-subscription if other holders of rights do not exercise their rights in
full.
Pro Rata Allocation. If there are more shares of our common stock available
than the number of over-subscription requests, all over-subscription requests
will be filled in full. If there are more over-subscription requests than
available shares, we will allocate the available shares pro rata among those
holders exercising the over-subscription privilege based upon the number of
shares each rights holder purchased by exercising the basic subscription
privilege. If there is a pro rata allocation of a greater number of shares than
you subscribed for under your over-subscription privilege, then we will
allocate to you only the number of shares for which you subscribed. The
remaining shares will be allocated among all other holders exercising their
over-subscription privilege.
16
<PAGE>
Limitation on Over-Subscription. In no event may a person acquire beneficial
ownership of more than . shares of our common stock, representing 1.0% of our
outstanding common stock, pursuant to his or her exercise of the over-
subscription privilege. Beneficial ownership will be determined in accordance
with the rules and regulations of the SEC.
Return of Excess Payment. If you exercised your over-subscription privilege
and are allocated less than all of the shares for which you wished to
subscribe, your excess payment for shares that were not allocated to you will
be returned by mail without interest or deduction as soon as practicable after
the expiration date. We will deliver to you certificates representing the
shares you purchased as soon as practicable after the expiration date and after
all pro rata allocations and adjustments have been completed.
Conditions to the Rights Offering
Western Resources will not consummate the rights offering unless the
following conditions have been satisfied: rights for at least . shares of our
common stock, representing . % of our outstanding common stock (including
rights exercised pursuant to the over-subscription privilege), are exercised by
the final expiration date; the common stock offered hereby shall have been
approved for listing on the NYSE; we are exempt from registration as an
investment company under the Investment Company Act; and each of the agreements
discussed in "Certain Relationships and Related Transactions--Our Transactions
involving Western Resources" shall have been executed and delivered. Subject to
applicable law, Western Resources may waive any of the foregoing conditions and
choose to proceed with the rights offering even if one or more of these events
do not occur.
Western Resources may also terminate the rights offering at any time before
completion of the rights offering. If Western Resources terminates the rights
offering, all rights will expire without value and all subscription payments
received by the Subscription and Information Agent will be returned promptly,
without interest.
Other Matters
Western Resources is not making the rights offering in any state or other
jurisdiction in which it is unlawful to do so, nor is Western Resources selling
or accepting any offers to purchase any shares of our common stock from rights
holders who are residents of those states or other jurisdictions. Western
Resources may delay the commencement of the rights offering in those states or
other jurisdictions, or change the terms of the rights offering in order to
comply with the securities law requirements of those states or other
jurisdictions. Western Resources may decline to make modifications to the terms
of the rights offering requested by those states or other jurisdictions, in
which case, if you are a resident in those states or jurisdictions you will not
be eligible to participate in the rights offering.
Method of Subscription--Exercise of Rights
You may exercise your rights by delivering the following to the Subscription
and Information Agent, at or prior to 5:00 p.m., New York City time, on . ,
2001, the date on which the rights expire or, if the subscription period is
extended, on the later date to which it is extended:
--Your properly completed and executed rights certificate with any required
signature guarantees or other supplemental documentation; and
--Your full subscription price payment for each share subscribed for under
your subscription privileges.
Method of Payment
Your payment of the subscription price must be made in U.S. dollars for the
full number of shares of common stock you are subscribing for by either:
--Check or bank draft drawn upon a U.S. bank or postal, telegraphic or
express money order payable to the Subscription and Information Agent; or
17
<PAGE>
--Wire transfer of immediately available funds to the subscription account
maintained by the Subscription and Information Agent at . ABA No. .
for further credit to . Attention: .
Receipt of Payment
Your payment will be considered received by the Subscription and Information
Agent only upon:
--Clearance of any uncertified check;
--Receipt by the Subscription and Information Agent of any certified check
or bank draft drawn upon a U.S. bank or of any postal, telegraphic or
express money order; or
--Receipt of collected funds in the subscription account designated above.
Clearance of Uncertified Checks
If you are paying by uncertified personal check, please note that
uncertified checks may take at least five business days to clear. If you wish
to pay the subscription price by uncertified personal check, we urge you to
make payment sufficiently in advance of the time the rights offering expires to
ensure that your payment is received and clears by that time. We urge you to
consider using a certified or cashier's check, money order or wire transfer of
funds to avoid missing the opportunity to exercise your rights should you
desire to do so.
Delivery of Subscription Materials and Payment
You should deliver your rights certificate and payment of the subscription
price or, if applicable, notice of guaranteed delivery to the Subscription and
Information Agent by one of the methods described below:
If by mail to: .
If by hand delivery or by overnight courier to: .
You may call the Subscription and Information Agent at . .
Your delivery to an address other than the address set forth above will not
constitute valid delivery.
Calculation of Rights Exercised
If you do not indicate the number of rights being exercised, or do not
forward full payment of the total subscription price payment for the number of
rights that you indicate are being exercised, then you will be deemed to have
exercised your basic subscription privilege with respect to the maximum number
of rights that may be exercised with the aggregate subscription price payment
you delivered to the Subscription and Information Agent. If your aggregate
subscription price payment is greater than the amount you owe for your
subscription, you will be deemed to have exercised your over-subscription
privilege to purchase the maximum number of shares with your overpayment. If
your full subscription price payment is not applied to your purchase of shares,
you will be refunded the amount of any overpayment, sent via mail, without
interest or deduction, as soon as practicable after the expiration date of the
rights offering.
Your Funds Will Be Held by the Subscription and Information Agent Until Shares
of Common Stock Are Issued
The Subscription and Information Agent will hold your payment of the
subscription price payment in a segregated account with other payments received
from other rights holders until we issue your shares to you.
Signature Guarantee May Be Required
Your signature on each rights certificate must be guaranteed by an eligible
institution such as a member firm of a registered national securities exchange
or a member of the National Association of Securities Dealers,
18
<PAGE>
Inc., or by a commercial bank or trust company having an office or
correspondent in the United States, subject to standards and procedures adopted
by the Subscription and Information Agent, unless:
. Your rights certificate provides that shares are to be delivered to you
as record holder of those rights; or
. You are an eligible institution.
Notice to Beneficial Holders
If you are a broker, a trustee or a depository for securities who holds
shares of Western Resources common stock for the account of others on . ,
2001, the record date for the rights offering, you should notify the respective
beneficial owners of such shares of the rights offering as soon as possible to
find out their intentions with respect to exercising their rights. You should
obtain instructions from the beneficial owner with respect to the rights, as
set forth in the instructions we have provided to you for your distribution to
beneficial owners. If the beneficial owner so instructs, you should complete
the appropriate rights certificates and submit them to the Subscription and
Information Agent with the proper payment. If you hold shares of Western
Resources common stock for the account(s) of more than one beneficial owner,
you may exercise the number of rights to which all such beneficial owners in
the aggregate otherwise would have been entitled had they been direct record
holders of Western Resources common stock on the record date for the rights
offering, provided that you, as a nominee record holder, make a proper showing
to the Subscription and Information Agent by submitting the form entitled
"Nominee Holder Certification" which we will provide to you with your rights
offering materials.
Beneficial Owners
If you are a beneficial owner of shares of Western Resources common stock or
will receive your rights through a broker, custodian bank or other nominee, we
will ask your broker, custodian bank or other nominee to notify you of the
rights offering. If you wish to exercise your rights, you will need to have
your broker, custodian bank or other nominee act for you. If you hold
certificates of Western Resources common stock directly and would prefer to
have your broker, custodian bank or other nominee exercise all or part of your
rights for you, you should contact your nominee and request it to effect the
transactions for you. To indicate your decision with respect to your rights,
you should complete and return to your broker, custodian bank or other nominee
the form entitled "Beneficial Owner Election Form." You should receive this
form from your broker, custodian bank or other nominee with the other rights
offering materials. If you wish to obtain a separate rights certificate, you
should contact the nominee as soon as possible and request that a separate
rights certificate be issued to you. You will be responsible for any fees
charged by your broker, custodian bank or other nominee in connection with the
rights offering.
Instructions for Completing Your Rights Certificate
You should read and follow the instructions accompanying the rights
certificates carefully.
If you want to exercise your rights, you should send your rights
certificates with your subscription price payment to the Subscription and
Information Agent. Do not send your rights certificates and subscription price
payment to us.
You are responsible for the method of delivery of your rights certificates
with your subscription price payment to the Subscription and Information Agent.
If you send your rights certificates and subscription price payment by mail, we
recommend that you send them by registered mail, properly insured, with return
receipt requested. You should allow a sufficient number of days to ensure
delivery to the Subscription and Information Agent prior to the time the rights
offering expires. Because uncertified personal checks may take at least five
business days to clear, you are strongly urged to pay, or arrange for payment,
by means of certified or cashier's check, money order or wire transfer of
funds.
19
<PAGE>
Determinations Regarding the Exercise of Your Rights
Western Resources, or the Subscription and Information Agent on its behalf,
will decide all questions concerning the timeliness, validity, form and
eligibility of your exercise of your rights and Western Resources'
determinations will be final and binding. Western Resources, in its sole
discretion, may waive any defect or irregularity, or permit a defect or
irregularity to be corrected within such time as Western Resources may
determine. Western Resources may reject the exercise of any of your rights
because of any defect or irregularity. Western Resources will not receive or
accept any subscription until all irregularities have been waived by it or
cured by you within such time as Western Resources decides, in its sole
discretion.
Neither Western Resources nor the Subscription and Information Agent will be
under any duty to notify you of any defect or irregularity in connection with
your submission of rights certificates and Western Resources will not be liable
for failure to notify you of any defect or irregularity. Western Resources
reserves the right to reject your exercise of rights if your exercise is not in
accordance with the terms of the rights offering or in proper form. Western
Resources will also not accept your exercise of rights if issuance of shares of
our common stock to you could be deemed unlawful under applicable law or is
materially burdensome to us.
Guaranteed Delivery Procedures
If you wish to exercise rights, but you do not have sufficient time to
deliver the rights certificate evidencing your rights to the Subscription and
Information Agent on or before the time your rights expire, you may exercise
your rights by the following guaranteed delivery procedures:
. Deliver your subscription price payment in full for each share you
subscribed for under your subscription privileges in the manner set
forth above in "--Method of Payment" to the Subscription and Information
Agent on or prior to the expiration date;
. Deliver the form entitled "Notice of Guaranteed Delivery," substantially
in the form provided with the "Instructions as to the Use of Westar
Industries Rights Certificates" distributed with your rights
certificates at or prior to the expiration date or any extended
expiration date; and
. Deliver the properly completed rights certificate evidencing your rights
being exercised and the related nominee holder certification, if
applicable, with any required signatures guaranteed, to the Subscription
and Information Agent within three business days following the date of
your Notice of Guaranteed Delivery.
Your Notice of Guaranteed Delivery must be delivered in substantially the
same form provided with the Instructions as to the Use of Westar Industries
Rights Certificates, which will be distributed to you with your rights
certificate. Your Notice of Guaranteed Delivery must come from an eligible
institution, or other eligible guarantee institutions which are members of, or
participants in, a signature guarantee program acceptable to the Subscription
and Information Agent.
In your Notice of Guaranteed Delivery, you must state:
. Your name;
. The number of rights represented by your rights certificates, the number
of shares of our common stock you are subscribing for under your basic
subscription privilege and the number of shares of our common stock you
are subscribing for under your over-subscription privilege; and
. Your guarantee that you will deliver to the Subscription and Information
Agent any rights certificates evidencing the rights you are exercising
within three business days following the date the Subscription and
Information Agent receives your Notice of Guaranteed Delivery.
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<PAGE>
You may deliver your Notice of Guaranteed Delivery to the Subscription and
Information Agent in the same manner as your rights certificates at the address
set forth above under "--Delivery of Subscription Materials and Payment." You
may alternatively transmit your Notice of Guaranteed Delivery to the
Subscription and Information Agent by facsimile transmission (Telecopy No.:
. ). To confirm facsimile deliveries, you may call . .
The Subscription and Information Agent will send you additional copies of
the form of Notice of Guaranteed Delivery if you need them. Please call . to
request any copies of the form of Notice of Guaranteed Delivery. Banks and
brokerage firms please call . to request any copies of the form of Notice of
Guaranteed Delivery.
Non-Transferability of Rights
Only you may exercise your rights or your over-subscription privilege. You
may not assign or transfer your rights or your over-subscription privilege.
Questions About Exercising Rights
If you have any questions or require assistance regarding the method of
exercising your rights or requests for additional copies of this prospectus,
the Instructions as to the Use of Westar Industries Rights Certificates or the
Notice of Guaranteed Delivery, you should contact the Subscription and
Information Agent at the address and telephone number set forth above under "--
Delivery of Subscription Materials and Payment."
Subscription and Information Agent
Western Resources has appointed . to act as Subscription and Information
Agent for the rights offering. Western Resources will pay all fees and expenses
of the Subscription and Information Agent related to the rights offering and
has also agreed to indemnify the Subscription and Information Agent from
liabilities which it may incur in connection with the rights offering.
Dealer Managers
Western Resources has appointed . and . as the Dealer Managers for the
rights offering. Western Resources will pay all fees and expenses of the Dealer
Managers and has also agreed to indemnify the Dealer Managers from liabilities
which they may incur in connection with the rights offering.
No Revocation
Once you have exercised your subscription privileges, you may not revoke
your exercise unless the expiration date is extended for more than thirty days
or a material change in the terms of the rights offering is made. Rights not
exercised prior to the final expiration date of the rights offering will
expire.
Subscription Price
The subscription price is $ . per share.
Extensions and Termination
Western Resources may extend the rights offering and the period for
exercising your rights in its sole discretion. In addition, Western Resources
may terminate the rights offering at any time prior to the time the rights
offering expires.
21
<PAGE>
No Board Recommendation
An investment in shares of our common stock must be made according to your
evaluation of your best interests. None of Western Resources, Westar Industries
or their respective boards of directors or management makes any recommendation
as to whether or not you should exercise your rights.
Foreign and Other Stockholders
Rights certificates will be mailed to rights holders whose addresses are
outside the United States or who have an APO or FPO address. To exercise such
rights, you must notify the Subscription and Information Agent, and take all
other steps which are necessary to exercise your rights on or prior to the
final expiration date of the rights offering. If the procedures set forth in
the preceding sentence are not followed prior to the final expiration date,
your rights will expire and will have no value.
USE OF PROCEEDS
The gross proceeds from the rights offering, assuming all of the rights have
been exercised, will be approximately $ . million, all of which will be
received by Western Resources. Expenses of the rights offering will be paid by
Western Resources and are estimated to be $ . .
MARKET PRICE OF COMMON STOCK
No current public trading market for our common stock exists. Application
will be made to have our common stock listed on the NYSE.
DIVIDEND POLICY
We currently intend to retain all of our earnings to finance the growth and
development of our business. We do not anticipate paying any cash dividends on
our capital stock in the foreseeable future. We may incur indebtedness in the
future that may effectively prohibit or restrict the payment of dividends.
Moreover, our principal subsidiary is subject to restrictions under agreements
for borrowed money which effectively prohibit it from paying dividends to us.
In the event we decide to declare dividends on our common stock in the
future, such declaration will be subject to the discretion of our board of
directors. Our board of directors may take into account such matters as general
business conditions, our financial results, our liquidity and capital
requirements, contractual, legal and regulatory restrictions on the payment of
dividends by us to our stockholders or by our subsidiaries to us and any such
other factors as our board of directors may deem relevant.
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<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of June 30, 2000. This
table should be read in conjunction with "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and the consolidated
financial statements and the notes thereto included elsewhere in this
prospectus.
<TABLE>
<CAPTION>
June 30, 2000
--------------
(in thousands)
<S> <C>
Long-term debt, including current portion:
Protection One debt
8.125% Senior subordinated notes due January 2009 ........... $ 262,040
7.375% Senior unsecured notes due August 2005................ 250,000
13.625% Senior subordinated discount notes due June 2005..... 53,208
6.75% Senior unsecured notes due September 2003.............. 28,185
Other.......................................................... 59,001
----------
Total long-term debt....................................... 652,434
----------
Shareholder's equity (deficit):
Common stock................................................... 1
Paid-in capital................................................ 1,836,443
Retained earnings.............................................. 370,834
Accumulated other comprehensive income......................... (2,345)
----------
Total shareholder's equity................................. 2,204,933
----------
Total capitalization..................................... $2,857,367
==========
</TABLE>
DILUTION
Our net tangible book value at . , was $ . million or approximately $ .
per share. Net tangible book value per share represents the amount of total
tangible assets less total liabilities, divided by the number of shares of
common stock outstanding, assuming there are . shares of common stock
outstanding upon completion of the rights offering. Based upon an exercise
price of $ . per share, this represents an immediate dilution (i.e., the
difference between the exercise price per share and the net tangible book value
per share at . ) of $ (.) per share to purchasers of the shares of common
stock offered hereby. The following table illustrates this per share dilution:
<TABLE>
<S> <C>
Exercise price per share......................................... $
Net tangible book value per share at . ........................
------
Dilution per share to new investors.............................. $( )
======
</TABLE>
The following table summarizes, on a pro forma basis as of . , the number
of shares of common stock purchased from us, the total consideration paid to us
for those shares and the average price per share paid by the existing
shareholder and by the new investors assuming all of the rights are exercised:
<TABLE>
<CAPTION>
Shares Total
Purchased Consideration
-------------- -------------- Average Price
Number Percent Amount Percent Per Share
------ ------- ------ ------- --------------
<S> <C> <C> <C> <C> <C> <C>
Existing shareholder............... % $ % $
New investors......................
----- ------ ---- ------
Total............................ 100.0% $ 100.0%
===== ====== ==== ======
</TABLE>
23
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth our selected consolidated financial data
derived from our audited consolidated financial statements as of and for the
three years ended December 31, 1999, our unaudited consolidated financial
statements as of and for the two years ended December 31, 1996 and our
unaudited interim consolidated financial statements as of and for the six
months ended June 30, 2000 and 1999. Such summary information may not be
indicative of our future performance as an independent company. In our opinion,
all adjustments, which are normal and recurring in nature, considered necessary
for a fair presentation have been included in our selected interim consolidated
financial data. The results of operations for the six months ended June 30,
2000 and 1999 are not necessarily indicative of the results to be expected for
the entire fiscal year or any other interim period. The selected consolidated
financial data should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations," "Risk Factors," and
the consolidated financial statements and the notes thereto included elsewhere
in this prospectus.
<TABLE>
<CAPTION>
As of and
for the Six
As of and for the Year Ended Months Ended
December 31, June 30,
----------------------------------------------------- --------------------
1999 1998 1997 1996 1995 2000 1999
-------- -------- -------- -------- ----- -------- --------
(in millions, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Total revenues......... $ 606.5 $ 422.4 $ 153.7 $ 10.8 $ 0.1 $ 280.6 $ 297.7
Income (loss) before
extraordinary gain.... (87.6)(1) (35.8)(2) 423.3(3) (18.4) -- 41.8(4) 19.9
Net income (loss)...... (75.9)(1) (34.2)(2) 423.3(3) (18.4) -- 77.7(4) 19.9
Earnings (loss) per
common share--Basic
and diluted(5)
Before extraordinary
gain.................. $ (1.25) $ (0.51) $ 6.05 $ (0.26) -- $ 0.60 $ 0.28
Extraordinary gain..... 0.17 0.02 -- -- -- 0.51 --
-------- -------- -------- -------- ----- -------- --------
Earnings (loss) per
common share.......... $ (1.08) $ (0.49) $ 6.05 $ (0.26) -- $ 1.11 $ 0.28
Balance Sheet Data:
Current assets......... 374.1 476.2 246.2 31.9 0.2 180.1 491.3
Total assets........... 3,433.1 3,484.3 2,290.4 1,345.7 2.2 3,327.0 3,598.6
Total long-term debt... 807.0 927.9 348.3 65.2 -- 652.4 1,037.0
Shareholder's equity... 2,149.5 1,276.6 1,289.7 425.1 2.0 2,204.9 1,247.8
Book value per common
share(5).............. $ 30.71 $ 18.24 $ 18.42 $ 6.07 $0.03 $ 31.50 $ 17.83
Other Data:
EBITDA(6).............. $ 175.2 $ 117.1 $ 872.6 $ 6.2 -- $ 233.6 $ 162.7
</TABLE>
--------
(1) Includes a $76.2 million pre-tax charge to record impairment for
marketable securities.
(2) Includes a $50.7 million pre-tax charge to record an impairment of equity
investments in international power generation projects.
(3) Includes a $864.3 million pre-tax gain on the sale of Tyco International
Ltd. common stock.
(4) Includes a $91.1 million pre-tax gain on the sale of an equity investment
in a gas compression company and a $24.5 million pre-tax gain on the sale
of investments in paging companies.
(5) Per share amounts assume 70 million outstanding shares of our common
stock. The actual number of our outstanding shares will be the same as the
number of outstanding shares of Western Resources common stock on the
record date for the rights offering, which we estimate will be
approximately 70 million shares.
(6) Earnings before interest, taxes, depreciation and amortization.
24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
You should read the following discussion in conjunction with our
consolidated financial statements and the notes thereto included elsewhere in
this prospectus.
Overview
We are a holding company principally engaged in the monitored security
business through Protection One and Protection One Europe which provide
monitored security services to approximately 1.6 million customers in North
America, the United Kingdom and continental Europe. We own approximately 85% of
Protection One and 100% of Protection One Europe. We also own 45% of ONEOK, an
Oklahoma based company that primarily produces, gathers, distributes and trades
natural gas. In addition, we own 40% of Paradigm Direct LLC, a marketing
company, minority interests in international power plants, and other
investments which in the aggregate are not material.
We are currently 100% owned by Western Resources. After completion of the
rights offering, assuming full exercise of the rights, we will be approximately
90.1% owned by Western Resources.
The principal activity of Protection One and Protection One Europe is
responding to the security and safety needs of their customers. Services are
provided to residential (both single family and multifamily residences),
commercial and wholesale customers. Sales are generated primarily from
recurring monthly payments for monitoring and maintaining the alarm systems
that are installed in customers' homes and businesses. Security systems are
designed to detect burglaries, fires and other events.
In prior years, Protection One's business was focused primarily on growing
its customer account base to achieve critical mass. The strategic focus has now
shifted to the following areas:
. improving customer service;
. reducing attrition (attrition is an industry term used to measure
customer account terminations);
. reducing customer acquisition costs, and diversifying the customer
acquisition strategy to include dealers, internal sales, smaller tuck-in
acquisitions and direct marketing;
. integrating and building infrastructure such as common platforms for
central monitoring stations, billing and other applications;
. enhancing revenues and margins by offering additional services to new
and existing customers;
. establishing name recognition by targeting growth to areas near existing
branches to increase customer density; and
. growing the commercial business.
We have four primary business segments, three of which relate to our alarm
monitoring business and one of which relates to our other holdings. The four
segments are:
. Protection One North America ("North America")--our core North America
alarm monitoring business.
. Network Multifamily, Inc. ("Multifamily")--our North America alarm
monitoring business for the multifamily/apartment market.
. Protection One Europe--our alarm monitoring business in continental
Europe and the United Kingdom.
. Other--our other investments and operations, including ONEOK, Paradigm
and our international power plants.
25
<PAGE>
The following table sets forth the allocation of our revenue and income
(loss) from operations among our reportable segments:
<TABLE>
<CAPTION>
Six Months
Year Ended December 31, Ended June 30,
-------------------------- ----------------
1999 1998 1997 2000 1999
------- -------- ------- ------- -------
(in millions)
<S> <C> <C> <C> <C> <C>
Revenues
Reportable Segment:
North America................... $ 403 $ 344 $ 145 $ 188 $ 197
Multifamily..................... 39 33 8 20 19
Protection One Europe........... 163 44 N/A 72 81
Other........................... 1 1 1 1 1
------- -------- ------- ------- -------
Total......................... $ 606 $ 422 $ 154 $ 281 $ 298
======= ======== ======= ======= =======
Income (loss) from operations
Reportable Segment:
North America................... $ (55) $ 18 $ (38) $ (37) $ 13
Multifamily..................... 7 6 1 1 4
Protection One Europe........... 13 10 N/A (1) 13
Other........................... (14) (34) (35) (6) 4
------- -------- ------- ------- -------
Total......................... $ (49) $ -- $ (72) $ (43) $ 34
======= ======== ======= ======= =======
</TABLE>
Recent Significant Matters
Accounting Matters
Change in Estimate of Useful Life of Goodwill. In the first quarter of 2000,
Protection One re-evaluated the original assumptions and rationale utilized in
the establishment of the carrying value and estimated useful life of goodwill.
Protection One management concluded that due to continued losses, increased
levels of attrition experienced in 1999 and other factors, the estimated useful
life of goodwill should be reduced from 40 years to 20 years. As of January 1,
2000, the remaining goodwill, net of accumulated amortization, is being
amortized over its remaining useful life based on a 20-year life. We anticipate
that this will result in an increase in annual goodwill amortization of
approximately $24 million for North America, $6 million for Multifamily and $4
million for Protection One Europe.
SEC Review. As previously disclosed by Western Resources and Protection One,
Protection One has been advised by the Staff of the Division of Corporation
Finance of the SEC that, in its view, there are errors in its previously filed
financial statements that are material and which, in the view of the Staff,
have had the effect of inflating reported earnings commencing with the year
ended December 31, 1997. Protection One had extensive discussions with the
Staff and exchanged numerous letters extending over a period of more than 18
months about the purchase price allocated to intangible customer accounts in
the Multifamily and Westinghouse Security Systems acquisitions, the methodology
used to amortize intangible customer accounts and other matters. Protection One
disclosed in its Form 10-Q for the quarter ended September 30, 1999 that it
restated its financial statements for 1998 and for the quarters ended March 31,
1999 and June 30, 1999 to reallocate portions of the initial purchase price for
acquired businesses in the Multifamily business segment. The reallocations
involved an increase of the amount allocated to customer accounts by $19
million, a reduction of goodwill by $13 million and an increase in deferred
taxes payable by $6 million. In addition, following the conclusion of a
comprehensive review of its amortization policy undertaken during the third
quarter of 1999, Protection One changed the method historically used for
amortizing the cost of customer accounts for its North American and Europe
customer pools. The method used for these pools changed from a straight-line
26
<PAGE>
amortization over ten years to a ten-year 130% declining balance method in the
case of the North America pool and a 125% declining balance method in the case
of the Europe pool. The adoption of the declining balance method effectively
shortened the estimated expected average customer life of these two customer
pools. For further discussion of these changes and their effect on Protection
One's financial results reference is made to the Protection One Form 10-Q for
the quarter ended September 30, 1999.
Following announcement of these changes, Protection One had no further
communications from the Staff until April 4, 2000 when in response to
Protection One's inquiry concerning processing of filings by Protection One,
the Staff resumed its inquiry on these matters.
In a letter from the SEC Staff dated May 16, 2000, the Staff stated that
"the information that [Protection One] provided strongly suggests the presence
of departures from GAAP in Western Resources' accounting for the acquisition of
Westinghouse Security System[s], and in the subsequent accounting for those
acquired assets by Protection One." More specifically, the Staff's letter
states that it is concerned that Western Resources and Protection One
"improperly inflated" reported earnings following the Westinghouse Security
Systems acquisition. This letter also contains comments and requests for
information concerning the initial and final valuation of Westinghouse Security
Systems' customer accounts, the $12.75 million write down of the value of
customer accounts acquired from Westinghouse Security Systems that was recorded
in the fourth quarter of 1997, shortening of the estimated life of customer
accounts acquired from Westinghouse Security Systems no later than the end of
1997 and the valuation of acquired alarm monitoring software.
Protection One responded by letter dated May 31, 2000 to each of the
comments contained in the Staff's May 16th letter, indicated its strong
disagreement with the views of the Staff and stated its belief that there are
no issues of "inflated earnings," "departures from GAAP," or "errors" in its
historical financial statements. Protection One's independent public
accountants, Arthur Andersen LLP, indicated they concurred with the accounting
decisions of Protection One.
After another exchange of letters in June as a result of which Protection
One supplied more information to the Staff, on July 6, 2000, Protection One
personnel and their advisors met with members of the Staff.
Thereafter, in a letter dated July 7, 2000 the Staff stated that Protection
One's financial statements should be "revised to reflect corrections of
accounting errors and revisions of disclosures" as more fully discussed in the
July 7th letter. The Staff's letter discussed six areas which it believed
required changes. Four of those areas relate to the acquisition of the security
business of Westinghouse. The remaining two areas related to the accounting for
ordinary amortization of security accounts and the accounting for the effects
of unanticipated customer attrition. Among other things, the Staff stated its
view that aspects of Protection One's accounting for the acquisition of the
Westinghouse security business "could" be indicative of "manipulative intent"--
a statement with which Protection One strongly disagrees.
By letter dated July 25, 2000, Protection One advised the Staff of
Protection One's strong disagreement with the views of the Staff regarding
these accounting matters. Arthur Andersen LLP has reviewed the correspondence,
has been consulted on responses to the SEC and has confirmed to the SEC Staff
that they are not aware of modifications needed to fairly present Protection
One's historical financial statements.
On July 25, 2000, the Staff advised Protection One orally that this matter
had been referred to the Enforcement Division of the SEC for consideration.
Protection One has not been contacted by the Staff of the Division of
Enforcement. By letter dated July 27, 2000, the Staff advised Protection One
that they had reviewed Protection One's letter of July 25th and requested that
Protection One amend its filings "in a manner that is fully responsive to our
July 7th letter without further delay." The Staff advised that if amendments
were not filed promptly, they would consider what action, if any, would be
appropriate under the circumstances. In Protection One's July 25th letter, they
had requested the opportunity to meet again together with more senior members
of the Staff to discuss these matters further. A meeting with the Staffs of the
Division of Corporation
27
<PAGE>
Finance, the Office of the Chief Accountant and the Division of Enforcement of
the SEC was held on September 8, 2000. Protection One has provided additional
information to the Staff as requested at that meeting and continues to
cooperate with the Staff.
At present, we are unable to predict the outcome of Protection One's
disagreements with the Staff. To date, Protection One's discussions with the
Staff have occurred for more than a year and a half and the process of
resolving these matters could extend over a protracted period. Were we to make
revisions to our financial statements, based upon our understanding of the
Staff's request (the Staff has never indicated what values alternative to the
ones used by Protection One it would find to be acceptable), such revisions
would result in a material adverse effect on our financial position and results
of operations. We cannot predict what action the Staff may take, including
enforcement action, the impact any action may have on us or our financial
statements, or the effect or timing of any action if taken.
Sale of Marketable Securities
During the first six months of 2000, we sold equity securities, primarily of
a gas compression company, and realized a pre-tax gain of $91.1 million. We
also sold other marketable securities in the first quarter of 2000 and realized
a pre-tax gain of $24.5 million.
Gain on Extinguishment of Debt
In the first six months of 2000, we extinguished $135.1 million face value
of Protection One debt in the open market. We recognized an extraordinary gain
of $35.8 million, net of tax, as a result of this debt retirement.
Attrition
Subscriber attrition has a direct impact on Protection One's results of
operations since it affects its revenues, amortization expense and cash flow.
Protection One defines attrition as a ratio, the numerator of which is the
gross number of lost customer accounts for a given period, net of certain
adjustments, and the denominator of which is the average number of accounts for
a given period. In some instances, estimates are used to derive attrition data.
The adjustments made to lost accounts are primarily related to those accounts
which are covered under a purchase price holdback and are "put" back to the
seller. Protection One reduces the gross accounts lost during a period by the
amount of the guarantee provided for in the purchase agreements with sellers.
In some cases, the amount of the purchase holdback may be less than actual
attrition experience.
Accounts lost during a period are not reduced by "move in" accounts, which
are accounts where a new customer moves into a home installed with a security
system and vacated by a prior customer, or "competitive takeover" accounts,
which are accounts where the owner of a residence monitored by a competitor
requests that we provide monitoring services.
Protection One's actual attrition experience shows that the relationship
period with any individual customer can vary significantly and may be
substantially shorter or longer than ten years. Customers discontinue service
for a variety of reasons, including relocation, service issues and cost. A
portion of the acquired customer base can be expected to discontinue service
every year. Any significant change in the pattern of Protection One's
historical attrition experience would have a material effect on our results of
operations.
Protection One monitors attrition each quarter based on an annualized and
trailing twelve-month basis. This method utilizes each segment's average
customer account base for the applicable period in measuring attrition.
Therefore, in periods of customer account growth, customer attrition may be
understated and in periods of customer account decline, customer attrition may
be overstated. When appropriate, Protection One will adjust amortization of the
cost of customer accounts.
28
<PAGE>
During 1999, Protection One experienced significant levels of attrition,
which had a direct impact on its results of operations since it affects both
its revenues and amortization expense. Protection One believes the high levels
of attrition were caused by customer service deficiencies and operational
difficulties relating to the integration of acquired customers into its
operations. Protection One hired an additional 150 service representatives late
in the second quarter of the year and increased its training and technology
investments in an effort to address the customer service concern. Protection
One has also scaled back its growth rate, which allows Protection One to focus
more attention on the current customer base and the integration of new
customers.
Customer attrition by business segment for the periods ended June 30, 2000
and 1999 are summarized below:
<TABLE>
<CAPTION>
Customer Account Attrition
---------------------------------------
June 30, 2000 June 30, 1999
------------------- -------------------
Annualized Trailing Annualized Trailing
Second Twelve Second Twelve
Quarter Months Quarter Months
---------- -------- ---------- --------
<S> <C> <C> <C> <C>
North America........................ 14.2% 15.5% 15.9% 11.9%
Multifamily.......................... 16.1% 9.9% 9.7% 5.9%
Total Protection One................. 14.6% 14.4% 14.8% 10.8%
Protection One Europe................ 8.9% 10.1% 8.7% (a)
</TABLE>
--------
(a) European operations were acquired in 1998.
Protection One experienced high levels of attrition for the North America
segment in 1999 with quarterly annualized attrition reaching peak levels of
15.9%, 19.1% and 16.3% in the second, third and fourth quarters, respectively.
The quarterly annualized attrition rate for North America in the first quarter
of 2000 was 11.9% as compared to 11.2% in the first quarter of 1999. The
quarterly annualized attrition rate for North America in the second quarter of
2000 increased to 14.2% from 11.9% in the first quarter but decreased from the
1999 second quarter attrition rate of 15.9%. Protection One believes the
general decline in attrition for North America from the peak levels in 1999 is
a result of efforts to improve customer service and collections of outstanding
accounts. The increase in the attrition rate for Multifamily in the second
quarter of 2000 is due to nonpayment of approximately 7,000 subscribers related
to one developer. Had these accounts not attrited, the annualized quarterly
attrition for Multifamily would have been approximately 6.6% and the twelve
months trailing attrition percentage for Multifamily would have been
approximately 7.5%. Protection One is pursuing contractual remedies for
nonpayment of these accounts.
In the second quarter, Protection One identified customer accounts which
were incorrectly entered into its system, representing duplicate existing
accounts or accounts for which credit and collection activities have not
occurred. Protection One has reported in its balance of customer accounts all
accounts recorded in Protection One's billing system as customers. Protection
One currently has approximately 30,000 accounts which it is analyzing and will
adjust its customer base appropriately either by reducing the number of
accounts reported or by including such accounts in reported attrition. We do
not expect any material adverse effect on our financial position or results of
operations because Protection One does not record revenue on these accounts
until received.
Impairment Test. As a result of several factors, including the high levels
of attrition experienced in 1999, Protection One performed an impairment test
of its customer accounts and related goodwill reflected in the year-end balance
sheet under the guidance of the Statement of Financial Accounting Standards No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of" (SFAS 121). Paragraph 6 of SFAS 121 indicates that an
impairment loss should be recognized if the sum of the expected future cash
flows (undiscounted and without interest charges) is less than the carrying
amount of the asset(s) grouped at the lowest level of identifiable cash flows.
After performing this test, as of December 31, 1999, Protection One management
determined that the customer accounts were not impaired.
29
<PAGE>
Protection One management updates its impairment analysis as changing
conditions or other events indicate testing for impairment is appropriate. If
an impairment would be incurred, Protection One would be required to record a
non-cash charge to income which could be material.
Customer Creation and Marketing
For the six months ended June 30, 2000, Protection One's North America
segment added 24,988 accounts, the Multifamily segment added 19,120 accounts,
and Protection One Europe added 10,423 accounts. While Protection One's
previous customer acquisition strategy in North America relied primarily on
the dealer program, the new customer acquisition strategy relies on a mix of
dealers, internal sales, smaller "tuck-in" acquisitions and direct marketing.
The number of accounts being purchased through the dealer program decreased
significantly from 126,779 for the six months ended June 30, 1999 to 14,334
for the six months ended June 30, 2000. Protection One expects small increases
in the number of accounts purchased through the dealer program over the
remainder of 2000. In February 2000, Protection One started a commission only
internal sales program, with a goal of acquiring accounts at a cost lower than
its external programs. Protection One currently has a commissioned sales force
of approximately 160 persons which it plans to expand through the remainder of
the year. This program utilizes the existing branch infrastructure. The
internal sales program generated 6,196 accounts in the three months ended June
30, 2000.
Operating Results
We separate our business into four reportable segments, three of which
relate to our alarm monitoring business (North America, Multifamily and
Protection One Europe), and one of which relates to our other holdings
(Other).
Below we discuss our operating results on a consolidated basis and then on
a segment-by-segment basis.
Consolidated Results
During the first six months of 2000, we reported net income of $77.7
million. A $115.6 million pre-tax gain on the sale of marketable securities
and an extraordinary gain of $35.8 million, net of tax, attributable to our
retirement of $135.1 million of Protection One debt significantly impacted our
results. These favorable items were partially offset by a loss from operations
recorded by Protection One. Net income for the first six months of 1999
totaled $19.9 million. Protection One had income from operations of $29.7
million in the first six months of 1999 and incurred a loss from operations of
$35.4 million in the first six months of 2000.
We reported a net loss of $75.9 million for the year ended December 31,
1999. This loss was largely impacted by operations at Protection One, our
largest operating subsidiary, and a $76.2 million charge to write down
marketable securities. These losses were partially off-set by net investment
earnings of $25.2 million and a gain on the sale of Protection One's Mobile
Services Group of $17.2 million.
The 1998 loss of $34.2 million was unfavorably affected by a $50.7 million
charge to write down impaired equity investments in international power
projects. Net income in 1997 was almost entirely comprised of a large non-
recurring gain on the sale of Tyco securities.
30
<PAGE>
North America Segment
The following table provides information for comparison of North America
operating results for the periods presented. Next to each period's results of
operations, the relevant percentage of total revenues is provided so you can
make comparisons about the relative change in revenues and expenses. The 1997
results reflect the operations of the security businesses of Western Resources
("WRSB") for the entire year, and one month of the operations of Protection One
and another security company which were acquired in November 1997. The 1998
results reflect an entire year of WRSB, Protection One and all other
acquisitions since their respective closing dates.
<TABLE>
<CAPTION>
Year Ended December 31, Six Months Ended June 30,
------------------------------------------------- --------------------------------
1999 1998 1997 2000 1999
--------------- -------------- --------------- --------------- --------------
(dollars in thousands) (dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Monitoring and related
services............. $387,962 96.2% $321,085 93.4% $126,630 87.5% $181,291 96.2% $189,357 96.2%
Installation and
rental............... 15,307 3.8 22,869 6.6 18,143 12.5 7,165 3.8 7,508 3.8
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total revenues........ 403,269 100.0 343,954 100.0 144,773 100.0 188,456 100.0 196,865 100.0
Cost of revenues:
Monitoring and related
services............. 108,875 27.0 93,569 27.2 32,656 22.5 55,365 29.4 45,930 23.3
Installation and
rental............... 12,646 3.1 14,030 4.1 3,013 2.1 5,793 3.1 6,965 3.6
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total cost of
revenues............. 121,521 30.1 107,599 31.3 35,669 24.6 61,158 32.5 52,895 26.9
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Gross profit.......... 281,748 69.9 236,355 68.7 109,104 75.4 127,298 67.5 143,970 73.1
Selling, general and
administrative
expenses............... 106,482 26.4 86,843 25.2 80,755 55.8 52,619 27.9 44,707 22.7
Acquisition and
transition expense..... 26,405 6.6 20,275 5.9 2,108 1.5 6,459 3.4 10,892 5.5
Amortization of
intangibles and
depreciation expense... 198,264 49.2 107,545 31.3 39,822 27.5 102,098 54.2 72,876 37.0
Other charges........... 5,809 1.4 3,400 1.0 24,292 16.8 3,050 1.6 2,000 1.0
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Income (loss) from
operations............. $(55,212) (13.7)% $ 18,292 5.3% $(37,873) (26.2)% $(36,928) (19.6)% $ 13,495 6.9%
======== ===== ======== ===== ======== ===== ======== ===== ======== =====
</TABLE>
Six Months Ended June 30, 2000 Compared to Six Months Ended June 30, 1999
North America Customers. Protection One had a net decrease of 62,112
customers in the first six months of 2000 as compared to a net increase of
50,717 customers in the same period of 1999. The average customer base for the
first six months of 2000 and 1999 was 1,173,586 and 1,221,406 respectively, or
a decrease of 47,820 customers. The decrease in customers is primarily
attributable to the significant decrease in the number of accounts being
purchased from dealers which has not yet been offset by growth from other
customer acquisition strategies. Protection One does not expect customer
acquisitions to replace accounts lost through attrition at least through the
remainder of 2000. Accordingly, North America's total customer base is likely
to decline based upon historical rates of attrition which is likely to result
in declining revenues. Protection One's current focus remains on the completion
of its current infrastructure projects, the development of cost effective
marketing programs and the generation of positive cash flow, all of which
Protection One believes will build the foundation for future growth.
The following table shows the change in the North America customer account
base:
<TABLE>
<CAPTION>
Six Months Ended
June 30,
--------------------
2000 1999
--------- ---------
<S> <C> <C>
Beginning balance, January 1....................... 1,204,642 1,196,047
Additions.......................................... 24,988 142,631
Customer losses not guaranteed with holdback put
backs............................................. (76,612) (83,239)
Customer losses guaranteed with holdback put
backs............................................. (10,488) (8,675)
--------- ---------
Ending balance..................................... 1,142,530 1,246,764
========= =========
Annualized attrition............................... 13.1% 13.6%
========= =========
</TABLE>
31
<PAGE>
Monitoring and Related Service Revenue. Revenues decreased approximately
$8.1 million in the first six months of 2000 as compared to the same period of
1999 primarily due to the decline in the North America customer base. An
additional factor was the issuance of more customer credits during the first
six months of 2000 as compared to the same period of 1999. A significant
portion of these credits were goodwill credits issued to customers in the first
quarter of 2000 as a result of billing problems encountered when Protection One
implemented a new billing and collections system in its Beaverton monitoring
station late in 1999.
Installation and Rental Revenues. These revenues consist primarily of
revenues generated from the internal installations of new alarm systems. These
revenues decreased by approximately $0.3 million, or 4.6%, from the first six
months of 1999.
Cost of Monitoring and Related Services Revenues. Costs for the first six
months of 2000 increased by $9.4 million, or 20.5%, to $55.3 million from $45.9
million for the same period of 1999. Compensation costs for the monitoring
stations increased by approximately $3.6 million due primarily to an increase
in personnel. The increase in employees is a direct result of efforts to
improve the level of customer service. In addition, parts and materials costs
increased by $2.5 million, telecommunications costs increased $1.0 million and
vehicle costs increased $0.7 million.
Cost of Installation and Rental Revenues. Costs were $1.2 million, or 16.8%,
less than in the first six months of 1999. These costs as a percentage of
installation and rental revenues were approximately 81% for the first six
months of 2000, as compared to approximately 93% for the same period of 1999.
Parts and materials costs decreased by $1.5 million.
Selling, General and Administrative Expenses. Expenses increased $7.9
million from $44.7 million in the first six months of 1999 to $52.6 million in
the same period of 2000. Bad debt and collection expenses increased
approximately $3.4 million as a result of an increased focus on collecting aged
trade receivables. Subcontract expense for outside information technology
support increased approximately $2.6 million due primarily to work performed in
connection with the implementation of Protection One's new billing and
collection software which started in November 1999. Sales commission expense
increased $0.6 million as a result of the expansion of Protection One's
internal commissioned sales force. In addition, telecommunications costs
increased $1.0 million.
Acquisition Expenses. Expenses decreased $4.4 million from $10.9 million in
the first six months of 1999 to $6.5 million in the same period of 2000. During
these respective periods for 2000 and 1999, third party monitoring costs
decreased by $2.4 million, signs and decals expense decreased by $1.8 million,
printing expense decreased by $0.9 million and compensation expense decreased
by $0.8 million. These decreases are a direct result of the significant decline
in the number of new accounts acquired in the first six months of 2000. These
decreases were partially offset in 2000 by $1.6 million in costs related to
winding down the old dealer program, along with an increase of $0.5 million in
reprogramming expense. The decrease in third party monitoring expense and
associated increase in reprogramming expense are a result of Protection One's
concentrated effort in late 1999 to move third party monitored accounts to
Protection One's monitoring stations.
Amortization of Intangibles and Depreciation Expense. Expenses for the first
six months of 2000 increased by $29.2 million, or 40.1%, to $102.1 million from
$72.9 million in the same period of 1999. As discussed above, Protection One
changed its amortization method from a 10-year straight line method to a
10-year declining balance method as of the third quarter in 1999. Therefore,
the amortization expense for the first six months of 1999 was calculated using
a straight line method whereas the amortization expense for the same period of
2000 is calculated using the declining balance method. Subscriber amortization
for these periods increased from $55.8 million for the first six months of 1999
to $65.0 million for the same period of 2000.
Protection One also changed its estimate of the useful life of goodwill from
40 years to 20 years effective January 1, 2000. As a result, amortization
expense increased $10.7 million from $11.4 million in the first six months of
1999 to $22.1 million for the same period of 2000. Additionally, in the first
six months of 2000,
32
<PAGE>
depreciation expense increased $9.2 million from $5.7 million for the same
period of 1999 to $14.9 million. This increase is due to accelerated
depreciation of a general ledger and accounts receivable system installed by
Protection One in 1999. Protection One decided to move to another general
ledger and accounts receivable system in 2000 which it believes is better
suited to its needs.
Other Charges. For the first six months of 2000, these charges consist of
$1.5 million for an officer's severance and $1.55 million for expenses relating
to the intercompany sale from Protection One to Westar Industries of Protection
One Europe. These costs for the same period of 1999 consisted of an officer's
severance costs of $2.0 million.
Interest Expense. Expense for the first six months of 2000 and 1999 was
$32.2 million and $35.9 million, respectively. The reduction in interest
expense is directly related to a reduction in Protection One's long-term debt.
This reduction has been accomplished primarily from open market purchases of
Protection One debt at amounts less than face value. Total debt decreased
during the first six months of 2000 from approximately $1.1 billion to
approximately $664.0 million, a decrease of $446.0 million.
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Customers. North America had a net increase of 8,595 customers in 1999 as
compared to a net increase of 445,156 customers in 1998. The substantial
increase in the customer base in 1998 resulted from several significant
acquisitions completed that year. Accordingly, results for 1999 include a full
year of operations with the customers added throughout 1998. We believe this to
be the primary reason for our increase in revenues and associated cost of
revenues in 1999 as compared to 1998.
The following table shows the change in the North America customer account
base:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
1999 1998
--------- ---------
<S> <C> <C> <C>
Beginning balance,
January 1,............. 1,196,047 750,891
Additions, net of
holdback put backs..... 200,407 552,015
Customer losses, net of
holdback put backs..... (191,812) (106,859)
--------- ---------
Ending balance, December
31..................... 1,204,642 1,196,047
========= =========
Twelve month trailing
attrition.............. 16.0% 11.0%
========= =========
</TABLE>
Monitoring and Related Service Revenues. Revenues for 1999 increased by
$66.9 million, or 20.8%, to $388.0 million from $321.1 million for 1998. The
primary reason for the increase in 1999 revenues is because North America had a
full year of revenues from the additional customers added throughout 1998. An
increase in North America's base monitoring and service fees also increased
revenue in 1999.
Installation and Rental Revenues. These revenues, which consist primarily of
revenues generated from the internal installations of new alarm systems,
decreased by 33.2% to $15.3 million in 1999, compared to $22.9 million in 1998.
This decrease in revenues is due primarily to the reduction of internal sales
and installation activities that resulted from Protection One's reliance on the
dealer program for residential customers in 1999. Protection One continued its
internal sales program and recorded installation revenues through the first
half of 1998, but then relied almost entirely on the dealer program to acquire
new customers for the balance of 1998 and all of 1999.
Cost of Monitoring and Related Services Revenues. Costs for 1999 increased
by $15.3 million, or 16.3%, to $108.9 million from $93.6 million for 1998. Cost
of monitoring and related services revenues as a percentage of the related
revenues decreased from 29.1% during 1998 to 28.0% during 1999. Monitoring and
related services expense for 1999 increased primarily due to a full year of
operations of the three major service
33
<PAGE>
centers and three smaller satellite monitoring facilities acquired in 1998.
Protection One also incurred additional expense in 1999 relating to the
addition of customer service representatives in the second quarter.
Cost of Installation and Rental Revenues. Costs for 1999 decreased by $1.4
million, or 9.9%, to $12.6 million from $14.0 million in 1998. This decrease
corresponds with the decrease in the internal installations in 1999.
Installation and other cost of revenues as a percentage of installation and
other revenues increased to 82.6% in 1999 from 61.4% in 1998.
Gross Profit. Gross profit for 1999 increased by $45.3 million, or 19.2%, to
$281.7 million from $236.4 million in 1998. Contribution of new customers by
the dealer program and acquisitions produced the increase in gross profit. As a
percentage of total revenues, gross profit was 69.9% for 1999 compared to 68.7%
for 1998. The increase in gross profit as a percentage of total revenues
reflects cost savings from the consolidation of some of Protection One's
monitoring operations, offset by a partial year of expense associated with
additional customer service representatives. Gross margin will be negatively
impacted in the future by the full year impact of additional customer service
representatives added in the second quarter and reflected in the cost of
monitoring and related service revenues.
Selling, General and Administrative Expenses. Expenses for 1999 increased by
$19.7 million, or 22.7%, to $106.5 million from $86.8 million in 1998. The
increase is attributable to costs associated with the overall increase in the
average number of customers billed, additional bad debt expense of
approximately $10.5 million resulting from higher attrition, costs associated
with Year 2000 compliance, professional fees and salary increases.
Acquisition Expenses. Expenses for 1999 increased by $6.1 million, or 30.2%,
to $26.4 million from $20.3 million in 1998. Protection One aggregates expenses
incurred in the acquisition and integration of customers in this line item.
These expenses include yard signs, the cost of monitoring acquired accounts by
a third party, and the reprogramming of alarm panels for new customers. The
increase in 1999 is primarily attributable to costs of $4.0 million associated
with the restructuring of the dealer program and $3.7 million of costs related
to the unsuccessful attempt to acquire Lifeline, offset by reduced transition
expenses associated with acquisitions. In 1998 Protection One incurred $5.3
million in additional customer transition expenses, primarily yard signs for
WRSB customers related to the merger of WRSB and Protection One. Protection One
incurred expenses to develop and manage its dealer program, as well as to
contact, assimilate and solicit acquired and new customers for new services.
Amortization of Intangibles and Depreciation Expense. Expenses for 1999
increased by $90.8 million, or 84.4%, to $198.3 million from $107.5 million in
1998. In the third quarter of 1999, Protection One changed its amortization
method from a 10-year straight line method to a 10-year declining balance
method which resulted in an increase in amortization expense in 1999 of
approximately $50 million. The balance of the increase is primarily attributed
to a full year of amortization expense on subscribers acquired during 1998. In
1999 and 1998 Protection One amortized goodwill over 40 years using a straight-
line method. Goodwill amortization expense increased $3.1 million to $21.6
million in 1999.
Other Charges. These costs for 1999 increased by $2.4 million to $5.8
million from $3.4 million in 1998. Protection One incurred $5.8 million for
severance and relocation expenses associated with a reorganization of its
operations in 1999 and $3.4 million for such expenses in late 1998.
Interest Expense. Expense for 1999 increased by $23.7 million, or 45.2%, to
$76.1 million from $52.4 million in 1998, reflecting Protection One's use of
debt to finance a substantial portion of its customer account growth.
Other Non-recurring (Income) Expense. Income in 1999 totaled $12.7 million
compared to $20.5 million of income in 1998. In 1999, other income consisted
primarily of a gain on the sale of Protection One's Mobile Services Group of
$17.2 million and dividend income reduced by losses on sales of marketable
securities of
34
<PAGE>
$7.7 million. In 1998, Protection One recognized a non-recurring gain on the
repurchase of customer contracts covered by a financing arrangement with New
York Life Secured Asset Management Company, Ltd. (SAMCO), a third party, of
approximately $16.4 million. Also during 1998, Protection One restructured its
investment in a security monitoring company and recognized a nonrecurring gain
of approximately $3.0 million.
Year Ended December 31, 1998 Compared to December 31, 1997
The 1998 to 1997 comparisons are largely reflective of increased business
volumes associated with acquisitions. We acquired Protection One in November
1997 and several other significant acquisitions were made by Protection One in
late 1997 and early 1998. Since operating results reflect amounts only from the
acquisition date, the 1998 balances, revenues and expenses, ran at considerably
higher levels than they did in 1997.
Monitoring and Related Service Revenues. Revenues for 1998 increased by
$194.5 million, or 153.6%, to $321.1 million from $126.6 million for 1997.
Monitoring and related service revenues increased due to Protection One's
acquisitions and new customers purchased through the dealer program. The
majority of additional revenues in 1998 were attributable to North America's
dealer program and acquisitions. Protection One added approximately $5.3
million of monthly recurring revenue from its dealer program and approximately
$7.3 million of monthly recurring revenue from its acquisitions. Because
purchases from the dealer program and acquisitions occurred throughout the
year, not all of the $12.6 million of acquired monthly recurring revenue is
reflected in 1998 results.
Installation and Rental Revenues. These revenues consist primarily of
revenues generated from installing new alarm systems. They increased by $4.8
million, or 26.0%, to $22.9 million in 1998, compared to $18.1 million in 1997.
At the time of the combination of WRSB with Protection One, Protection One
committed to a plan to wind down internal sales activities and increase
reliance on the dealer program as a source of new customers. The scaling back
of these activities took place through the first half of 1998.
Cost of Monitoring and Related Services Revenues. Costs for 1998 increased
by $60.9 million, or 186.5%, to $93.6 million from $32.7 million for 1997.
Total cost of revenues as a percentage of total revenues increased to 31.3%
during 1998 from 24.6% during 1997. Monitoring and related services expenses
for 1998 increased due to the acquisition of three major service centers and
three smaller satellite monitoring facilities in the U.S. Monitoring and
service activities at existing facilities increased as well, due to new
customers generated by the dealer program. Monitoring and related services
expenses as a percentage of monitoring and related services revenues increased
to 29.1% in 1998 from 25.8% during 1997. The percentage increased due to the
expenses of the acquired facilities, as well as expenses from several higher
cost subcontract monitoring agreements.
Cost of Installation and Rental Revenues. Costs for l998 increased by $11.0
million, or 365.6%, to $14.0 million from $3.0 million in 1997. The increase in
expense reflects the cost of equipment, installation labor and other expenses
incurred in the installation of security alarm systems. Installation and other
cost of revenues as a percentage of installation and other revenues increased
to 61.4% in 1998 from 16.6% in 1997. Acquired commercial installation
activities generated lower profit margins due to declining installation
revenues and the selling outright, rather than leasing, of security alarm
systems.
Gross Profit. Gross profit for 1998 increased by $127.3 million, or 116.6%,
to $236.4 million from $109.1 million in 1997. Contribution of new customers by
the dealer program and acquisitions produced the increase in gross profit. As a
percentage of total revenues, gross profit was 68.7% for 1998 compared to 75.4%
for 1997. The decline in gross profit as a percentage of total revenues
reflects the higher monitoring, field service and installation expenses noted
above.
Selling, General and Administrative Expenses. Expenses for 1998 increased by
$6.0 million, or 7.5%, to $86.8 million from $80.8 million in 1997. The
increase in expenses resulted primarily from acquisitions, partially offset by
a reduction in sales and related expenses. The transition of North America's
primary
35
<PAGE>
distribution channel from an internal sales force to the dealer program
resulted in sales commissions declining by approximately $9.0 million.
Protection One also reduced advertising and telemarketing activities that
formerly supported the internal sales force.
Acquisition Expenses. Expenses for 1998 increased by $18.2 million, or
861.8%, to $20.3 million from $2.1 million in 1997. Protection One aggregates
expenses incurred in the acquisition and integration of customers in this line
item. These expenses include the replacement of yard signs and the
reprogramming of alarm panels for new customers. In 1998, North America
incurred $5.3 million in additional customer transition costs, primarily yard
signs for WRSB customers related to the merger of WRSB and Protection One.
Protection One incurred expenses to develop and manage the dealer program, as
well as to contact, assimilate and solicit acquired and new customers for new
services. Other acquisition expenses were incurred in connection with
Protection One's dealer program and the costs related to maintaining an
acquisition department.
Amortization of Intangibles and Depreciation Expense. Expense for 1998
increased by $67.7 million, or 170.1%, to $107.5 million from $39.8 million in
1997. North America spent approximately $442.6 million to purchase customer
accounts and incurred $211.0 million in costs allocated to goodwill during 1998
from its purchases of security alarm companies, portfolios of customer
accounts, and individual new customers through the dealer program. In 1998,
North America amortized customer accounts over a 10-year straight-line method
and goodwill over 40 years using a straight-line method.
Other Charges. These costs for 1998 decreased by $20.9 million, or 86.0%, to
$3.4 million from $24.3 million in 1997. North America incurred $3.4 million
for severance and relocation expenses associated with a reorganization of North
America's operations in 1998. Other charges for 1997 consisted of $12.8 million
for impairment of customer accounts and $11.5 million of merger related costs.
The merger related costs consisted of $3.6 million for inventory and other
asset losses, $4.1 million for disposition of fixed assets, $2.0 million for
closure of duplicate facilities and approximately $1.9 million for severance
compensation and benefits.
Interest Expense. Expense for 1998 increased by $18.9 million, or 56.4%, to
$52.4 million from $33.5 million in 1997, reflecting the use of debt to finance
a substantial portion of North America's customer account growth.
Other Non-recurring (Income) Expense. Income in 1998 totaled $20.6 million
compared to zero in 1997. In 1998, Protection One recognized a non-recurring
gain on the repurchase of customer contracts covered by a financing arrangement
with New York Life Secured Asset Management Company, Ltd., a third party, in
the amount of $16.4 million. Also during 1998, Protection One restructured its
investment in a security monitoring company and recognized a non-recurring gain
of approximately $3.0 million.
36
<PAGE>
Multifamily Segment
The following table provides information for comparison of Multifamily's
operating results for the periods presented. Next to each period's results of
operations, the relevant percentage of total revenues is provided so that you
can make comparisons about the relative change in revenues and expenses. During
1998, over 80,000 accounts were acquired in two acquisitions that increased
monthly recurring revenues by approximately $550,000, or $6.6 million per year.
About 39,000 of these accounts were acquired in May with the balance acquired
in September. The 1999 Multifamily results reflect a full year of operations
with these acquired accounts which is the primary reason that revenues and
associated expenses are higher in 1999. Westar Industries acquired the
Multifamily segment in September 1997. As Multifamily was acquired in 1997, the
fluctuations between 1998 and 1997 are attributable to the inclusion of only
four months of activities in 1997 as compared to a full year of operations in
1998.
<TABLE>
<CAPTION>
Year Ended December 31, Six Months Ended June 30,
------------------------------------------- ----------------------------
1999 1998 1997 2000 1999
------------- -------------- ------------ ------------- -------------
(dollars in thousands) (dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Monitoring and related
services.............. $34,309 88.2% $29,356 87.8% $7,574 100.0% $17,379 88.7% $16,982 88.3%
Installation and
rental................ 4,592 11.8 4,061 12.2 -- -- 2,212 11.3 2,249 11.7
------- ----- ------- ----- ------ ----- ------- ----- ------- -----
Total revenues......... 38,901 100.0 33,417 100.0 7,574 100.0 19,591 100.0 19,231 100.0
Cost of revenues:
Monitoring and related
services.............. 7,565 19.4 5,852 17.5 3,130 41.3 3,911 20.0 3,438 17.9
Installation and
rental................ 3,448 8.9 3,820 11.4 -- -- 2,112 10.8 1,785 9.3
------- ----- ------- ----- ------ ----- ------- ----- ------- -----
Total cost of
revenues.............. 11,013 28.3 9,672 28.9 3,130 41.3 6,023 30.8 5,223 27.2
------- ----- ------- ----- ------ ----- ------- ----- ------- -----
Gross profit........... 27,888 71.7 23,745 71.1 4,444 58.7 13,568 69.2 14,008 72.8
Selling, general and
administrative
expenses............... 11,339 29.2 9,767 29.2 1,777 23.5 5,331 27.2 5,550 28.8
Acquisition and
transition expense..... 313 0.8 -- -- -- -- -- -- 313 1.6
Amortization of
intangibles and
depreciation expense... 9,507 24.4 7,721 23.1 1,285 17.0 7,719 39.4 4,615 24.0
------- ----- ------- ----- ------ ----- ------- ----- ------- -----
Income (loss) from
operations............. $ 6,729 17.3% $ 6,257 18.7% $1,382 18.2% $ 518 2.6% $ 3,530 18.4%
======= ===== ======= ===== ====== ===== ======= ===== ======= =====
</TABLE>
Six Months Ended June 30, 2000 Compared to Six Months Ended June 30, 1999
Customers. Multifamily had a net increase of 1,378 customers in the first
six months of 2000 as compared to a net increase of 4,196 customers in the same
period in 1999. The average customer base was 295,649 for the first half of
2000 compared to 288,052 for the first half of 1999. The change in
Multifamily's customer base for the period is shown below.
<TABLE>
<CAPTION>
Six Months
Ended June 30,
----------------
2000 1999
------- -------
<S> <C> <C>
Beginning balance, January 1,............................ 294,960 285,954
Additions................................................ 19,120 14,782
Customer losses.......................................... (17,742) (10,586)
------- -------
Ending balance........................................... 296,338 290,150
======= =======
Annualized attrition..................................... 12.0% 7.4%
======= =======
</TABLE>
The increase in the attrition rate for Multifamily for the six months ended
June 30, 2000 is due to nonpayment of approximately 7,000 subscribers related
to one developer. Had these accounts not attrited, the annualized quarterly
attrition would have been approximately 6.6%. Protection One is pursuing
contractual remedies for nonpayment of these accounts.
37
<PAGE>
Monitoring and Related Services Revenues. Revenues for the first six months
of 2000 increased by $0.4 million, or 2.3%, to $17.4 million from $17.0 million
for the first half of 1999 due primarily to the larger customer base in 2000.
Cost of Monitoring and Related Revenues. Costs for the first six months of
2000 increased by $0.5 million, or 13.8%, to $3.9 million from $3.4 million for
the first half of 1999. Monitoring and related service expenses, as a
percentage of monitoring and related service revenues, increased to 22.5% for
the first six months of 2000 from 20.2% for the first six months of 1999. This
increase is primarily related to higher employment costs resulting from the
current competitive labor market and an increase in claims experience on a self
funded medical insurance plan.
Cost of Installation and Rental Revenues. Costs increased by $0.3 million,
or 18.3%, to $2.1 million from $1.8 million in 1999. Installation and rental
cost of revenues, as a percentage of installation and rental revenues,
increased to 95.5% in the first six months of 2000 from 79.4% in the first six
months of 1999. This increase is primarily due to the significant number of
installations in 1999 which used less sophisticated monitoring equipment than
Multifamily's standard contracts, combined with the increased use in 2000 of
wireless systems, which are more expensive but expected to reduce future
service costs.
Selling, General and Administrative Expense. Expense decreased 4.0% or $.2
million in 2000 to $5.3 million from $5.5 million as a result of a temporary
decline in the sales force.
Amortization of Intangibles and Depreciation Expense. Expense for the first
six months of 2000 increased by $3.1 million, or 67.3%, from $4.6 million in
1999 to $7.7 million in 2000. This increase is primarily due to the change in
estimate of goodwill life from 40 years to 20 years. Subscriber amortization
increased by $0.8 million due to the larger customer base being amortized.
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Customers. Protection One increased its Multifamily customer base a total of
9,006 customers in 1999. The average customer base was 289,592 for 1999
compared to 234,185 for 1998. The change in Multifamily's customer base for
1999 and 1998 is shown below:
<TABLE>
<CAPTION>
Year Ended
December 31,
----------------
1999 1998
------- -------
<S> <C> <C>
Beginning balance, January 1,............................ 285,954 186,590
Additions, net of holdback put backs..................... 30,973 110,152
Customer losses, net of holdback put backs............... (21,967) (10,788)
------- -------
Ending balance, December 31.............................. 294,960 285,954
======= =======
Twelve month trailing attrition.......................... 7.6% 4.6%
======= =======
</TABLE>
Monitoring and Related Services Revenues. Revenues for 1999 increased by
$4.9 million, or 16.9%, to $34.3 million from $29.4 million for 1998.
Multifamily's additional revenues in 1999 were primarily attributable to the
1998 acquisitions.
Cost of Monitoring and Related Revenues. Costs for 1999 increased by $1.7
million, or 29.3%, to $7.6 million from $5.9 million for 1998. Monitoring and
related services expenses as a percentage of monitoring and related services
revenues increased to 22.0% in 1999 from 19.9% during 1998. The percentage
increase is due primarily to the lower contracted recurring revenues on the
accounts acquired in 1998.
Selling, General and Administrative Expenses. Expenses for 1999 increased by
$1.5 million, or 15.3%, to $11.3 million from $9.8 million in 1998. The
increase resulted primarily from increased selling expense
38
<PAGE>
attributable to a 20% increase in contract sales and increased general and
administrative expenses principally associated with the 1998 acquisitions.
Acquisition Expenses. Expenses for 1999 were $0.3 million and zero in 1998.
We aggregate expenses incurred in the acquisition and integration of customers
in this line item. These expenses principally relate to the conversion of
customer account data into Multifamily's monitoring database from the 1998
acquisitions.
Amortization of Intangibles and Depreciation Expense. Expense for 1999
increased by $1.8 million, or 23.1%, to $9.5 million from $7.7 million in 1998.
Europe Segment
On May 18, 1998, Protection One acquired all of the capital stock of Hambro
Countrywide Security, the fifth largest security company in the United Kingdom
with operations throughout the United Kingdom, for approximately $18 million.
On September 30, 1998, Protection One established a major presence in Western
Europe by purchasing the common stock of Compagnie Europeenne de Telesecurite
("CET"), a public company with approximately 60,000 customers for approximately
$140 million. In the acquisition, Protection One also assumed liabilities for
recourse financing contracts sold by CET to a third party financing company.
The following table provides information for comparison of Protection One
Europe's operating results for the periods presented. The operating results for
1999 include a full year of operations for acquisitions made in 1998.
Protection One Europe experienced a net increase of 46,011 customers in 1999.
The operating results for 1998 reflect the partial year of operations reported
in 1998.
<TABLE>
<CAPTION>
Year Ended Three Months Six Months Six Months
December 31, Ended Ended June Ended June
1999 December 31, 1998 30, 2000 30, 1999
-------------- ------------------ -------------- -------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Monitoring and related
services.............. $ 92,793 56.9% $ 25,400 58.1% $40,561 56.4 % $46,468 57.4%
Installation and
rental................ 70,213 43.1 18,324 41.9 31,324 43.6 34,529 42.6
-------- ----- --------- ------- ------- ----- ------- -----
Total revenues......... 163,006 100.0 43,724 100.0 71,885 100.0 80,997 100.0
Cost of revenues:
Monitoring and related
services.............. 21,110 13.0 4,100 9.4 9,792 13.6 8,837 10.9
Installation and
rental................ 30,361 18.6 7,712 17.6 14,781 20.6 14,832 18.3
-------- ----- --------- ------- ------- ----- ------- -----
Total cost of
revenues.............. 51,471 31.6 11,812 27.0 24,573 34.2 23,669 29.2
-------- ----- --------- ------- ------- ----- ------- -----
Gross profit........... 111,535 68.4 31,912 73.0 47,312 65.8 57,328 70.8
Selling, general and
administrative
expenses.............. 68,169 41.8 17,897 40.9 33,300 46.3 33,364 41.2
Acquisition and
transition expense.... 733 0.4 22 0.1 -- -- 427 0.5
Amortization of
intangibles and
depreciation expense.. 29,472 18.1 3,945 9.0 14,812 20.6 10,865 13.4
-------- ----- --------- ------- ------- ----- ------- -----
Income (loss) from
operations............ $ 13,161 8.1% $ 10,048 23.0% $ (800) (1.1)% $12,672 15.6%
======== ===== ========= ======= ======= ===== ======= =====
</TABLE>
Six Months Ended June 30, 2000 Compared to Six Months Ended June 30, 1999
Customers. In the first six months of 2000, Protection One Europe increased
its customer base a total of 10,423 customers compared to an increase of 10,532
customers in the same period in 1999. The smaller increase resulted from
turnover in the sales force in France which caused a decline in sales
productivity.
Revenues. In the first six months of 2000, revenues decreased by
approximately $9.1 million, to $71.9 million from $81.0 million in the same
period in 1999. This decrease is primarily attributable to a decline in
commercial system sales.
Cost of Revenues. In the first six months of 2000, cost of revenues
increased by approximately $0.9 million, to $24.6 million from $23.7 million in
1999. This increase resulted from a larger work force in France, due to
increased staffing to handle growth and a reduction in the work week for
certain employees in France,
39
<PAGE>
higher selling costs related to higher turnover in the selling force in France
and resulting training costs, and higher selling costs related to an effort to
penetrate the residential market in France.
Year Ended December 31, 1999 Compared to Three Months Ended December 31, 1998
Customers. In 1999, Protection One Europe acquired approximately 35,000
additional customers through acquisitions in the United Kingdom and continental
Europe. These additional customers produced an increase in monthly recurring
revenues of approximately $1.0 million. The change in our customer base for
1999 is shown below:
<TABLE>
<CAPTION>
1999
-------
<S> <C>
Beginning balance, January 1,..................................... 78,292
Additions, net of holdback put backs.............................. 55,607
Customer losses, net of holdback put backs........................ (9,596)
-------
Ending balance, December 31....................................... 124,303
=======
Twelve month trailing attrition................................... 9.6%
=======
</TABLE>
The results of operations for 1999 include a full year of operations for the
1998 acquisitions as well as a partial year of operations for the 1999
acquisitions. Protection One Europe experienced a net increase of 46,011
customers in 1999 or a 58.8% increase over the three month period ended
December 31, 1998 amount of 78,292.
CET has recognized as a financing transaction, cash received through the
sale of security equipment and future cash flows to be received under security
equipment operating lease agreements with customers to a third-party financing
company. A liability has been recorded for the proceeds of these sales as the
finance company has recourse to CET in the event of nonpayment by customers of
their equipment rental obligations. The average implicit interest rate in the
financing is approximately 18%. Accordingly, the liability is reduced, rental
revenue is recognized, and interest expense is being recorded as these recourse
obligations are reduced through the cash receipts paid to the financing company
over the term of the related equipment rental agreements which average four
years. The liability is increased as new security monitoring equipment and
equipment rental agreements are sold to the finance company that have recourse
provisions.
Revenues of approximately $33.8 million in 1999 and $10.2 million in 1998
were recognized as revenue as a result of ongoing reductions in the liability
under these recourse obligations. In relation to this revenue, we have also
recognized interest expense of approximately $8.9 million and $3.0 million and
depreciation expense of approximately $5.8 million and $1.8 million for 1999
and 1998, respectively.
As discussed above in "Overview of 1999 Activities," we changed our
amortization method from a 10-year straight line method to a 10-year declining
balance method which resulted in an increase in amortization expense in 1999 of
approximately $2.5 million. The balance of the increase is primarily attributed
to a full year of amortization expense on subscribers acquired during 1998. In
1999 and 1998 we amortized goodwill over 40 years using a straight-line method.
Goodwill amortization expense increased $2.3 million to $3.7 million in 1999.
Other
Investment earnings have historically been a significant component of
earnings. ONEOK investment income, earnings from other investments, interest
income on debt securities and gains and losses on marketable security sales
comprise the significant components of investment earnings.
40
<PAGE>
Six Months Ended June 30, 2000 Compared to Six Months Ended June 30, 1999
We reported $150.7 million of other income in 2000 primarily due to the
gains on the sales of marketable securities of approximately $115.6 million. We
reported $40.2 million of other income in 1999 primarily due to ONEOK
investment income of $24.3 million and other interest and dividend income.
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
We reported $14.2 million of other expense in 1999. Significant components
include ONEOK investment income of $44.4 million, interest income of
approximately $11.4 million, a $76.2 million impairment in marketable
securities due to an other than temporary decline in their value and a $17.2
million gain on the sale of the Mobile Services Group. The impairment in
marketable securities resulted from a decline in value experienced on those
securities during the last six to nine months of 1999.
We reported $2.8 million of other expense in 1998. Significant components
include ONEOK investment income of $42.0 million, interest income of
approximately $6.3 million and a $50.7 million charge to write down to
estimated fair value investments we had made in certain international power
projects where conditions indicated the decline in value of these investments
was other than temporary. See Note 8 of Notes to Consolidated Financial
Statements.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
In contrast to the $2.8 million of other expense we reported in 1998, we
reported $903.1 million of other income in 1997. We recorded an $864.3 million
gain on the sale of common stock of Tyco International Ltd. We also had
approximately $20.7 million from equity earnings in ADT, an $11.8 million gain
on the sale of other marketable securities and investment earnings in ONEOK of
$3.0 million. The ONEOK investment was made in November 1997, and earnings
recognized represent a partial year.
Liquidity and Capital Resources
Our principal need for liquidity is to fund the operations of our security
monitoring businesses. Cash from Protection One's and Protection One Europe's
operations, existing cash balances, dividends from ONEOK and other investments,
and amounts that will be available to us under a demand note from Western
Resources are expected to provide adequate liquidity for the foreseeable
future. These liquidity sources are discussed further below. If these sources
are insufficient, we may need to find third party sources of capital or
financing. We cannot assure you that capital or financing will be available to
us on acceptable terms or at all.
Protection One
Operating Cash Flows. Protection One operating activities provided net cash
flows of $33.5 million in the first six months of 2000, a decrease of $38.4
million from the comparable period for 1999, and $91.3 million in fiscal 1999,
an increase of $6.1 million from 1998. The decrease in the first six months of
2000 was primarily due to a decrease in revenues resulting from a smaller
customer base. The increase in 1999 was due to increased recurring revenue
generated from the customer accounts added in 1998 primarily through business
combinations and the dealer program, as well as the net additions in customers
during 1999.
Investing Cash Flows. Protection One investing activities provided net cash
flows of $154.5 million in the first six months of 2000 compared to a use of
cash of $192.3 million in the same period in 1999. This increase is due to the
sale of the certain investments. Protection One also reduced the purchases of
customer accounts and fixed assets by $145.6 million from $174.1 million in the
first six months of 1999 to $28.5 million in the same period in 2000.
Protection One used a net $272.2 million in investing activities in 1999,
primarily to purchase new customer accounts from its external dealers, compared
to $893.9 million in 1998.
41
<PAGE>
EBITDA. Protection One generated $76.4 million of positive earnings before
income taxes, interest expense, depreciation and amortization, or EBITDA, from
the North America and Multifamily operations in the first six months of 2000.
Protection One Europe generated $14.2 million of positive EBITDA from its
operations in the first six months of 2000. EBITDA does not represent cash flow
from operations as defined by generally accepted accounting principles, should
not be construed as an alternative to operating income and is indicative
neither of operating performance nor cash flows available to fund our cash
needs. Items excluded from EBITDA are significant components in understanding
and assessing our financial performance. We believe that presentation of EBITDA
enhances an understanding of our financial condition, results of operations and
cash flows because EBITDA is used to satisfy our debt service obligations and
our capital expenditure and other operational needs as well as to provide funds
for growth.
Protection One Credit Facility. We provide a portion of Protection One's
liquidity needs through an intercompany $115.0 million senior credit facility
to Protection One which matures on January 2, 2001. As of September 30, 2000,
Protection One had borrowed $72.0 million under this facility. Amounts borrowed
under this facility are eliminated in our consolidated financial statements. We
have advised Protection One that while we would consider an extension of the
facility upon terms reflecting market conditions, we desire that Protection One
replace the facility with other financing. Protection One has announced that it
is considering new sources of financing, including new credit facilities with
third parties and sales of assets. Since the facility was last renewed,
interest rates have increased and market conditions for comparable borrowers
have become more difficult. There is no assurance Protection One will be able
to obtain new financing from third parties on similar terms with no disruption
to its operations or liquidity, or at all.
Dividends from ONEOK and other Investments
ONEOK dividends paid to us totaled $41 million for 1999 and $18.7 million
for the first six months of 2000. We received distributions from other
investments of $18.8 million in 1999 and $6.0 million for the first six months
of 2000. A decrease or interruption in the dividends paid by ONEOK would
adversely affect our liquidity and ability to continue our operations. There
can be no assurance ONEOK will continue to pay dividends at the current rate or
at all in the future. ONEOK's failure to pay dividends in certain amounts would
result in the termination of the shareholder agreement between us and ONEOK
unless we agreed otherwise and would have a material adverse effect on our cash
flow and liquidity. Debt agreements pursuant to which ONEOK's outstanding long-
term and short-term debt has been issued limit dividends and other
distributions on its common stock. Please refer to ONEOK's Form 10-K, Forms 10-
Q and other documents it files with the SEC for further information concerning
ONEOK. Such reports and documents are available at the SEC's public reference
rooms and from the SEC's website. See "Available Information."
Western Resources Note
We have a receivable due from our parent, Western Resources, which will be
converted to a demand note upon consummation of the rights offering. Terms of
this note will allow us to require Western Resources to pay us in cash $ .
million upon demand, but not later than the closing of a strategic transaction
involving Western Resources' electric utilities. The note will bear interest
at . % per annum, a rate that approximates Western Resources' pre-tax average
cost of capital. The remaining balance of the receivable will be repaid by our
election to receive either (1) convertible preferred stock of Western
Resources, (2) shares of our common stock currently held by Western Resources
at a price not less than the subscription price, (3) shares of common stock of
Western Resources, or (4) a note convertible no later than the closing of a
strategic transaction involving Western Resources' electric utilities into one
of the types of equity securities mentioned above. Furthermore, beginning with
the consummation of the rights offering, we will be required to use the
proceeds of asset sales in excess of our operating needs to acquire convertible
preferred stock or common stock of Western Resources or shares of our common
stock owned by Western Resources. If we do not select one of these options as
of the time the asset sale proceeds become available, we will deliver the cash
to Western Resources in return for a note, which will be repaid with the
securities we ultimately select. We must make all elections prior to the date
of the pro rata distribution by Western Resources of our remaining shares.
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<PAGE>
Repurchases of Securities
During the second quarter of 2000, Protection One purchased 423,500 shares
of its outstanding common stock for a total of $0.8 million. These shares are
reflected in our equity section of the balance sheet as treasury stock, at
cost. We or Protection One may continue to acquire additional shares of
Protection One's common stock based upon market conditions and other factors.
We or Protection One may also continue to acquire additional debt securities
in the open market or through negotiated transactions based upon market
conditions and other factors. We expect that we would also realize an
extraordinary gain on extinguishment of debt on any such purchases.
Material Commitments
Our principal commitments relate to the operations of our Protection One
monitored security business. Protection One has material, long-term commitments
made in the past several years in connection with its growth. We believe these
commitments will be met through a combination of refinancings and operating
cash flows. The following reflects these commitments as of June 30, 2000.
<TABLE>
<CAPTION>
June 30,
Debt Security Maturity Date 2000
------------- -------------- --------------
(in thousands)
<S> <C> <C>
Convertible Senior
Subordinated Notes
(a).................... September 2003 $ 28,185
Senior Subordinated
Discount Notes......... June 2005 53,208
Senior Unsecured Notes.. August 2005 250,000
Senior Subordinated
Notes.................. January 2009 262,040
Other (b)............... Various 59,001
--------
$652,434
========
</TABLE>
--------
(a) These notes are convertible into Protection One common stock at a price of
$11.19 per share, which is currently above the price at which the shares
are traded in the public stock markets.
(b) Includes debt obligations assumed in the acquisition of a French security
subsidiary in 1998, debt related to international power projects and
capital leases.
Protection One was in compliance with the financial covenants under the
senior credit facility and the indentures under which the notes listed above
were issued for the second quarter ended June 30, 2000.
In March 2000, Moody's, S&P and Fitch downgraded their ratings on Protection
One's outstanding securities with outlook remaining negative. As of August 3,
2000, these ratings were as follows:
<TABLE>
<CAPTION>
Senior
Senior Subordinated
Unsecured Unsecured
Debt Debt
--------- ------------
<S> <C> <C>
S&P....................... B+ B-
Moody's................... B2 Caal
Fitch..................... B+ B
</TABLE>
Capital Expenditures
We anticipate Protection One will make capital expenditures of approximately
$55 million in 2000 (of which it has made approximately $29 million through
June 30, 2000, including $20 million to acquire customer accounts). Of such
amount, Protection One expects to invest approximately $35 million to acquire
customer accounts, $10 million to complete the development and installation of
our new software platforms, $5 million for replacement of vehicles, and $5
million for other capital items. Capital expenditures for 2001 and 2002 are
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<PAGE>
expected to be approximately $123 million each year of which approximately $108
million would be to acquire accounts and $15 million for vehicles and other
capital items. These estimates are prepared for planning purposes and may be
revised. Actual expenditures for these and possibly other items not presently
anticipated may vary from these estimates during the course of the years
presented. We do not expect our capital expenditures, in addition to those
requirements for Protection One, to be significant in the remainder of 2000 or
during 2001.
Tax Matters
We and Protection One are consolidated into income tax returns filed by
Western Resources. We will enter into a tax disaffiliation agreement, and
Protection One has entered into a tax sharing agreement, with Western Resources
whereby Western Resources will make cash payments to us for current tax
benefits utilized for income tax return purposes and which will require cash
payments from us for current tax expenses incurred for income tax return
purposes. This arrangement has allowed us and Protection One to provide a
current tax benefit for the year ended December 31, 1999, as well as for the
six months ended June 30, 2000. If we or Protection One did not file taxes on a
consolidated basis with Western Resources, our deferred tax assets (amounting
to $71 million at June 30, 2000) might not be realizable and we might not be in
a position to record a tax benefit for losses incurred. We will cease filing
consolidated returns with Western Resources upon consummation of a strategic
transaction by Western Resources and the pro rata distribution by Western
Resources of our common stock.
Prior to the November 24, 1997 acquisition by Western Resources of its
interest in Protection One, Protection One had net operating loss (NOL)
carryforwards for federal income tax purposes. Historically, tax regulations
limited the use of NOL carryforwards. During the third quarter of 2000,
Protection One determined that these NOLs would be utilized as a reduction to
taxable income by the end of 2000. As such, Protection One will adjust its
valuation allowance for these NOLs as an offset to goodwill in the third
quarter of 2000. The reduction in the valuation allowance and the corresponding
reduction to goodwill will approximate $27 million.
Year 2000 Issue
We experienced no business disruptions as a result of the transition from
December 31, 1999 to January 1, 2000, or as a result of "leap day" on February
29, 2000. As of December 31, 1999, Protection One expensed $4.3 million to
complete remediation and testing of mission critical systems necessary to
continue to provide monitored services to its customers. Protection One expects
to incur minimal costs in 2000 to complete remediation of less important
systems as we expect no Year 2000 issues to arise in 2000.
Exposure to Market Risk
We are exposed to market risk, including changes in the market price,
foreign currency exchange rates, equity instrument investment prices, as well
as interest rates.
. Foreign currency exchange rates. We have international monitored
security subsidiaries and investments in international power plants
which use functional currencies other than the U.S. dollar. As of
December 31, 1999, the unrealized loss on currency translation,
presented as a separate component of stockholders' equity and reported
within other comprehensive income was approximately $1.3 million pretax.
A 10% change in the currency exchange rates would have an immaterial
effect on other comprehensive loss.
. Equity and Debt Investments. We had approximately $177.1 million of
securities as of December 31, 1999. By June 30, 2000, we sold most of
these securities and realized a pre-tax gain of $115.6 million.
Following the sale of these securities, we had $5.2 million of
securities as of June 30, 2000. We do not hedge these investments and
are exposed to the risk of changing market prices. We
44
<PAGE>
classify these securities as available for sale for accounting purposes
and mark them to market on the balance sheet at the end of each period
as an adjustment to shareholders' equity. Declines in market value which
are other than temporary are recognized in income.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (SFAS 133). SFAS 133, as
amended, is effective for fiscal years beginning after June 15, 2000. SFAS 133
cannot be applied retroactively. We are currently evaluating our financial
instruments to determine what, if any, affect adopting SFAS 133 might have on
our financial statements. We have not yet quantified all effects of adopting
SFAS 133 on our financial statements, however, we do not expect the adoption
of this Statement to have a material impact upon adoption on January 1, 2001.
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<PAGE>
BUSINESS
We are principally engaged in the monitored security business through
Protection One and Protection One Europe which provide monitored security
services to approximately 1.6 million customers in North America, the United
Kingdom and continental Europe. We own approximately 85% of Protection One and
100% of Protection One Europe. We also own 45% of ONEOK, an Oklahoma based
company that primarily produces, gathers, distributes and trades natural gas.
In addition, we own 40% of Paradigm Direct LLC, a marketing company, minority
interests in international power plants, and other investments which in the
aggregate are not material.
Monitored Security Services
General
Through Protection One and Protection One Europe, we are one of the leading
providers of life safety and property monitoring services, providing electronic
monitoring and maintenance of alarm systems to over 1.4 million customers in
North America and approximately 130,000 customers in the United Kingdom and
continental Europe.
The principal activity of Protection One and Protection One Europe is
responding to the security and safety needs of their customers. Protection
One's sales are generated primarily from recurring monthly payments for
monitoring and maintaining the alarm systems that are installed in its
customers' homes and businesses. Protection One Europe's sales are generated
primarily from the sale of contracts for monitoring and maintaining the alarm
systems that are installed in customers' homes and businesses. Security systems
are designed to detect burglaries, fires and other events. Through a network of
service branches in North America, continental Europe and the United Kingdom,
Protection One and Protection One Europe provide maintenance services for
security systems and, in certain markets, armed response to verify that an
actual emergency has occurred.
Protection One and Protection One Europe have grown rapidly by participating
in the growth in the alarm industry and by acquiring other alarm companies.
Protection One and Protection One Europe provide their services to
residential (both single family and multifamily residences), commercial and
wholesale customers. Currently, Protection One's customers are primarily in the
residential market and Protection One Europe's customers are primarily in the
commercial market. In prior years, the strategy for the monitored security
business was focused primarily on growing the customer account base to achieve
critical mass. The strategic focus has now shifted to the following areas:
. improving customer service;
. reducing attrition;
. reducing customer acquisition costs, and diversifying the customer
acquisition strategy to include dealers, internal sales, tuck-in
acquisitions and direct marketing;
. integrating and building infrastructure such as common platforms for
central stations, billing and other applications;
. enhancing revenues and margins by offering additional services to new
and existing customers;
. establishing name recognition by targeting growth to areas near existing
branches to increase customer density; and
. growing the commercial business.
Protection One has two business segments--Protection One North America
("North America") and Network Multifamily, Inc. ("Multifamily"). North America
is the core alarm monitoring business in the United States and Canada which
generated $403.3 million, or 67%, of our revenues in 1999 and $188.5 million,
or
46
<PAGE>
67%, of our revenues in the six months ended June 30, 2000. Multifamily
provides alarm monitoring services to the multifamily/apartment market and
generated approximately $38.9 million, or 6%, of our revenues in 1999 and $19.6
million, or 7%, of our revenues in the six months ended June 30, 2000.
Protection One Europe generated $163.0 million, or 27%, of our revenues in
1999 and $71.9 million, or 26%, of our revenues in the six months ended June
30, 2000.
Operations
The operations of Protection One and Protection One Europe consist
principally of alarm monitoring, customer service functions and branch
operations. Security alarm systems include many different types of devices
installed at customers' premises designed to detect or react to various
occurrences or conditions, such as intrusion or the presence of fire or smoke.
Protection One's alarm monitoring customer contracts generally have initial
terms ranging from one to five years in duration, and provide for automatic
renewals for a fixed period (typically one year) unless Protection One or the
customer elect to cancel the contract at the end of its term.
Protection One maintains eight major service centers in North America to
provide monitoring services to the majority of its customer base. Protection
One Europe maintains a service center in metropolitan London for the United
Kingdom market, and service centers in Paris and metropolitan Marseilles,
France for the continental European market.
Protection One maintains approximately 70 service branches in North America
from which Protection One provides field repair, customer care, alarm response
and sales services. Protection One's branch infrastructure plays an important
role in enhancing customer satisfaction, reducing attrition and building brand
awareness.
Customer Acquisition Strategy
Protection One relies on a diverse customer acquisition strategy that
includes a mix of dealers, internal sales, "tuck-in" acquisitions and direct
marketing. Previously, Protection One relied primarily on the dealer program
for account generation. Protection One established its market position from
November 1997 through December 1998 by completing in excess of 30 transactions
which added approximately one million new customers.
In February 2000, Protection One commenced a commission only internal sales
program, with a goal of acquiring accounts at a cost lower than its external
programs. This program utilizes Protection One's existing branch infrastructure
in 54 markets. Protection One is also pursuing alignments with other strategic
partners in an effort to further diversify its marketing distribution channels.
Multifamily markets its services and products primarily to developers,
owners and managers of apartment complexes and other multifamily dwellings.
Multifamily grows its business through national and regional advertising, a
nationwide professional field sales force and affiliations with professional
industry-related associations. Protection One believes this targeted internal
sales effort is an effective means of generating sales in the multifamily
market, which is comprised primarily of developers and professionals that can
be identified and contacted with relative ease.
Protection One Europe uses an internal sales force to acquire new accounts.
Dealer Marketing
Dealer contracts provide for the purchase of all or a portion of a dealers'
customer accounts by Protection One on an ongoing basis. The dealers install
the alarm systems, arrange for customers to enter into Protection
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<PAGE>
One alarm monitoring agreements, and install Protection One yard signs and
window decals. In addition, Protection One requires dealers to qualify
prospective customers by meeting a minimum credit standard.
Competition
The security alarm industry is highly competitive and highly fragmented. In
North America, most security alarm companies are either large regional or
small, privately held alarm companies. Based on number of residential
customers, Protection One believes the top five alarm companies in North
America are:
--ADT Security Services, a subsidiary of Tyco International, Ltd. (ADT)
--Protection One
--SecurityLink from Ameritech, Inc., a subsidiary of Ameritech Corporation
--Brinks Home Security Inc., a subsidiary of The Pittston Services Group of
North America
--Honeywell Inc.
In the United Kingdom and continental Europe, there are a large number of
small competitors and a few large regional competitors who have recently been
taking steps towards establishing a continental presence. The large regional
competitors include the following companies:
--CIPE, a subsidiary of ADT Security Services and Tyco International, Ltd.,
which is the largest security company in France
--Chubb, a United Kingdom based company which is also a leading security
company in France
--Securitas, a world leader in the security industry based in Sweden, with
its principal operations in the guarding industry but expanding operations
in monitored security
--Group 4 Falck, a leading Danish security company with significant
operations in Scandinavia and recent expansion into Germany and The
Netherlands
--Rentokil Initial, a leading security company in The Netherlands with
established operations in France and the United Kingdom
Some competitors have greater financial resources than Protection One or
Protection One Europe, or may be willing to offer higher prices than Protection
One or Protection One Europe are prepared to offer to purchase customer
accounts. The effect of such competition may be to reduce the purchase
opportunities available to Protection One and Protection One Europe, thus
reducing their rate of growth, or to increase the price paid by Protection One
and Protection One Europe for customer accounts, which would adversely affect
their return on investment in such accounts and Protection One's and Protection
One Europe's results of operations.
Regulatory Matters
A number of local governmental authorities have adopted or are considering
various measures aimed at reducing the number of false alarms. Such measures
include:
--Subjecting alarm monitoring companies to fines or penalties for
transmitting false alarms.
--Requiring permits for individual alarm systems and revoking permits
following a specified number of false alarms.
--Imposing fines on alarm customers for false alarms.
--Imposing limitations on the number of times the police will respond to
alarms at a particular location after a specified number of false alarms.
--Requiring further verification of an alarm signal before the police will
respond.
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<PAGE>
Our monitoring services operations are subject to a variety of other laws,
regulations and licensing requirements of both domestic and foreign federal,
state, and local authorities. In certain jurisdictions, Protection One and
Protection One Europe are required to obtain licenses or permits, to comply
with standards governing employee selection and training, and to meet certain
standards in the conduct of our business. Many jurisdictions also require
certain employees to obtain licenses or permits. Those employees who serve as
patrol officers are often subject to additional licensing requirements,
including firearm licensing and training requirements in jurisdictions in which
they carry firearms.
The alarm industry is also subject to requirements imposed by various
insurance, approval, listing, and standards organizations. Depending upon the
type of customer served, the type of security service provided, and the
requirements of the applicable local governmental jurisdiction, adherence to
the requirements and standards of such organizations is mandatory in some
instances and voluntary in others.
Protection One's monitoring services advertising and sales practices are
regulated in the United States by both the Federal Trade Commission and state
consumer protection laws. In addition, certain administrative requirements and
laws of the foreign jurisdictions in which Protection One and Protection One
Europe operate also regulate such practices. Such laws and regulations include
restrictions on the manner in which the sale of our security alarm system is
promoted, the obligation to provide purchasers of our alarm systems with
certain rescission rights and certain foreign jurisdictions' restrictions on a
company's freedom to contract.
The alarm monitoring business utilizes telephone lines and radio frequencies
to transmit alarm signals. The cost of telephone lines and the type of
equipment which may be used in telephone line transmission are currently
regulated by both federal and state governments. The Federal Communications
Commission and state public utilities commissions regulate the operation and
utilization of radio frequencies. In addition, the laws of certain of the
foreign jurisdictions in which Protection One Europe operates regulate the
telephone communications with the local authorities.
Risk Management
The nature of the services provided by our monitoring services potentially
exposes us to greater risks of liability for employee acts or omissions, or
system failure, than may be inherent in other businesses. Substantially all of
our alarm monitoring agreements, and other agreements, pursuant to which we
sell our products and services contain provisions limiting liability to
customers in an attempt to reduce this risk.
Our monitoring services alarm response and patrol services require their
employees to respond to emergencies that may entail risk of harm to such
employees and to others. We employ over 100 patrol and alarm response officers.
The nature of patrol and alarm response service subjects us to greater risks
related to accidents or employee behavior than other types of businesses.
Our monitoring services carry insurance of various types, including general
liability and errors and omissions insurance in amounts we consider adequate
and customary for our industry and business. Our loss experience, and the loss
experiences at other security service companies, may affect the availability
and cost of such insurance. Certain of our insurance policies, and the laws of
some states, may limit or prohibit insurance coverage for punitive or certain
other types of damages, or liability arising from gross negligence.
ONEOK
We own approximately 45% of the capital stock of ONEOK. Our investment
includes approximately 7.4% of ONEOK's outstanding common stock and shares of
convertible preferred stock.
ONEOK and its subsidiaries engage in several aspects of the energy business.
ONEOK purchases, gathers, compresses, transports, stores, and distributes
natural gas. It also leases pipeline capacity to others. ONEOK drills for and
produces oil and gas, extracts and sells natural gas liquids, and is engaged in
the gas marketing
49
<PAGE>
business. In addition, ONEOK leases and operates a headquarters office building
(leasing excess space to others) and owns and operates a related parking
facility. As a regulated natural gas utility, ONEOK distributes natural gas to
approximately 1.4 million customers in the states of Oklahoma and Kansas.
Please refer to ONEOK's Form 10-K, Forms 10-Q and other documents it files
with the SEC for further information concerning ONEOK. Such reports and
documents are available at the SEC's public reference rooms and from the SEC's
website. See "Available Information."
ONEOK Convertible Preferred Stock
Dividends on the ONEOK convertible preferred stock are payable quarterly and
are not cumulative, so that dividends unpaid as of the dividend payment date
for any dividend period shall permanently remain unpaid for such dividend
period. The dividend amount on each share of such stock, with respect to each
dividend period on the ONEOK common stock, is equal to 1.5 times (1.25 times
following November 2002) the dividend amount declared in respect of each share
of ONEOK common stock for such dividend period, as adjusted to reflect any
stock split or similar events. In no event, however, will the aggregate annual
dividend amount per share be less than $1.80 per share.
After the occurrence of a regulatory change, we will have the right to
convert each share into one fully paid and nonassessable share of ONEOK common
stock, subject to adjustment to reflect stock splits and similar events.
Conversion will, however, be automatic and mandatory upon the transfer of ONEOK
convertible preferred stock to any person other than us or one of our
affiliates. A regulatory change is deemed to have occurred upon our receipt of
an opinion to the effect that PUHCA has been repealed, we are otherwise exempt
from PUHCA or that we have registered under PUHCA, such that we may fully and
legally exercise our rights under the shareholder agreement.
Holders of ONEOK convertible preferred stock are not entitled to vote in any
election of directors to the board of ONEOK or any matter submitted to ONEOK
shareholders other than as required by law. Holders of ONEOK convertible
preferred stock are entitled to vote together with holders of ONEOK common
stock, as a single class, with respect to (i) any proposed amendment to the
ONEOK charter documents which would reasonably have the effect of modifying in
any way the charter amendment allowing ONEOK to opt out of Oklahoma's Control
Share Acquisition Statute or would reasonably cause ONEOK to become subject to
the Control Share Acquisition Statute or any similar provisions; and (ii) any
transaction or series thereof which, if consummated, would constitute a change
in control. With respect to such matters, each share of ONEOK convertible
preferred stock will carry a number of votes equal to the number of votes
carried in the aggregate by the number of shares of ONEOK common stock issuable
upon conversion of one share of ONEOK convertible preferred stock.
ONEOK Shareholder Agreement
The shareholder agreement between us and ONEOK provides for, among other
matters, the matters specified below:
Standstill; Top-Up Rights. The shareholder agreement provides, among other
things, that we and our affiliates will be prohibited from taking certain
actions, including, without limitation:
(a) prior to the occurrence of a regulatory change, the acquisition of
voting securities of ONEOK that would cause us and our affiliates to have
securities representing more than 9.9% of the total outstanding voting
power of ONEOK and, at any time, the acquisition of securities that would
cause total ownership percentage of us and our affiliates to exceed 45%,
less the voting power represented by ONEOK securities we have transferred
(the "Maximum Ownership Percentage"); and
(b) engage in any action, either alone or in concert with others, to
seek to control or influence ONEOK's management, board or policies.
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In the event that our total ownership percentage falls below the Maximum
Ownership Percentage, we have certain rights to acquire additional securities
to restore our total ownership percentage to the Maximum Ownership Percentage.
Restrictions on Transfer. During the term of the shareholder agreement, we
are prohibited, without the prior written consent of a majority of ONEOK's
independent directors, from transferring any ONEOK securities, except (a)
transfers of securities representing voting power of less than 5%; provided
that the transferee does not have a voting ownership percentage of 5% or more
immediately prior to such transfer; (b) in a bona fide underwritten public
offering pursuant to a registration rights agreement entered into between ONEOK
and us; (c) pursuant to a pro rata distribution to our shareholders; and (d)
pursuant to a procedure which permits us to transfer securities representing 5%
or more of ONEOK's voting power, provided that ONEOK has been given notice
thereof, and has failed, within a specified period of time, to purchase from us
the securities proposed to be sold at a cash purchase price per share equal to
98.5% of the then current market price for ONEOK's common stock. In addition,
in the case of a bona fide third party tender offer for ONEOK, we may tender
into such offer a proportionate amount of our ONEOK securities.
Voting. During the term of the shareholder agreement, we have agreed to vote
all voting securities owned by us as follows: with respect to the election of
directors, we will vote our voting securities in favor of the election of all
candidates for director nominated by the ONEOK board. With respect to any
proposal initiated by a shareholder of ONEOK relating to the redemption of the
rights issued pursuant to the ONEOK Rights Agreement or any modification of the
Rights Agreement (other than nonbinding precatory resolutions), we shall vote
all voting securities beneficially owned by us in accordance with the
recommendation of the ONEOK board. With respect to transactions constituting a
change in control or with respect to any proposal relating to Oklahoma's
Control Share Acquisition Statute, we may vote any or all of the voting
securities and convertible preferred stock (which, as described above, has the
right in such circumstance to vote together with the ONEOK common stock on a
one vote per share basis, as adjusted to reflect any stock split or similar
events) held by us in our sole discretion. With respect to any proposed
amendment to the ONEOK certificate or ONEOK by-laws which would reasonably have
the effect of modifying in any way applicability of Oklahoma's Control Share
Acquisition Statute or would reasonably cause ONEOK to become subject to the
Control Share Acquisition Statute or any similar provisions we have the right
to abstain or vote against such amendment. With respect to all other matters,
(i) prior to the occurrence of a regulatory change, we may vote any voting
securities of ONEOK held by us in our sole discretion, (ii) after the
occurrence of such a regulatory change, we may vote in our sole discretion
voting securities representing up to 9.9% of the ONEOK outstanding voting power
and we must vote any other voting securities owned by us in the same proportion
as all voting securities voted on such other matter are voted by the other
shareholders of ONEOK.
Term; Buy/Sell Option. The shareholder agreement terminates under certain
circumstances, including, but not limited to: (a) ONEOK's quarterly dividend on
the ONEOK common stock falling below $0.30 per share (as adjusted to reflect
any stock split or similar events) in any five quarters or ONEOK's failure to
pay the stated quarterly dividend on any series of convertible preferred stock
in any five quarters, (b) our total ownership percentage falling below 9.9% at
any time or (c) our total ownership percentage falling below 30% at any time
following November 26, 2012. In addition, on November 26, 2012, and each
subsequent anniversary of the signing of the shareholder agreement, each of us
and ONEOK, on behalf of ONEOK's shareholders, has the right to buy from or sell
to the other, by purchase, sale or credible tender offer, as appropriate, all
outstanding shares of ONEOK capital stock beneficially owned by the selling
party (which, in the case of ONEOK, means the shareholders of ONEOK other than
us and our affiliates). In addition, if we register as a holding company under
PUHCA and ONEOK believes in good faith that our regulatory status would place
an unreasonable restriction on the implementation of ONEOK's strategic business
plans, ONEOK may immediately initiate its buy/sell rights.
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<PAGE>
Other Investments
We own a 40% interest in Paradigm Direct LLC, a marketing company
headquartered in Fort Lee, New Jersey. Paradigm designs, manages and executes
multi-channel marketing programs engineered to deliver customers to its
clients. Paradigm provides its services to industry leading brands in the
telecommunications, insurance, financial services and home services industries.
We own a 9% interest in a 478 megawatt power plant located near Istanbul in
the Republic of Turkey. The plant began operation in 1999 and was constructed
on a "build, operate, transfer" basis. The plant will transfer to the Republic
of Turkey in 2019. We own 50% of a joint venture which owns 49% of four 55
megawatt coal fired power plants located in Dengfeng City of the Henan Province
in the People's Republic of China. The plants primarily supply electricity to
manufacturing facilities owned by the other owner of the plants. The
transaction is structured on a twenty year term with a maturity in 2017.
We own convertible preferred stock of Guardian International, Inc.
(Guardian) representing approximately 26% of the outstanding capital stock of
Guardian on a fully diluted unconverted basis. Guardian is a leading supplier
of security monitoring and high grade monitored security and fire systems in
Florida and New York. Guardian had total revenues of $18.2 million in fiscal
1999 and is headquartered in Hollywood, Florida.
We also have other various businesses and investments which in the aggregate
are not material to our business or results of operation.
Investment Company Act and PUHCA
We are presently exempt from registration under the Investment Company Act
and upon completion of the rights offering will qualify for and rely on a
temporary one year exemption from the Investment Company Act. If we were not
exempt, we would be required to be registered as an investment company because
of the value and nature of our investment in ONEOK. We intend to file an
application with the SEC seeking permanent exemption from registration under
the Investment Company Act. If our application is not approved, we would need
to take action so as not to be required to register.
Possible action would include selling a portion of our investment in ONEOK,
or exercising our option to purchase an interest in an electric generating
facility near Joplin, Missouri from Western Resources and registering to become
a public utility holding company under PUHCA. Being subject to regulations
under PUHCA would impose a number of restrictions on our operations. These
restrictions include a requirement that the SEC approve, in advance, securities
issuances, sales and acquisitions of utility assets or of securities of utility
companies and acquisitions of interest in other businesses. PUHCA also limits
the ability of registered holding companies to engage in non-utility ventures
and regulates transactions between various affiliates within the holding
company system, including the provision of services by holding company
affiliates to the system's utilities.
Employees
As of September 30, 2000, we had 21 employees other than those employed by
Protection One and Protection One Europe. We have entered into a shared service
agreement with Western Resources pursuant to which Western Resources provides
administrative services, including accounting, human resources, legal,
facilities and information technology. See "Certain Relationships and Related
Transactions--Our Transactions Involving Western Resources--Shared Services
Agreement."
At September 30, 2000, Protection One and Protection One Europe employed
approximately 3,100 persons and 1,600 persons, respectively, on a full time
basis. We believe that Protection One and Protection One Europe have good
relations with their employees.
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Properties
Our executive offices are located at 818 South Kansas Avenue, Topeka, Kansas
66612. We share facilities with Western Resources which maintains its executive
offices at the same location. We are in the process of evaluating our needs for
office space. Upon completion of the evaluation, we expect to have designated
space in the facilities maintained by Western Resources and that we will pay
for the use of this space pursuant to the shared services agreement with
Western Resources.
Protection One maintains its executive offices at 6011 Bristol Parkway,
Culver City, California 90230, and its main financial and administrative
offices at 818 South Kansas Avenue, Topeka, Kansas 66612. Protection One and
Protection One Europe operate primarily from the following facilities, although
Protection One also leases office space for approximately 70 service branch
offices in North America and Protection One Europe leases offices for
approximately 50 sales branch offices in the United Kingdom and continental
Europe.
<TABLE>
<CAPTION>
Location Size (sq. ft.) Lease/Own Principal Purpose
-------- -------------- --------- -----------------
<S> <C> <C> <C>
United States
Addison, TX............. 28,512 Lease Service center/administrative headquarters
Beaverton, OR........... 44,600 Lease Service center
Chatsworth, CA.......... 43,472 Lease Marketing call center
Hagerstown, MD.......... 21,370 Lease Service center
Irving, TX.............. 53,750 Lease Service center
Irving, TX.............. 54,394 Lease Administrative functions
Orlando, FL............. 11,020 Lease Wholesale service center
Topeka, KS.............. 6,996 Lease Financial/administrative headquarters
Wichita, KS............. 50,000 Own Service center/administrative functions
Canada
Ottawa, ON.............. 7,937 Lease Service center/administrative headquarters
Vancouver, BC........... 5,177 Lease Service center
Europe
Basingstoke (London), 3,500 Lease Financial/administrative headquarters/service center
UK.....................
Paris, FR............... 3,498 Lease Financial/service center
Vitrolles (Marseilles), 13,003 Lease Administrative headquarters/service center
FR.....................
</TABLE>
Legal Proceedings
We, Western Resources, Protection One, Monitoring, and certain present and
former officers and directors of Protection One are defendants in a purported
class action litigation pending in the United States District Court for the
Central District of California, Ronald Cats, et al. v. Protection One, Inc.,
et al., No CV 99-3755 DT (RCx). Pursuant to an Order dated August 2, 1999, four
pending purported class actions were consolidated into a single action. In
March 2000, plaintiffs filed a Second Consolidated Amended Class Action
Complaint ("Amended Complaint"). Plaintiffs purport to bring the action on
behalf of a class consisting of all purchasers of publicly traded securities of
Protection One, including common stock and notes, during the period of February
10, 1998 through November 12, 1999. The Amended Complaint asserts claims under
Section 11 of the Securities Act of 1933 and Section 10(b) of the Securities
Exchange Act of 1934 against Protection One, Monitoring, and certain present
and former officers and directors of Protection One based on allegations that
various statements concerning Protection One's financial results and operations
for 1997 and 1998 were false and misleading and not in compliance with
generally accepted accounting principles. Plaintiffs allege, among other
things, that former employees of Protection One have reported that Protection
One lacked adequate internal accounting controls and that certain accounting
information was unsupported or manipulated by management in order to avoid
disclosure of accurate information. The Amended Complaint further asserts
claims against Western Resources and us as controlling persons under Sections
11 and 15 of the Securities Act of 1933 and Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934. A claim is also asserted under Section 11 of
the Securities Act of 1933 against Protection One's auditor, Arthur Andersen
LLP. Arthur
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Andersen also serves as Western Resources' and our independent auditor. The
Amended Complaint seeks an unspecified amount of compensatory damages and an
award of fees and expenses, including attorneys' fees. On June 12, 2000,
Protection One and the other defendants filed motions to dismiss in part the
Amended Complaint. On August 31, 2000, the plaintiffs filed their papers in
opposition to our action. These motions are currently pending and a hearing is
set for October 16, 2000. Protection One believes that all the claims asserted
in the Amended Complaint are without merit and intends to defend against them
vigorously. We cannot currently predict the impact of this litigation on us,
which could be material.
Six Protection One dealers have filed a class action lawsuit in the U.S.
District Court for the Western District of Kentucky alleging breach of contract
because of Protection One's interpretation of their dealer contracts. The
action is styled Total Security Solutions, Inc., et al. v. Protection One Alarm
Monitoring, Inc., Civil Action No. 3:99CV-326-H (filed May 21, 1999). In
September 1999, the Court granted Protection One's motion to stay the
proceeding pending the individual plaintiffs' pursuit of arbitration as
required by the terms of their agreements. On June 23, 2000, the Court denied
plaintiffs' motion for collective arbitration. As of August 7, 2000, none of
these dealers have commenced arbitration.
Other Protection One dealers have threatened litigation or arbitration based
upon a variety of theories surrounding calculations of holdback and other
payments. Protection One believes it has complied with the terms of these
contracts and intends to vigorously defend its position. Although Protection
One believes that no such individual claim will have a material adverse effect,
Protection One cannot currently predict the aggregate impact of these disputes
with dealers, which could be material to Protection One.
The SEC commenced a private investigation in 1997 with Western Resources
(including Westar Industries) relating to, among other things, the timeliness
and adequacy of disclosure filings with the SEC by Western Resources (including
Westar Industries) with respect to securities of ADT Ltd. Western Resources
(including Westar Industries) is cooperating with the SEC staff in this
investigation.
We are party to claims and matters of litigation incidental to the normal
course of business. The ultimate outcome of such matters cannot presently be
determined; however, in the opinion of management, the resolution of such
matters will not have a material adverse effect upon our financial position or
results of operations.
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MANAGEMENT
Directors and Executive Officers
Our board of directors currently consists of three directors, Messrs. Wages,
Lake and Koupal, all of whom are executive officers of Western Resources.
Western Resources has indicated that the board of directors will be increased
to seven directors concurrently with the consummation of the rights offering,
consisting of Paul R. Geist, our President, three executive officers of Western
Resources, and three persons not affiliated with us or Western Resources.
Western Resources has indicated that it will identify the three independent
members of the board of directors prior to completion of the rights offering.
Our articles of incorporation provide that our board of directors is divided
into three classes of directors, with the classes to be as nearly equal in
number as possible. Mr. Lake serves and Mr. Geist will serve as Class I
directors, whose terms expire at the 2003 annual shareholders' meeting. Mr.
Koupal serves as a Class II director, whose term expires at the 2002 annual
shareholders' meeting. Mr. Wages serves as a Class III director, whose term
expires at the 2001 annual shareholders' meeting. One of the new directors will
be elected to each class of directors. Executive officers are elected annually
by the board of directors and serve at its discretion. The following table sets
forth information as to the persons who serve or who are expected to serve as
our directors and executive officers immediately following the rights offering.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Douglas T. Lake................................ 50 Director
Carl M. Koupal, Jr............................. 47 Director
Lee Wages...................................... 51 Director
Paul R. Geist.................................. 37 Director and President
Greg A. Greenwood.............................. 34 Treasurer and Secretary
</TABLE>
Douglas T. Lake
Mr. Lake has been a director since September 1998. Mr. Lake currently serves
as Executive Vice President and Chief Strategic Officer of Western Resources
(since September 1998). Prior to that Mr. Lake was Senior Managing Director at
Bear, Stearns & Co. Inc., an investment banking firm. Mr. Lake is also Chairman
of the Board of Protection One.
Carl M. Koupal, Jr.
Mr. Koupal has been a director since June 1995. Mr. Koupal currently serves
as Executive Vice President and Chief Administrative Officer of Western
Resources (since July 1995). Prior to that Mr. Koupal was Executive Vice
President, Corporate Communications, Marketing and Economic Development of
Western Resources.
Lee Wages
Mr. Wages has been a director since October 1998. He will resign as a
director following the rights offering. Mr. Wages also currently serves as
Controller of Western Resources (since July 1999). Prior to that Mr. Wages
served as Senior Director, Corporate Strategy and in other positions with
Western Resources.
Paul R. Geist
Mr. Geist has served as President since September 2000. Mr. Geist also
currently serves as Executive Director, Corporate Strategy, of Western
Resources since November 1999, a position he will relinquish upon the closing
of the rights offering. From October 1998 to November 1999, Mr. Geist served as
Vice President--
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<PAGE>
Finance of Panera Bread Company. From 1989 to 1998, Mr. Geist served as
Executive Vice President--Chief Financial Officer and in many other positions
for Houlihan's Restaurant Group, Inc.
Greg A. Greenwood
Mr. Greenwood has served as Treasurer and Secretary since September 2000.
Mr. Greenwood also currently serves as Senior Director, Finance, of Western
Resources and has held that position since October 1999. He has served in
various other capacities with Western Resources since 1993.
Committees of the Board of Directors
Prior to or immediately following the closing of the rights offering, our
board of directors will establish an audit committee, a nominating committee
and a compensation committee of our board of directors. The audit committee
will be comprised of independent directors and the compensation committee will
be comprised of at least two independent directors. The audit committee will be
responsible for reviewing our audited financial statements and accounting
practices, and considering and recommending the employment of, and approving
the fee arrangements with, independent accountants for both audit functions and
for advisory and other consulting services. The compensation committee will
review and approve the compensation and benefits for our key executive
officers, administer our employee benefit plans and make recommendations to the
board of directors regarding such matters. The nominating committee will select
nominees for election as members of the board of directors. The board of
directors may establish additional committees from time to time.
Director Compensation
To date, we have not paid compensation to any of our directors for acting in
such capacity. Beginning after the closing of the rights offering, directors
who are not our full-time employees or full-time employees of Western Resources
will receive an annual fee of $ . , of which $ . will be payable in cash and
$ . will be payable in stock, and will also receive $ . per board or
committee meeting attended. Directors who are our officers and full-time
employees or full-time employees of Western Resources will receive no
additional compensation for service as directors. We reimburse all directors
for the expenses incurred in attending meetings of the board of directors. All
directors are eligible for option grants under our 2001 Long Term Incentive
Compensation and Share Award Plan. Each independent director appointed
concurrently with the closing of the rights offering will receive options to
purchase . shares of our common stock at a price per share equal to the
subscription price for our common stock.
Executive Compensation
Each of our executive officers is currently an employee of Western
Resources, but will become solely our employee upon consummation of the rights
offering. Prior to the rights offering, all compensation paid to our executive
officers was paid by Western Resources. After completion of the rights
offering, we will pay all of their compensation.
Long Term Incentive Compensation and Share Award Plan
Our board of directors has adopted and Western Resources as our sole
stockholder has approved the Westar Industries, Inc. 2001 Long Term Incentive
Compensation and Share Award Plan (the "Plan"). The Plan allows the granting of
stock options, stock appreciation rights, called SARs, restricted share and
restricted share unit awards, performance share and performance unit awards,
dividend equivalent awards, director shares in lieu of fees, and other share-
based awards (collectively, "awards") to eligible Plan participants. While we
have no current plans to grant awards other than stock options, restricted
share and restricted share unit awards, and the issuance of shares to non-
employee directors in lieu of fees, the board of directors believes that the
ability to use different types of equity compensation vehicles will give us the
flexibility needed to adapt most effectively over time to changes in the labor
market and in equity compensation practices.
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<PAGE>
The board has authorized the issuance of up to . shares of our common
stock pursuant to awards granted under the Plan. If an award expires or is
canceled without having been fully exercised or vested, the
unvested or canceled shares generally will be available thereafter for grants
of awards. The number of shares available for grant under the Plan, as well as
outstanding awards, non-employee director shares, and the numerical limits for
individual grants, will be adjusted as appropriate to reflect any stock splits,
stock dividends, recapitalization, reorganizations or other changes to our
capital structure. The type, amount and conditions of any awards have not been
determined.
Purpose of the Plan. The Plan is intended to attract, motivate and retain
(1) employees of Westar Industries and its affiliates, and (2) non-employee
directors of Westar Industries called outside directors. The Plan is designed
to further the growth and financial success of Westar Industries and its
affiliates by aligning the interests of the Plan participants, through stock
ownership and other incentives, with the interests of our stockholders. The
Plan is also intended to meet competitive compensation levels through increases
in variable (at-risk) pay rather than traditional base salary.
Administration of the Plan. The Plan will be administered by the
compensation committee of the board or such other board committee as may be
designated by the board to administer the Plan and is referred to as the
Committee. The Committee must have two or more members and all of the members
of the Committee must qualify as "non-employee directors" under Rule 16b-3
under the Securities Exchange Act of 1934, and as "outside directors" under
Section 162(m) of the Internal Revenue Code (for purposes of qualifying amounts
received under the Plan as "performance-based compensation" under Section
162(m)).
Subject to the terms of the Plan, the Committee has the sole discretion to
determine the employees who shall be granted awards, to designate affiliates
that will be participating employers under the Plan, to determine the type(s)
and number of awards to be granted, to determine the number of shares to which
awards may relate, to determine the manner in which an award may be settled, to
determine the manner in which awards may be deferred, to prescribe the form of
award agreements, to adopt or alter rules and regulations and to appoint agents
to administer the Plan, to correct defects or inconsistencies and to construe
and interpret the Plan, to accelerate the exercisability of awards, and to
determine the terms and conditions of all awards. The Committee may delegate
its authority to grant and administer awards to a separate committee appointed
by the Committee, but only the Committee may make awards to participants who
are executive officers of Westar Industries. The non-employee director portion
of the Plan will be administered by the full board of directors, rather than
the Committee.
Eligibility to Receive Awards. Employees of Westar Industries and its
affiliates (i.e., any entity other than Westar Industries and its subsidiaries
that is designated by the board as a participating employer under the Plan) are
eligible to be selected to receive one or more awards. The actual number of
employees who will receive awards under the Plan cannot be determined because
selection for participation in the Plan is in the sole discretion of the
Committee.
The Plan also allows for non-employee directors to receive all or a portion
of their fees in the form of common stock. The terms and conditions of shares
to be granted to directors are discussed below under "Director Fees."
Options. The Committee may grant non-qualified stock options, incentive
stock options, called ISOs, or any combination thereof. The number of shares
covered by each option will be determined by the Committee, but during any
calendar year, no participant may be granted options or SARs for more than .
shares.
The exercise price of each option is set by the Committee, but generally
will not be less than 100% of the fair market value of our common stock on the
date of grant, and may require achievement of performance criteria established
by the Committee. The exercise price of an ISO must comply with the provisions
of Section 422 of the Internal Revenue Code which currently provides, among
other things, that the aggregate fair market
57
<PAGE>
value of the shares (determined on the grant date) covered by ISOs which first
become exercisable by any participant during any calendar year may not exceed
$100,000.
Stock options may be exercised in whole or in part. The Committee may permit
payment through the tender of shares of our common stock then owned by the
participant, or by any other means that the Committee determines to be
consistent with the Plan's purpose. Any taxes required to be withheld must be
paid at the time of exercise.
Options become exercisable at the times and on the terms established by the
Committee. Options expire at the times established by the Committee, but
generally not later than 10 years after the date of grant. The Committee may
extend the maximum term of any option granted under the Plan, subject to the
preceding limits.
Director Fees. Non-employee director participants may receive a portion of
their annual director fees in shares, with the remainder of the fees to be
payable either in cash or shares as elected by the non-employee director
participant.
The required portion of stock compensation will be paid at the beginning of
each year, or promptly following the non-employee director's election to the
board. The elective stock compensation due a non-employee director participant
will be payable on a quarterly basis, as described in the Plan. Distribution
amounts will be determined by dividing the participant's required and elected
dollar amount of compensation by the market value of the shares on the date one
business day prior to the date of distribution. For additional information
concerning fees payable to non-employee directors, see "--Directors'
Compensation."
Stock Appreciation Rights. The Committee determines the terms and conditions
of each SAR. SARs may be granted in conjunction with an option, or may be
granted on an independent basis. The number of shares covered by each SAR will
be determined by the Committee, but during any calendar year, no participant
may be granted options and SARs for more than . shares.
Upon exercise of a SAR, the participant will receive payment from us in an
amount measured by the difference between the exercise price of the right and
the fair market value of shares on the exercise date or other date specified by
the Committee.
SARs are exercisable at times and on the terms established by the Committee.
Proceeds from SAR exercises may be paid in cash, shares, or property as
determined by the Committee. SARs expire at the times established by the
Committee.
Restricted Share Awards and Restricted Share Unit Awards. Restricted share
awards are shares of stock that are granted subject to restrictions established
by the Committee. Restricted share units are rights to receive shares or cash
at the end of a specified deferral period subject to restrictions established
by the Committee. The number of restricted shares and restricted share units
(if any) granted to a participant will be determined by the Committee.
In determining the vesting schedule for each award of restricted shares or
restricted share units, the Committee may impose whatever conditions to vesting
as it determines to be appropriate. For example, the Committee may (but is not
required to) provide that restricted share units will vest only if one or more
of the following measures in setting the performance goals are satisfied. In
order for the award to qualify as "performance-based" compensation under
Section 162(m) of the Internal Revenue Code, the Committee must use one or more
of the following measures in setting the performance goals: (1) total
shareholder return; (2) earnings per share; (3) operating income; (4) net
income; (5) pro forma net income; (6) return on shareholders' equity; (7)
return on designated assets; (8) shareholder value added; (9) revenues; (10)
capital gains; (11) expenses; (12) operating profit margin; (13) operating cash
flow; (14) net profit margin; and (15) achievement of operational strategies in
terms of control of accidents, lost time and customer satisfaction.
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<PAGE>
The Committee may apply the performance measures on a corporate or business
unit basis, as deemed appropriate in light of the participant's specific
responsibilities. The Committee may, in its sole discretion, accelerate the
time at which any restrictions lapse or remove any restrictions. In no event
may the total compensation payable to any participant in any calendar year
under all performance-based restricted shares, restricted units, performance
shares and performance units intended to qualify as "performance-based"
compensation under Section 162(m) of the Code exceed the equivalent of .
shares.
Performance Share Awards and Performance Unit Awards. Performance share
awards and performance unit awards are amounts credited to a bookkeeping
account established for the participant. The performance goals are established
by the Committee at the time of its grant. A performance share has an initial
value equal to the fair market value of a share of our common stock on the date
of grant. The number of performance units or performance shares (if any)
granted to a participant will be determined by the Committee.
Whether a performance unit or performance share actually will result in a
payment to a participant will depend upon the extent to which performance goals
established by the Committee are satisfied. The applicable performance goals
will be determined by the Committee. In order to qualify as "performance-based"
compensation under Section 162(m) of the Internal Revenue Code, the same
measures of performances goals stated under restricted share awards above must
be used. In no event may the total compensation payable to any participant in
any calendar year under all performance-based restricted shares, restricted
units, performance shares and performance units intended to qualify as
"performance-based" compensation under Section 162(m) of the Code exceed the
equivalent of . shares.
After a performance unit or performance share award has vested (that is,
after the applicable performance goal or goals have been achieved), the
participant will be entitled to receive a payout of cash, shares, or any
combination thereof, as determined by the Committee. Unless otherwise
determined by the Committee at the date of grant, unvested performance units
and performance shares will be forfeited upon the earlier of the recipient's
termination of employment or the date set forth in the award agreement.
Dividend Equivalents. Dividend equivalents are rights to receive cash,
shares or other property equal in value to dividends paid with respect to a
specified number of shares. Independently or in connection with an award, the
board may grant dividend equivalents to a participant based on the dividends
declared on the shares for record dates during the period between the date an
award is granted and the date such award is exercised or the date all
conditions of the award shall have been satisfied. Dividend equivalents may be
paid or distributed when accrued or deemed to have been reinvested in
additional shares or other investment vehicles as determined by the Committee.
If granted in connection with an award, dividend equivalents shall be
subject to all conditions and restrictions associated with the underlying
awards to which they relate.
Other Share-Based Awards. The Committee is authorized to grant other stock-
based awards subject to such terms and conditions as it may prescribe.
Nontransferability of Awards. Unless otherwise set forth by the Committee in
the award agreement, awards (other than vested shares) granted under the Plan
may not be sold, transferred, pledged, assigned, or otherwise alienated or
hypothecated, other than by will or by the applicable laws of descent and
distribution; provided, however, that a participant may designate one or more
beneficiaries to receive any exercisable or vested awards following his or her
death.
Change of Control. In the event of a change of control, all awards granted
under the Plan then outstanding but not then exercisable (or subject to
restrictions) shall become immediately exercisable, all restrictions shall
lapse, and any performance criteria shall be deemed satisfied, unless otherwise
provided in the applicable award agreement. In addition, for a period of up to
60 days following a change of control, a participant may elect to surrender any
outstanding award and receive a cash payment equal to the value of such
59
<PAGE>
award, with the value of any shares being determined for this purpose based on
the "change of control price" (essentially, the higher of the highest reported
sales price during the 30 days preceding the change of control or the highest
price paid or offered in the transaction). In general, a change in control
occurs if (1) a person (other than Western Resources and its subsidiaries and
certain other entities) is or becomes a "beneficial owner," either directly or
indirectly, of 20% or more of the outstanding voting securities, (2) the
composition of the board changes whereby directors at the effective date of the
Plan (including new directors approved by a vote of three-quarters of the
directors then in office and any directors previously so approved) cease to
constitute a majority of the board, (3) the consummation of a merger,
consolidation, statutory share exchange or similar form of corporate
transaction involving Westar Industries occurs (subject to certain exceptions),
or (4) the stockholders of Westar Industries approve a plan of complete
liquidation or dissolution of Westar Industries or a sale of all or
substantially all of its assets. Our separation from the regulated electric
utility business of Western Resources through a distribution of our common
stock to the stockholders of Western Resources concurrently with the
consummation of a transaction involving a strategic partner for Western
Resources' electric utilities will not be a change of control under the Plan.
Federal Income Tax Consequences. A recipient of a stock option or SAR will
not have taxable income on the date of grant. Upon the exercise of non-
qualified options and SARs, the participant will recognize ordinary income
equal to the difference between the fair market value of the shares on the date
of exercise and the exercise price. Any gain or loss recognized upon any later
disposition of the shares generally will be capital gain or loss.
Purchase of shares upon exercise of an ISO will not result in any taxable
income to the participant, except for purposes of the alternative minimum tax.
Gain or loss recognized by the participant on a later sale or other disposition
either will be long-term capital gain or loss or ordinary income, depending
upon how long the participant has held the shares. Any ordinary income
recognized will be in the amount, if any, by which the lesser of (1) the fair
market value of such shares on the date of exercise, or (2) the amount realized
from the sale, exceeds the exercise price.
Upon receipt of a restricted share, restricted share unit, dividend
equivalents, a performance unit or a performance share, the participant will
not have taxable income except that in the case of restricted shares, the
participant may elect to be taxed at the time of the award. Absent such
election, upon vesting the participant will recognize ordinary income equal to
the fair market value of the shares at such time. With respect to restricted
share units, performance units, dividend equivalents and performance shares,
upon payment in cash or unrestricted shares, the participant will recognize
ordinary income equal to the amount of cash and the fair market value of the
stock at the time of payment.
The Committee may permit participants to satisfy tax withholding
requirements in connection with the exercise or receipt of an award by (1)
electing to have Westar Industries withhold otherwise deliverable shares, or
(2) delivering to Westar Industries then owned shares having a value equal to
the amount required to be withheld.
Westar Industries will be entitled to a tax deduction for an award in any
amount equal to the ordinary income realized by the participant at the time the
participant recognizes such income. Internal Revenue Code Section 162(m)
contains special rules regarding the federal income tax deductibility of
compensation paid to our Chief Executive Officer and to each of the other four
most highly compensated executive officers. The general rule is that annual
compensation paid to any of these specified executives will be deductible only
to the extent that it does not exceed $1 million. We can preserve the
deductibility of certain compensation in excess of $1 million, however, if we
comply with conditions imposed by Section 162(m). The Plan has been designed to
permit the Committee to grant awards which satisfy the requirements of Section
162(m).
Amendment and Termination of the Plan. The Board generally may amend or
terminate the Plan at any time and for any reason, but in accordance with
Section 162(m) of the Internal Revenue Code, certain material amendments to the
Plan will be subject to shareholder approval.
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Westar Industries, Inc. Employee Stock Purchase Plan
Our board of directors adopted, and Western Resources as our sole
stockholder has approved, the Westar Industries, Inc. Employee Stock Purchase
Plan, called the ESPP. The ESPP will provide a means for eligible employees of
Westar Industries and designated subsidiaries to purchase shares of our common
stock under favorable terms through payroll deductions or cash payments. The
Board believes that adoption of the ESPP will promote the interests of Westar
Industries and its stockholders by assisting us in attracting, retaining and
stimulating the performance of employees and by aligning employees' interests
through their purchases of common stock with the interests of stockholders.
Shares Subject to the Plan. We have authorized the issuance of up to .
shares of our common stock under the ESPP, subject to adjustment from time to
time for stock dividends, recapitalization, merger, spin-off, and certain
changes in capitalization as provided in the ESPP.
Administration. The ESPP will be administered by the Committee. The
Committee is authorized to administer and interpret the ESPP and to make such
rules and regulations as it deems necessary to administer the ESPP.
Eligibility. The ESPP is an employee benefit program that enables qualified
employees of Westar Industries and its subsidiaries designated by the Committee
to purchase shares of common stock at a discount through payroll deductions or
cash payments without incurring broker commissions. To participate, an employee
must have been employed for at least one year at the beginning of the offering
period and the employee's customary employment must be for more than 20 hours
each week and five months in any calendar year (unless the Committee determines
otherwise on a uniform and nondiscriminatory basis.) An employee is not
eligible to continue participation in the ESPP in the event his or her
employment is voluntarily or involuntarily terminated, or if such employee owns
or will own, as a result of such participation, shares possessing 5% or more of
the total combined voting power or value of all classes of stock of Westar
Industries or any related corporation. Employees represented by bargaining
units do not currently participate in the ESPP. Currently, approximately . of
our employees are eligible to participate in the ESPP, including the named
executive officers. Non-employee directors of Westar Industries are not
eligible to participate in the ESPP.
Stock Purchases. The ESPP will be implemented through a series of offerings.
The length of each offering period will be established by the Committee. During
these offering periods, participating employees accumulate funds in an account
used to buy common stock through payroll deductions or cash payments at a rate
selected by the employee (subject to such maximums and minimums as the
Committee may prescribe). No participating employee may be granted an option to
purchase common stock that permits the employee to purchase in any calendar
year under the ESPP shares of common stock with the aggregate fair market value
(determined at the time such option is granted) in excess of $25,000.
At the end of each offering period, the market price of our common stock is
determined and the participating employees' accumulated funds (including any
interests that may be credited under rules prescribed by the Committee) are
used to purchase the appropriate number of shares of common stock. The purchase
price per share of common stock under the ESPP will be established by the
Committee, but may not be less than the lower of 85% of the per share fair
market value on the date of grant or exercise.
Amendment and Termination. The board of directors has the power to amend,
suspend or terminate the ESPP, provided that the board may not amend the ESPP
without shareholder approval if such approval is required by Section 423 of the
Internal Revenue Code of 1986, as amended.
Effective Date; Term of the Plan. The ESPP shall become effective upon
consummation of the rights offering. The ESPP will continue in effect until
. , 2010, unless sooner terminated by the board of directors.
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Federal Income Tax Consequences. We intend that the ESPP qualify as an
"employee stock purchase plan" under Section 423 of the Code. Section 423
allows an employer to grant options to its employees to purchase company stock
at a stipulated price without having the employees realize taxable income at
the time the option is granted or when exercised. The basis of the stock
received on exercise of an option under the ESPP is the exercise price paid for
the stock. The Code imposes a holding period for favorable tax treatment upon
disposition of common stock acquired under the ESPP equal to the later of two
years after the grant date or one year after the purchase date. When the common
stock is sold after this holding period, the employee will realize ordinary
income up to the amount of any discount (up to a maximum of 15%) from the fair
market value of common stock as of the grant date. Any further gain is taxed at
long term capital gain rates. If the stock is sold before the holding period
expires, the employee will realize ordinary income to the extent of the
difference between the price actually paid for the stock and the fair market
value of the stock at the purchase date, regardless of the price at which the
stock is sold; and any further gain would be capital gain (short term or long
term, depending on the holding period). If the sale price is less than the fair
market value of the stock on the purchase date, the employee will realize a
capital loss equal to such difference.
We may not take a deduction for the difference between the fair market value
of the common stock on the date of purchase by the employee and the purchase
price paid for the common stock by the employee unless the employee disposes of
the stock before the statutory holding periods expire.
The Westar Industries, Inc. 2001 Short Term Incentive Plan
The board of directors adopted the Westar Industries, Inc. 2001 Short Term
Incentive Plan, called the Short Term Plan. Western Resources, as our sole
stockholder, approved the Short Term Plan to qualify compensation paid under
the Plan as "performance-based" compensation not subject to the limitation on
deductibility for federal income tax purposes of certain executive compensation
in excess of $1 million under Section 162(m) of the Code. The Short Term Plan
is intended to serve as a vehicle for making certain annual incentive
compensation awards to employees who are or are expected to become subject to
Section 162(m).
Purpose. The purpose of the Short Term Plan is to motivate key executives,
managers, and select exempt employees to achieve the highest level of
performance to further the achievement of our goals, objectives, and
strategies. The Short Term Plan is designed to reward exceptional performance
using financial incentives to supplement base compensation. Also, the Short
Term Plan will enhance our ability to attract new executive talent when needed.
In addition, the Short Term Plan is intended to benefit us in the pursuit of
our goals and objectives by stimulating and motivating officers and select
employees, which will in turn enhance productivity and promote the retention of
experienced and qualified executive talent in a cost effective and efficient
manner. A further purpose of the Plan is to serve as a qualified "performance-
based" compensation program under Section 162(m) of the Code.
Administration. The Short Term Plan is administered by the Committee. The
Committee will have full and complete discretion (subject to the terms of the
Short Term Plan) to determine the persons to whom awards shall be granted, to
grant awards under the Short Term Plan, to determine the terms, conditions,
restrictions and performance goals relating to each award, and to interpret and
apply the terms of the Plan.
Eligibility. The Committee may grant awards under the Short Term Plan to the
Chief Executive Officer of Westar Industries and the other four most highly
compensated officers of Westar Industries and its subsidiaries who are subject
to Section 162(m) of the Code as well as to any other salaried employees or
groups of salaried employees as the Committee may designate. Currently,
approximately . of our employees would be eligible to participate in the
Short Term Plan, including the named executive officers. Non-employee directors
of Westar Industries are not eligible to participate in the Short Term Plan.
Awards. Not later than 90 days after the beginning of each calendar year (or
such other date as may be required or permitted by Section 162(m) of the Code),
the Committee will determine the persons to whom awards will be made for that
calendar year (the "Participants"), select one or more performance measures,
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establish objective written performance goals with respect to each selected
performance measure, and establish in writing the award opportunities and other
terms of the awards to be made to each Participant. The performance measures
which may serve as determinants of the Participant's award opportunities are
limited to: total shareholder return, earnings per share, operating income, net
income, pro forma net income, return on shareholders' equity, return on
designated assets, shareholder value added, revenues, capital gains, expenses,
operating profit margin, operating cash flow, net profit margin, and
achievement of operational strategies in terms of control of accidents, lost
time and customer satisfaction. The performance goals may be determined by
reference to the performance of Westar Industries or of a division or unit of
Westar Industries. The selected goals may be different for different
Participants. Performance goals will include a threshold level below which no
payment will be made, a level of performance at which the target payment will
be made and a maximum level of performance above which no additional amount
will be paid. Unless the Committee determines otherwise, a Participant's award
opportunity will be expressed in terms of a percentage of the Participant's
eligible compensation. The Committee may adjust performance goals, to the
extent consistent with Section 162(m) of the Code, to account for extraordinary
events affecting the determination of performance. The maximum amount payable
to any Participant in respect of all awards (other than Insurance-Related
Awards described below) under the Short Term Plan in respect of any calendar
year is $2.8 million.
Payment of Awards. Payments in respect of awards (other than Insurance-
Related Awards described below) earned under the Plan will be made in cash
following the calendar year for which the award was granted. Before payment is
made the Committee must certify in writing the extent to which the Participant
has satisfied the performance goals, and payment will be made only to the
extent the award has been earned on account of attainment of such performance
goals. The Committee may not increase the amount payable under an award above
the amount actually earned by the Participant.
If the Participant ceases to be continually employed by Westar Industries
(other than as a result of a Westar Industries approved leave of absence or the
Participant's death, disability or retirement under the Westar Industries
pension plan's early or normal retirement provisions), the Participant shall
forfeit all rights to the award for the calendar year not then ended. If the
Participant dies, becomes disabled or retires under the Westar Industries
pension plan's early or normal retirement provisions during a calendar year,
his or her award for that year will be prorated to reflect the period of
participation prior to termination.
Insurance-Related Awards. In addition to the awards described below, the
Committee may make awards called Insurance-Related Awards to such eligible
employees as the Committee may select pursuant to which amounts earned by the
Participant shall be applied to the purchase of life insurance policies on the
Participant's life in which the Participant will have an interest as discussed
below. Such Insurance-Related Awards shall be made within the same time periods
as other incentive awards under the Short Term Plan, and the Participant's
entitlements under such Insurance-Related Awards shall be conditioned on such
objective written performance goals as the Committee shall establish. The
maximum amount of compensation that may be earned by any Participant in respect
of all Insurance-Related Awards for any calendar year shall be $10 million. The
Committee shall select the applicable performance measure or measures from the
same list of available measures described above.
Following the calendar year for which the Insurance-Related Award was
granted, the Committee will determine the amount earned by the Participant that
is to be applied toward the purchase of a life insurance policy on the life of
the Participant. Before a policy is so purchased, the Committee must certify in
writing the extent to which the Participant has satisfied the performance
goals, and the purchase will be made only to the extent the award has been
earned on account of attainment of such performance goals.
As a condition to the purchase of a life insurance policy on the life of a
Participant, the Participant must enter into an agreement with the Company in
such form as the Committee determines in its sole discretion. Unless the
Committee determines otherwise, such agreement shall include the following:
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(i) Westar Industries will be the owner of the policy and will be
entitled, upon the death of the Participant, to the portion of the death
benefit equal to the sum of (A) the greater of the total amount of the
premiums paid by Westar Industries under the policy (as adjusted for
interest at a rate determined by the Committee) or the cash surrender value
of the policy, reduced in either case by any indebtedness against the
policy existing at the time of the Participant's death (including any
interest due on such indebtedness) together with (B) the amount of any
death benefit sold to Westar Industries by the Participant. The balance of
the death benefit shall be payable to the beneficiary or beneficiaries
designated by the Participant.
(ii) The Participants will have the right to sell to Westar Industries
at a price determined under a formula established in the agreement all or a
portion of his or her interest in the death benefit under the Policy,
subject to such terms and conditions as the Committee may determine.
Amendment and Termination. The board of directors may from time to time and
at any time alter, amend, suspend, discontinue, or terminate the Short Term
Plan; provided, however, that any amendment which requires shareholder approval
in order to comply with Code Section 162(m) shall not be effective unless
approved by the shareholders. The board of directors may not modify or
terminate the Short Term Plan to the extent doing so would adversely affect the
rights of a Participant to an outstanding award.
Effective Date. The Short Term Plan will be effective upon consummation of
the rights offering.
Federal Income Tax Consequences. In respect of awards (other than Insurance-
Related Awards) under the Short Term Plan, a Participant will recognize
ordinary income for federal income tax purposes in an amount equal to the
amount paid to the Participant under the Short Term Plan. Westar Industries
generally will be entitled to a corresponding federal income tax deduction at
the time of the payment. The Short Term Plan has been drafted and is intended
to be administered to enable payments under the Short Term Plan to qualify as
"performance-based" compensation for purposes of Section 162(m) of the Code.
Section 162(m) of the Code disallows a public company's deductions for employee
remuneration exceeding $1 million per year for the chief executive officer and
the four other most highly compensated executive officers, but contains an
exception for "performance-based" compensation.
The federal income tax treatment of the Insurance-Related Awards will depend
on the specific terms of the applicable arrangements. It is expected that a
Participant will not realize taxable income upon the purchase of a life
insurance policy by Westar Industries but would have taxable income each year
equal to the term life insurance value of the current life insurance
protection. In addition, a Participant would have ordinary compensation income
in an amount equal to the amounts received under the Insurance-Related Awards
upon the sale of any portion of the death benefit to Westar Industries. Westar
Industries could not deduct its premium payments to purchase the life insurance
policy or the term life insurance value, but could deduct the amounts paid to
the Participant upon the sale of any portion of the death benefit to Westar
Industries. Neither Westar Industries nor the beneficiary of the Participant
would realize taxable income on the death benefit payable upon the death of the
Participant.
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OWNERSHIP OF COMMON STOCK
Principal Stockholders and Selling Stockholder
The following table sets forth as of . , 2001 information known to us
regarding beneficial ownership of each stockholder owning more than five
percent of the outstanding shares of common stock of us and Western Resources
and all executive officers and directors as a group. The table also indicates
the expected decrease in the percentage of our common stock owned by Western
Resources following completion of the rights offering, assuming all of the
rights are exercised:
<TABLE>
<CAPTION>
Amount and Amount and
Nature of Nature of
Beneficial Percent of Class Beneficial Percent of Class
Ownership of ------------------ Ownership of ------------------
Name and Address of Our Common Before After Western Before After
Beneficial Owner Stock Offering Offering* Resources Offering Offering*
------------------- ------------ -------- --------- ------------ -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Western Resources,
Inc.................... 100% 90.1% -- -- --
818 South Kansas Avenue
Topeka, Kansas 66612
All executive officers
and directors as a
group**................
Douglas T. Lake.........
Carl M. Koupal, Jr......
Lee Wages...............
Paul R. Geist...........
Greg A. Greenwood.......
</TABLE>
--------
* Assumes all rights are exercised.
** Will reflect all stock ownership, whether restricted stock or options, held
or to be held on completion of the rights offering.
Resale of Our Common Stock
All shares of our common stock purchased by holders of Western Resources
common stock upon exercise of the rights will be freely transferable, except
that shares of our common stock purchased by persons who are deemed to be our
"affiliates" (as such term is defined under the Securities Act) at the time of
consummation of the rights offering may be resold by them only in transactions
permitted by the resale provisions of Rule 144 under the Securities Act or as
otherwise permitted under the Securities Act. Persons who may be deemed to be
our affiliates generally include individuals or entities that control, are
controlled by, or are under common control with, us or our principal
stockholder, Western Resources, and may include certain officers and directors
of such party as well as principal stockholders of such party.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Our Transactions Involving Western Resources
In connection with the rights offering, we will enter into a number of
agreements with Western Resources for the purpose of allocating assets and
liabilities between us and defining our continuing relationship following the
rights offering. These agreements are summarized below. Each of these
agreements has been negotiated in the context of a parent-subsidiary
relationship and, therefore, will not be the result of negotiations between
independent parties with separate representation. Thus, we cannot guarantee you
that each of these agreements or the related transactions will be on as
favorable terms as could have been obtained from unaffiliated third parties.
Allocation Agreement
We have entered into an allocation and separation agreement, called the
allocation agreement, with Western Resources. The primary purposes of the
allocation agreement are to provide for the terms of Western Resources'
ultimate distribution of the shares of our common stock not sold in the rights
offering to its common stockholders and the allocation of liabilities between
Western Resources and us.
The allocation agreement also provides the terms for repayment of an
intercompany receivable in the amount of approximately $225 million at June 30,
2000 owed to us by Western Resources. Under that agreement Western Resources
will issue us a note for $ . million of the intercompany receivable, which will
bear interest at a rate designed to mirror the pre-tax average cost of capital
of Western Resources and which will be repaid no later than the closing of a
strategic transaction involving Western Resources' electric utilities. The
remaining balance of the receivable will be repaid by our election to receive
either (1) convertible preferred stock of Western Resources, (2) shares of our
common stock currently held by Western Resources, (3) shares of common stock of
Western Resources, or (4) a note convertible no later than the closing of a
strategic transaction involving Western Resources' electric utilities into one
of the types of equity securities mentioned above. Furthermore, beginning with
the consummation of the rights offering, we will be required to use the
proceeds in excess of our operating needs of asset sales to acquire convertible
preferred stock or common stock of Western Resources or shares of our common
stock owned by Western Resources at a price not less than the subscription
price. If we do not select one of these options as of the time the asset sale
proceeds become available, we will deliver the cash to Western Resources in
return for a note, which will be repaid with the securities we ultimately
select. We must make all elections prior to the date of the pro rata
distribution by Western Resources of our remaining shares. The agreement as to
the use of the proceeds of an asset sale will terminate upon the earliest of
(1) the closing of a transaction with a strategic partner for Western Resources
electric utilities, (2) Western Resources' secured debt securities receiving an
investment grade rating from Moody's and Standard & Poors, or (3) the reduction
of Western Resources' unconsolidated debt plus Kansas Gas and Electric Company
debt to $2.5 billion.
The allocation agreement also provides:
. that the non-tax liabilities of Westar Industries and its subsidiaries
will continue to be liabilities of the appropriate member of the Westar
Industries group after consummation of the rights offering. All tax
liabilities will be allocated pursuant to the Tax Disaffiliation
Agreement discussed below.
. for indemnification, effective as of the consummation of the strategic
transaction, of the Western Resources group or any of it successors by
the Westar Industries group from (1) all non-tax liabilities of the
Westar Industries group, including those liabilities allocated to the
Westar Industries group pursuant to the allocation agreement and (2) the
breach by us of the allocation agreement or the other agreements
executed in connection with the allocation agreement. Western Resources
has agreed to indemnify us for the liabilities of the Western Resources
group and for any breach by Western Resources of the allocation
agreement or the other allocation agreements. All indemnities related to
tax matters or the Tax Disaffiliation Agreement are governed by the Tax
Disaffiliation Agreement.
. that immediately prior to the consummation of the strategic transaction,
Western Resources will distribute on a pro rata basis the remaining
shares of our common stock that it holds to its
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stockholders of record as of the record date set for the consummation of
that transaction. The distribution will not be consummated unless the
following conditions have been satisfied or waived: (1) our common stock
shall have been registered under the Securities Exchange Act of 1934 and
any registration statement filed in connection with the distribution
shall have become effective and such effectiveness shall not have been
withdrawn or suspended; (2) the common stock to be delivered in the
distribution shall have been approved for listing on the NYSE; (3) each
of our board of directors and the Western Resources board of directors
shall have received a solvency opinion in connection with the
distribution; and (4) the conditions to consummation of a strategic
transaction shall have been satisfied (other than those that will be
satisfied after the distribution). The distribution will be effective
immediately prior to the consummation of the strategic transaction. The
strategic transaction and the distribution will be consummated so that
the consideration paid in the strategic transaction and the shares of
common stock distributed in the distribution will be issuable only to
the same Western Resources stockholders. No fractional shares will be
issued in the distribution and any such shares will be sold in the open
market, and the proceeds will be disbursed to each holder entitled
thereto.
. that Western Resources will pay all expenses incurred by us in
connection with the rights offering and the distribution.
Shared Services Agreement
The Shared Services Agreement will provide that Western Resources will
provide to us management and administrative services. This agreement will
terminate on . . The services to be provided by Western Resources, through its
employees, will include financial reporting, accounting, auditing, tax, office
services, payroll and human resources, as well as management consulting
services. We will pay Western Resources for these services at various hourly
charges and negotiated fees and will reimburse Western Resources for out-of-
pocket expenses. As we increase our infrastructure and hire additional staff,
Western Resources expects to allocate less of its resources to administrative
and management services for us.
Option Agreement
We will enter into a Stock Purchase Option Agreement with Western Resources
that will grant us the right to purchase the interest of Western Resources in
an electric power plant near Joplin Missouri under joint development with the
Empire District Electric Company. Western Resources' interest in the power
plant is held by Westar Generating, Inc., a subsidiary of Western Resources.
The Stock Purchase Option Agreement gives us the option for a period of five
years following the consummation of a strategic transaction to purchase all of
the outstanding capital stock of Westar Generating, Inc. for the net book value
of Westar Generating at the time of the exercise of the option. The Stock
Purchase Option Agreement also provides that from the date of signing until the
option is exercised, Westar Generating must be operated in the ordinary course
of business.
Tax Disaffiliation Agreement
Prior to the distribution contemplated in the allocation agreement, we and
Western Resources will enter into a Tax Disaffiliation Agreement, which will
set forth each party's rights and obligations with respect to payments and
refunds, if any, of Federal taxes for periods before and after such
distribution and related matters such as the filing of Federal tax returns and
the conduct of audits or other proceedings involving claims made by the
Internal Revenue Service. This agreement will terminate on . .
Under the Tax Disaffiliation Agreement, we will assume sole responsibility
of any (i) tax liability assessed to the extent attributable to us or any
corporation that will be a member of the consolidated group of which we are the
common parent immediately after the distribution (the "Westar Group") and (ii)
tax liability resulting from the breach by us or any member the Westar Group of
certain representations and covenants that we have provided to Western
Resources relating to the distribution. An indemnity arises under the Tax
Disaffiliation Agreement only to the extent the tax liability results in a cash
payment to a tax authority.
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Registration Rights Agreement
We have entered into a registration rights agreement with Western Resources
which grants to Western Resources registration rights with respect to shares of
our common stock that it holds. These registration rights effectively allow
Western Resources to sell all of its common stock either on demand or upon the
occurrence of certain events and to participate as a selling shareholder in
future public offerings by us. This agreement will terminate on . , and
Western Resources will pay all of the registration expenses.
Our Transactions Involving Protection One
Purchase of Protection One Europe
On February 29, 2000, Protection One sold its European operations and
certain investments to us. The consideration paid was comprised of
approximately $183 million in cash and certain of Monitoring's outstanding debt
securities that we had acquired with a market value of approximately $61
million (including 6.75% convertible senior subordinated notes due 2003
convertible into 3,554,560 shares of common stock of Protection One). The
transaction was accounted for at book value. We agreed to pay Protection One a
portion of the net gain, if any, on a subsequent sale of the business on a
declining basis over the four years following the date of the purchase
agreement. Protection One used the cash proceeds of the sale to reduce the $240
million outstanding balance under the $250 million senior credit facility
provided by us to Monitoring. We paid approximately $102 million for the
aggregate of approximately $76 million of Monitoring's debt securities paid to
Protection One as described above. Protection One paid an aggregate of
approximately $228.5 million for the European operations and other investments
sold to us.
Based on the recommendation of a special committee of the board of directors
of Protection One, the sale of Protection One's European operations and the
entering into of the amendment to the senior credit facility were approved by
Protection One's board of directors. The special committee received a fairness
opinion from an investment banker with regard to the sale of the European
operations.
On December 17, 1999, we became the lender under Protection One's senior
credit facility. On February 29, 2000, we and Protection One entered into an
amendment to the senior credit facility that reduced the commitment under the
senior credit facility from $250 million to $115 million, changed the maturity
date from December 21, 2001 to January 2, 2001 and changed various other
provisions of the facility, including the interest for borrowing and
calculation of financial covenants. The amendment also provided that the
commitment available under the facility may be increased by up to $40 million
to finance certain acquisitions by Protection One approved by us. As of
September 30, 2000, approximately $72 million was drawn under the facility.
Amounts outstanding have been eliminated in our consolidated financial
statements.
Transactions Between Protection One and Western Resources
Contribution Agreement
Pursuant to a contribution agreement between Protection One and Western
Resources, which terminates on . , Western Resources has agreed to certain
arrangements relating to the election of directors of Protection One. In
addition, during the 10-year period following November 24, 1997, a merger or a
sale of all or substantially all of the assets of Protection One involving
Western Resources or any affiliate of Western Resources generally will require
the prior approval of a majority of the "Independent Directors" (as defined in
the contribution agreement), and Western Resources may not acquire more than
85% of the outstanding shares of common stock or other voting securities of
Protection One except under specified circumstances and subject to specified
limitations.
Tax Sharing Arrangement
A tax sharing arrangement between Protection One and Western Resources,
which will terminate upon consummation of Western Resources' strategic
transaction, provides for the payment to Protection One by
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Western Resources for tax benefits utilized by Western Resources. Accordingly,
a receivable of $31.1 million at December 31, 1999 from Western Resources
reflects a receivable of $20.3 million for the tax benefit utilized by Western
Resources in its 1998 consolidated income tax return. The balance of the
receivable reflects the estimated benefit Western Resources expects to utilize
in its 1999 consolidated income tax return. In February 2000, Protection One
received payment from Western Resources in the amount of $29.2 million for the
$20.3 million 1998 tax receivable and an additional intercompany receivable of
$8.9 million, reflecting the balance of a $12.6 million 1999 intercompany
receivable relating to the acquisition of Protection One, reduced by charges
under the service agreement with Western Resources described below. The payment
was comprised of certain of Monitoring's outstanding debt securities that we
had acquired with a market value of approximately $15 million (including 6 3/4%
convertible senior subordinated notes due 2003 convertible into 873,501 shares
of common stock of Protection One) and a promissory note in the principal
amount of approximately $14.2 million, payable in cash or the delivery of
Monitoring's debt securities, with a variable interest rate and a maturity date
of December 31, 2000. The variable interest rate is tied to the rate on
Protection One's senior credit facility, which was 8.2% on February 29, 2000. A
similar arrangement will be in place between us and Protection One upon
termination of the arrangement with Western Resources.
Services Agreement
During the third quarter of 1999, Protection One entered into a service
agreement with Western Resources which provides for certain services for a term
of twelve calendar months commencing January 1, 2000, and continuing on a year-
to-year basis thereafter until terminated by either party in accordance with
the terms of the agreement. Pursuant to this agreement, Western Resources
provides administrative services, including accounting, human resources, legal,
facilities and technology services. During 1999, Protection One incurred
charges of approximately $2 million for these services, which were based upon
various hourly charges, negotiated fees and out-of-pocket expenses. These
charges are expected to be approximately $6 million in 2000.
Transaction between Protection One and Paradigm
Protection One entered into a three-year marketing agreement with Paradigm
Direct LLC ("Paradigm") during 1999. We have a 40% ownership interest in
Paradigm. Under the arrangement, Protection One was to purchase a targeted
number of accounts from Paradigm during each year of the agreement following an
initial pilot program. During 1999, Protection One expensed $1.0 million paid
to Paradigm in the third quarter in connection with startup costs relative to
this program and prepaid approximately $1.0 million for anticipated account
purchases. Subsequent to year-end, Protection One converted this program for an
account acquisition program to a lead generation program. The pilot program
with Paradigm, which utilized direct marketing to produce consumer accounts,
was concluded on June 30, 2000 and the marketing agreement was terminated.
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DESCRIPTION OF WESTAR INDUSTRIES CAPITAL STOCK
The following description does not purport to be complete, but summarizes
the material terms of our capital stock, and is qualified in its entirety by
reference to our Articles of Incorporation (the "Westar Industries Articles"),
our Bylaws (the "Westar Industries Bylaws") and the Kansas General Corporation
Code ("KGCC"). Copies of the Westar Industries Articles and the Westar
Industries Bylaws are filed as exhibits to the Registration Statement and are
incorporated by reference herein.
General
Our authorized capital stock will consist of 150,000,000 shares of common
stock, par value $.01 per share, and . shares of preferred stock, par value
$.01 per share, of which . shares are designated as Series A Junior
Participating Preferred Stock ("Series A Preferred Stock") and . shares are
undesignated. Upon closing of the rights offering, Westar Industries will have
outstanding . shares of common stock and no shares of preferred stock.
Common Stock
Dividend Rights
The holders of our common stock are entitled to receive dividends, when and
as declared by our Board of Directors subject to the preferred rights of the
holders of the preferred stock. See "Dividend Policy."
Voting Rights
The holders of our common stock are entitled to one vote per share. Holders
of common stock do not have cumulative voting rights.
Liquidation Rights
Upon any liquidation, dissolution or winding up, whether voluntary or
involuntary, our remaining assets shall belong to and be divided among the
holders of our common stock after satisfaction of the liquidation preference of
the preferred stock. The consolidation or merger of us with or into any other
corporation or corporations or a share exchange or division involving us
pursuant to applicable law will not be deemed a liquidation, dissolution or
winding up under the Westar Industries Articles.
Preemptive or Other Subscription Rights
The holders of our common stock have no right to participate in any right of
subscription to any increased or additional capital stock of ours.
Conversion and Other Rights
Our common stock does not have any conversion, redemption or sinking fund
provisions and is not liable to further call or assessment by us. All issued
and outstanding shares of our common stock are fully paid and non-assessable.
Preferred Stock
Our board has the authority, without further stockholder approval, to issue
up to . shares of preferred stock in one or more series and to fix the number
of shares constituting the series and the preferences, limitations and relative
rights, including dividend rights, dividend rate, voting rights, terms of
redemption, redemption price or prices, conversion rights and liquidation
preferences of the shares constituting any series,
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without any further vote or action by the our stockholders. The issuance of
preferred stock by the our board could adversely affect the rights of holders
of common stock. As of the date of this prospectus, except for the Series A
Preferred Stock, there are no shares of preferred stock designated or
outstanding.
The potential issuance of preferred stock may have the effect of delaying,
deferring or preventing a change in control of us and may discourage bids for
our common stock at a premium over its market price and may adversely affect
the market price of, and the voting and other rights of the holders of, our
common stock. We have no current plans to issue any shares of preferred stock
other than the Series A Preferred Stock.
Series A Preferred Stock
Our board of directors designated . shares of preferred stock as Series A
Junior Participating Preferred Stock, $0.01 par value per share. The terms of
the Series A Preferred Stock are summarized below under "Rights Plan."
Rights Plan
Our board of directors has adopted, and Western Resources, as our sole
stockholder, has approved a shareholder rights plan under which our
stockholders have been granted one preferred stock purchase right (each, a
"purchase right") for each outstanding share of our common stock. Each purchase
right, when it becomes exercisable as described below, entitles the holder to
purchase from us one one-hundredth of a share of Series A Preferred Stock, at a
price of $ . , subject to adjustment. The issuance of the rights will not
result in any tax consequence. The description and terms of the purchase rights
are set forth in the rights agreement which has been filed as an exhibit to the
registration statement of which this prospectus is a part.
The purchase rights become exercisable upon the occurrence of a
"distribution date," which is defined as the earlier to occur of:
. ten calendar days following the date (the "shares acquisition date") of
public announcement that a person or group of affiliated or associated
persons, other than Western Resources (an "acquiring person") has
acquired, or obtained the right to acquire, beneficial ownership of 10%
or more of the outstanding shares of the common stock (a "substantial
block") or
. ten calendar days following the commencement or announcement of an
intention to make a tender offer or exchange offer if, upon consummation
thereof, such person would be an acquiring person.
The rights agreement does not apply to certain acquisitions, including
acquisitions by a person that owns less than 20% of our common stock, acquired
such stock without the intention of effecting control of Westar Industries and
promptly divests sufficient shares of common stock to reduce its percentage
ownership below 10%.
The purchase rights will be transferred with and only with our common stock
until the distribution date. Thereafter, separate certificates evidencing the
purchase rights will be mailed to holders of record of our common stock and
such separate purchase right certificates alone will evidence the purchase
rights.
The purchase rights are not exercisable until the distribution date. The
purchase rights will expire at the close of business on unless earlier redeemed
or exchanged by us as described below.
In the event that:
. we are the surviving corporation in a merger with an acquiring person
and its common stock is not changed or exchanged,
. a person or group becomes the beneficial owner of more than 10% of the
then outstanding shares of common stock (except pursuant to an offer for
all outstanding shares of our common stock which the
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board of directors determines to be fair to and otherwise in the best
interests of us and our stockholders),
. an acquiring person engages in one or more "self-dealing" transactions
as set forth in the rights agreement, or
. during such time as there is an acquiring person, an event occurs which
results in such acquiring person's ownership interest being increased by
more than 1% (e.g., a reverse stock split), at any time following the
distribution date,
each holder of a purchase right will thereafter have the right to receive, upon
exercise, common stock (or, in certain circumstances, cash, property or other
securities of Westar Industries) having a value equal to two times the purchase
price. Following the occurrence of any of the events set forth in the bullet
points above in this paragraph, all purchase rights that are beneficially owned
by any acquiring person will be null and void.
In the event that, at any time following the shares acquisition date:
. we are acquired in a merger or other business combination transaction
(other than a merger described in the immediately preceding paragraph or
a merger which follows an offer described in the immediately preceding
paragraph), or
. 50% or more of our assets or earning power is sold or transferred,
each holder of a purchase right (other than purchase rights which previously
have been annulled and voided as set forth above) shall thereafter have the
right to receive, upon exercise, common stock of the acquiring company having a
value equal to two times the purchase price. The events set forth in this
paragraph and in the preceding paragraph are referred to as the "triggering
events."
The purchase price payable, and the number of shares of Series A Preferred
Stock or other securities or property issuable upon exercise of the purchase
rights are subject to adjustment from time to time to prevent dilution.
At any time after any person becomes an acquiring person, and prior to such
person's acquisition of 50% or more of our outstanding common stock, the board
of directors may exchange the purchase rights (other than purchase rights owned
by the acquiring person which shall have become null and void), in whole or in
part, at an exchange ratio of one share of common stock (or a fraction of a
share of Series A Preferred Stock having the same market value) per purchase
right (subject to adjustment).
In addition, at any time prior to 5:00 P.M. New York City time on the tenth
calendar day following the shares acquisition date, we may redeem the purchase
rights in whole, but not in part, at a price of $.0l per purchase right.
Until a purchase right is exercised, the holder thereof, as such, will have
no rights as a stockholder of Westar Industries, including, without limitation,
the right to vote or to receive dividends.
Each share of Series A Preferred Stock will have a quarterly dividend rate
per share equal to the greater of $1.00 or 100 times the per share amount of
any dividend declared from time to time on the common stock, subject to certain
adjustments. The Series A Preferred Stock will not be redeemable. In the event
of liquidation, the holders of the Series A Preferred Stock will be entitled to
receive a preferred liquidation payment per share of $ . (plus accrued and
unpaid dividends) or, if greater, an amount equal to 100 times the payment to
be made per share of common stock, subject to certain adjustments.
Generally, each share of Series A Preferred Stock will vote together with
the common stock and any series of preferred stock entitled to vote in such
manner and will be entitled to 100 votes, subject to certain adjustments. In
the event of any merger, consolidation, combination or other transaction in
which shares of
72
<PAGE>
common stock are exchanged for or changed into other stock or securities, cash
and/or other property, each share of Series A Preferred Stock will be entitled
to receive 100 times the aggregate amount of stock, securities, cash and/or
other property, into which or for which each share of common stock is changed
or exchanged, subject to certain adjustments.
These dividend, voting and liquidation rights of the Series A Preferred
Stock are protected by anti-dilution provisions.
Our board of directors may amend the rights agreement prior to the
distribution date, other than those provisions relating to the principal
economic terms of the purchase rights and the time period within which to
redeem the purchase rights. After the distribution date, our board may amend
the provisions of the rights agreement to cure any ambiguity, defect or
inconsistency, to make changes which do not adversely affect the interests of
holders of purchase rights or, with certain limitations, to shorten or lengthen
any time period under the rights agreement.
Certain Anti-Takeover Provisions and Statutes
The Charter and By Laws
Our articles and By laws and the KGCC contain several provisions that may
make the acquisition of control of Westar Industries more difficult without the
prior approval of the board of directors. Certain provisions of our charter and
the By laws, among other things:
(i) classify the board of directors into three classes, each of which
serves for staggered three-year terms;
(ii) provide that directors may be removed by the stockholders only for
cause;
(iii) provide that only the Chairman of the Board or the board of
directors may call special meetings of the stockholders;
(iv) provide that stockholders must comply with certain advance notice
procedures in order to nominate candidates for election to the board of
directors or to place stockholders' proposals on the agenda for
consideration at meetings of the stockholders;
(v) provide that the stockholders' action may be taken only at annual or
special meetings; and
(vi) provide that the stockholders may amend or repeal any of the
foregoing provisions of the charter or by-laws only by a vote of 80% of the
stock entitled to vote generally in the election of directors.
Business Combination Statutes
The KGCC has a statute known as a "business combination statute." This
statute restricts certain "business combinations" between a domestic
corporation and an "interested stockholder." For this purpose, a "business
combination" means one of various types of transactions, including mergers,
that increases the proportionate voting power of the interested stockholder. An
"interested stockholder" means any person, or their affiliate or associate, who
owns or controls 15% or more of the outstanding shares of the corporation's
voting stock.
Under the statute, a domestic corporation may not engage in a business
combination with an interested stockholder for a period of three years
following the time the interested stockholder became an interested stockholder,
unless:
. prior to that time the board of directors of the corporation approved
either the business combination or the transaction that resulted in the
stockholder becoming an interested stockholder;
. upon consummation of the transaction that resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation
73
<PAGE>
outstanding at the time the transaction commenced, excluding shares
owned by persons who are directors and also officers and shares held by
specified employee stock ownership plans; or
. at or after that time the business combination is approved by the board
of directors and authorized at a stockholders' meeting by the
affirmative vote of at least two-thirds of the outstanding voting stock
not owned by the interested stockholder.
A domestic corporation may opt out of coverage of the business combination
statute by including a provision to that effect in its governing corporate
documents. Westar Industries has not opted out of the statute.
Control Share Acquisition Statute
The KGCC also has a statute known as a "control share acquisition statute."
This statute provides that any person must obtain stockholder approval before
acquiring any shares of stock of a publicly traded Kansas corporation, if
after the acquisition he or she would have the power to exercise certain
levels of voting power set forth in the statute. If the acquiring person fails
to obtain stockholder approval, the acquiring person's shares lose their
voting rights. The voting rights may be retained or restored only if certain
disclosure requirements are met and upon the approval by both a majority of
the outstanding voting stock and a majority of the outstanding voting stock
after exclusion of "interested shares." For this purpose, "interested shares"
means all shares owned by the acquiring person, by directors of the
corporation who are also its employees, and by officers of the corporation.
A Kansas corporation may opt out of coverage by the control share
acquisition statute by including a provision to that effect in its governing
corporate documents. Westar Industries has not opted out of the statute.
Listing
Application will be made to list our common stock on the NYSE.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is . at . . Its
telephone number is . .
74
<PAGE>
PLAN OF DISTRIBUTION
Western Resources is distributing non-transferable rights, at no charge, to
the holders of Western Resources common stock outstanding as of the record
date. See "The Rights Offering -- The Rights." You will receive one right for
every . shares of Western Resources common stock held as of the record date.
Each right will entitle the holder thereof to receive, upon payment of the
subscription price, one share of our common stock. Each share of common stock
will have associated with it one right to purchase one one-hundredth of a share
of Westar Industries preferred stock at a stipulated price in certain
circumstances relating to changes in ownership of our stock under our
shareholder rights agreement. Record date stockholders who fully exercise all
rights distributed to them will also be entitled to subscribe at the
subscription price for shares of common stock that are not otherwise purchased
pursuant to the exercise of rights, subject to proration by us under certain
circumstances. See "The Rights Offering--Subscription Privileges."
Assuming all of the rights are exercised, Western Resources will receive
approximately $ . in net cash proceeds for the rights offering, after payment
of approximately $ . of fees and expenses incurred in connection with the
rights offering. See "Use of Proceeds."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following summary briefly describes certain federal income tax
consequences of the rights offering. This summary is based upon laws,
regulations, rulings and decisions now in effect, all of which are subject to
change. This summary assumes that you hold your Western Resources stock as a
capital asset and does not discuss all aspects of federal income taxation that
may be relevant to you, particularly if you are a type of investor that is
subject to special treatment under the federal income tax laws (such as life
insurance companies and foreign taxpayers), and does not discuss any aspect of
state, local or foreign tax laws.
The distribution of rights will be treated as a taxable dividend in an
amount equal to the fair market value of the rights which we currently estimate
to be $ . per right.
Upon exercise of the rights, you will not recognize income, gain or loss.
The basis of the common stock acquired upon such exercise will equal the value
of the rights on the date of distribution plus the subscription price paid.
If your rights expire unexercised, you will have a capital loss equal to the
value of the rights on the date of distribution. Because utilization of capital
losses against ordinary income is strictly limited, you may suffer a net tax
related to receipt of rights that expire unexercised.
THE PRECEDING DISCUSSION DOES NOT PURPORT TO BE A COMPLETE ANALYSIS OR
DISCUSSION OF ALL POTENTIAL TAX EFFECTS RELEVANT TO THE RIGHTS OFFERING. THUS,
WESTERN RESOURCES STOCKHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS
TO THE SPECIFIC TAX CONSEQUENCES TO THEM OF THE RIGHTS OFFERING, INCLUDING TAX
RETURN REPORTING REQUIREMENTS, THE APPLICABILITY AND EFFECT OF FEDERAL, STATE,
LOCAL, AND OTHER APPLICABLE TAX LAWS AND THE EFFECT OF ANY PROPOSED CHANGES IN
THE TAX LAWS.
75
<PAGE>
LEGAL MATTERS
The legality of the securities offered hereby will be passed upon for us by
Richard D. Terrill, Executive Vice President and General Counsel of Western
Resources. Mr. Terrill beneficially owns . shares of Western Resources'
common stock and . restricted share units. Immediately after the rights
offering, Mr. Terrill will beneficially own . shares of our common stock
assuming full exercise of all rights received by him in the rights offering.
EXPERTS
The financial statements of Westar Industries included in this registration
statement to the extent and for the periods indicated in their reports have
been audited by Arthur Andersen LLP, independent public accountants, and are
included herein in reliance upon the authority of said firm as experts in
giving said reports. Reference is made to said report, which includes an
explanatory paragraph with respect to the change in method of amortization for
customer accounts in 1999 as discussed in Note 2 to the financial statements.
The consolidated financial statements of ONEOK, Inc. and subsidiaries as of
August 31, 1999 and 1998 and for each of the years in the three year period
ended August 31, 1999, have been included herein in Exhibit A in reliance upon
the report of KPMG LLP, independent public accountants, appearing elsewhere
herein, and upon the authority of said firm as experts in accounting and
auditing.
AVAILABLE INFORMATION
We have filed with the SEC a registration statement on Form S-1 with respect
to the common stock offered hereby and certain rights to purchase one one-
hundredth of a share of our preferred stock at a stipulated price in certain
circumstances. This prospectus, which constitutes a part of the registration
statement, does not contain all of the information set forth in the
registration statement or the exhibits and schedules which are part of the
registration statement. For further information with respect to us and our
common stock and the attached rights, reference is made to the registration
statement and the exhibits and schedules thereto. You may read and copy any
document we, Western Resources, Protection One and ONEOK periodically file at
the SEC's public reference room in Washington, DC. Please call the SEC at 1-
800-SEC-0330 for further information on the public reference room. These SEC
filings are also available to the public from the SEC's website at
http://www.sec.gov.
Upon completion of the rights offering, we will become subject to the
information and periodic reporting requirements of the Securities Exchange Act
and, in accordance therewith, will file periodic reports, proxy statements and
other information with the SEC. Such periodic reports, proxy statements and
other information will be available for inspection and copying at the SEC's
public reference rooms and the website of the SEC referred to above.
76
<PAGE>
INDEX TO FINANCIAL STATEMENTS
WESTAR INDUSTRIES, INC.
<TABLE>
<CAPTION>
Page
----
<S> <C>
Unaudited Financial Statements
Consolidated Balance Sheet as of June 30, 2000........................... F-2
Consolidated Statements of Operations for the six months ended June 30,
2000
and 1999................................................................ F-3
Consolidated Statements of Comprehensive Income for the six months ended
June 30, 2000
and 1999................................................................ F-4
Consolidated Statements of Cash Flows for the six months ended June 30,
2000
and 1999................................................................ F-5
Audited Financial Statements
Report of Independent Public Accountants................................. F-6
Consolidated Balance Sheets as of December 31, 1999 and 1998............. F-7
Consolidated Statements of Operations for the years ended December 31,
1999, 1998
and 1997................................................................ F-8
Consolidated Statements of Comprehensive Income for the years ended
December 31, 1999, 1998 and 1997........................................ F-9
Consolidated Statements of Shareholder's Equity for the years ended
December 31, 1999, 1998 and 1997........................................ F-10
Consolidated Statements of Cash Flows for the years ended December 31,
1999, 1998
and 1997................................................................ F-11
Notes to Consolidated Financial Statements (includes notes to unaudited
interim financial statements as of June 30, 2000 and for the six months
ended June 30, 2000 and 1999)........................................... F-12
</TABLE>
F-1
<PAGE>
WESTAR INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEET
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
June 30,
2000
----
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.................................... $ 7,566
Restricted cash.............................................. 14,186
Accounts receivable (net).................................... 72,178
Inventories and supplies (net)............................... 15,300
Marketable securities........................................ 5,182
Deferred tax asset, current.................................. 35,576
Tax receivable from Western Resources........................ 14,126
Prepaid expenses and other................................... 15,949
----------
Total Current Assets........................................ 180,063
----------
PROPERTY, PLANT & EQUIPMENT (NET).............................. 54,403
----------
OTHER ASSETS
Goodwill (net)............................................... 1,071,440
Customer accounts (net)...................................... 1,071,991
Investment in ONEOK.......................................... 589,758
Receivable from Western Resources............................ 224,599
Note receivable.............................................. 1,879
Deferred tax asset........................................... 34,991
Other........................................................ 97,921
----------
Total Other Assets.......................................... 3,092,579
----------
TOTAL ASSETS................................................... $3,327,045
==========
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt......................... $ 28,326
Accounts payable............................................. 27,755
Accrued liabilities.......................................... 73,712
Purchase holdbacks........................................... 5,868
Accrued income taxes......................................... 51,833
Deferred security revenues................................... 57,081
Other........................................................ 11,450
----------
Total Current Liabilities................................... 256,025
----------
LONG-TERM LIABILITIES
Long-term debt (net)......................................... 624,108
Deferred income taxes........................................ 13,844
Minority interests........................................... 195,724
Other liabilities............................................ 31,155
----------
Total Long-Term Liabilities................................. 864,831
----------
COMMITMENTS AND CONTINGENCIES
AMOUNTS DUE TO WESTERN RESOURCES............................... 1,256
---------- ---
SHAREHOLDER'S EQUITY
Common stock................................................. 1
Paid-in capital.............................................. 1,836,443
Retained earnings............................................ 370,834
Accumulated other comprehensive income....................... (2,345)
----------
Total Shareholder's Equity.................................. 2,204,933
----------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY..................... $3,327,045
==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
<PAGE>
WESTAR INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands, Except Per Share Amounts)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended June
30,
----------------------
2000 1999
---- ----
<S> <C> <C>
REVENUES
Monitoring and related services....................... $242,213 $252,807
Installation, rental and other........................ 38,405 44,940
---------- ----------
Total Revenues...................................... 280,618 297,747
---------- ----------
COST OF REVENUES
Monitoring and related services....................... 68,098 58,205
Installation, rental, and other....................... 23,770 23,647
---------- ----------
Total Cost of Revenues.............................. 91,868 81,852
---------- ----------
GROSS PROFIT............................................ 188,750 215,895
---------- ----------
OPERATING EXPENSES
Selling, general and administrative................... 102,670 91,366
Depreciation and amortization......................... 125,711 88,844
Severance and relocation costs........................ 3,050 2,000
---------- ----------
Total Operating Expenses............................ 231,431 182,210
---------- ----------
INCOME (LOSS) FROM OPERATIONS........................... (42,681) 33,685
---------- ----------
OTHER INCOME
Investment earnings................................... 150,090 37,328
Minority interests.................................... 308 1,850
Other................................................. 299 1,015
---------- ----------
Total Other Income.................................. 150,697 40,193
---------- ----------
EARNINGS BEFORE INTEREST AND TAXES...................... 108,016 73,878
INTEREST EXPENSE........................................ 28,983 41,451
---------- ----------
EARNINGS BEFORE INCOME TAXES............................ 79,033 32,427
INCOME TAX EXPENSE...................................... 37,202 12,515
---------- ----------
INCOME BEFORE EXTRAORDINARY GAIN........................ 41,831 19,912
EXTRAORDINARY GAIN, NET OF TAX.......................... 35,839 --
---------- ----------
NET INCOME.............................................. $ 77,670 $ 19,912
========== ==========
AVERAGE COMMON SHARES OUTSTANDING (SEE NOTES 1 AND 2)... 70,000,000 70,000,000
---------- ----------
EARNINGS (LOSS) PER COMMON SHARE--BASIC AND DILUTED:
Earnings (loss) per common share before extraordinary
gain................................................. $ 0.60 $ 0.28
Extraordinary gain.................................... 0.51 --
---------- ----------
EARNINGS (LOSS) PER COMMON SHARE (SEE NOTES 1 AND 2).... $ 1.11 $ 0.28
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
WESTAR INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
---------------------------
2000 1999
---- ----
<S> <C> <C>
NET INCOME........................................ $ 77,670 $ 19,912
------------- ------------
OTHER COMPREHENSIVE INCOME (LOSS), BEFORE TAX
Unrealized holding gains (losses) on marketable
securities arising during the period........... 44,863 (15,167)
Less: Reclassification adjustment for (gains)
losses included in net income.................. (115,629) 140
------------- ------------
Change in unrealized loss on marketable
securities (net)............................... (70,766) (15,027)
Change in unrealized loss on currency
translation.................................... (1,035) (1,541)
------------- ------------
Other comprehensive (loss), before tax........ (71,801) (16,568)
------------- ------------
Income tax benefit.............................. 31,668 6,663
------------- ------------
NET CHANGE IN OTHER COMPREHENSIVE (LOSS), NET OF
TAX.............................................. (40,133) (9,905)
------------- ------------
COMPREHENSIVE INCOME.............................. $ 37,537 $ 10,007
============= ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
WESTAR INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30
--------------------------
2000 1999
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income....................................... $ 77,670 $ 19,912
Extraordinary gain............................... (35,839) --
Depreciation and amortization.................... 125,711 88,844
Equity in earnings from investments.............. (7,200) (6,492)
Gain on sale of securities....................... (115,629) --
Net deferred taxes............................... 16,930 3
Provision for doubtful accounts.................. 14,263 6,092
Changes in other working capital:
Accounts receivable, net....................... (6,655) (10,209)
Inventories and supplies....................... (2,345) (3,388)
Prepaid expenses and other..................... 4,221 (6,633)
Accounts payable............................... 1,778 4,440
Accrued liabilities............................ (9,189) 5,644
Accrued income taxes........................... 17,090 (2,518)
Deferred revenue............................... (4,068) 6,218
------------ ------------
Cash flow from operating activities................ 76,738 101,913
------------ ------------
CASH FLOWS USED IN INVESTING ACTIVITIES
Additions to property, plant and equipment, net.. (7,591) (19,534)
Customer account acquisitions.................... -- (154,571)
Monitored services acquisitions, net of cash
required........................................ (20,943) (20,722)
Purchases of marketable securities............... -- (11,999)
Proceeds from sale of marketable securities...... 217,062 21,699
Investment in Paradigm........................... -- (32,009)
Sale of ONEOK stock.............................. 4,246 --
------------ ------------
Cash flow from (used in) investing activities...... 192,774 (217,136)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term debt..................... -- 129,583
Payments on long-term debt....................... (46,519) --
Net increase in receivable from Western
Resources....................................... (224,599) --
Other financing.................................. (4,257) (6,433)
------------ ------------
Cash flows from (used in) financing activities..... (275,375) 123,150
------------ ------------
NET INCREASE (DECREASE) IN CASH.................... (5,863) 7,927
CASH AND CASH EQUIVALENTS:
Beginning of period.............................. 13,429 16,340
------------ ------------
End of period.................................... $ 7,566 $ 24,267
============ ============
Supplemental Disclosures of Cash Flow Information
Cash paid for:
Interest on financing activities................. $ 36,539 $ 22,378
Income taxes..................................... 29,255 256
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
After the transaction discussed in Note 1 to Westar Industries' Consolidated
Financial Statements under "Reorganization" and "Basis of Presentation" is
effected, we expect to be in a position to render the following audit report.
Arthur Andersen LLP
Kansas City, Missouri
September 22, 2000
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholder and Board of Directors of Westar Industries, Inc.:
We have audited the accompanying consolidated balance sheets of Westar
Industries, Inc. (a wholly owned subsidiary of Western Resources, Inc.) and
affiliates (see Note 1) as of December 31, 1999 and 1998, and the related
consolidated statements of operations, comprehensive income, cash flows, and
shareholder's equity for each of the three years in the period ended December
31, 1999. These consolidated financial statements are the responsibility of the
company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audits 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 consolidated financial position of Westar
Industries, Inc., as of December 31, 1999 and 1998, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States.
As explained in Note 2 to the financial statements, effective September 1,
1999, the company changed its method of amortization for customer accounts for
its North American and European customers from the straight-line method to a
declining balance (accelerated) method.
F-6
<PAGE>
WESTAR INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
<TABLE>
<CAPTION>
December 31,
---------------------
1999 1998
---- ----
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents.............................. $ 13,429 $ 16,340
Restricted cash........................................ 11,175 11,987
Accounts receivable (net).............................. 79,786 74,851
Inventories and supplies (net)......................... 12,955 7,902
Marketable securities.................................. 177,128 288,077
Deferred tax asset, current............................ 28,400 49,543
Tax receivable from Western Resources.................. 31,056 5,886
Prepaid expenses and other............................. 20,170 21,644
---------- ----------
Total Current Assets................................. 374,099 476,230
---------- ----------
PROPERTY, PLANT & EQUIPMENT (NET)........................ 62,777 47,195
---------- ----------
OTHER ASSETS
Goodwill (net)......................................... 1,102,157 1,175,544
Customer accounts (net)................................ 1,138,903 1,031,956
Investment in ONEOK.................................... 590,109 615,094
Deferred tax asset..................................... 71,508 72,340
Other.................................................. 93,539 65,954
---------- ----------
Total Other Assets................................... 2,996,216 2,960,888
---------- ----------
TOTAL ASSETS............................................. $3,433,092 $3,484,313
========== ==========
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt................... $ 35,955 $ 85,006
Accounts payable....................................... 25,977 16,404
Accrued liabilities.................................... 82,901 86,488
Purchase holdbacks..................................... 20,213 42,303
Accrued income taxes................................... 34,743 28,361
Deferred security revenues............................. 61,149 57,703
Other.................................................. 13,694 1,945
---------- ----------
Total Current Liabilities............................ 274,632 318,210
---------- ----------
LONG-TERM LIABILITIES
Long-term debt (net)................................... 771,047 842,938
Minority interests..................................... 193,499 205,822
Other liabilities...................................... 44,451 84,425
---------- ----------
Total Long-Term Liabilities.......................... 1,008,997 1,133,185
---------- ----------
COMMITMENTS AND CONTINGENCIES (Notes 1 and 18)
AMOUNTS DUE TO WESTERN RESOURCES......................... -- 756,276
---------- ----------
SHAREHOLDER'S EQUITY
Common stock........................................... 1 1
Paid-in capital........................................ 1,818,510 898,100
Retained earnings...................................... 293,164 369,033
Accumulated other comprehensive income................. 37,788 9,508
---------- ----------
Total Shareholder's Equity........................... 2,149,463 1,276,642
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY............... $3,433,092 $3,484,313
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE>
WESTAR INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
REVENUES
Monitoring and related services......... $ 515,065 $375,840 $134,204
Installation, rental and other.......... 91,395 46,597 19,487
---------- ---------- ----------
Total Revenues........................ 606,460 422,437 153,691
---------- ---------- ----------
COST OF REVENUES
Monitoring and related services......... 137,551 103,521 35,786
Installation and rental................. 46,599 25,727 3,253
---------- ---------- ----------
Total Cost of Revenues................ 184,150 129,248 39,039
---------- ---------- ----------
GROSS PROFIT.............................. 422,310 293,189 114,652
---------- ---------- ----------
OPERATING EXPENSES
Selling, general and administrative..... 227,071 169,870 120,887
Depreciation and amortization........... 238,691 120,167 41,279
Other charges:
Severance and relocation costs........ 5,809 3,400 --
Impairment of customer accounts....... -- -- 12,750
Merger related costs.................. -- -- 11,542
---------- ---------- ----------
Total Operating Expenses.............. 471,571 293,437 186,458
---------- ---------- ----------
INCOME (LOSS) FROM OPERATIONS............. (49,261) (248) (71,806)
---------- ---------- ----------
OTHER INCOME (EXPENSE)
Investment earnings..................... 25,152 25,540 38,259
Impairment of marketable securities..... (76,166) -- --
Gain on sale of Mobile Services Group... 17,249 -- --
Minority interests...................... 12,934 382 3,586
Impairment of international
investments............................ -- (50,749) --
Non-recurring gain on contract
repurchase............................. -- 16,348 --
Gain on sale of Tyco securities......... -- -- 864,253
Other................................... 6,633 5,711 (2,989)
---------- ---------- ----------
Total Other Income (Expense).......... (14,198) (2,768) 903,109
---------- ---------- ----------
(LOSS) EARNINGS BEFORE INTEREST AND
TAXES.................................... (63,459) (3,016) 831,303
INTEREST EXPENSE.......................... 85,164 52,914 64,016
---------- ---------- ----------
(LOSS) EARNINGS BEFORE INCOME TAXES....... (148,623) (55,930) 767,287
INCOME TAX (BENEFIT) EXPENSE.............. (61,011) (20,099) 343,944
---------- ---------- ----------
(LOSS) EARNINGS BEFORE EXTRAORDINARY
GAIN..................................... (87,612) (35,831) 423,343
EXTRAORDINARY GAIN NET OF TAX............. 11,743 1,591 --
---------- ---------- ----------
NET INCOME (LOSS)......................... $ (75,869) $(34,240) $423,343
========== ========== ==========
AVERAGE COMMON SHARES OUTSTANDING
(SEE NOTES 1 AND 2)...................... 70,000,000 70,000,000 70,000,000
---------- ---------- ----------
EARNINGS (LOSS) PER AVERAGE COMMON SHARE
OUTSTANDING--BASIC AND DILUTED:
Earnings (loss) per common share before
extraordinary gain..................... $ (1.25) $(0.51) $ 6.05
Extraordinary gain...................... 0.17 0.02 --
---------- ---------- ----------
EARNINGS (LOSS) PER COMMON SHARE
(SEE NOTES 1 AND 2)...................... $ (1.08) $ (0.49) $ 6.05
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
<PAGE>
WESTAR INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in Thousands)
<TABLE>
<CAPTION>
Year Ended
December 31,
----------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
NET INCOME (LOSS)................................. $(75,869) $(34,240) $423,343
-------- -------- --------
OTHER COMPREHENSIVE INCOME (LOSS), BEFORE TAX:
Unrealized holding (losses) gains on marketable
securities arising during the year............. (55,420) (17,244) 25,248
Less: Reclassification adjustment for losses
included in net income......................... 102,417 14,029 --
-------- -------- --------
Change in unrealized gain (loss) on marketable
securities (net)............................... 46,997 (3,215) 25,248
Change in unrealized loss on currency
translation.................................... (115) (1,026) --
-------- -------- --------
Other comprehensive income (loss), before tax... 46,882 (4,241) 25,248
-------- -------- --------
Income tax (benefit) expense.................... 18,602 (1,630) 13,129
-------- -------- --------
NET CHANGE IN OTHER COMPREHENSIVE INCOME (LOSS),
NET OF TAX....................................... 28,280 (2,611) 12,119
-------- -------- --------
COMPREHENSIVE INCOME (LOSS)....................... $(47,589) $(36,851) $435,462
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-9
<PAGE>
WESTAR INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
(Dollars in Thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
COMMON STOCK:
Beginning balance........................ $ 1 $ 1 $ 1
---------- ---------- ----------
Ending balance........................... 1 1 1
---------- ---------- ----------
PAID-IN CAPITAL:
Beginning balance........................ 898,100 874,326 283,082
Contributions............................ 920,410 23,774 591,244
---------- ---------- ----------
Ending balance........................... 1,818,510 898,100 874,326
---------- ---------- ----------
RETAINED EARNINGS:
Beginning balance........................ 369,033 403,273 (20,070)
Net income (loss)........................ (75,869) (34,240) 423,343
---------- ---------- ----------
Ending balance........................... 293,164 369,033 403,273
---------- ---------- ----------
ACCUMULATED OTHER COMPREHENSIVE INCOME:
Beginning balance........................ 9,508 12,119 --
Unrealized (loss) gain on marketable
securities.............................. 46,997 (3,215) 25,248
Unrealized (loss) on currency
translation............................. (115) (1,026) --
Income tax benefit (expense)............. (18,602) 1,630 (13,129)
---------- ---------- ----------
Ending balance........................... 37,788 9,508 12,119
---------- ---------- ----------
TOTAL SHAREHOLDER'S EQUITY................. $2,149,463 $1,276,642 $1,289,719
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-10
<PAGE>
WESTAR INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
For the Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)......................... $ (75,869) $ (34,240) $ 423,343
Extraordinary gain........................ (11,743) (1,591) --
Depreciation and amortization............. 238,691 120,167 41,279
Equity in earnings from investments....... (8,199) (6,064) (25,405)
Gain on sale of Mobile services........... (17,249) -- --
Minority interests........................ (12,934) 382 --
(Gain) loss on sale of securities......... 26,251 14,029 (864,253)
Impairment of marketable securities....... 76,166 -- --
Accretion of debt premium................. (6,799) 3,034 1,026
Impairment of international investments... -- 50,749 --
Net deferred taxes........................ (38,906) (62,400) 2,348
Provision for doubtful accounts........... 25,534 10,567 3,657
Monitored services special charge......... -- -- 24,292
Changes in other working capital (net of
effects from acquisitions):
Accounts receivable, net................ (21,765) (43,650) (4,918)
Inventories and supplies................ (3,275) (3,769) 4,089
Tax receivable from Western Resources... (25,170) 19,314 (25,200)
Prepaid expenses and other.............. (6,237) (22,674) (4,766)
Accounts payable........................ 9,573 (2,595) (58,398)
Accrued liabilities..................... 1,842 (9,566) 26,120
Accrued income taxes.................... 6,382 1,336 37,503
Deferred revenue........................ 3,479 (2,237) --
Other................................... (1,435) (10,220) --
Changes in other assets and liabilities... (39,252) (20,932) 30,237
--------- ----------- ----------
Cash flow from (used in) operating
activities................................ 119,085 (360) (389,046)
--------- ----------- ----------
CASH FLOWS USED IN INVESTING ACTIVITIES
Additions to property, plant and
equipment, net........................... (32,644) (32,711) (3,826)
Customer account acquisitions............. (241,000) (277,667) (49,867)
Monitored security company acquisitions,
net of cash acquired..................... (27,407) (549,196) (438,717)
Divestiture of Mobile services............ 19,087 -- --
Proceeds from issuance of stock by
subsidiary (net)......................... -- 45,565 --
Purchases of marketable securities........ (12,003) (261,036) --
Proceeds from sale of marketable
securities............................... 73,456 30,479 1,533,530
Investment in other securities............ (35,883) (26,644) --
Sale of ONEOK stock....................... 28,101 -- --
Other investments (net)................... (15,420) (72,295) (57,273)
--------- ----------- ----------
Cash flow (used in) from investing
activities................................ (243,713) (1,143,505) 983,847
--------- ----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net funding from Western Resources........ (60,349) 557,220 (194,751)
Proceeds from long-term debt.............. 213,809 645,767 --
Payments on long-term debt................ (31,743) (118,430) (324,573)
--------- ----------- ----------
Cash flows from (used in) financing
activities................................ 121,717 1,084,557 (519,324)
--------- ----------- ----------
Net increase (decrease) in cash and cash
equivalents............................... (2,911) (59,308) 75,477
Cash and cash equivalents
Beginning of period....................... 16,340 75,648 171
--------- ----------- ----------
End of period............................. $ 13,429 $ 16,340 $ 75,648
========= =========== ==========
Supplemental Disclosures of Cash Flow
Information
Cash Paid For:
Interest on financing activities.......... $ 69,012 $ 18,695 $ 10,391
Income taxes.............................. 783 311 383,614
</TABLE>
F-11
<PAGE>
WESTAR INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollar amounts in thousands, except for per share amounts)
(interim amounts as of June 30, 2000 and 1999 are unaudited)
1. BUSINESS AND ORGANIZATION
Business
Westar Industries Inc. (hereinafter referred to as "Westar Industries" or
the "Company") is a holding company principally engaged in the monitoring
security business through Protection One and Protection One Europe, which
provide life safety and property monitoring services to nearly 1.6 million
customers in North America and Europe. The principal activity of Protection One
and Protection One Europe is responding to the security and safety needs of
their customers. Protection One's sales are generated primarily from recurring
monthly payments for monitoring and maintaining the alarm systems that are
installed in customers' homes and businesses. Protection One Europe's sales are
generated primarily from the sale of contracts for monitoring and maintaining
the alarm systems that are installed in its customers' homes and businesses.
Security systems are designed to detect burglaries, fires and other events.
Westar Industries also has investment interests in a natural gas
distribution company, a direct marketing company, international power
generation, and other businesses which in the aggregate are not material.
Reorganization
Wing Turkey, Inc. and Western Resources (Bermuda) Ltd., currently wholly
owned subsidiaries of Western Resources Inc. ("Western Resources"), will be
contributed to and become wholly owned subsidiaries of Westar Industries. These
contributions will complete the contemplated reorganization of Westar
Industries and will occur prior to the consummation of the rights offering
referred to in "Description of Transaction" below. These contributions will be
recorded at their historical cost basis.
The Company will approve an increase in the number of authorized shares of
common stock from 1,000 shares to 150,000,000 shares enabling the Company to
complete a stock split effected in the form of a 100% stock dividend so that
the number of the Company's shares outstanding will equal the number of Western
Resources shares outstanding. All references to retained earnings, common
stock, common shares outstanding, average number of shares outstanding and per
share amounts in these consolidated financial statements and notes to
consolidated financial statements prior to the record date of the stock split
have been restated to reflect this expected stock split on a retroactive basis.
Per share amounts assume 70,000,000 outstanding shares of the Company's common
stock, which the Company estimates will be the approximate number of
outstanding shares of Western Resources common stock on the record date for the
rights offering.
Prior to the effective date of the rights offering, the Company will adopt a
shareholder rights plan in which each shareholder will be granted one preferred
stock purchase right for each outstanding share of common stock. Each right
will entitle shareholders to purchase Series A Preferred Stock at a prescribed
ratio and price. The rights will be exercisable if an entity other than Western
Resources acquires or attempts to acquire over 10% of our outstanding common
shares.
Westar Industries will enter into a Stock Purchase Option Agreement with
Western Resources in which Western Resources will grant Westar Industries the
right to purchase Western Resources' interest in a jointly held electric power
plant. The option will expire after 5 years.
F-12
<PAGE>
WESTAR INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollar amounts in thousands, except for per share amounts)
(interim amounts as of June 30 are unaudited)
Description of Transaction
As described in the prospectus of which these consolidated financial
statements are a part, Western Resources intends to distribute, at no charge,
non-transferable rights to its common shareholders. The rights will enable
Western Resources shareholders to acquire up to approximately 9.9% of Westar
Industries' common stock from Western Resources for a fixed price for a
specified time period. Attached to the common shares will be rights to purchase
preferred stock at a stipulated price in certain circumstances relating to
changes in ownership of Westar Industries under its shareholder rights
agreement. Proceeds from the rights offering will be retained by Western
Resources.
Organization
The significant components of the Company's consolidated group after
completing the reorganization are as follows:
1. Monitored services: Provided by Westar Industries via its
subsidiaries, including Protection One, Inc., an 85%-owned subsidiary.
Services in the United Kingdom and Continental Europe are provided by
Protection One International, Inc. and Protection One (UK) plc, which are
wholly owned by Westar Industries (collectively referred to as Protection
One Europe).
2. Natural gas: Westar Industries maintains a 45% investment in ONEOK,
Inc. ("ONEOK"), an Oklahoma natural gas distribution company. This
investment was acquired by Western Resources in November 1997 and has been
contributed to Westar Industries.
3. Direct marketing: Westar Industries owns a 40% interest in Paradigm
Direct LLC.
4. Foreign power generation: Investments in Europe and Asia are
maintained by Wing Turkey, Inc. and Western Resources (Bermuda) Ltd.
Basis of Presentation
The consolidated financial statements of Westar Industries reflect the
results of operations, financial position, changes in net worth and cash flows
of Westar Industries as if it were a separate entity for all periods presented.
For purposes of these financial statements, the Company's subsidiaries are
included from the date of acquisition and the ONEOK investment is included from
the date the investment was made by Western Resources. The financial
information included herein may not necessarily reflect the consolidated
results of operations, financial position, changes in group net worth and cash
flows of Westar Industries had it been a separate, stand-alone entity during
the periods presented.
As an integrated business of Western Resources, Westar Industries has not
historically prepared separate financial statements in accordance with
generally accepted accounting principles ("GAAP") in the normal course of
operations. However, these consolidated financial statements were prepared in
accordance with GAAP for purposes of this filing. See Note 18 for a discussion
of the SEC Review. The consolidated financial statements reflect certain
assets, liabilities, revenues and expenses directly attributable to Westar
Industries as well as allocations deemed reasonable by management to present
the financial position, results of operations and cash flows on a stand-alone
basis. The allocation methodologies have been described within the notes to
these consolidated financial statements. Management considers the allocation
methodologies adopted to be
F-13
<PAGE>
WESTAR INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollar amounts in thousands, except for per share amounts)
(interim amounts as of June 30 are unaudited)
reasonable; however, the costs of these services charged to Westar Industries
may not necessarily be indicative of costs that would have been incurred if
Westar Industries had performed these functions entirely as a stand-alone
entity.
Intercompany agreements with Western Resources for shared services, tax
sharing, other corporate allocations, and the demand note for amounts due from
Western Resources have not been finalized and are in the process of being
drafted. The financial statements have been prepared based upon the terms and
conditions expected to be contained in these documents.
The accompanying audited financial statements as of December 31, 1999, and
1998, and for the three years in the period ended December 31, 1999 and the
unaudited balance sheet as of June 30, 2000 and the unaudited results of
operations for the year-to-date periods ended June 30, 2000 and 1999 have been
presented on a consolidated basis to reflect the operations of Westar
Industries and subsidiaries together with the results of the affiliates after
elimination of all material accounts and transactions between all affiliated
entities.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Interim Financial Data
The consolidated financial statements as of and for the six months ended
June 30, 2000 and 1999 and the related amounts in these notes to consolidated
financial statements are unaudited, but, in the opinion of management, reflect
all normal and recurring adjustments necessary for a fair presentation of the
results of those periods. Operating results for the six months ended June 30,
2000 are not necessarily an indication of the results that may be expected for
the year ended December 31, 2000.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements, as well as the reported amounts of
revenue and expenses during the reporting period. Significant estimates made in
preparing the consolidated financial statements include amortization periods,
allowance for doubtful accounts, income tax valuation allowances, and the
allocation of certain general and administrative expenses and working capital
account balances. Actual amounts and results could differ from those estimates.
Westar Industries' operations and ability to grow may be affected by
numerous factors, including changes in customer requirements, new laws,
technological advances, entry of new competitors and changes in the willingness
of Western Resources and other potential lenders to finance operations. Westar
Industries cannot predict which, if any, of these or other factors might have a
significant impact in the future, nor can it predict what impact, if any, the
occurrence of these or other events might have on its operations.
Cash and Cash Equivalents
All highly liquid investments purchased with a remaining maturity of three
months or less at the date acquired are cash equivalents. These investments,
consisting of money market funds, are stated at cost, which approximates
market.
F-14
<PAGE>
WESTAR INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollar amounts in thousands, except for per share amounts)
(interim amounts as of June 30 are unaudited)
Restricted Cash
Restricted cash at June 30, 2000 consists of cash used to collateralize
letters of credit primarily related to international power investments.
Restricted cash at December 31, 1999 and 1998 primarily consists of cash held
in escrow pursuant to one of Protection One's 1998 acquisitions.
Accounts Receivable
Receivables, which consist primarily of trade accounts receivable, have been
reduced by allowances for doubtful accounts of $30,815 and $20,142, at December
31, 1999 and 1998 respectively. The Company's allowance for doubtful accounts
at June 30, 2000 was $37,917.
Marketable Securities
Management classifies the Company's marketable securities as "Available-for-
Sale" in accordance with Statement of Financial Accounting Standards ("SFAS")
No. 115 "Accounting for Certain Investments in Debt and Equity Securities."
Accordingly, any unrealized gains and losses are reported as a component of
Other Comprehensive Income (Loss) in accordance with SFAS No. 130 "Reporting
Comprehensive Income." Gains or losses on securities sold are calculated based
on the specific identification method.
Inventories
Inventories, comprised of alarm systems and parts, are stated at the lower
of average cost or market.
Property and Equipment
Property and equipment are stated at cost and depreciated using the
straight-line method over estimated useful lives. Gains or losses from
retirements and dispositions of property and equipment are recognized in income
in the period realized. Repair and maintenance costs are expensed as incurred.
Estimated useful lives of property and equipment are as follows:
<TABLE>
<S> <C>
Furniture, fixtures and equipment......................... 5-10 years
Data processing and telecommunications.................... 8 months-5 years
Leasehold improvements.................................... 5-10 years
Vehicles.................................................. 5 years
Buildings................................................. 40 years
</TABLE>
Customer Accounts
Customer accounts are stated at cost. Cost includes amounts paid to dealers
and the estimated fair value of accounts acquired in business acquisitions.
Internal costs incurred in support of acquiring customer accounts are expensed
as incurred.
Protection One conducted a comprehensive review of its amortization policy
during the third quarter of 1999. This review was performed specifically to
evaluate the historic amortization policy in light of the inherent declining
revenue curve over the life of a pool of customer accounts, and Protection
One's historical attrition experience. After completing the review, Protection
One management identified three distinct pools,
F-15
<PAGE>
WESTAR INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollar amounts in thousands, except for per share amounts)
(interim amounts as of June 30 are unaudited)
each of which has distinct attributes that affect differing attrition
characteristics. The pools corresponded to the North America, Multifamily and
Europe business segments. For the North America and Europe pools, the analyzed
data indicated to management that it can expect attrition be greatest in years
one through five of asset life and that a change from a straight-line to a
declining balance (accelerated) method would more closely match future
amortization cost with the estimated revenue stream from these assets.
Protection One management elected to change to an accelerated method for the
North America and Europe pools in the third quarter of 1999. Prior to this
date, Protection One amortized customer accounts on a straight line basis over
ten years. No change was made for the 10-year straight line method used for the
Multifamily pool.
The amortization rates for the North America and Europe customer pools
consider the average estimated remaining life and historical and projected
attrition rates. The average estimated remaining life for each customer pool is
as follows:
<TABLE>
<CAPTION>
Average
Estimated
Remaining
Pool Life (Years) Method
---- ------------ ------
<S> <C> <C>
North America................. 8-10 Ten-year 130% declining balance
Europe........................ 10 Ten-year 125% declining balance
Multifamily................... 12 Ten-year straight-line
</TABLE>
Adoption of the declining balance method effectively shortens the estimated
expected average customer life for these two customer pools, and does so in a
way that does not make it possible to distinguish the effect of a change in
method (straight-line to declining balance) from the change in estimated lives.
In such cases, GAAP requires that the effect of such a change be recognized in
operations in the period of the change, rather than as a cumulative effect of a
change in accounting principle. Accordingly, the effect of the change in
accounting principle increased amortization expense reported in the third
quarter of 1999 by $47,000. Accumulated amortization recorded on the balance
sheet would have been approximately $41,000 higher through the end of the
second quarter of 1999 if Protection One had historically used the declining
balance method.
In accordance with SFAS No. 121 "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of," long-lived assets held and
used by Protection One are evaluated for recoverability on a periodic basis or
as circumstances warrant. An impairment would be recognized when the
undiscounted expected future operating cash flows derived from customer
accounts are less than the carrying value of capitalized customer accounts and
goodwill. If an impairment would be incurred, the Company would be required to
record a non-cash change to income which could be material.
Due to the high level of customer attrition experienced in 1999 and the
decline in market value of Protection One's publicly traded equity and debt
securities, management performed an impairment test on its customer account
asset in the fourth quarter of 1999 and concluded that no impairment has
occurred.
Customer account accumulated amortization is as follows:
<TABLE>
<CAPTION>
As of December
31, As of
----------------- June 30,
1999 1998 2000
---- ---- --------
<S> <C> <C> <C>
Customer account accumulated amortization..... $307,600 $118,400 $384,739
</TABLE>
F-16
<PAGE>
WESTAR INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollar amounts in thousands, except for per share amounts)
(interim amounts as of June 30 are unaudited)
Customer account amortization expense is as follows:
<TABLE>
<CAPTION>
For the year For the six
ended December months ended
31, June 30,
---------------- ---------------
1999 1998 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Customer account amortization expense... $188,097 $87,958 $77,504 $64,109
</TABLE>
Goodwill
The excess of the cost over the fair value of net assets of businesses
acquired is recorded as goodwill. Protection One has historically amortized
goodwill on a straight-line basis over 40 years. The carrying value of goodwill
was included in its evaluation of recoverability of customer accounts. No
reduction in the carrying value was necessary at December 31, 1999.
In conjunction with the impairment test for customer accounts, Protection
One reevaluated the original assumptions and rationale utilized in the
establishment of the carrying value and estimated useful life of goodwill.
Protection One concluded that due to continued losses and increased levels of
attrition experienced in 1999, the estimated useful life of goodwill should be
reduced from 40 to 20 years. The change was accounted for as a change in
accounting estimate. As of January 1, 2000, the remaining goodwill, net of
accumulated amortization, will be amortized over its remaining useful life
based on a 20-year life. The resulting increase in annual goodwill amortization
on the existing account base will be approximately $24,000 for North America,
$6,000 for Multifamily, and $4,000 for Protection One Europe.
Goodwill accumulated amortization is as follows:
<TABLE>
<CAPTION>
As of As of
December 31, June
--------------- 30,
1999 1998 2000
---- ---- ----
<S> <C> <C> <C>
Goodwill accumulated amortization................. $64,366 $31,474 $94,285
</TABLE>
Goodwill amortization expense is as follows:
<TABLE>
<CAPTION>
For the year For the six
ended December months ended
31, June 30,
--------------- ---------------
1999 1998 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Goodwill amortization expense............. $31,053 $24,178 $31,948 $16,177
</TABLE>
Income Taxes
Westar Industries recognizes a liability or asset for the deferred tax
consequences of temporary differences between the tax basis of assets and
liabilities and their reported amounts in the financial statements. These
temporary differences will result in taxable or deductible amounts in future
years when reported amounts of the assets or liabilities are recovered or
settled. The deferred tax assets are periodically reviewed for recoverability.
F-17
<PAGE>
WESTAR INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollar amounts in thousands, except for per share amounts)
(interim amounts as of June 30 are unaudited)
Westar Industries is reimbursed for tax benefits utilized by Western
Resources. The income tax provision has been calculated as if Westar Industries
filed on a stand-alone basis. The Company has recorded an income tax receivable
for amounts due from Western Resources pursuant to a similar agreement between
Western Resources and Protection One. If Westar Industries did not file its
taxes on a consolidated basis with Western Resources, the deferred tax assets
may not be realizable and Westar Industries may not be in a position to record
a tax benefit for losses incurred.
Revenues
Monitored services revenues are recognized when monitoring, extended service
protection, patrol, repair and other services are provided. Deferred revenues
result from customers who are billed for monitoring, extended service
protection and patrol and alarm response services in advance of the period in
which such services are provided, on a monthly, quarterly or annual basis.
Advertising Costs
Printed materials are generally expensed as incurred. Broadcast advertising
costs are generally expensed upon the first broadcast of the respective
advertisement. Total advertising expense was $3,054, $3,684, and $10,415 during
the years ended December 31, 1999, 1998, and 1997, respectively.
Earnings (Loss) Per Share
Earnings (loss) per share as reflected on the consolidated statement of
operations, has been computed and presented in accordance with SFAS No. 128
"Earnings Per Share". The weighted average shares outstanding used in the
computation of earnings (loss) per share for each period presented was the
shares outstanding giving effect to the stock split described in Note 1. The
number of shares outstanding after this stock split was assumed to be 70
million shares of the Company's common stock. The actual number of shares of
the Company's outstanding common stock will be the same as the number of
outstanding shares of Western Resources' common stock on the record date for
the rights offering, which the Company estimates will be approximately
70 million shares.
Comprehensive Loss
During 1998, Westar Industries adopted the provisions of SFAS No. 130
"Reporting Comprehensive Income." Comprehensive loss comprises net loss plus
the unrealized gains and losses associated with foreign currency translations
and available-for-sale investment securities.
Concentrations of Credit Risk
Financial instruments which potentially subject the company to
concentrations of credit risk consist principally of trade receivables from a
large number of customers, including both residential and commercial, dispersed
across a wide geographic base. Westar Industries extends credit to its
customers in the normal course of business, performs periodic credit
evaluations and maintains allowances for potential credit losses. The Company
has customers located throughout the United States, Canada, and Europe. The
Company does not believe a significant loss from a concentration of credit risk
exists.
F-18
<PAGE>
WESTAR INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollar amounts in thousands, except for per share amounts)
(interim amounts as of June 30 are unaudited)
Pending Accounting Pronouncements
SFAS 133, "Accounting for Derivative Instruments and Hedging Activities," as
amended, is effective for fiscal years beginning after June 15, 2000. SFAS 133
cannot be applied retroactively. We are currently evaluating our financial
instruments to determine what, if any, affect adopting SFAS 133 might have on
our financial statements. We have not yet quantified all effects of adopting
SFAS 133 on our financial statements.
3. RELATED PARTY TRANSACTIONS
Cash Management
Protection One and Protection One Europe maintain their own cash management
function. Historically, Westar Industries, exclusive of Protection One and
Protection One Europe, utilized the central cash management of Western
Resources under a centralized cash management system, and no significant cash
balances are maintained. Also, Western Resources determined the amount of
funding provided to Westar Industries based on actual cash used for capital and
operating expenses, net of Westar Industries cash receipts. Funds required by
Westar Industries were subject to the ongoing approval and budgeting processes
of Western Resources. Following the rights offering, Westar Industries will
continue to utilize the cash management systems of Western Resources pursuant
to the shared services agreement.
Financing Arrangements and Liquidity
Westar Industries has historically relied on Western Resources for its
capital needs. At June 30, 2000 the Company had a receivable from Western
Resources (see below) which will be converted into a demand note upon
consummation of the rights offering. Liquidity available through amounts due
from Western Resources combined with cash flows of Protection One and
Protection One Europe, dividends from ONEOK and from other investments and the
Company's existing cash balances are expected to be adequate and provide for
Westar Industries' liquidity requirements.
During the period beginning with the consummation of the rights offering,
the Company will be required to use proceeds from the sale of assets in excess
of its operating needs to acquire convertible preferred stock or common stock
of Western Resources or shares of the Company's common stock owned by Western
Resources at a price not less than the subscription price. If the Company does
not select one of these options as of the time the asset sales proceeds become
available, the Company will deliver the cash to Western Resources in return for
a note, which will be repaid with the securities the Company ultimately
selects, provided that the Company's election must be made prior to the date of
the pro rata distribution by Western Resources of the Company's remaining
shares. The agreement as to the use of the proceeds of asset sales will
terminate upon the earliest of (1) the closing of a transaction with a
strategic partner for Western Resources electric utilities, (2) Western
Resources' secured debt securities receiving an investment grade rating from
Moody's and Standard & Poors, or (3) the reduction of Western Resources
unconsolidated debt plus Kansas Gas and Electric Company debt to $2,500,000.
Protection One has initiated efforts to obtain a credit facility from a
third party lender. Due to Protection One's credit downgrades received in 2000
by the rating agencies, higher interest rates and a more difficult lending
market, it is not known on what terms a credit facility could be obtained or if
a credit facility could be obtained at all. Protection One currently has an
intercompany credit facility with Westar Industries that expires in January
2001. Amounts outstanding have been eliminated in consolidation.
F-19
<PAGE>
WESTAR INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollar amounts in thousands, except for per share amounts)
(interim amounts as of June 30 are unaudited)
General and Administrative
Direct operating costs of Westar Industries are charged directly by Western
Resources. Other costs are allocated and include the estimated costs of
information systems services, payroll and benefits administration, purchasing
and certain other accounting and administrative services. These costs were
allocated based upon headcount, square footage, revenue, and other factors
which management believes to be reasonable. Allocated costs are as follows:
<TABLE>
<CAPTION>
Year Ended December 31 Amount
---------------------- ------
<S> <C>
1999.................................. $3,628
1998.................................. 4,894
1997.................................. 3,026
<CAPTION>
For the six months ended
June 30,
------------------------
<S> <C>
2000.................................. $1,194
1999.................................. 1,196
</TABLE>
Management believes that the allocation methodologies applied are
reasonable. However, it is not practicable to determine whether the allocated
amounts represent amounts that would have been incurred on a stand-alone basis.
Receivable from Western Resources
The Company has an intercompany receivable from Western Resources for
approximately $225,000 at June 30, 2000. The balance primarily represents
proceeds from the liquidation of Westar Industries' portfolio of marketable
securities during the first half of 2000. Upon consummation of the rights
offering, a portion of the receivable will be converted into a demand note
bearing interest at a rate designed to mirror the pre-tax average cost of
capital of Western Resources. The note is payable on demand, but no later than
the closing of a strategic transaction involving Western Resources' electric
utilities. The remaining balance will be repaid at the Company's option in
stock of Western Resources, stock of the Company held by Western Resources at a
price not less than the subscription price, or a note convertible no later than
the closing of the strategic transaction involving Western Resources' electric
utilities into one of the types of equity securities mentioned above.
Amounts Due to (from) Western Resources and Paid-in Capital
The paid in capital of Westar Industries at December 31, 1999 includes
approximately $920,410 of capital contributions recorded in an intercompany
account in prior periods. Management believes this change is consistent with
the substance of the Company's intercompany transactions.
Shared Corporate Services
Western Resources and Westar Industries will enter into a shared services
agreement prior to completion of the rights offering. Under this agreement a
portion of Western Resources' shared corporate services (such as human
resources, legal, accounting and auditing, tax, treasury, strategic planning,
investor relations and corporate technology) will be allocated to Westar
Industries based upon specific identification of such services
F-20
<PAGE>
WESTAR INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollar amounts in thousands, except for per share amounts)
(interim amounts as of June 30 are unaudited)
used by Westar Industries. Where determinations based on use alone are
impracticable, other methods and criteria will be used that management believes
are fair and provide a reasonable estimate of the cost attributable to Westar
Industries.
Protection One has entered into a shared services agreement with Western
Resources. Pursuant to this agreement, Western Resources provides
administrative services including accounting, human resources, legal,
facilities and technology. Since entering into the agreement, Protection One
incurred charges of approximately $2,000 through December 31, 1999 and
approximately $2,353 for the six months ended June 30, 2000, which were based
upon various hourly charges, negotiated fees and out of pocket expenses.
Marketing Agreement
Protection One entered into a three-year marketing agreement with Paradigm
Direct LLC ("Paradigm") during 1999. Westar Industries has a 40% ownership
interest in Paradigm. Under the arrangement, Protection One was to purchase a
targeted number of accounts from Paradigm during each year of the agreement
following an initial pilot program. During 1999, Protection One expensed $1,000
paid to Paradigm in the third quarter in connection with startup costs relative
to this program and prepaid approximately $1,000 from anticipated account
purchases. Subsequent to year-end, Protection One converted this program for an
account acquisition program to a lead generation program. The pilot program
Protection One had with Paradigm, which utilized direct marketing to produce
customer accounts, was concluded on June 30, 2000 and the marketing agreement
was terminated.
ONEOK Stock Repurchase
In 1999, Western Resources and Westar Industries sold a total of 984,000
shares of ONEOK stock to ONEOK as a result of ONEOK's repurchase program. The
Company reduced its investment in ONEOK for proceeds received from this sale.
All such shares were required to be sold to ONEOK in accordance with a
Shareholder Agreement between Western Resources and ONEOK. The Company's
ownership interest remains at approximately 45%.
Intercompany Interest Expense
Interest expense for 1998 and 1997 includes intercompany interest expense
from Western Resources. Amounts for 1998 and 1997 were $11,500 and $36,900
respectively.
4. ACQUISITION TRANSACTIONS
Protection One and its predecessor entity, Western Resources Security
Business (WRSB), acquired a significant number of monitored services companies
in 1998 and 1997. All companies acquired have been accounted for using the
purchase method. The principal assets acquired in the acquisitions are customer
accounts. The excess of the purchase price over the estimated fair value of the
net assets acquired is recorded as goodwill. The results of operations have
been included in the consolidated results of operations of the Company from the
date of the acquisition.
F-21
<PAGE>
WESTAR INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollar amounts in thousands, except for per share amounts)
(interim amounts as of June 30 are unaudited)
The following unaudited pro forma consolidated results of operations for the
years ended December 31, 1998 and 1997 assume all material business
combinations occurred at January 1, 1997.
<TABLE>
<CAPTION>
Year Ended
December 31,
------------------
1998 1997
---- ----
(Unaudited)
<S> <C> <C>
Revenues............................................... $563,472 $464,775
Net income (loss)...................................... (43,258) 390,038
Earnings (loss) per share.............................. (0.62) 5.57
</TABLE>
The unaudited pro forma financial information is not necessarily indicative
of the results of operations had the entities been consolidated for the entire
period nor do they purport to be indicative of results which will be obtained
in the future.
During 1999, Protection One completed four primary acquisitions in the
United Kingdom, for a combined purchase price of approximately $32,000.
5. MARKETABLE SECURITIES
Marketable securities are valued as follows:
<TABLE>
<CAPTION>
As of
December 31,
------------------ June 30,
1999 1998 2000
---- ---- --------
<S> <C> <C> <C>
Equity Securities
Cost......................................... $ 43,124 $ 94,369 $ 6,918
Gross unrealized gain........................ 70,407 45,685 --
Gross unrealized loss........................ (1,628) (10,182) (1,736)
-------- -------- --------
Aggregate fair value......................... $111,903 $129,872 $ 5,182
======== ======== ========
Sales Proceeds............................... $ 48,473 $ 27,904 $126,955
======== ======== ========
Realized gain (loss) from sales.............. $(15,043) $(13,943) $ 90,749
======== ======== ========
Debt Securities
Cost......................................... $ 65,225 $172,129 $ --
Gross unrealized gain........................ -- -- --
Gross unrealized loss........................ -- (13,924) --
-------- -------- --------
Aggregate fair value......................... $ 65,225 $158,205 $ --
======== ======== ========
Sales proceeds............................... $ 24,983 $ 2,575 $ 90,107
======== ======== ========
Realized gain (loss) from sales.............. $(11,208) $ 100 $ 24,880
======== ======== ========
</TABLE>
During the fourth quarter of 1999, Westar Industries decided to sell its
remaining marketable security investments in paging industry companies. These
securities have been classified as available-for-sale; therefore, changes in
market value have been historically reported as a component of other
comprehensive income.
F-22
<PAGE>
WESTAR INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollar amounts in thousands, except for per share amounts)
(interim amounts as of June 30 are unaudited)
The market value for these securities declined during the last six to nine
months of 1999. Westar Industries determined that the decline in value of these
securities was other than temporary and a charge to earnings for the decline in
value was required at December 31, 1999. Therefore, Westar Industries recorded
a non-cash charge of $76,166 in the fourth quarter of 1999. This charge to
earnings has been presented separately in the accompanying Consolidated
Statements of Operations.
During the six-month period ended June 30, 2000, the Company recorded
investment income of $150,090. This income was primarily attributable to gains
on the sale of marketable securities and income from the ONEOK investment. A
summary of investment income is as follows:
<TABLE>
<S> <C>
Gain on sale of marketable securities........................... $115,629
ONEOK income.................................................... 23,895
Equity investment income........................................ 5,590
Other........................................................... 4,976
--------
Total......................................................... $150,090
========
</TABLE>
6. PROPERTY AND EQUIPMENT
Property and equipment are summarized as follows:
<TABLE>
<CAPTION>
December 31,
------------------ June 30,
1999 1998 2000
---- ---- ----
<S> <C> <C> <C>
Furniture, fixtures and equipment............ $ 19,126 $ 18,915 $ 17,157
Data processing and telecommunication........ 60,548 36,057 66,268
Leasehold improvements....................... 2,219 1,826 5,212
Vehicles..................................... 7,019 3,720 7,815
Buildings and other.......................... 3,731 777 3,744
-------- -------- --------
92,643 61,295 100,196
Less accumulated depreciation................ (29,866) (14,100) (45,793)
-------- -------- --------
Property and equipment, net.................. $ 62,777 $ 47,195 $ 54,403
======== ======== ========
</TABLE>
Depreciation expense was as follows:
<TABLE>
<CAPTION>
Year ended
December 31,
--------------
1999 1998
---- ----
<S> <C> <C>
Depreciation expense........................................ $19,541 $8,031
</TABLE>
F-23
<PAGE>
WESTAR INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollar amounts in thousands, except for per share amounts)
(interim amounts as of June 30 are unaudited)
7. CUSTOMER ACCOUNTS
The following is a roll forward of the investment in customer accounts (at
cost):
<TABLE>
<CAPTION>
December 31,
---------------------- June 30,
1999 1998 2000
---- ---- ----
<S> <C> <C> <C>
Beginning customer accounts, net..... $1,031,956 $ 530,312 $1,138,903
Acquisition of customer accounts..... 333,195 601,063 22,952
Amortization of customer accounts.... (189,214) (89,893) (77,504)
Non-cash charges against purchase
holdbacks............................ (37,034) (9,526) (12,360)
---------- ---------- ----------
Ending customer accounts, net........ $1,138,903 $1,031,956 $1,071,991
========== ========== ==========
</TABLE>
In conjunction with certain purchases of customer accounts, Protection One
usually withholds a portion of the purchase price as a reserve to offset
qualifying losses of the acquired customer accounts for a specified period as
provided for in the purchase agreements, and as a reserve for purchase price
settlements of assets acquired and liabilities assumed. The estimated expected
amount to be paid at the end of the holdback period is capitalized and an
equivalent current liability established at the time of purchase.
The following is a roll forward of purchase holdbacks:
<TABLE>
<CAPTION>
December 31,
------------------
1999 1998
---- ----
<S> <C> <C>
Balance, beginning of period........................... $ 42,303 $ 11,444
Additions.............................................. 26,663 72,673
Non-cash charges against customer accounts............. (37,034) (9,526)
Cash payments to sellers............................... (11,719) (32,288)
-------- --------
Balance, end of period................................. $ 20,213 $ 42,303
======== ========
</TABLE>
Purchase holdback periods are negotiated between Protection One and sellers
or dealers, but typically range from zero to 12 months. At the end of the
period prescribed by the purchase holdback, Protection One verifies customer
losses experienced during the period and calculates a final payment to the
seller or dealer. The purchase holdback is extinguished at the time of final
payment and a corresponding adjustment is made in the customer intangible to
the extent the final payment varies from the estimated liability established at
the time of purchase.
8. INVESTMENTS ACCOUNTED FOR BY THE EQUITY METHOD
Westar Industries' investments which are accounted for by the equity method
are as follows:
<TABLE>
<CAPTION>
Equity
Earnings
Investment at Year Ended
Ownership at December 31, December 31,
December 31, ----------------- -------------
1999 1999 1998 1999 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
ONEOK(1)...................... 45% $590,109 $615,094 $6,945 $6,064
Paradigm Direct............... 40% 35,385 -- 1,254 --
International companies and
joint ventures(2)............ 9% to 50% 18,724 10,500 -- --
</TABLE>
--------
(1) The company also received preferred and common dividends of approximately
$41,000 and $40,000 in 1999 and 1998, respectively.
(2) Investment is aggregated. Individual investments are not material.
F-24
<PAGE>
WESTAR INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollar amounts in thousands, except for per share amounts)
(interim amounts as of June 30 are unaudited)
Investment in ONEOK
The following summarized financial information for ONEOK is presented as of
and for the periods ended December 31, 1999 and November 30, 1998, the most
recent periods for which public information is available. In 1999, ONEOK
changed its fiscal year end from August 31 to December 31. This balance sheet
information was derived from the publicly filed financial statements of ONEOK,
Inc. on Form 10-Q. Income statement data related to the twelve month periods
ended December 31, 1999 and November 30, 1998 were derived from unaudited
supplemental information contained in ONEOK's Transition Report on Form 10-Q
filed for the 1999 period and quarterly and annual financial statements
contained in ONEOK's Forms 10-Q and Form 10-K filed for the 1998 period.
<TABLE>
<CAPTION>
December 31, November 30,
1999 1998
---- ----
<S> <C> <C>
Balance Sheet:
Current assets................................. $ 593,721 $ 404,358
Non-current assets............................. 2,645,854 2,091,797
Current liabilities............................ 786,713 338,466
Non-current liabilities........................ 1,301,338 993,668
Equity......................................... 1,151,524 1,164,021
<CAPTION>
Twelve Months Ended
-------------------------
December 31, November 30,
1999 1998
---- ----
<S> <C> <C>
Income Statement:
Revenues....................................... $2,070,983 $1,896,178
Net revenues................................... 760,209 645,606
Net income..................................... 106,873 103,525
</TABLE>
At December 31, 1999, the Company's ownership interest in ONEOK was comprised
of approximately 2.3 million common shares and approximately 19.9 million
convertible preferred shares. If all the preferred shares were converted,
Westar Industries would own approximately 45% of ONEOK's common shares.
Investments in International Power Development Projects
In 1998, the Company's equity investments in certain power generation
projects were written down to estimated fair value after it was determined that
the decline in value of these investments was not temporary. A charge of
approximately $50,749 was recorded to reduce these investments to an estimated
fair value of $10,500.
F-25
<PAGE>
WESTAR INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollar amounts in thousands, except for per share amounts)
(interim amounts as of June 30 are unaudited)
9. LONG-TERM DEBT
Long-term debt and the fixed or weighted average interest rates are as
follows:
<TABLE>
<CAPTION>
December 31,
------------------ June 30,
1999 1998 2000
---- ---- ----
<S> <C> <C> <C>
Senior Credit Facility, maturing December 2001,
variable rate 6.8% (a)......................... $ -- $ 42,417 $ --
Senior Subordinated Notes, maturing January
2009, fixed rate 8.125%........................ 341,415 350,000 262,040
Senior Unsecured Notes, maturing August 2005,
fixed rate 7.375%.............................. 250,000 250,000 250,000
Senior Subordinated Discount Notes, maturing
June 2005, effective rate of 6.4%.............. 87,038 125,590 53,208
Convertible Senior Subordinated Notes, maturing
September 2003, fixed 6.75%.................... 53,950 53,950 28,185
Other debt obligations, including capital
leases......................................... 74,599 105,987 59,001
-------- -------- --------
807,002 927,944 652,434
Less current portion............................ (35,955) (85,006) (28,326)
-------- -------- --------
Total long-term debt.......................... $771,047 $842,938 $624,108
======== ======== ========
</TABLE>
--------
(a) Represents weighted average rate of borrowings under facility at year end.
Senior Subordinated Notes
In 1998, Protection One issued $350,000 of unsecured 8.125% Senior
Subordinated Notes due 2009. The notes are redeemable at Protection One's
option, in whole or in part, at a predefined price.
Protection One did not complete a required exchange offer during 1999. As a
result, the interest rate on these notes increased to 8.625% in June 1999. If
the exchange offer is completed, the interest rate will revert back to 8.125%.
Interest on these notes is payable semi-annually on January 15 and July 15. In
1998, Protection One issued $250,000 of Senior Unsecured Notes. Interest is
payable semi-annually on February 15 and August 15. The notes are redeemable at
Protection One's option, in whole or in part, at a predefined price.
Senior Subordinated Discount Notes
In 1995, Protection One issued $166,000 of unsecured Senior Subordinated
Discount Notes with a fixed interest rate of 13 5/8%. Interest payments began
in 1999 and are payable semi-annually on June 30 and December 31. In connection
with the acquisition of Protection One in 1997, these notes were restated to
fair value reflecting a current market yield of approximately 6.4%. This
resulted in bond premium being recorded to reflect the increase in value of the
notes as a result of the decline in interest rates since the note issuance. The
revaluation had no impact on the expected cash flow to existing noteholders.
Convertible Senior Subordinated Notes
In 1996, Protection One issued $103,500 of Convertible Senior Subordinated
Notes. Interest is payable semi-annually on March 15 and September 15. The
notes are convertible at any time at a conversion price of $11.19 per share.
The notes are redeemable, at Protection One's option, at a specified redemption
price.
F-26
<PAGE>
WESTAR INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollar amounts in thousands, except for per share amounts)
(interim amounts as of June 30 are unaudited)
Other
Represents debt obligations assumed from an acquisition of a French security
company in 1998, debt related to international power projects and capital
leases. Interest rates on these obligations range from 8.5% to 18%.
Extinguishments of Debt
During 1999, 1998 and for the six month period ended June 30, 2000, Westar
Industries recorded gains (losses) on the extinguishment of debt instruments as
follows:
In the fourth quarter 1999, Westar Capital purchased Protection One
bonds on the open market at amounts less than the carrying amount of the
debt. The Company has recognized an extraordinary gain of $13,434, net of
tax, at December 31, 1999 related to the retirement of this debt.
During the first six months of 2000, Westar Industries and Protection
One purchased Protection One debt on the open market. An extraordinary gain
of $35,839 was recognized on these retirements.
During 1999, Westar Industries acquired Protection One's Senior Credit
Facility from Protection One's lenders. Simultaneous to the acquisition of
the Senior Credit Facility by Westar Industries, Western Resources
extinguished the liability to the lenders on behalf of Westar Industries.
Westar Industries recognized an extraordinary loss of $1,691, net of tax on
this transaction. In December 1999, Western Resources forgave Westar
Industries' obligation to Western Resources related to the repayment of the
Senior Credit Facility.
In 1998, Protection One redeemed senior subordinated discount notes with
a book value of $69,000 and recorded an extraordinary gain on the
extinguishment of $1,591, net of tax. The remaining notes are redeemable at
Protection One's option, in whole or in part, at anytime on or after June
30, 2000, at a predefined price.
Debt Maturities
Debt maturities at December 31, 1999 over the next five years are as
follows:
<TABLE>
<S> <C>
2000............................. $35,955
2001............................. 27,000
2002............................. 6,031
2003............................. 56,018
2004............................. 457
</TABLE>
Financial and Operating Covenants
All of these debt instruments contain restrictions based on "EBITDA". The
definition of EBITDA varies among the various indentures and the Senior Credit
Facility. EBITDA is generally derived by adding to income (loss) before income
taxes, the sum of interest expense and depreciation and amortization expense.
However, under the varying definitions of the indentures, various and numerous
additional adjustments are sometimes required.
F-27
<PAGE>
WESTAR INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollar amounts in thousands, except for per share amounts)
(interim amounts as of June 30 are unaudited)
Protection One's credit facilities contain financial and operating covenants
which may restrict its ability to incur additional debt, pay dividends, make
loans or advances and sell assets. The financial covenants are based on
Protection One's stand-alone financial results. These covenants as of December
31, 1999, unless noted otherwise, are summarized as follows:
<TABLE>
<CAPTION>
Debt Instrument Financial Covenant
--------------- ------------------
<C> <S>
Senior Subordinated Notes........... Current fiscal quarter EBITDA/current
fiscal quarter interest expense greater
than 2.25 to 1.0
Senior Subordinated Discount Notes.. Total debt/annualized fourth quarter
EBITDA less than
6.0 to 1.0
Senior debt/annualized fourth quarter
EBITDA less than
4.0 to 1.0
</TABLE>
From September 30, 1999 through February 29, 2000, Protection One received
waivers from compliance with the then-applicable leverage and interest coverage
ratio covenants under the Senior Credit Facility. Protection One is currently
in compliance with the financial covenants under the indentures. Indentures
governing Protection One's debt securities require that it offer to repurchase
the securities in certain circumstances following a change of control.
10. SALE OF MOBILE SERVICES GROUP
During the third quarter of 1999, Protection One sold the assets which
comprised its Mobile Services Group. Cash proceeds of this sale approximated
$19,087 and Protection One recorded a pre-tax gain of approximately $17,249.
11. GAIN ON SALE OF SECURITIES
During 1996, Westar Industries acquired 27% of the common shares of ADT
Limited, Inc. (ADT) and made an offer to acquire the remaining ADT common
shares. ADT rejected this offer and in July 1997, ADT merged with Tyco
International Ltd. (Tyco).
Following the ADT and Tyco merger, the Company's equity investment in ADT
became an available-for-sale security in Tyco. During the third quarter of
1997, Westar Industries sold the Tyco common shares for approximately
$1,533,530. Westar Industries recorded a gain of $864,253 on the sale and
recorded tax expense of approximately $345,000 in connection with this gain.
12. OTHER CHARGES
In December 1997, Protection One incurred charges of $12,750 to write down
the value of the customer account base due to excessive losses associated with
a specific acquisition and $11,542 to reflect the closing of business
activities that were no longer of continuing value.
F-28
<PAGE>
WESTAR INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollar amounts in thousands, except for per share amounts)
(interim amounts as of June 30 are unaudited)
13. STOCK WARRANTS AND OPTIONS
Westar Industries accounts for employee stock options in accordance with
Accounting Principles Board Opinion No. 25 (APB No. 25) "Accounting for Stock
Issued to Employees." Under ABP No. 25, Westar Industries recognizes no
compensation expense related to employee stock options, as no options are
granted at a price below the market price on the day of grant.
Protection One is the only Westar Industries company which has issued stock
warrants and options. A summary of warrant and option activity for Protection
One's common stock from November 1997 through December 31, 1999 is as follows:
<TABLE>
<CAPTION>
Weighted
Warrants Average
And Options Exercise Price
----------- --------------
<S> <C> <C>
Outstanding and exercisable at November 24,
1997(1)..................................... 2,366,741 $ 5.805
Granted.................................... -- --
Exercised.................................. (306) 0.050
Surrendered................................ -- --
--------- -------
Outstanding and exercisable at December 31,
1997........................................ 2,366,435 5.805
Granted.................................... 1,246,500 11.033
Exercised.................................. (109,595) 5.564
Surrendered................................ (117,438) 10.770
Adjustment to May 1995 warrants.............. 36,837 --
--------- -------
Outstanding at December 31, 1998............. 3,422,739 7.494
--------- -------
Exercisable at December 31, 1998............. 2,263,239 $ 5.681
========= =======
Outstanding and exercisable at December 31,
1998........................................ 3,422,739 $ 7.494
Granted.................................... 1,092,908 7.905
Exercised.................................. -- --
Surrendered................................ (956,511) 10.124
========= =======
Outstanding at December 31, 1999............. 3,559,136 $12.252
========= =======
Exercisable at December 31, 1999............. 2,313,309 $ 6.358
========= =======
</TABLE>
--------
(1) As WRSB had no outstanding stock at or prior to November 24, 1997, there
were no related options.
F-29
<PAGE>
WESTAR INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollar amounts in thousands, except for per share amounts)
(interim amounts as of June 30 are unaudited)
The table below summarizes stock options and warrants for Protection One
common stock outstanding as of December 31, 1999:
<TABLE>
<CAPTION>
Weighted-
Number Average
of Remaining Weighted
Shares Of Contractual Average
Range of Common Life in Exercise
Description Exercise Price Stock Years Price
----------- -------------- --------- ----------- --------
<S> <C> <C> <C> <C>
Exercisable
Fiscal 1995.................... $6.375-$9.125 64,800 5 years $ 6.491
Fiscal 1996.................... 8.00-10.313 178,400 6 years 8.031
Fiscal 1996.................... 13.750-15.5 69,000 6 years 14.924
Fiscal 1997.................... 9.500 136,000 7 years 9.500
Fiscal 1997.................... 15.000 25,000 7 years 15.000
Fiscal 1997.................... 14.268 50,000 2 years 14.268
Fiscal 1998.................... 11.000 367,499 8 years 11.000
Fiscal 1998.................... 8.5625 16,331 8 years 8.5625
Fiscal 1999.................... 8.9275 87,600 9 years 8.9275
KOP Warrants................... 3.633 103,697 1 years 3.633
1993 Warrants.................. 0.167 428,400 4 years 0.167
1995 Note Warrants............. 3.890 786,277 5 years 3.890
Other.......................... 0.050 305 7 years 0.050
---------
2,313,309
---------
Not exercisable
1998 options................... $11.000 333,001 8 years $11.000
1998 options................... 8.5625 32,660 8 years 8.5625
1999 options................... 8.9275 686,500 9 years 8.9275
1999 options................... 3.875-6.125 193,666 9 years 5.855
---------
1,245,827
---------
Outstanding.................... 3,559,136
=========
</TABLE>
On July 9, 1997, Protection One granted an option to purchase an aggregate
of 50,000 shares of its common stock in connection with an acquisition for an
unaffiliated party. The option has a term of four years. The purchase price of
the shares issuable pursuant to the option is greater than the fair market
value of the common stock of Protection One at the date of the option grant.
1994 Stock Option Plan
The 1994 Stock Option Plan (the "Plan"), approved by the Protection One
stockholders in June 1994, provides for the award of incentive stock options to
directors, officers and key employees. Under the Plan, 1,300,000 shares of
Protection One's common stock are reserved for issuance, subject to such
adjustment as may be necessary to reflect changes in the number or kinds of
shares of common stock or other securities of Protection One. The Plan provides
for the granting of options that qualify as incentive stock options under the
Internal Revenue Code and options that do not so qualify.
F-30
<PAGE>
WESTAR INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollar amounts in thousands, except for per share amounts)
(interim amounts as of June 30 are unaudited)
A summary of options issued under the Plan by fiscal year are as follows:
<TABLE>
<CAPTION>
Shares Granted Total Shares
to Officers Granted
-------------- ------------
<S> <C> <C>
1995...................... 132,000 266,000
1996...................... 400,000 638,800
1997...................... 100,000 375,444
The purchase price of the Protection One shares issuable pursuant to the
options is equal to (or greater than) the fair market value of common stock at
the date of option grant. The vesting period was accelerated on November 24,
1997 and all remaining options are currently exercisable.
1997 Long-Term Incentive Plan
The 1997 Long-Term Incentive Plan (the "LTIP"), approved by the Protection
One stockholders on November 24, 1997, provides for the award of incentive
stock options for Protection One shares of common stock to directors, officers
and key employees. Under the LTIP, 4,200,000 shares are reserved for issuance,
subject to such adjustment as may be necessary to reflect changes in the number
or kinds of shares of common stock or other securities of Protection One. The
LTIP provides for the granting of options that qualify as incentive stock
options under the Internal Revenue Code and options that do not so qualify.
A summary of options issued for Protection One shares of common stock under
the LTIP by fiscal year are as follows:
<CAPTION>
Shares Granted Total Shares
to Officers Granted
-------------- ------------
<S> <C> <C>
1998...................... 690,000 1,246,500
1999...................... 399,700 1,092,908
</TABLE>
Each option has a term of 10 years and vests ratably over 3 years. The
purchase price of the shares issuable pursuant to the options is equal to (or
greater than) the fair market value of the common stock at the date of the
option grant.
The weighted average fair value of options granted by Protection One during
1999 and 1998 and estimated on the date of grant was $6.87 and $5.41 per share,
respectively. The fair value was calculated for the respective year using the
following assumptions:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1999 1998
---- ----
<S> <C> <C>
Dividend yield..................................... 0.00% 0.00%
Expected stock price volatility.................... 64.06% 61.72%
Risk free interest rate............................ 6.76% 5.50%
Expected option life............................... 6 years 6 years
</TABLE>
F-31
<PAGE>
WESTAR INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollar amounts in thousands, except for per share amounts)
(interim amounts as of June 30 are unaudited)
No compensation cost has been recognized for issuance under the plans in
1999 and 1998. Had compensation cost for the plan been determined based on the
fair value at the grant date consistent with SFAS No. 123 "Accounting for
Stock-Based Compensation," Westar Industries' net income and income per share
would have been as follows:
<TABLE>
<CAPTION>
Year ended December 31,
------------------------
1999 1998
---- ----
<S> <C> <C>
Net loss:
As reported................................... $ (75,869) $ (34,240)
Pro forma..................................... (78,801) (35,710)
Net loss per common share (basic and diluted):
As reported................................... $ (1.08) $ (0.49)
Pro forma..................................... $ (1.13) $ (0.51)
</TABLE>
As there were no options granted by Protection One during 1997, there is no
related compensation expense.
14. INCOME TAXES
Components of income tax expense (benefit) are as follows:
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Federal
Current................................... $(17,631) $(23,290) $281,113
Deferred.................................. (40,251) 9,138 (705)
State
Current................................... (1,403) (6,458) 63,768
Deferred.................................. (4,069) 589 (232)
Foreign tax expense, current................ 1,432 2,652 --
-------- -------- --------
(61,922) (17,369) 343,944
Less tax on extraordinary item.............. 911 (2,730) --
-------- -------- --------
Total................................... $(61,011) $(20,099) $343,944
======== ======== ========
</TABLE>
The difference between the income tax expense (benefit) at the federal
statutory rate and income tax expense (benefit) in the accompanying statements
of operations is as follows:
<TABLE>
<CAPTION>
Year ended
December 31,
------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Federal statutory tax rate............................. (35)% (35)% 35%
Effect of:
State income taxes................................... (3) (6) 5
Amortization of non-deductible goodwill.............. 4 10 --
Dividends received deduction......................... (7) (17) --
Corporate-owned life insurance....................... -- 8 1
Adjustment to provision.............................. -- 8 4
Other................................................ -- (3) --
--- --- ---
Effective income tax rate.............................. (41)% (35)% 45%
=== === ===
</TABLE>
F-32
<PAGE>
WESTAR INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollar amounts in thousands, except for per share amounts)
(interim amounts as of June 30 are unaudited)
A tax sharing agreement allows Protection One to be reimbursed by Western
Resources for current tax benefits utilized in Western Resources consolidated
tax return. At December 31, 1999 and 1998, a receivable for $31,056 and $5,886
has been recorded pursuant to this arrangement. If the Company did not file its
income taxes on a consolidated basis with Western Resources, the Company's
deferred taxes may not be realizable and a valuation allowance may be required.
Westar Industries will cease filing consolidated returns with Western Resources
upon consummation of a strategic transaction by Western Resources and the pro
rata distribution by Western Resources of the Company's common stock.
Prior to the November 24, 1997 acquisition by Western Resources of its
interest in Protection One, Protection One had net operating loss (NOL)
carryforwards for federal income tax purposes. Historically, tax regulations
limited the use of NOL carryforwards.
During the third quarter of 2000, Protection One determined that these NOLs
would be utilized as a reduction to taxable income by the end of 2000. As such,
Protection One will adjust its valuation allowance for these NOLs as an offset
to goodwill in the third quarter of 2000. The reduction in the valuation
allowance and the corresponding reduction to goodwill will approximate $27,000.
Deferred income tax assets and liabilities were composed of the following:
<TABLE>
<CAPTION>
December 31,
-----------------
1999 1998
---- ----
<S> <C> <C>
Deferred tax asset, current:
Accrued liabilities................................... $ 3,009 $12,127
Accounts receivable, allowance........................ 8,167 15,583
Acquisition and dealer................................ 15,023 12,238
Other................................................. 2,201 9,595
-------- -------
$ 28,400 $49,543
======== =======
Deferred tax asset, noncurrent:
Recourse financing contracts.......................... $ 25,908 $30,162
Customer accounts..................................... 13,346 9,506
Property and equipment................................ (10,756) (1,762)
OID amortization...................................... 7,742 6,592
Other................................................. 35,268 27,842
-------- -------
$ 71,508 $72,340
======== =======
</TABLE>
15. EMPLOYEE BENEFIT PLANS
With exception of Protection One and Protection One Europe, which are
staffed by their own employees, Westar Industries has 21 employees. Protection
One maintains employee benefit plans for its employees. These plans of
Protection One, Inc. are as follows:
Protection One 401(k) Plan
Protection One maintains a tax-qualified, defined contribution plan that
meets the requirements of Section 401(k) of the Internal Revenue Code (the
"Protection One 401(k) Plan"). Protection One, at its election, also may make
contributions to the Protection One 401(k) Plan, which contributions will be
allocated among participants based upon the respective contributions made by
the participants through salary deductions
F-33
<PAGE>
WESTAR INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollar amounts in thousands, except for per share amounts)
(interim amounts as of June 30 are unaudited)
during the applicable plan year. Protection One's matching contribution may be
made in Protection One common stock, cash or a combination of both stock and
cash. For the years ended December 31, 1999, 1998, and 1997, Protection One
made a matching contribution to the plan of $944, $992, and $34, respectively.
WRSB also maintained a savings plan which qualified under Section 401(k).
The savings plan allowed eligible employees to contribute up to 15% of their
income on a pre-tax basis, with a discretionary employer match of 50% of the
employee's contribution up to the first 6% of the employee's compensation.
During the year ended December 31, 1997, matching contributions equal to $721
were made. The plan sponsor merged this plan into the Protection One 401(k)
Plan on July 1, 1998.
Through Protection One's 1998 acquisitions, a number of defined contribution
plans have been acquired. These plans either have been merged or will be merged
into the Protection One 401(k) Plan.
Protection One Employee Stock Purchase Plan
Protection One maintains a qualified "Employee Stock Purchase Plan" within
the meaning of Section 423 of the Internal Revenue Code, which allows eligible
employees to acquire shares of common stock at periodic intervals through their
accumulated payroll deductions. A total of 650,000 shares of Protection One
common stock have been reserved for issuance under the Protection One Employee
Stock Purchase Plan.
The purchase price of shares of Protection One common stock purchased under
the Employee Stock Purchase Plan during any purchase period will be the lower
of 85% of the fair market value of the Protection One common stock on the first
day of that purchase period and 85% of the fair market value of the Protection
One common stock on the purchase date.
Termination of a participant's employment for any reason (including death,
disability or retirement) cancels participation in the Employee Stock Purchase
Plan immediately. The Employee Stock Purchase Plan will in all events terminate
upon the earliest to occur of
. the last business day in September 2005,
. the date on which all shares available for issuance under the plan have
been sold, and
. the date on which all purchase rights are exercised in connection with
an acquisition of Protection One or of all or substantially all of its
assets.
16. LEASES
The Company leases office facilities for lease terms maturing through 2012.
Future minimum lease payments under non-cancelable operating leases are as
follows:
<TABLE>
<S> <C>
Year ended December 31,
2000......................................... $11,998
2001......................................... 10,978
2002......................................... 9,539
2003......................................... 7,519
2004......................................... 5,704
Thereafter..................................... 9,252
-------
$54,990
=======
</TABLE>
Total rent expense for the years ended December 31, 1999, 1998 and 1997 was
$12,422, $8,780, and $5,574, respectively.
F-34
<PAGE>
WESTAR INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollar amounts in thousands, except for per share amounts)
(interim amounts as of June 30 are unaudited)
17. FAIR MARKET VALUE OF FINANCIAL INSTRUMENTS
For certain of Westar Industries' financial instruments, including cash and
cash equivalents, accounts receivable, accounts payable and other accrued
liabilities, the carrying amounts approximate fair market value due to their
short maturities.
The carrying value of Westar Industries' marketable securities at December
31, 1999 was approximately $1,628 greater than their fair value, based on
quoted market prices.
The fair value of Protection One's publicly traded debt and the Company's
other long-term debt is estimated based on quoted market prices for the issues.
Fair value of other long-term debt is estimated at carrying value. At December
31, 1999, the fair value and carrying amount of Protection One's long-term debt
was as follows:
<TABLE>
<CAPTION>
Fair Carrying
Value Value
-------- --------
<S> <C> <C>
Publicly Traded Debt:
Senior Subordinated Notes (8.125%)...................... $174,121 $341,415
Senior Unsecured Notes (7.375%)......................... 182,500 250,000
Senior Subordinated Discount Notes (13.625%)............ 50,597 87,038
Convertible Senior Subordinated Notes (6.75%)........... 26,975 53,950
-------- --------
Total Publicly Traded Debt................................ 434,193 732,403
-------- --------
Other Long-Term Debt...................................... 38,644 38,644
-------- --------
$472,837 $771,047
======== ========
</TABLE>
At December 31, 1998, the fair value of Protection One's long-term debt was
$852,483, compared to a carrying value of $842,938. The estimated fair values
may not be representative of actual values of the financial instruments that
could have been realized at year-end or may be realized in the future. Westar
Industries has no outstanding publicly traded debt.
18. COMMITMENTS AND CONTINGENCIES
Legal Proceedings
The Company, Western Resources, Protection One, Protection One Alarm
Monitoring, Inc. ("Monitoring"), and certain present and former officers and
directors of Protection One are defendants in a purported class action
litigation pending in the United States District Court for the Central District
of California, RONALD CATS, ET AL. V. PROTECTION ONE, INC., ET AL., No CV 99-
3755 DT (RCx). Pursuant to an Order dated August 2, 1999, four pending
purported class actions were consolidated into a single action. In March 2000,
plaintiffs filed a Second Consolidated Amended Class Action Complaint ("Amended
Complaint"). Plaintiffs purport to bring the action on behalf of a class
consisting of all purchasers of publicly traded securities of Protection One,
including common stock and notes, during the period of February 10, 1998
through November 12, 1999. The Amended Complaint asserts claims under Section
11 of the Securities Act of 1933 and Section 10(b) of the Securities Exchange
Act of 1934 against Protection One, Monitoring, and certain present and former
officers and directors of Protection One based on allegations that various
statements concerning Protection One's financial results and operations for
1997 and 1998 were false
F-35
<PAGE>
WESTAR INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollar amounts in thousands, except for per share amounts)
(interim amounts as of June 30 are unaudited)
and misleading and not in compliance with generally accepted accounting
principles. Plaintiffs allege, among other things, that former employees of
Protection One have reported that Protection One lacked adequate internal
accounting controls and that certain accounting information was unsupported or
manipulated by management in order to avoid disclosure of accurate information.
The Amended Complaint further asserts claims against Western Resources and
Westar Industries, Inc. as controlling persons under Sections 11 and 15 of the
Securities Act of 1933 and Sections 10(b) and 20(a) of the Securities Exchange
Act of 1934. A claim is also asserted under Section 11 of the Securities Act of
1933 against Protection One's auditor, Arthur Andersen LLP. The Amended
Complaint seeks an unspecified amount of compensatory damages and an award of
fees and expenses, including attorneys' fees. On June 12, 2000, Protection One
and the other defendants filed motions to dismiss in part the Amended
Complaint. On August 31, 2000, the plaintiffs filed their papers in opposition
to our action. These motions are currently pending and a hearing is set for
October 16, 2000. Protection One believes that all the claims asserted in the
Amended Complaint are without merit and intends to defend against them
vigorously. We cannot currently predict the impact of this litigation on us,
which could be material.
Six Protection One dealers have filed a class action lawsuit in the U.S.
District Court for the Western District of Kentucky alleging breach of contract
because of Protection One's interpretation of their dealer contracts. The
action is styled TOTAL SECURITY SOLUTIONS, INC., ET AL. V. PROTECTION ONE ALARM
MONITORING, INC., Civil Action No. 3:99CV-326-H (filed May 21, 1999). In
September 1999, the Court granted Protection One's motion to stay the
proceeding pending the individual plaintiffs' pursuit of arbitration as
required by the terms of their agreements. On June 23, 2000, the Court denied
plaintiffs' motion for collective arbitration. As of August 7, 2000, none of
these dealers have commenced arbitration.
Other Protection One dealers have threatened litigation or arbitration based
upon a variety of theories surrounding calculations of holdback and other
payments. Protection One believes it has complied with the terms of these
contracts and intends to vigorously defend its position. Although Protection
One believes that no such individual claim will have a material adverse effect,
Protection One cannot currently predict the aggregate impact of these disputes
with dealers, which could be material.
Protection One is a party to claims and matters of litigation incidental to
the normal course of its business. Additionally, Protection One receives
notices of consumer complaints filed with various state agencies. Protection
One has developed a dispute resolution process for addressing these
administrative complaints. The ultimate outcome of such matters cannot
presently be determined; however, in the opinion of management of Protection
One, the resolution of such matters will not have a material adverse effect
upon the company's consolidated financial position or results of operations.
SEC Review
As previously disclosed by Western Resources and Protection One, Protection
One has been advised by the Staff of the Division of Corporation Finance of the
SEC that, in its view, there are errors in Protection One's previously filed
financial statements that are material and that, in the view of the Staff, have
had the effect of inflating reported earnings commencing with the year ended
December 31, 1997. Protection One has had extensive discussions with the Staff
and exchanged numerous letters extending over a period of more than 18 months
about the purchase price allocated to intangible customer accounts in the
Multifamily and Westinghouse Security Systems acquisitions, the methodology
used to amortize intangible customer accounts and other matters. In Protection
One's Form 10-Q for the quarter ended September 30, 1999, Protection One
disclosed that it restated its financial statements for 1998 and for the
quarters ended March 31, 1999 and June
F-36
<PAGE>
WESTAR INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollar amounts in thousands, except for per share amounts)
(interim amounts as of June 30 are unaudited)
30, 1999 to reallocate portions of the initial purchase price for acquired
businesses in its Multifamily business segment. The reallocations involved an
increase of the amount allocated to customer accounts by $19,000, a reduction
of goodwill by $13,000 and an increase in deferred taxes payable by $6,000. In
addition, following the conclusion of a comprehensive review of its
amortization policy undertaken during the third quarter of 1999, Protection One
changed the method historically used for amortizing the cost of customer
accounts for the North America and Europe customer pools. The method used for
these pools changed from a straight-line amortization over ten years to a ten-
year 130% declining balance method in the case of the North America pool and a
125% declining balance method in the case of the Europe pool. The adoption of
the declining balance method effectively shortened the estimated expected
average customer life of these two customer pools. For further discussion of
these changes and their effect on Protection One's financial results, reference
is made to Protection One's Form 10-Q for the quarter ended September 30, 1999.
Following the announcement of these changes, Protection One had no further
communications from the Staff until April 4, 2000, when in response to its
inquiry concerning processing of filings by Protection One, the Staff resumed
its inquiry on these matters.
In a letter from the SEC Staff dated May 16, 2000, the Staff stated that
"the information that [Protection One] provided strongly suggests the presence
of departures from GAAP in Western Resources' accounting for the acquisition of
Westinghouse Security System[s], and in the subsequent accounting for those
acquired assets by Protection One." More specifically, the Staff's letter
states that it is concerned that Western Resources and Protection One
"improperly inflated" reported earnings following the Westinghouse Security
Systems acquisition. This letter also contains comments and requests for
information concerning the initial and final valuation of Westinghouse Security
Systems' customer accounts, the $12,750 write-down of the value of customer
accounts acquired from Westinghouse Security Systems that was recorded in the
fourth quarter of 1997, shortening of the estimated life of customer accounts
acquired from Westinghouse Security Systems no later than the end of 1997 and
the valuation of acquired alarm monitoring software.
Protection One responded by letter dated May 31, 2000 to each of the
comments contained in the Staff"s May 16th letter, indicated its strong
disagreement with the views of the Staff and stated its belief that there are
no issues of "inflated earnings," "departures from GAAP," or "errors" in its
historical financial statements. Protection One's independent public
accountants, Arthur Andersen LLP, indicated they concurred with the accounting
decisions of Protection One.
After another exchange of letters in June as a result of which Protection
One supplied more information to the Staff, on July 6, 2000, company personnel
and their advisors met with members of the Staff.
Thereafter, in a letter dated July 7, 2000, the Staff stated that Protection
One's financial statements should be "revised to reflect corrections of
accounting errors and revisions of disclosures" as more fully discussed in the
July 7th letter. The Staff's letter discussed six areas which it believed
required changes. Four of those areas relate to the acquisition of the security
business of Westinghouse. The remaining two areas relate to the accounting for
ordinary amortization of security accounts and the accounting for the effects
of unanticipated customer attrition. Among other things, the Staff stated its
view that aspects of Protection One's accounting for the acquisition of the
Westinghouse security business "could" be indicative of "manipulative intent"
--a statement with which Protection One strongly disagrees.
By letter dated July 25, 2000, Protection One advised the Staff of
Protection One's strong disagreement with the views of the Staff regarding
these accounting matters. Arthur Andersen LLP has reviewed the
F-37
<PAGE>
WESTAR INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollar amounts in thousands, except for per share amounts)
(interim amounts as of June 30 are unaudited)
correspondence, has been consulted on responses to the SEC and has confirmed to
the SEC Staff that they are not aware of modifications needed to fairly present
Protection One's historical financial statements.
On July 25, 2000, the Staff advised Protection One orally that this matter
had been referred to the Enforcement Division of SEC for consideration.
Protection One has not been contacted by the staff of the Division of
Enforcement. By letter dated July 27, 2000, the Staff advised Protection One
that they had reviewed Protection One's letter of July 25th and requested that
Protection One amend its filings "in a manner that is fully responsive to our
July 7th letter without further delay." The Staff advised that if amendments
were not filed promptly, they would consider what action, if any, would be
appropriate under the circumstances. In Protection One's July 25th letter,
Protection One requested the opportunity to meet again together with more
senior members of the Staff to discuss these matters further. A meeting with
the Staffs of the Division of Corporation Finance, the Office of the Chief
Accountant and the Division of Enforcement of the SEC was held on September 8,
2000. Protection One has provided additional information to the Staff as
requested at the meeting and continues to cooperate with the Staff.
At present, Protection One is unable to predict the outcome of its
disagreements with the Staff. To date, discussions with the Staff have occurred
for more than a year and a half and the process of resolving these matters
could extend over a protracted period. Were Protection One to make revisions to
its financial statements, based upon its understanding of the Staff's request
(the Staff has never indicated what values alternative to the ones used by
Protection One it would find to be acceptable), such revisions would result in
a material adverse effect on Protection One's and the Company's financial
position and results of operations. Protection One cannot predict what action
the Staff may take, including enforcement action, the impact any action may
have on us Protection One or our financial statements, or the effect or timing
of any action if taken.
Other
Under Protection One's agreements with dealers, Protection One may be
required to purchase customer accounts on an ongoing basis. Protection One is
currently spending less than $5,000 per month to purchase these customer
accounts.
The SEC commenced a private investigation in 1997 with Western Resources
(including Westar Industries) relating to, among other things, the timeliness
and adequacy of disclosure filings with the SEC by Western Resources (including
Westar Industries) with respect to securities of ADT Ltd. Western Resources
(including Westar Industries) is cooperating with the SEC staff in this
investigation.
19. SEGMENT REPORTING
Westar Industries' reportable segments are defined as components for which
separate financial information is available that is evaluated regularly by
management. The segments are managed separately because each segment represents
a strategic business unit that serves different markets.
The Company separates its business into four reportable segments, three of
which relate to its alarm monitoring business (North America, Multifamily and
Protection One Europe); and one of which related to its
F-38
<PAGE>
WESTAR INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollar amounts in thousands, except for per share amounts)
(interim amounts as of June 30 are unaudited)
other holdings (Other). North America provides residential, commercial, and
wholesale security alarm monitoring services, which include sales, installation
and related servicing of security alarm systems for residential and business
customers in the United States and Canada. Multifamily provides security alarm
services to apartments, condominiums and other multifamily dwellings. Europe
provides security alarm monitoring services to residential and business
customers in Europe. Other includes a 45% interest in ONEOK, a 40% interest in
Paradigm Direct LLC, investments in international power plants and other
investments which in the aggregate are not material to our business or results
of operations.
The accounting policies of the operating segments are the same as those
described in the summary of significant accounting policies. Westar Industries
manages its business segments based on earnings before interest, income taxes,
depreciation and amortization (EBITDA).
Reportable segments:
<TABLE>
<CAPTION>
For the year ended December 31, 1999
---------------------------------------------------
North Multi-
America family Europe Other Total
---------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C>
Revenue.................. $ 403,269 $ 38,901 $163,006 $ 1,284 $ 606,460
EBITDA................... 148,861 16,236 42,633 (32,498) 175,232
Amortization of
intangibles and
depreciation expense.... 198,264 9,507 29,472 1,448 238,691
Income (loss) from
operations.............. (55,212) 6,729 13,161 (13,939) (49,261)
Segment assets........... 1,991,211 225,550 341,474 874,857 3,433,092
Expenditures for
property, net........... 27,008 826 4,810 -- 32,644
Expenditures for customer
accounts, net........... 224,855 9,715 6,430 -- 241,000
<CAPTION>
For the year ended December 31, 1998
---------------------------------------------------
North Multi-
America family Europe Other Total
---------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C>
Revenue.................. $ 343,954 $ 33,417 $ 43,724 $ 1,342 $ 422,437
EBITDA................... 129,237 13,978 13,993 (40,057) 117,151
Amortization of
intangibles and
depreciation expense.... 107,545 7,721 3,945 956 120,167
Income (loss) from
operations.............. 18,292 6,257 10,048 (34,845) (248)
Segment assets........... 1,986,695 222,657 301,084 973,877 3,484,313
Expenditures for
property, net........... 29,092 950 2,669 -- 32,711
Expenditures for customer
accounts, net........... 271,399 4,365 1,903 -- 277,667
<CAPTION>
For the six months ended June 30, 2000
---------------------------------------------------
North Multi-
America family Europe Other Total
---------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C>
Revenue.................. $ 188,456 $ 19,591 $ 71,885 $ 686 $ 280,618
EBITDA................... 68,220 8,237 14,234 143,036 233,727
Amortization of
intangibles and
depreciation expense.... 102,098 7,719 14,812 1,082 125,711
Income (loss) from
operations.............. (36,928) 518 (800) (5,471) (42,681)
</TABLE>
F-39
<PAGE>
WESTAR INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollar amounts in thousands, except for per share amounts)
(interim amounts as of June 30 are unaudited)
<TABLE>
<CAPTION>
For the six months ended June 30, 1999
----------------------------------------
North Multi-
America family Europe Other Total
-------- ------- ------- ------ --------
<S> <C> <C> <C> <C> <C>
Revenue.............................. $196,865 $19,231 $80,997 $ 654 $297,747
EBITDA............................... 88,371 8,145 23,537 42,669 162,722
Amortization of intangibles and
depreciation expense................ 72,876 4,615 10,865 488 88,844
Income (loss) from operations........ 13,495 3,530 12,672 3,988 33,685
</TABLE>
Westar Industries currently has international operations. International data
for these locations for 1999 and 1998, respectively, is as follows:
<TABLE>
<CAPTION>
1999 1998
---------------- ----------------
Europe Canada Europe Canada
------ ------ ------ ------
<S> <C> <C> <C> <C>
Total revenues............................. $163,006 $ 8,073 $ 43,724 $ 3,756
Total assets............................... 341,474 26,854 296,356 29,504
</TABLE>
In 1997, Westar Industries operated under a single reportable segment
providing alarm monitoring services in the United States. Accordingly, no
further segment information is presented.
F-40
<PAGE>
ONEOK, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Exhibit
-------
<S> <C>
Independent Auditors' Report together with the audited consolidated
balance sheets as of August 31, 1999 and 1998 and the related
consolidated statements of income, shareholders' equity, and cash
flows for each of the years in the three year period ended August 31,
1999 and related notes............................................... A
Consolidated balance sheets as of December 31, 1999 and August 31,
1999 and the related consolidated statements of income and cash flows
for the four months ended December 31, 1999 and 1998 and related
notes................................................................ B
Consolidated balance sheets as of June 30, 2000 and December 31, 1999
and the related consolidated statements of income and cash flows for
the three and six months ended June 30, 2000 and 1999 and related
notes................................................................ C
</TABLE>
----------------
All financial information concerning ONEOK was excerpted from the reports it
files with the SEC pursuant to the Securities Exchange Act. We have not
independently verified the information concerning ONEOK contained in this
prospectus and we do not make any representation or warranty concerning the
accuracy thereof.
<PAGE>
EXHIBIT A
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of ONEOK, Inc.:
We have audited the accompanying consolidated balance sheets of ONEOK, Inc.
and subsidiaries as of August 31, 1999 and 1998, and the related consolidated
statements of income, shareholders' equity, and cash flows for each of the
years in the three-year period ended August 31, 1999. These consolidated
financial statements are the responsibility of ONEOK's management. Our
responsibility is to express an opinion on these consolidated 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of ONEOK, Inc.
and subsidiaries as of August 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the years in the three-year period
ended August 31, 1999, in conformity with generally accepted accounting
principles.
KPMG LLP
Tulsa, Oklahoma
October 21, 1999
A-1
<PAGE>
ONEOK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
(Thousands of Dollars, except
per share amounts)
<S> <C> <C> <C>
Operating Revenues............................ $1,842,810 $1,820,758 $1,161,927
Cost of gas............................... 1,156,024 1,220,009 725,960
---------- ---------- ----------
Net Revenues.................................. 686,786 600,749 435,967
---------- ---------- ----------
Operating Expenses
Operations and maintenance.................. 297,784 277,068 210,852
Depreciation, depletion, and amortization... 129,704 101,653 74,509
General Taxes............................... 39,715 33,217 22,491
---------- ---------- ----------
Total Operating Expenses.................. 467,203 411,938 307,852
---------- ---------- ----------
Operating Income.......................... 219,583 188,811 128,115
---------- ---------- ----------
Other Income.................................. 6,639 14,644 --
Interest...................................... 52,809 35,075 34,008
Income Taxes.................................. 67,056 66,585 34,839
---------- ---------- ----------
Net Income.................................... 106,357 101,795 59,268
Preferred Stock Dividends..................... 37,247 26,979 285
---------- ---------- ----------
Income Available for Common Stock......... $ 69,110 74,816 58,983
========== ========== ==========
Earnings Per Share of Common Stock--Basic..... $ 2.19 $ 2.44 2.13
========== ========== ==========
Earnings Per Share of Common Stock--Diluted... $ 2.06 $ 2.23 2.13
========== ========== ==========
Dividends Per Share of Common Stock........... $ 1.24 $ 1.20 1.20
========== ========== ==========
Average Shares of Common Stock--Basic......... 31,498,002 30,674,475 27,644,181
Average Shares of Common Stock--Diluted....... 51,570,723 45,729,363 27,644,181
</TABLE>
See accompanying notes to consolidated financial statements.
A-2
<PAGE>
ONEOK, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
August 31,
---------------------
1999 1998
---------- ----------
(Thousands of
Dollars)
<S> <C> <C>
Assets
Current Assets
Cash and cash equivalents............................... $ 4,402 $ 86
Trade accounts and notes receivable..................... 228,336 177,649
Materials and supplies.................................. 10,792 10,046
Gas in storage.......................................... 108,159 128,334
Advance payments for gas................................ 3,600 3,619
Deferred income taxes................................... 9,702 10,094
Purchased gas cost adjustment........................... 4,552 --
Other current assets.................................... 69,724 8,245
---------- ----------
Total Current Assets.................................. 439,267 338,073
---------- ----------
Property, Plant and Equipment
Distribution............................................ 1,771,400 1,717,800
Transportation and Storage.............................. 483,983 424,489
Marketing............................................... 5,786 5,051
Gathering and Processing................................ 358,439 68,688
Production.............................................. 399,613 327,970
Other................................................... 38,405 57,932
---------- ----------
Total Property, Plant and Equipment................... 3,057,626 2,601,930
Accumulated depreciation, depletion, and amortization... 988,797 915,769
---------- ----------
Net Property............................................ 2,068,829 1,686,161
---------- ----------
Deferred Charges and Other Assets
Investments............................................. 73,777 10,505
Regulatory assets, net.................................. 246,658 229,543
Goodwill................................................ 81,560 77,422
Other................................................... 114,854 80,783
---------- ----------
Total Deferred Charges and Other Assets............... 516,849 398,253
---------- ----------
Total Assets.......................................... $3,024,945 $2,422,487
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
A-3
<PAGE>
ONEOK, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
August 31,
----------------------
1999 1998
---------- ----------
(Thousands of
Dollars)
<S> <C> <C>
Liabilities and Shareholders' Equity
Current Liabilities
Current maturities of long-term debt.................. $ 22,817 $ 16,909
Notes payable......................................... 263,747 212,000
Accounts payable...................................... 183,759 136,601
Dividends payable..................................... 9,275 9,007
Accrued taxes......................................... 11,186 16,829
Accrued interest...................................... 7,042 7,814
Customers' deposits................................... 17,139 17,042
Purchased gas cost adjustment......................... -- 12,168
Other................................................. 28,617 32,443
---------- ----------
Total Current Liabilities........................... 543,582 460,813
---------- ----------
Long-term Debt, excluding current maturities............ 810,087 312,355
Deferred Credits and Other Liabilities
Deferred income taxes................................. 323,624 313,955
Other deferred credits................................ 173,193 166,493
---------- ----------
Total Deferred Credits and Other Liabilities........ 496,817 480,448
---------- ----------
Total Liabilities................................. 1,850,486 1,253,616
---------- ----------
Commitments and Contingencies (Note I)
Shareholders' Equity
Convertible Preferred Stock, $0.01 par value:
Series A authorized 20,000,000 shares; issued and
outstanding 19,946,448 shares at August 31, 1999
and 1998........................................... 199 199
Series B authorized 30,000,000 shares; issued and
outstanding 0 shares at August 31, 1999 and 83,826
shares at August 31, 1998.......................... -- 1
Common stock, $0.01 par value: authorized 100,000,000
shares; issued 31,599,305 shares and outstanding
30,884,225 shares at August 31, 1999 and issued and
outstanding 31,576,287 shares at August 31, 1998..... 316 316
Paid in capital......................................... 894,978 897,547
Retained earnings....................................... 301,536 270,808
Treasury stock at cost: 715,080 shares at August 31,
1999................................................... (22,570) --
---------- ----------
Total Shareholders' Equity.......................... 1,174,459 1,168,871
---------- ----------
Total Liabilities and Shareholders' Equity.......... $3,024,945 $2,422,487
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
A-4
<PAGE>
ONEOK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- --------
(Thousands of Dollars)
<S> <C> <C> <C>
Operating Activities
Net income................................... $ 106,357 $ 101,795 $ 59,268
Depreciation, depletion, and amortization.... 129,704 101,653 74,509
Gain on sale of assets....................... (6,639) (14,644) --
Net (income) losses from other investments... (3,861) -- 257
Deferred income taxes........................ 14,925 (7,623) (2,988)
Other........................................ -- (2,577) --
Changes in assets and liabilities
(Increase) decrease in accounts and notes
receivable................................ (50,687) 53,400 18,401
(Increase) decrease in inventories......... 19,429 1,232 13,226
(Increase) decrease in other assets........ (88,930) 13,472 (10,096)
(Increase) decrease in regulatory assets... (6,261) -- 384
Increase (decrease) in accounts payable and
accrued liabilities....................... 41,320 51,957 (14,897)
Changes in purchased gas cost adjustment... (16,720) 54,257 10,539
Increase (decrease) in deferred credits and
other liabilities......................... (7,034) (6,396) 3,448
--------- --------- --------
Cash Provided by Operating Activities.... 131,603 346,526 152,051
--------- --------- --------
Investing Activities
Changes in other investments, net............ (59,422) (3,778) 1,698
Acquisitions, net............................ (296,287) (24,421) --
Capital expenditures, net of salvage......... (210,076) (301,515) (90,530)
Proceeds from sale of property............... 16,500 30,000 --
--------- --------- --------
Cash Used in Investing Activities........ (549,285) (299,714) (88,832)
--------- --------- --------
Financing Activities
Issuance (payment) of notes payable, net..... 51,747 5,302 (5,230)
Issuance of debt............................. 695,888 -- --
Payment of debt.............................. (224,868) (17,859) (14,000)
Issuance of common stock..................... 1,380 6,257 7,363
Acquisition of treasury stock................ (22,570) -- --
Dividends paid............................... (76,281) (54,803) (28,033)
Acquisition and cancellation of preferred
stock....................................... (3,298) -- (9,540)
--------- --------- --------
Cash Provided by (Used in) Financing
Activities.............................. 421,998 (61,103) (49,440)
--------- --------- --------
Change in Cash and Cash Equivalents............ 4,316 (14,291) 13,779
Cash and Cash Equivalents at Beginning of
Year.......................................... 86 14,377 598
--------- --------- --------
Cash and Cash Equivalents at End of Year....... $ 4,402 $ 86 $ 14,377
========= ========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
A-5
<PAGE>
ONEOK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Preferred Common Paid-in Retained Treasury
Stock Stock Capital Earnings Stock Total
--------- ------ -------- -------- -------- ----------
(Thousands of Dollars)
<S> <C> <C> <C> <C> <C> <C>
August 31, 1996......... $ 9,000 $272 $206,812 $207,611 $ -- $ 423,695
Net Income............ -- -- -- 59,268 -- 59,268
Issuance of common
stock................ -- 9 22,710 -- -- 22,719
Preferred stock
dividends--$2.375 per
share................ -- -- -- (321) -- (321)
Redemption of Series A
Preferred Stock...... (9,000) -- (540) -- (9,540)
Common stock
dividends--$1.20 per
share................ -- -- -- (33,195) -- (33,195)
------- ---- -------- -------- -------- ----------
August 31, 1997......... -- 281 229,522 232,823 -- 462,626
Net income............ -- -- -- 101,795 -- 101,795
Issuance of common
stock
Acquisitions........ -- 33 93,648 -- -- 93,681
Stock Purchase
Plans.............. -- 2 6,255 -- -- 6,257
Convertible preferred
stock dividends--
$1.80 and $1.50 per
share for Series A
and B, respectively.. -- -- -- (26,979) -- (26,979)
Issuance of Series A
and Series B
Convertible Preferred
Stock................ 200 -- 568,122 -- -- 568,322
Common stock
dividends--$1.20 per
share................ -- -- -- (36,831) -- (36,831)
------- ---- -------- -------- -------- ----------
August 31, 1998......... 200 316 897,547 270,808 -- 1,168,871
Net Income............ -- -- -- 106,357 -- 106,357
Issuance of common
stock
Stock Purchase
Plans.............. -- -- 1,380 -- -- 1,380
Convertible preferred
stock dividends--
$1.86 and $1.55 per
share for Series A
and B, respectively.. -- -- -- (37,247) -- (37,247)
Acquisition and
Cancellation of
Series B Convertible
Preferred Stock...... (1) -- (3,949) 652 -- (3,298)
Acquisition of
Treasury Stock....... -- -- -- -- (22,570) (22,570)
Common stock
dividends--$1.24 per
share................ -- -- -- (39,034) -- (39,034)
------- ---- -------- -------- -------- ----------
August 31, 1999......... $ 199 $316 $894,978 $301,536 $(22,570) $1,174,459
======= ==== ======== ======== ======== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
A-6
<PAGE>
ONEOK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(A) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation--ONEOK, Inc. acquired the gas business of Western
Resources, Inc. (Western) on November 26, 1997. The transaction was effective
November 30, 1997, for financial reporting purposes. See Note B of Notes to
Consolidated Financial Statements.
Nature of Operations--ONEOK, Inc. and subsidiaries (collectively, the
Company) is a diversified energy company engaged in the production, processing,
gathering, storage, transportation, distribution, and marketing of
environmentally clean fuels and products. The Company manages its business in
six segments: Distribution, Transportation and Storage, Marketing, Gathering
and Processing, Production, and Other.
The Company's Distribution segment provides natural gas distribution
services in Oklahoma and Kansas through its divisions Oklahoma Natural Gas
Company and Kansas Gas Service Company. The Transportation and Storage segment
owns and leases natural gas storage facilities and transports gas in Oklahoma
and Kansas. The Marketing segment purchases and markets natural gas, primarily
in the central area of the United States and began trading electricity on a
limited basis in 1999. The Company owns and operates gas processing plants as
well as gathering pipeline in Oklahoma through its Gathering and Processing
segment. The Production segment produces natural gas and oil and owns natural
gas and oil reserves. The Company's Other segment, whose results of operations
are not material, operates and leases the Company's headquarters building and
parking facility.
Consolidation--The consolidated financial statements include the accounts of
ONEOK, Inc. and its wholly-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation. Investments in
twenty percent to 50 percent-owned affiliates are accounted for on the equity
method. Investments in less than twenty percent owned affiliates are accounted
for on the cost method.
Regulation--The distribution, transportation and portions of the storage and
gathering operations of the Company are subject to the rate regulation and
accounting requirements of the Oklahoma Corporation Commission (OCC) and of the
Kansas Corporation Commission (KCC). Certain other transportation activities of
the Company are subject to regulation by the Federal Energy Regulatory
Commission (FERC). Accordingly, these operations follow the accounting and
reporting guidance contained in Statement of Financial Accounting Standards No.
71, "Accounting for the Effects of Certain Types of Regulation." Allocation of
costs and revenues to accounting periods for ratemaking and regulatory purposes
may differ from bases generally applied by nonregulated companies. Such
allocations to meet regulatory accounting requirements are considered to be
generally accepted accounting principles for regulated utilities provided that
there is a demonstrable ability to recover any deferred costs in future rates.
A July, 1999 order by the OCC removed the Oklahoma gathering and storage
assets from utility regulation effective November 1, 1999. An August, 1999
order from the OCC distinguished between upstream (transportation) and
downstream (distribution) assets and cleared the way for competitive bidding of
upstream services to begin fall, 1999.
During the rate-making process, regulatory commissions may require a utility
to defer recognition of certain costs to be recovered through rates over time
as opposed to expensing such costs as incurred. This allows the utility to
stabilize rates over time rather than passing such costs on to the customer for
immediate recovery. This causes certain expenses to be deferred as a regulatory
asset and amortized to expense as it is recovered through rates. Total
regulatory assets resulting from this deferral process are approximately
$247 million and $230 million at August 31, 1999 and 1998, respectively. As the
Company continues to unbundle its services, certain of these assets will no
longer meet the criteria for following SFAS No. 71, and accordingly, a write-
off of regulatory assets and stranded costs may be required. However, the
Company does not anticipate that these costs will be significant. See Note D of
Notes to Consolidated Financial Statements.
A-7
<PAGE>
ONEOK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Revenue Recognition--The Company recognizes revenue when services are
rendered or product is delivered. Major industrial and commercial gas
distribution customers are invoiced as of the end of each month. Certain gas
distribution customers, primarily residential and some commercial, are invoiced
on a cycle basis throughout the month, and the Company accrues unbilled
revenues at the end of each month. Oklahoma Natural Gas Company's (ONG's)
tariff rates for residential and commercial customers contain a temperature
normalization clause that provides for billing adjustments from actual volumes
to normalized volumes during the winter heating season. Revenues from
marketing, gathering and processing, and production are recognized on the sales
method. Credit is granted to these customers under customary terms.
Regulated Property--Regulated properties are stated at cost which includes
personnel costs, general and administrative costs, and allowance for funds used
during construction. The allowance for funds used during construction
represents the capitalization of estimated average cost of borrowed funds (7.8
percent, 8.6 percent, and 8.6 percent, in 1999, 1998, and 1997, respectively)
used during the construction of major projects and is recorded as a credit to
earnings.
Depreciation is calculated using the straight-line method based upon rates
prescribed for ratemaking purposes. The average depreciation rate for property
that is regulated by the OCC approximated 3.8 percent in 1999, and 3.7 percent
in 1998 and 1997. The average depreciation rates for properties regulated by
the KCC were approximately 3.2 percent in 1999 and 3.3 percent in 1998. The
average depreciation rates for Mid Continent Market Center (MCMC) properties
were 3.1 percent in 1999 and 3.4 percent in 1998.
Maintenance and repairs are charged directly to expense. Generally, the cost
of property retired or sold, plus removal costs, less salvage, is charged to
accumulated depreciation. Gains and losses from sales or transfers of operating
units or systems are recognized in income.
<TABLE>
<CAPTION>
Remaining Service
Life (Years)
--------- -------
<S> <C> <C>
Distribution property................................... 22-25 40
Gathering property...................................... 5-33 47
Storage property........................................ 5-19 40
Transmission property................................... 18-33 47
Other property.......................................... 6-24 40
</TABLE>
Production Property--The Company uses the successful-efforts method to
account for costs incurred in the acquisition and exploration of oil and
natural gas reserves. Costs to acquire mineral interests in proved reserves and
to drill and equip development wells are capitalized. Geological and
geophysical costs and costs to drill exploratory wells which do not find proved
reserves are expensed. Unproved oil and gas properties which are individually
significant are periodically assessed for impairment. The remaining unproved
oil and gas properties are aggregated, and amortized based upon remaining lease
terms and exploratory and developmental drilling experience. Depreciation and
depletion are calculated using the unit-of-production method based upon
periodic estimates of proven oil and gas reserves.
Other Property--Gas processing plants and all other properties are stated at
cost. Gas processing plants are depreciated using various rates based on
estimated lives of available gas reserves. All other property and equipment is
depreciated using the straight-line method over its estimated useful life.
Inventories--Materials and supplies are priced at average cost. Noncurrent
gas in storage is classified as property and is priced at cost. Cost of current
gas in storage for ONG is determined under the last-in, first-out, (lifo)
methodology. The estimated replacement cost of current gas in storage valued
under the lifo method was $23.1 million and $73.6 million at August 31, 1999
and 1998, respectively, compared to its value under the lifo method of $18.1
million and $68.3 million at August 31, 1999 and 1998, respectively. Current
gas in storage for all other companies is determined using the weighted average
cost of gas method.
A-8
<PAGE>
ONEOK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Income Taxes--Deferred income taxes are recognized for the tax consequences
of "temporary differences" by applying enacted statutory tax rates applicable
to future years to differences between the financial statement carrying amounts
and the tax bases of existing assets and liabilities. The effect on deferred
taxes of a change in tax rates is deferred and amortized for operations
regulated by the OCC and for all other operations, is recognized in income in
the period that includes the enactment date. The Company continues to amortize
previously deferred investment tax credits on gas distribution and transmission
properties over the period prescribed by the OCC and KCC for ratemaking
purposes.
Commodity Price Risk Management--To minimize the risk from market
fluctuations in the price of natural gas and oil, the Company enters into
futures transactions, swaps, and options in order to hedge certain natural gas
in storage, existing physical gas purchases or sales commitments, as well as
anticipated sales of natural gas production. In order to qualify as a hedge,
the price movements in the underlying commodity derivatives must be
sufficiently correlated with the hedged transaction. Changes in the market
value of these financial instruments utilized as hedges are (1) recognized as
an adjustment of the carrying value in the case of existing assets and
liabilities, (2) included in the measurement of the transaction that satisfies
the commitment in the case of existing commitments, and (3) included in the
measurement of the subsequent transaction in the case of anticipated
transactions. In cases where anticipated transactions do not occur, deferred
gains and losses are recognized when such transactions were scheduled to occur.
Some of these financial instruments carry off-balance sheet risks. See Note C
of Notes to Consolidated Financial Statements.
Impairments--The Company accounts for the impairment of long-lived assets to
be recognized when indicators of impairment are present and the undiscounted
cash flows are not sufficient to recover the assets carrying amount. The
impairment loss is measured by comparing the fair value of the asset to its
carrying amount. Fair values are based on discounted future cash flows or
information provided by sales and purchases of similar assets. The Company
evaluates impairment of production assets on the lowest possible level, (a
field by field basis) rather than using a total company basis for its proved
properties.
Use of Estimates--Management has made a number of estimates and assumptions
relating to reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from these estimates.
Goodwill--The Company amortizes goodwill, which represents the excess of the
purchase price over the fair value of net assets acquired, over a period of 40
years. The Company assesses the recoverability of this intangible asset by
determining whether the amortization of the goodwill balance over its remaining
life can be recovered through undiscounted future operating cash flows of the
acquired operation.
Earnings Per Common Share--Basic earnings per share are calculated based on
the weighted average number of shares of common stock outstanding during the
period. Diluted earnings per share are calculated based on the weighted average
number of shares of common stock outstanding plus potentially dilutive
securities.
Environmental Expenditures--The Company accrues for losses associated with
environmental remediation obligations when such losses are probable and
reasonably estimatable. Accruals for estimated losses from environmental
remediation obligations generally are recognized no later than completion of
the remedial feasibility study. Such accruals are adjusted as further
information develops or circumstances change. Recoveries of environmental
remediation costs from other parties are recorded as assets when their receipt
is deemed probable.
Cash and Cash Equivalents--Cash equivalents consist of highly liquid
investments, which are readily convertible into cash and have original
maturities of three months or less.
A-9
<PAGE>
ONEOK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Common Stock Options and Awards--The Company follows SFAS No. 123,
"Accounting for Stock-Based Compensation" which permits, but does not require,
a fair value based method of accounting for stock-based employee compensation.
Alternatively, SFAS No. 123 allows companies to continue applying the
provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" ("APB 25"), however, such companies are required to
disclose pro forma net income and earnings per share as if the fair value based
method had been applied. The Company has elected to continue to apply the
provisions of APB 25 for purposes of computing compensation expense and has
provided the pro forma disclosure provisions of SFAS No. 123 in Note N of Notes
to Consolidated Financial Statements.
Reclassification--Certain amounts in the 1997 and 1998 consolidated
financial statements have been reclassified to conform with the 1999
presentation. In particular, the Company reclassified other income, including
gains on sales of assets from operating revenue to a separate caption, and now
presents operating income.
(B) ACQUISITION
On November 26, 1997, Old ONEOK acquired from Western all of the gas
distribution assets of Western and all of the outstanding capital stock of
Western's directly or indirectly wholly-owned subsidiaries, Westar Gas
Marketing, Inc. and MCMC, and assumed all of the liabilities of Western that
arose primarily out of the gas business and approximately $161 million in debt
of Western; and Old ONEOK merged with and into New ONEOK, with New ONEOK as the
surviving corporation. The shares of Old ONEOK common stock were converted on a
one-for-one basis into shares of stock of New ONEOK, and Western received
2,996,702 shares of the Company's Common Stock and 19,317,584 shares of the
Company's Series A Convertible Preferred Stock. Such shares and additional
shares purchased by Western at the closing of the transaction represented in
the aggregate 9.9 percent of the outstanding Common Stock or 45 percent of the
Capital Stock of the Company. A shareholder agreement, which includes
standstill provisions, prevents Western from increasing its position in the
Company above a common stock interest of 45 percent on a fully converted basis
and maintains control of the Company in the hands of the public shareholders of
the Company.
The acquisition was accounted for as a purchase and, accordingly, the
operating results of the properties acquired from Western are included in the
consolidated financial statements since December 1, 1997. The aggregate
purchase price was approximately $824 million, including debt assumed and
transaction costs. The aggregate purchase price, which was funded through the
issuance of a combination of preferred and common stock, was allocated based on
the estimated fair value of the net assets. The excess of the purchase price
over the fair value of the net assets acquired approximated $74 million and is
being amortized over 40 years.
(C) FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
Financial Instruments--The following table presents the carrying amounts and
fair values of certain of the Company's financial instruments. Fair value is
defined as the amount at which the instrument could be exchanged in a current
transaction between willing parties. The estimated fair value of long-term debt
and notes payable has been determined using quoted market prices of same or
similar issues, discounted cash flows, and/or rates currently available to the
Company for debt with similar terms and remaining maturities. The fair value of
natural gas and oil swaps, options, and futures contracts generally reflect the
estimated amounts that the Company would pay or receive to terminate the
contracts at the reporting date, thereby taking into account the unrealized
gains and losses on open contracts. There is no readily available market for
natural gas swaps. The items presented without a carrying value are off-balance
sheet financial instruments. All of the Company's financial instruments are
held for purposes other than trading.
A-10
<PAGE>
ONEOK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
August 31, 1999
--------------------
Book Approximate
Value Fair Value
-------- -----------
(Thousands of
Dollars)
<S> <C> <C>
Cash and cash equivalents............................. $ 4,402 $ 4,402
Accounts and notes receivable......................... $228,336 $228,336
Natural gas swaps..................................... -- $ 6,359
Natural gas options................................... -- $ 6,522
Natural gas futures................................... -- $(24,421)
Notes payable......................................... $263,747 $263,747
Long-term debt........................................ $836,975 $790,961
-------- --------
</TABLE>
<TABLE>
<CAPTION>
August 31, 1998
---------------------
Book Approximate
Value Fair Value
--------- -----------
(Thousands of
Dollars)
<S> <C> <C>
Cash and cash equivalents............................ $ 86 $ 86
Accounts and notes receivable........................ $ 177,649 $177,649
Natural gas swaps.................................... -- $ 750
Natural gas options.................................. -- $ 3,486
Natural gas futures.................................. -- $ 9,971
Notes payable........................................ $ 212,000 $212,000
Long-term debt....................................... $ 329,264 $358,207
--------- --------
</TABLE>
Risk Management--The Company's operations subject earnings to variability
based on fluctuations in the market price and transportation costs of natural
gas and oil and in the temperature during the heating season. The Company's
exposure arises from fixed price purchase or sale agreements which extend for
periods of up to 48 months, certain gas storage inventories, and anticipated
sales of oil and gas production. In order to mitigate the financial risks
associated with such activities, the Company routinely enters into natural gas
and oil futures contracts, swaps, and options, collectively referred to herein
as derivatives. Net open positions in terms of price, volume, and specified
delivery point do occur. The Company is using derivative contracts to mitigate
its risk associated with weather for the winter of 1999/2000 and reduce the
impact of degree day variances from normal.
The futures contracts are purchased and sold on the New York Mercantile
Exchange (NYMEX) or the Kansas City Board of Trade (KCBOT) and require the
Company to buy or sell natural gas at a fixed price. Swap agreements generally
require one party to make payments based on the difference between a fixed
price or fixed differential from the NYMEX or KCBOT price while the other party
pays a price based on a published index. Swaps and options allow the Company to
commit to purchase gas at one location and sell it at another location without
assuming unacceptable risk with respect to changes in the price of gas or the
cost of the intervening transportation. Natural gas options held to hedge price
risk provide the right, but not the requirement, to buy or sell natural gas at
a fixed price. The Company utilizes options to limit overall price risk
exposure. None of these derivatives are held for speculative purposes and, in
general, the Company's risk management policy requires that positions taken
with derivatives be offset by positions in physical transactions or other
derivatives.
The notional value of futures contracts purchased and sold is $316.2 million
and $407.2 million, respectively, at August 31, 1999. The term "notional
amount" refers to the current contract unit price times the contract volume for
the relevant derivative. In general, such amounts are not indicative of the
cash requirements associated with these derivatives. The notional amount is
intended to be indicative of the
A-11
<PAGE>
ONEOK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Company's level of activity in such derivatives, although the amounts at risk
are significantly smaller because, in general, changes in market value of these
derivatives are offset by changes in the value associated with the underlying
physical transaction or other derivatives.
<TABLE>
<CAPTION>
Estimated
Volumes Volumes Fair Value
Purchased Sales Gain (Loss)(A)
--------- ------- --------------
(Volumes in Mmcf,
Thousands of Dollars)
<S> <C> <C> <C>
August 31, 1999
Options................................... 238,420 38,390 $ 6,522
Swaps..................................... 49,545 47,110 $ 6,359
Futures................................... 113,730 156,140 $(24,421)
------- ------- --------
August 31, 1998
Options................................... 4,543 2,536 $ 3,486
Swaps..................................... 49,281 44,715 $ 750
Futures................................... 5,375 35,492 $ 9,971
</TABLE>
--------
(A) represents the estimated amount which would have been recognized upon
termination of the relevant derivatives as of the date indicated. The amount
which is ultimately charged or credited to earnings is affected by subsequent
changes in the fair value of these derivatives.
NYMEX- and KCBOT-traded futures and option contracts are guaranteed by NYMEX
and KCBOT and have nominal credit risk. All other derivative transactions
expose the Company to off-balance sheet risk in the event of non performance by
the counterparts. In order to minimize this risk, the Company analyzes each
counterpart's financial condition prior to entering into an agreement,
establishes credit limits, and monitors the appropriateness of these limits on
an on-going basis. Swap agreements are generally settled at the expiration
of the contract term and may be subject to margin requirements with the
counterparty. NYMEX- and KCBOT-traded futures and options contracts require
daily cash settlement in margin accounts with brokers.
(D) REGULATORY ASSETS
The table presents a summary of regulatory assets, net of amortization,
outstanding at August 31, 1999 and 1998.
<TABLE>
<CAPTION>
August 31,
-----------------
1999 1998
-------- --------
(Thousands of
Dollars)
<S> <C> <C>
Recoupable take-or-pay.................................. $ 85,996 $ 90,708
Pension costs........................................... 20,881 25,061
Postretirement costs other than pension................. 61,830 59,963
Other................................................... 8,521 8,917
Transition costs........................................ 22,903 18,447
Reacquired debt costs................................... 22,413 --
Income taxes............................................ 24,114 26,447
-------- --------
Regulatory assets, net................................ $246,658 $229,543
======== ========
</TABLE>
A-12
<PAGE>
ONEOK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The remaining recovery period for these assets that the Company is not
earning a return on is set forth in the table below.
<TABLE>
<CAPTION>
Remaining Recovery
Period (Months)
------------------
<S> <C>
Postretirement costs other than pension-Oklahoma........ 169
Income taxes-Oklahoma................................... 142-158
Transition costs........................................ 459
-------
</TABLE>
The OCC has authorized recovery of the take-or-pay settlement, pension and
postretirement benefit costs over a 10 to 20 year period. Kansas Gas Service
has been deferring and recording postretirement benefits in excess of pay-as-
you-go as a regulatory asset as authorized by the KCC. See Note H of Notes to
Consolidated Financial Statements.
The KCC has allowed certain transition costs to be amortized and recovered
in rates over a forty year period with no rate of return on the unrecovered
balance. Management believes that all transition costs recorded as a regulatory
asset will be recovered through rates based on the accounting orders received
and regulatory precedents established by the KCC.
The Company amortizes reacquired debt costs, which includes unamortized debt
costs, in accordance with the accounting rules prescribed by the OCC and KCC.
These costs have been included in recent rate filings with the OCC and will be
included in future rate filings with the KCC as a component of interest.
In accordance with various rate orders received from the KCC and the OCC,
Kansas Gas Service has not yet collected through rates the amounts necessary to
pay a significant portion of the net deferred income tax liabilities. As
management believes it is probable that the net future increases in income
taxes payable will be recovered from customers, it has recorded a regulatory
asset for these amounts.
Amortization expense related to regulatory assets was approximately $13.7
million, $11.4 million, and $10.1 million in 1999, 1998, and 1997,
respectively.
(E) CAPITAL STOCK
The Company has approximately 68 million shares of unrestricted common stock
available for issue. The Company redeemed all of its outstanding shares of
Series A Preferred Stock, par value $50 per share, at its stated voluntary
liquidation value of $53 per share during the third quarter of fiscal 1997. The
Company issued Series A Convertible Preferred Stock, par value $0.01 per share,
at the time of the transaction with Western. The holders of Series A
Convertible Preferred Stock are entitled to receive a dividend payment, with
respect to each dividend period of the common stock, equal to 1.5 times the
dividend amount declared in respect of each share of common stock for the first
five years of the agreement. After five years, the rate will be 1.25 times the
dividend amount declared in respect of each share of common stock, and at no
time, will the dividend be less that $1.80 per share. The terms of Series B
Convertible Preferred Stock are the same as Series A Convertible Preferred
Stock, except that the dividend amount is equal to the greater of 1.25 times
the common stock dividend or $1.50 per share. In 1999, the Company acquired and
canceled all of the Series B Convertible Preferred Stock it had issued in 1998
and 1999. Series C Preferred Stock is designed to protect ONEOK, Inc.
shareholders from coercive or unfair takeover tactics. Holders of Series C
Preferred Stock are entitled to receive, in preference to the holders of ONEOK
common stock, quarterly dividends in an amount per share equal to the greater
of $1 or subject to adjustment, 100 times the aggregate per share amount of all
cash dividends, and 100 times the aggregate per share amount of all non-cash
dividends. No Series C Preferred Stock has been issued.
A-13
<PAGE>
ONEOK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Series A and Series B Convertible Preferred Stock is convertible,
subject to certain restrictions, at the option of the holder, into ONEOK, Inc.,
Common Stock at the rate of one share for each share of Series A or Series B
Convertible Preferred Stock.
During 1999, the Company initiated a stock buyback plan for up to 15 percent
of its capital stock. The program authorizes the Company to make purchases of
its common stock on the open market with the timing and terms of purchases and
the number of shares purchased to be determined by management based on market
conditions and other factors. Through August 31, 1999, the shares purchased
totaled 715,080. The purchased shares will be held in treasury and will be
available for general corporate purposes, funding of stock-based compensation
plans, resale at a future date, or retirement. Purchases will be financed with
short-term debt or made from available funds.
The Board of Directors has reserved 3.0 million shares of ONEOK, Inc.'s
common stock for the Direct Stock Purchase and Dividend Reinvestment Plan of
which 127 thousand shares were issued in 1999 and 142 thousand shares were
issued in 1998; and has reserved approximately 7.2 million shares for the
Thrift Plan for Employees of ONEOK, Inc. and Subsidiaries.
Under the most restrictive covenants of the Company's loan agreements,
$251.4 million (83.4 percent) of retained earnings at August 31, 1999, was
available to pay dividends.
(F) LINES OF CREDIT AND SHORT-TERM NOTES PAYABLE
Commercial paper and short-term notes payable totaling $264 million and $212
million were outstanding at August 31, 1999 and 1998, respectively. The
commercial paper and notes carried average interest rates of 5.42 percent and
5.83 percent at August 31, 1999 and 1998, respectively. The Company has a $600
million short-term unsecured revolving credit facility which provides a back-up
line of credit for commercial paper in addition to providing short-term funds.
Interest rates and facility fees are based on prevailing market rates and the
Company's credit ratings. No compensating balance requirements existed at
August 31, 1999. Maximum short-term debt from all sources as approved by the
Company's Board of Directors is $750 million.
(G) LONG-TERM DEBT
All long-term notes payable at August 31, 1999, are unsecured. The aggregate
current maturities of long-term debt for each of the five years ending August
31, 2004, are $22.8 million; $18.2 million; $14.7 million; $14.7 million; and
$14.7 million, respectively, including $7.1 million which is callable at the
option of the holder in each of those years.
A-14
<PAGE>
ONEOK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
During fiscal 1999, the Company refinanced $116.2 million of the 9.7% and
$59.7 million of the 9.75% long-term notes payable with new debt at a lower
interest rate. In connection therewith, the Company paid a redemption premium
of $18 million. See Note D of Notes to the Consolidated Financial Statements.
<TABLE>
<CAPTION>
August 31,
-----------------
1999 1998
-------- --------
(Thousands of
Dollars)
<S> <C> <C>
Long-term Notes Payable
6.20% due 1999.......................................... $ $ 8,000
6.43% due 2000.......................................... 5,000 5,000
6.5% due 2001........................................... 1,534 5,393
8.44% due 2004.......................................... 40,000 40,000
7.75% due 2006.......................................... 300,000 --
8.32% due 2007.......................................... 32,000 36,000
6.00% due 2009.......................................... 100,000 --
6.40% due 2019.......................................... 99,794 --
9.70% due 2019.......................................... 8,826 125,000
9.75% due 2020.......................................... 15,305 75,000
8.70% due 2021.......................................... 34,871 34,871
6.50% due 2028.......................................... 99,645 --
6 7/8 due 2028.......................................... 100,000 --
-------- --------
Total Long-term Notes Payable......................... 836,975 329,264
Unamortized debt discount................................. 4,071 --
Current maturities........................................ 22,817 16,909
-------- --------
Long-term debt........................................ $810,087 $312,355
======== ========
</TABLE>
(H) EMPLOYEE BENEFIT PLANS
Retirement Plans--The Company has defined benefit retirement plans covering
substantially all employees. Company officers and certain key employees are
also eligible to participate in supplemental retirement plans. The Company
generally funds pension costs at a level equal to the minimum amount required
under the Employee Retirement Income Security Act of 1974.
Other Postretirement Benefit Plans--The Company sponsors welfare care plans
that provide postretirement medical benefits and life and accidental death and
dismemberment benefits to substantially all employees who retire under the
Retirement Plans at age 55 or older with at least five years of service. The
plans are contributory, with retiree contributions adjusted periodically, and
contain other cost-sharing features such as deductibles and coinsurance.
The Company elected to delay recognition of the accumulated postretirement
benefit obligation (APBO) of approximately $72.2 million and amortize it over
20 years as a component of net periodic postretirement benefit cost.
In 1999, the Company adopted SFAS No. 132, "Employers' Disclosures About
Pensions and Other Postretirement Benefits," which standardized the disclosure
requirements for pensions and other postretirement benefits. SFAS No. 132 did
not change the measurement or recognition of amounts related to those plans.
A-15
<PAGE>
ONEOK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Prior-year amounts were reclassified to conform to the new standard. The status
of the Company's pension and other postretirement benefit plans are summarized
in the tables below.
<TABLE>
<CAPTION>
Postretirement
Pension Benefits Benefits
------------------ --------------------
1999 1998 1999 1998
-------- -------- --------- ---------
(Thousands of Dollars)
<S> <C> <C> <C> <C>
Change in Benefit Obligations
Benefit obligation, beginning of
year............................... $500,327 $327,127 $ 153,326 $ 76,068
Acquisition......................... -- 128,279 -- 51,106
Service cost........................ 9,282 7,221 4,036 2,570
Interest cost....................... 32,832 30,875 10,055 8,223
Participant contributions........... -- -- 2,260 8,632
Plan amendments..................... 7,600 -- 1,956 --
Actuarial loss (gain)............... (15,501) 32,404 (4,081) 13,604
Benefits paid....................... (29,675) (25,579) (7,181) (6,877)
-------- -------- --------- ---------
Benefit obligation, end of year..... $504,865 $500,327 $ 160,371 $ 153,326
======== ======== ========= =========
Change in Plan Assets
Fair value of assets, beginning of
year............................... $595,308 $326,384 $ 14,075 $ 5,871
Acquisition......................... -- 174,468 -- --
Actual return on assets............. 93,854 116,640 (111) 2,296
Employer contributions.............. 899 3,395 3,536 5,910
Benefits paid....................... (29,675) (25,579) -- (2)
-------- -------- --------- ---------
Fair value of assets, end of year... $660,386 $595,308 $ 17,500 $ 14,075
======== ======== ========= =========
Funded status--over (under)......... $155,521 $ 94,981 $(142,871) $(139,251)
Unrecognized net asset.............. (2,338) (2,805) -- --
Unrecognized transition obligation.. -- -- 43,048 48,522
Unrecognized prior service cost..... 8,030 607 4,195 --
Unrecognized net (gain) / loss...... (93,683) (30,388) 18,379 18,095
Activity subsequent to measurement
date............................... -- -- (1,306) (915)
-------- -------- --------- ---------
(Accrued) / prepaid pension cost.... $ 67,530 $ 62,395 $ (78,555) $ (73,549)
======== ======== ========= =========
Actuarial Assumptions
Discount Rate....................... 7.00% 6.75% 7.00% 6.75%
Expedctied riate of return.......... 9.00% 9.00% 8.00% 8.00%
Compensation increase rate.......... 4.50% 4.00% 4.50% 4.00%
</TABLE>
<TABLE>
<CAPTION>
Pension Benefits Postretirement Benefits
---------------------------- -------------------------
1999 1998 1997 1999 1998 1997
-------- -------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Components of Net
Periodic Benefit Cost
Service Cost............ $ 9,282 $ 7,221 $ 5,126 $ 4,036 $ 2,570 $ 1,744
Interest cost........... 32,832 30,875 23,766 10,055 8,224 5,599
Expected return on
assets................. (46,846) (38,686) (25,490) (1,325) (739) (297)
Amortization of
unrecognized net asset
at adoption............ (467) (467) (467) -- -- --
Amortization of
unrecognized net
transition obligation
at adoption............ -- -- -- 3,235 3,235 3,608
Amortization of
unrecognized prior
service cost........... 177 177 120 -- (212) --
Amortization of net
(gain)/loss)........... 786 146 546 688 -- (108)
-------- -------- -------- ------- ------- -------
Net periodic benefit
cost................... $ (4,236) $ (734) $ 3,601 $16,689 $13,078 $10,546
======== ======== ======== ======= ======= =======
</TABLE>
A-16
<PAGE>
ONEOK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For measurement purposes, a 7.2 percent annual rate of increase in the per
capita cost of covered medical benefits (i.e., medical cost trend rate) was
assumed for 1999, the rate was assumed to decrease gradually to 5 percent by
the year 2003 and remain at that level thereafter. The medical cost trend rate
assumption has a significant effect on the amounts reported. For example,
increasing the assumed medical cost trend by one percentage point in each year
would increase the accumulated postretirement benefit obligation as of
August 31, 1999, by $14.6 million and the aggregate of the service and interest
cost components of net periodic postretirement benefit cost for the year ended
August 31, 1999, by $1.4 million. Decreasing the assumed medical cost trend by
one percentage point in each year would decrease the accumulated postretirement
benefit obligation as of August 31, 1999, by $11.9 million and the aggregate of
the service and interest cost components of net periodic postretirement benefit
cost for the year ended August 31, 1999, by $1.1 million.
Employee Thrift Plans--The Company has Thrift Plans covering substantially
all employees. Employee contributions are discretionary. Subject to certain
limits, employee contributions are matched by the Company. The annual cost of
the plans was $6.3 million in 1999; $4.7 million in 1998; and $3.4 million in
1997.
Postemployment Benefits--The Company pays postemployment benefits to former
or inactive employees after employment but before normal retirement.
Regulatory Treatment--The OCC has approved the recovery of ONG pension costs
and other postretirement benefit costs through rates. The costs recovered
through rates are based on current funding requirements and the net periodic
postretirement benefit cost for pension and postretirement costs, respectively.
Differences, if any, between the expense and the amount ordered through rates
are charged to earnings.
Prior to the acquisition of the assets regulated by the KCC in fiscal 1998,
Western had established a corporate-owned life insurance ("COLI") program which
it believed in the long term would offset the expenses of its postretirement
and postemployment benefit plans. Accordingly, the KCC issued an order
permitting the deferral of postretirement and postemployment benefit expenses
in excess of amounts recognized on a pay-as-you-go basis. The Company did not
acquire the COLI program. In connection with the KCC's approval of the
acquisition, the KCC granted the Company the benefit of all previous accounting
orders issued to Western and requested that the Company submit a plan of
recovery either through a general rate increase or through specific cost
savings or revenue increases. Based on regulatory precedents established by the
KCC, and the accounting order which permits the Company to seek recovery
through rates, management believes that it is probable that accrued
postretirement and postemployment benefits can be recovered in rates. The
Company plans to file for recovery of these costs and anticipates that recovery
will be allowed over a period not to exceed 20 years. If these costs cannot be
recovered in rates charged to customers, the Company would be required to
record a one-time charge to expense the regulatory asset established for
postretirement and postemployment benefit costs totaling approximately $52.7
million at August 31, 1999.
(I) COMMITMENTS AND CONTINGENCIES
Leases--The initial term of the Company's headquarters building, ONEOK
Plaza, is for 25 years, expiring in 2009, with six five-year renewal options.
At the end of the initial term or any renewal period, the Company can purchase
the property at its fair market value. Rent for the lease accrues annually at
$6.8 million until 2009. Rent payments were $5.8 million for 1999, 1998, and
1997. Estimated future minimum rental payments for the lease are $7.6 million
for the year ending August 31, 2000, and $9.3 million for each of the years
ending August 31, 2001 through 2009.
The Company has the right to sublet excess office space in ONEOK Plaza. The
Company received $2.8 million, $2.8 million, and $2.7 million in rental revenue
during 1999, 1998, and 1997, respectively, for
A-17
<PAGE>
ONEOK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
various subleases. Estimated minimum future rental payments to be received
under existing contracts for subleases are $2.9 million in 2000, $2.9 million
in 2001, $2.8 million in 2002, $2.4 million in 2003, $1.8 million in 2004, and
a total of $2.9 million thereafter.
Other operating leases include office buildings and equipment. The total
estimated payments for these leases are $2.5 million in 2000, $1.5 million in
2001, and $1.4 million in 2002, $1.2 million in 2003 and $0.6 million in 2004.
Southwest Gas Corporation--During the year ended August 31, 1999, the
Company and Southwest Gas Corporation (Southwest) entered into a definitive
agreement whereby the Company agreed to acquire Southwest for $30 per share in
an all cash transaction valued at $918 million. The total transaction cost,
including assumed debt, is estimated at $1.8 billion. The transaction is
expected to be completed during 2000, subject to various conditions including
regulatory approvals. Southwest shareholders approved the agreement on
August 10, 1999. The Company and certain of its officers as well as Southwest
have been named as defendants in a lawsuit brought by Southern Union Company in
connection with the proposed acquisition in the total amount of $750 million.
The Southern Union allegations include, but are not limited to, Racketeer,
Influenced and Corrupt Organizations Act violations and improper interference
in a contractual relationship between Southwest and Southern Union. If any of
the plaintiffs should be successful in any of their claims against the Company
or Southwest and substantial damages are awarded, it could have a material
adverse effect on the Company's operations, cash flow, and financial position.
The Company, as third party beneficiary, has filed a lawsuit against Southern
Union for breach of a confidentiality agreement with Southern Union and
Southwest. The parties are presently involved in discovery. The Company
believes the Southern Union allegations are without merit and is defending
itself vigorously against all claims.
Environmental--In connection with the Western transaction, the Company
acquired responsibility for 12 manufactured gas sites located in Kansas which
may contain coal tar and other potentially harmful materials that are
classified as hazardous material. Hazardous materials are subject to control or
remediation under various environmental laws and regulations. A consent
agreement with the Kansas Department of Health and Environment (KDHE) presently
governs all future work at these sites. The terms of the consent agreement
allow the Company to investigate these sites and set remediation priorities
based upon the results of the investigations and risk analysis. The prioritized
sites will be investigated over a ten year period. At August 31, 1999, the
costs of the investigations and risk analysis have been minimal. Limited
information is available about the sites and no testing has been performed.
Management's best estimate of the cost of remediation ranges from $100 thousand
to $10 million per site based on a limited comparison of costs incurred to
remediate comparable sites. These estimates do not give effect to potential
insurance recoveries, recoveries through rates or from third parties. The KCC
has permitted others to recover their remediation costs through rates. It
should be noted that additional information and testing could result in costs
significantly below or in excess of the amounts estimated above. To the extent
that such remediation costs are not recovered, the costs could be material to
the Company's results of operations and cash flows depending on the degree of
remediation required and number of years over which the remediation must be
completed.
Other--The Company is a party to other litigation matters and claims which
are normal in the course of its operations, and while the results of litigation
and claims cannot be predicted with certainty, management believes the final
outcome of such matters will not have a materially adverse effect on
consolidated results of operations, financial position, or liquidity.
A-18
<PAGE>
ONEOK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(J) INCOME TAXES
The provisions for income taxes are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
(Thousands of Dollars)
<S> <C> <C> <C>
Current income taxes
Federal.......................................... $48,760 $62,462 $32,207
State............................................ 3,371 11,746 5,620
------- ------- -------
Total current income taxes..................... 52,131 74,208 37,827
------- ------- -------
Deferred income taxes
Federal.......................................... 13,671 (6,325) (2,551)
State............................................ 1,254 (1,298) (437)
------- ------- -------
Total deferred income taxes.................... 14,925 (7,623) (2,988)
------- ------- -------
Total provision for income taxes............... $67,056 $66,585 $34,839
======= ======= =======
</TABLE>
Following is a reconciliation of the provision for income taxes.
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- -------
(Thousands of Dollars)
<S> <C> <C> <C>
Pretax income................................. $173,413 $168,380 $94,107
Federal statutory income tax rate............. 35% 35% 35%
-------- -------- -------
Provision for federal income taxes............ 60,695 58,933 32,937
Amortization of distribution property
investment tax credit........................ (1,103) (938) (655)
State income taxes, net of federal tax
benefit...................................... 5,737 6,253 2,936
Other, net.................................... 1,727 2,337 (379)
-------- -------- -------
Actual income tax expense................... $ 67,056 $ 66,585 $34,839
======== ======== =======
</TABLE>
The tax effects of temporary differences that gave rise to significant
portions of the deferred tax assets and liabilities are shown in the
accompanying table.
<TABLE>
<CAPTION>
August 31,
-----------------
1999 1998
-------- --------
(Thousands of
Dollars)
<S> <C> <C>
Deferred tax assets
Accrued liabilities not deductible until paid.......... $ 16,856 $ 6,089
Net operating loss carry forward....................... 1,315 854
Regulatory assets...................................... 8,728 4,894
Other.................................................. 3,444 --
-------- --------
Total deferred tax assets............................ 30,343 11,837
Valuation allowance for net operating loss carryforward
expected to expire prior to utilization................. 880 854
-------- --------
Net deferred tax assets................................ 29,463 10,983
-------- --------
Deferred tax liabilities
Excess of tax over book depreciation and depletion..... 265,493 220,064
Investment in joint ventures........................... 7,458 4,543
Regulatory assets...................................... 66,932 77,454
Other.................................................. 3,502 12,783
-------- --------
Total deferred tax liabilities....................... 343,385 314,844
-------- --------
Net deferred tax liabilities......................... $313,922 $303,861
======== ========
</TABLE>
A-19
<PAGE>
ONEOK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company has remaining net operating loss carry-forwards for income tax
purposes of approximately $17.0 million at August 31, 1999, which expire,
unless previously utilized, at various dates through the year 2011. At August
31, 1999, the Company had $8.5 million in deferred investment tax credits
recorded in other deferred credits which will be amortized over the next 16
years.
(K) SEGMENT INFORMATION
In 1999, the Company adopted SFAS 131, "Disclosures about Segments of an
Enterprise and Related Information." This statement requires the Company to
define and report the Company's business segments based on how management
currently evaluates its business. Management has segmented its business based
on differences in products and services and management responsibility.
The Company conducts its operations through six segments: (1) the
Distribution segment distributes natural gas to residential, commercial and
industrial customers and leases pipeline capacity to others; (2) the
Transportation and Storage segment transports and stores natural gas for
others; (3) the Marketing segment markets natural gas to wholesale and retail
customers and markets electricity to wholesale customers; (4) the Gathering and
Processing segment gathers and processes natural gas and natural gas liquids;
(5) the Production segment produces natural gas and oil; and (6) the Other
segment primarily operates and leases the Company's headquarters building and a
related parking facility.
The accounting policies of the segments are substantially the same as those
described in the summary of significant accounting policies. Intersegment oil
and gas sales are recorded on the same basis as sales to unaffiliated
customers. All corporate overhead costs relating to a reportable segment have
been allocated for the purpose of calculating operating income. The Company's
equity method investments do not represent operating segments of the Company.
The Company has no single external customer from which it receives ten percent
or more of its revenues.
<TABLE>
<CAPTION>
Gathering
Transportation and Eliminations
1999 Distribution and Storage Marketing Processing Production and Other Total
---- ------------ -------------- --------- ---------- ---------- ------------ ----------
(Thousands of Dollars)
<S> <C> <C> <C> <C> <C> <C> <C>
Sales to unaffiliated
customers.............. $ 915,782 $ 29,393 $772,331 $72,277 $ 46,386 $ 6,641 $1,842,810
Intersegment sales...... $ 8,168 $ 79,993 $ 53,067 11,513 $ 22,868 $(175,609) --
---------- -------- -------- ------- -------- --------- ----------
Total Revenues........ $ 923,950 $109,386 $825,398 83,790 $ 69,254 $(168,968) $1,842,810
---------- -------- -------- ------- -------- --------- ----------
Net Revenues............ $ 404,384 $109,386 $ 35,443 83,790 $ 69,254 $ (15,471) $ 686,786
Operating Expenses...... $ 230,868 $ 33,894 $ 9,069 63,686 $ 19,128 $ (19,146) $ 337,499
Depreciation, depletion
and amortization....... $ 75,443 $ 13,852 $ 503 3,562 $ 34,073 $ 2,271 $ 129,704
Operating Income........ $ 98,073 $ 61,640 $ 25,871 16,542 $ 16,053 $ 1,404 $ 219,583
Income from Equity
Investments............ -- $ 1,501 -- -- $ 2,360 -- $ 3,861
Total Assets............ $1,722,381 $373,742 $273,491 343,133 $361,806 $ (49,608) $3,024,945
Capital Expenditures.... $ 98,685 $ 32,618 $ 4,196 $ 8,557 $ 95,431 $ 4,068 $ 243,555
</TABLE>
A-20
<PAGE>
ONEOK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
Gathering
Transportation and Eliminations
1998 Distribution and Storage Marketing Processing Production and Other Total
---- ------------ -------------- --------- ---------- ---------- ------------ ----------
(Thousands of Dollars)
<S> <C> <C> <C> <C> <C> <C> <C>
Sales to unaffiliated
customers.............. $ 956,044 $ 17,399 $746,744 $63,248 $ 31,570 $ 5,753 $1,820,758
Intersegment sales...... $ 7,784 $ 73,302 $ 31,870 $15,309 $ 12,312 $(140,577) --
---------- -------- -------- ------- -------- --------- ----------
Total Revenues........ $ 963,828 $ 90,701 $778,614 $78,557 $ 43,882 $(134,824) $1,820,758
---------- -------- -------- ------- -------- --------- ----------
Net Revenues............ $ 378,376 $ 90,701 $ 19,927 $78,557 $ 43,882 $ (10,694) $ 600,749
Operating Expenses...... $ 208,513 $ 31,052 $ 7,024 $60,887 $ 14,312 $ (11,503) $ 310,285
Depreciation, depletion
and amortization....... $ 66,214 $ 12,818 $ 561 $ 2,249 $ 18,872 $ 939 $ 101,653
Operating Income........ $ 103,650 $ 46,831 $ 12,342 $15,421 $ 10,698 $ (131) $ 188,811
Income from Equity
Investments............ -- -- -- -- -- -- --
Total Assets............ $1,771,999 $351,692 $130,100 $86,955 $282,765 $(201,024) $2,422,487
Capital Expenditures.... $ 77,198 $ 50,271 -- $ 4,735 $167,669 $ 6,533 $ 306,406
<CAPTION>
Gathering
Transportation and Eliminations
1997 Distribution and Storage Marketing Processing Production and Other Total
---- ------------ -------------- --------- ---------- ---------- ------------ ----------
(Thousands of Dollars)
<S> <C> <C> <C> <C> <C> <C> <C>
Sales to unaffiliated
customers.............. $ 592,603 $ 5,229 $459,698 $72,739 $ 26,497 $ 5,161 $1,161,927
Intersegment sales...... $ 2,502 $ 65,270 $ 23,501 $14,333 $ 14,018 $(119,624) --
---------- -------- -------- ------- -------- --------- ----------
Total Revenues........ $ 595,105 $ 70,499 $483,199 $87,072 $ 40,515 $(114,463) $1,161,927
---------- -------- -------- ------- -------- --------- ----------
Net Revenues............ $ 225,252 $ 70,499 $ 12,321 $87,072 $ 40,515 $ 308 $ 435,967
Operating Expenses...... $ 116,325 $ 28,136 $ 3,707 $71,800 $ 12,342 $ 1,033 $ 233,343
Depreciation, depletion
and amortization....... $ 42,980 $ 8,395 $ 482 $ 2,393 $ 19,899 $ 360 $ 74,509
Operating Income........ $ 65,947 $ 33,968 $ 8,132 $12,879 $ 8,274 $ (1,085) $ 128,115
Income from Equity
Investments............ -- -- -- -- -- -- --
Total Assets............ $ 855,587 $221,233 $ 64,190 $46,602 $ 94,496 $ (44,701) $1,237,407
Capital Expenditures.... $ 39,825 $ 27,922 $ 373 $10,563 $ 32,911 $ 413 $ 112,007
</TABLE>
A-21
<PAGE>
ONEOK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(L) QUARTERLY FINANCIAL DATA (UNAUDITED)
Total operating revenues are consistently greater from November through May
due to the large volume of natural gas sold to customers for heating. A summary
of the unaudited quarterly results of operations for 1999 and 1998 follows:
<TABLE>
<CAPTION>
1999
-----------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- -------- -------- --------
(Thousands of Dollars, Except Per
Share Amounts)
<S> <C> <C> <C> <C>
Operating revenues.................... $374,936 $592,664 $418,080 $457,130
Operating income...................... $ 29,999 $125,137 $ 45,166 $ 19,281
Other income.......................... $ 4,993 $ -- $ -- $ 1,646
Income taxes.......................... $ 9,387 $ 44,596 $ 10,985 $ 2,089
Net Income............................ $ 14,250 $ 68,532 $ 21,196 $ 2,379
Earnings (loss) per share of common
stock
Basic............................... $ 0.16 $ 1.87 $ 0.38 $ (0.22)
Diluted............................. $ 0.16 $ 1.33 $ 0.38 $ (0.22)
Dividends per share of common stock... $ 0.31 $ 0.31 $ 0.31 $ 0.31
Average shares of common stock
outstanding (000's)
Basic............................... 31,535 31,594 31,634 31,233
Diluted............................. 31,578 51,687 31,640 31,233
<CAPTION>
1998
-----------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- -------- -------- --------
(Thousands of Dollars, Except Per
Share Amounts)
<S> <C> <C> <C> <C>
Operating revenues.................... $314,160 $707,410 $444,048 $355,140
Operating income...................... $ 28,486 $116,605 $ 50,050 $ (6,330)
Other income.......................... $ -- $ 14,644 $ -- $ --
Income taxes.......................... $ 7,438 $ 46,611 $ 17,270 $ (4,734)
Net Income (loss)..................... $ 12,520 $ 73,836 $ 26,936 $(11,497)
Earnings (loss) per share of common
stock
Basic............................... $ 0.44 $ 2.06 $ 0.57 $ (0.65)
Diluted............................. $ 0.44 $ 1.43 $ 0.52 $ (0.65)
Dividends per share of common stock... $ 0.30 $ 0.30 $ 0.30 $ 0.30
Average shares of common stock
outstanding (000's)
Basic............................... 28,268 31,466 31,536 31,586
Diluted............................. 28,268 51,576 51,589 31,586
</TABLE>
A-22
<PAGE>
ONEOK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(M) SUPPLEMENTAL CASH FLOW INFORMATION
The table presents supplemental information relative to the Company's cash
flows for the years ended August 31, 1999, 1998, and 1997.
<TABLE>
<CAPTION>
1999 1998 1997
-------- --------- -------
(Thousands of Dollars)
<S> <C> <C> <C>
Cash paid during the year
Interest (including amounts capitalized)........ $ 50,498 $ 34,637 $39,993
Income taxes.................................... $ 59,466 $ 73,772 $34,618
Noncash transactions
Gas received as payment in kind................. $ 135 $ 280 $ 478
Issuance of common stock related to
Stock Performance Plan........................ $ -- $ -- $ --
Dividend reinvestment plan.................... $ -- $ -- $ 5,482
Acquisitions
Plant, property and equipment................. $289,931 $ 642,742 --
Current assets................................ -- 232,738 --
Current liabilities........................... -- (42,575) --
Debt assumed.................................. -- (161,698) --
Regulatory assets and goodwill................ 10,817 169,983 --
Deferred debits............................... -- 62,633 --
Deferred credits.............................. -- (89,655) --
Deferred income taxes......................... (4,461) (127,744) --
Capital stock................................. -- (662,003) --
-------- --------- -------
Cash paid................................... $296,287 $ 24,421 $ --
======== ========= =======
</TABLE>
(N) STOCK BASED COMPENSATION
Long-term Incentive Plan--The Long-term Incentive Plan (Plan) provides for
the granting of incentive stock options, fixed stock options, and stock bonus
awards to key employees. This Plan replaces the Key Employee Stock Purchase
Plan. Under the Plan, options may be granted by the Executive Compensation
Committee (the Committee) at any time within ten years expiring August 17,
2005. Options may be granted which are not exercisable until a fixed future
date or in installments. The Plan also provides for restored options in the
event that the optionee surrenders shares of common stock which the optionee
already owns in full or partial payment of the options price under this option
and/or surrenders shares of common stock to satisfy withholding tax obligations
incident to the exercise of this option. A restored option has an option price
equal to the fair market value of the common stock on the date on which the
exercise of the option resulted in the grant of the restored option. The
Company has reserved one million shares of common stock for the Plan.
A-23
<PAGE>
ONEOK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Options issued to date become void upon voluntary termination of employment
other than retirement. In the event of retirement or involuntary termination,
the optionee may exercise the option within three months. In the event of
death, the option may be exercised by the personal representative of the
optionee within a period to be determined by the Committee and stated in the
option. Options issued to date can be exercised after one year from grant date
and must be exercised no more than ten years after grant date. Activity to date
has been as follows:
<TABLE>
<CAPTION>
Number of Weighted Average
Shares Exercise Price
--------- ----------------
<S> <C> <C>
Outstanding August 31, 1996....................... 107,400 $23.69
Granted........................................... 100,700 $26.88
Exercised......................................... (20,700) $23.69
Expired........................................... (2,200) $26.69
Restored.......................................... 4,147 $30.71
------- ------
Outstanding August 31, 1997....................... 189,347 $25.54
Granted........................................... 262,576 $33.39
Exercised......................................... (96,047) $25.55
Expired........................................... (4,900) $33.94
------- ------
Outstanding August 31, 1998....................... 350,976 $31.30
Granted........................................... 265,724 $35.22
Exercised......................................... (27,950) $26.88
Expired........................................... (2,500) $34.90
Restored.......................................... 35,845 $35.95
------- ------
Outstanding August 31, 1999....................... 622,095 $33.09
------- ------
Options Exercisable
August 31, 1997................................... 88,347 $24.00
August 31, 1998................................... 94,469 $25.78
August 31, 1999................................... 354,995 $31.49
</TABLE>
At August 31, 1999, the Company had 283,524 outstanding options with
exercise prices ranging between $23.69 to $34.03 and a weighted average
remaining life of 7.68 years. All of these options were exercisable at August
31, 1999 with a weighted average exercise price of $30.26.
The Company also had 338,571 options outstanding at August 31, 1999 with
exercise prices ranging between $35.22 and $42.53 and a weighted average
remaining life of 8.78 years. Of these options, 71,471 were exercisable at
August 31, 1999 at a weighted average exercise price of $35.46.
Employee Stock Purchase Plan--In 1995, the Company authorized the Employee
Stock Purchase Plan and reserved 350,000 shares of common stock for it. Almost
all full-time employees are eligible to participate. Under the terms of the
plan, employees can choose to have up to ten percent of their annual earnings
withheld to purchase the Company's common stock. The Committee may allow
contributions to be made by other means provided that in no event will
contributions from all means exceed ten percent of the employee's annual
earnings. The purchase price of the stock is 85 percent of the lower of its
beginning-of-year or end-of-year market price. Approximately 54 percent, 60
percent and 55 percent of eligible employees participated in the plan in fiscal
1999, 1998 and 1997, respectively. Under the plan, the Company sold 97,091
shares in December 1998, 105,923 shares in December 1997 and 107,080 shares in
December 1996.
A-24
<PAGE>
ONEOK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Accounting Treatment--The Company continues to apply APB 25 in accounting
for both plans and accordingly, no compensation has been recognized in the
consolidated financial statements. Had the Company applied the provisions of
SFAS 123 to determine the compensation cost under these plans, the Company's
pro forma net income and diluted earnings per share would have been as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- -------
<S> <C> <C> <C>
Net Income (000's)
As reported................................... $106,357 $101,795 $59,268
Pro forma..................................... $ 99,887 $ 98,592 $58,247
Earnings per share--Diluted
As reported................................... $ 2.06 $ 2.23 $ 2.13
Pro forma..................................... $ 1.94 $ 2.16 $ 2.10
======== ======== =======
</TABLE>
The fair market value of each option granted is estimated based on the
Black-Scholes model. Based on previous stock performance, volatility is
estimated to be 0.2151 for 1999, 0.2720 for 1998 and 0.2264 for 1997. Dividend
yield is estimated to be 4.0 for 1999, 3.9 percent for 1998 and 3.7 percent for
1997, with a risk-free interest rate of 5.983 percent, 5.032 percent, and 6.590
percent in 1999, 1998, and 1997, respectively.
Expected life ranged from 1 to 10 years based upon experience to date and
the make-up of the optionees. Fair value of options granted under the Plan were
$13.86, $8.75, and $11.58 for 1999, 1998, and 1997, respectively.
(O)EARNINGS PER SHARE INFORMATION
The following is a reconciliation of the numerators and denominators of the
basic and diluted EPS computations.
The effect of dilutive options in fiscal 1997 is insignificant.
<TABLE>
<CAPTION>
August 31, 1999
-------------------------
Per Share
Income Shares Amount
-------- ------ ---------
(Thousands, except per
share amounts)
<S> <C> <C> <C>
Basic EPS
Income available to common stockholders............ $ 69,110 31,498 $2.19
Effect of Dilutive Securities Options................ -- 20
Convertible preferred stock........................ 37,247 20,053
-------- ------
Diluted EPS
Income available to common stockholders + assumed
conversions....................................... $106,357 51,571 $2.06
======== ====== =====
</TABLE>
<TABLE>
<CAPTION>
August 31, 1998
-------------------------
Per Share
Income Shares Amount
-------- ------ ---------
(Thousands, except per
share amounts)
<S> <C> <C> <C>
Basic EPS
Income available to common stockholders............ $ 74,816 30,674 $2.44
Effect of Dilutive Securities
Options............................................ -- 53
Convertible preferred stock........................ 26,979 15,002
-------- ------
Diluted EPS
Income available to common stockholders + assumed
conversions....................................... $101,795 45,729 $2.23
======== ====== =====
</TABLE>
A-25
<PAGE>
ONEOK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
August 31, 1997
------------------------
Per Share
Income Shares Amount
------- ------ ---------
(Thousands, except per
share amounts)
<S> <C> <C> <C>
Basic and Diluted EPS
Income available to common stockholders.............. $58,983 27,644 $2.13
======= ====== =====
</TABLE>
(P) OIL AND GAS PRODUCING ACTIVITIES
The following is historical revenue and cost information relating to the
Company's production operations:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- -------
(Thousands of Dollars)
<S> <C> <C> <C>
Capitalized costs at end of year
Unproved properties............................ $ 4,245 $ 3,505 $ 2,994
Proved properties.............................. 393,096 320,055 155,208
-------- -------- -------
Total capitalized costs...................... 397,341 323,560 158,202
Accumulated depreciation, depletion, and
amortization.................................. 120,109 100,601 83,457
-------- -------- -------
Net capitalized costs........................ $277,232 $222,959 $74,745
======== ======== =======
Costs incurred during the year
Property acquisition costs (unproved).......... $ 948 $ 601 $ 174
Exploitation costs............................. $ 17 $ 6 $ 71
Development costs.............................. $ 13,659 $ 15,315 $ 6,683
Purchase of minerals in place.................. $ 79,385 $151,019 $21,489
</TABLE>
The accompanying schedule presents the results of operations of the
Company's oil and gas producing activities. The results exclude general office
overhead and interest expense attributable to oil and gas production.
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
(Thousands of Dollars)
<S> <C> <C> <C>
Net revenues from production
Sales to unaffiliated customers................. $42,077 $30,003 $24,141
Gas sold to affiliates.......................... 22,868 12,312 14,018
------- ------- -------
Net revenues from production.................. 64,945 42,315 38,159
------- ------- -------
Production costs.................................. 14,516 9,478 7,918
Exploitation costs................................ 17 351 (12)
Depreciation, depletion, and amortization......... 33,771 18,210 19,246
Income taxes...................................... 6,359 5,522 4,258
------- ------- -------
Total expenses................................ 54,663 33,561 31,410
------- ------- -------
Results of operations from producing
activities................................... $10,282 $ 8,754 $ 6,749
======= ======= =======
</TABLE>
(Q)OIL AND GAS RESERVES (UNAUDITED)
Following are estimates of the Company's proved oil and gas reserves, net
of royalty interests and changes herein, for the 1999, 1998, and 1997 fiscal
years.
A-26
<PAGE>
ONEOK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company emphasizes that the volumes of reserves shown are estimates,
which, by their nature, are subject to later revision. The estimates are made
by the Company utilizing all available geological and reservoir data as well as
production performance data. These estimates are reviewed annually and revised,
either upward or downward, as warranted by additional performance data.
<TABLE>
<CAPTION>
Oil Gas
------- -------
(MBbls) (MMcf)
<S> <C> <C>
August 31, 1996............................................. 2,010 74,068
Revisions of prior estimates.............................. 115 2,108
Extensions, discoveries, and other additions.............. 111 3,009
Purchases of minerals in place............................ 155 19,214
Sales of minerals in place................................ (41) (515)
Production................................................ (336) (14,565)
----- -------
August 31, 1997............................................. 2,014 83,319
Revisions of prior estimates.............................. (223) (1,255)
Extensions, discoveries, and other additions.............. 167 23,251
Purchases of minerals in place............................ 1,645 89,724
Sales of minerals in place................................ (1) (174)
Production................................................ (330) (16,818)
----- -------
August 31, 1998............................................. 3,272 178,047
Revisions of prior estimates.............................. 300 8,397
Extensions, discoveries, and other additions.............. 376 37,202
Purchases of minerals in place............................ 884 61,286
Sales of minerals in place................................ (175) (3,057)
Production................................................ (460) (27,773)
----- -------
August 31, 1999............................................. 4,197 254,102
===== =======
Proved developed reserves
August 31, 1997........................................... 1,615 62,115
August 31, 1998........................................... 2,228 134,346
August 31, 1999........................................... 2,540 175,771
</TABLE>
(R) DISCOUNTED FUTURE NET CASH FLOWS (UNAUDITED)
Estimates of the standard measure of discounted future cash flows from
proved reserves of oil and natural gas shown in the accompanying table are
based on prices at the end of the year. Gas prices are escalated only for fixed
and determinable amounts under provisions of applicable regulations in some
contracts. These estimated future cash flows are reduced by estimated future
development and production costs based on year-end cost levels, assuming
continuation of existing economic conditions, and by estimated future income
tax expense. The tax expense is calculated by applying the current year-end
statutory tax rates to pretax net cash flows (net of tax depreciation,
depletion, and lease amortization allowances) applicable to oil and gas
production.
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
(Thousands of Dollars)
<S> <C> <C> <C>
Future cash inflows............................. $639,721 $423,331 $218,708
Future production and development costs......... 194,077 129,128 67,962
Future income taxes............................. 53,442 32,025 33,514
-------- -------- --------
Future net cash flows........................... 392,202 262,178 117,232
10 percent annual discount for estimated timing
of cash flows.................................. 161,156 99,549 40,621
-------- -------- --------
Standardized measure of discounted future net
cash flows relating to oil and gas reserves.... $231,046 $162,629 $ 76,611
======== ======== ========
</TABLE>
A-27
<PAGE>
ONEOK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The changes in standardized measure of discounted future net cash flow
relating to proved oil and gas reserves are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- -------
(Thousands of Dollars)
<S> <C> <C> <C>
Beginning of year............................. $162,629 $ 76,611 $67,316
Changes resulting from:
Sales of oil and gas produced, net of
production costs........................... (50,120) (32,837) (30,241)
Net changes in price, development, and
production costs........................... 13,629 (6,269) 12,478
Extensions, discoveries, additions, and
improved recovery, less related costs...... 37,379 26,217 5,047
Purchases of minerals in place.............. 67,120 94,031 19,747
Sales of minerals in place.................. (9,326) (142) (1,000)
Revisions of previous quantity estimates.... 10,477 (2,750) 3,159
Accretion of discount....................... 17,317 9,865 8,084
Net change in income taxes.................... (11,618) 3,055 (7,372)
Other, net.................................... (6,081) (5,152) (607)
-------- -------- -------
End of year................................... $231,406 $162,629 $76,611
======== ======== =======
</TABLE>
A-28
<PAGE>
EXHIBIT B
<PAGE>
ONEOK, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Four Months Ended
December 31,
-----------------
1999 1998
-------- --------
(Thousands of
Dollars, except
per share
amounts)
(Unaudited)
<S> <C> <C>
Operating Revenues........................................... $808,874 $580,701
Cost of gas.................................................. 523,533 368,783
-------- --------
Net Revenues............................................... 285,341 211,918
-------- --------
Operating Expenses
Operations and maintenance................................... 141,395 89,559
Depreciation, depletion, and amortization.................... 43,227 41,736
General taxes................................................ 14,755 12,485
-------- --------
Total Operating Expenses................................... 199,377 143,780
-------- --------
Operating Income........................................... 85,964 68,138
-------- --------
Other income................................................. -- 4,993
Interest..................................................... 27,883 15,567
Income taxes................................................. 22,737 22,736
-------- --------
Net Income................................................... 35,344 34,828
Preferred Stock Dividends.................................... 12,367 12,432
-------- --------
Income Available for Common Stock.......................... $ 22,977 $ 22,396
======== ========
Earnings Per Share of Common Stock--Basic.................... $ 0.76 $ 0.71
======== ========
Earnings Per Share of Common Stock--Diluted.................. $ 0.70 $ 0.67
======== ========
Average Shares of Common Stock--Basic (Thousands)............ 30,425 31,535
Average Shares of Common Stock--Diluted (Thousands).......... 50,384 51,648
</TABLE>
See accompanying notes to consolidated condensed financial statements.
B-1
<PAGE>
ONEOK, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, August 31,
1999 1999
------------ ----------
(Thousands of Dollars)
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents........................... $ 72 $ 4,402
Trade accounts and notes receivable................. 371,313 228,336
Inventories......................................... 134,871 118,951
Other current assets................................ 87,465 87,578
---------- ----------
Total Current Assets.............................. 593,721 439,267
---------- ----------
Property, Plant and Equipment......................... 3,143,693 3,057,626
Accumulated depreciation, depletion, and
amortization....................................... 1,021,915 988,797
---------- ----------
Net Property........................................ 2,121,778 2,068,829
---------- ----------
Deferred Charges and Other Assets
Regulatory assets, net (Note D)..................... 247,486 246,658
Goodwill............................................ 80,743 81,560
Investments and other............................... 195,847 188,631
---------- ----------
Total Deferred Charges and Other Assets........... 524,076 516,849
---------- ----------
Total Assets...................................... $3,239,575 $3,024,945
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Current maturities of long-term debt................ $ 21,767 $ 22,817
Notes payable....................................... 462,242 263,747
Accounts payable.................................... 237,653 183,759
Accrued taxes....................................... 359 11,186
Accrued interest.................................... 16,628 7,042
Other............................................... 48,064 55,031
---------- ----------
Total Current Liabilities......................... 786,713 543,582
---------- ----------
Long-term Debt, excluding current maturities.......... 775,074 810,087
Deferred Credits and Other Liabilities
Deferred income taxes............................... 348,218 323,624
Other deferred credits.............................. 178,046 173,193
---------- ----------
Total Deferred Credits and Other Liabilities...... 526,264 496,817
---------- ----------
Total Liabilities................................. 2,088,051 1,850,486
---------- ----------
Commitments and Contingencies (Note C and G)
Shareholders' Equity
Convertible Preferred Stock, $0.01 par value: Series
A authorized 20,000,000 shares; issued and
outstanding 19,946,448 shares...................... 199 199
Common stock, $0.01 par value: authorized
100,000,000 shares; issued 31,599,305 shares and
outstanding 29,554,623 and 30,884,225 shares....... 316 316
Paid in capital (Note I)............................ 894,976 894,978
Unearned compensation............................... (1,825) --
Retained earnings................................... 317,964 301,536
Treasury stock at cost: 2,044,682 and 715,080
shares............................................. (60,106) (22,570)
---------- ----------
Total Shareholders' Equity........................ 1,151,524 1,174,459
---------- ----------
Total Liabilities and Shareholders' Equity........ $3,239,575 $3,024,945
========== ==========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
B-2
<PAGE>
ONEOK, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Four Months Ended
December 31,
--------------------
1999 1998
--------- ---------
(Thousands of
Dollars)
(Unaudited)
<S> <C> <C>
Operating Activities
Net income.............................................. $ 35,344 $ 34,828
Depreciation, depletion, and amortization............... 43,227 41,736
Gain on sale of assets.................................. -- (4,993)
Net income from other investments....................... (2,396) (634)
Deferred income taxes................................... 28,317 (4,874)
Changes in assets and liabilities....................... (111,524) (85,001)
--------- ---------
Cash Provided by Operating Activities................. (7,032) (18,938)
--------- ---------
Investing Activities
Changes in other investments, net....................... 994 1,813
Capital expenditures, net of retirements................ (92,165) (64,767)
Proceeds from sale of property.......................... -- 13,500
--------- ---------
Cash Used in Investing Activities..................... (91,171) (49,454)
--------- ---------
Financing Activities
Payment of notes payable, net........................... 198,495 98,000
Issuance of debt........................................ -- 199,634
Payment of debt......................................... (36,952) (201,221)
Acquisition of treasury stock........................... (39,610) --
Dividends paid.......................................... (28,060) (28,107)
--------- ---------
Cash Provided by Financing Activities................. 93,873 68,306
--------- ---------
Change in Cash and Cash Equivalents....................... (4,330) (86)
Cash and Cash Equivalents at Beginning of Period.......... 4,402 86
--------- ---------
Cash and Cash Equivalents at End of Period................ $ 72 $ --
========= =========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
B-3
<PAGE>
ONEOK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
A. Change in Fiscal Year End
In October, 1999, the Company's Board of Directors approved a change in the
Company's fiscal year-end from August 31 to December 31 beginning January 1,
2000. The consolidated condensed financial statements included in this Form 10-
Q represent the period from September 1, 1999 through December 31, 1999, the
Company's transition period (the "Transition Period") preceding the beginning
of the new fiscal year.
B. Summary of Significant Accounting Policies
Interim Reporting. The interim consolidated condensed financial statements
reflect all adjustments which, in the opinion of management, are necessary for
a fair presentation of the results for the interim periods presented. All such
adjustments are of a normal recurring nature. Due to the seasonal nature of the
business, the results of operations for the Transition Period are not
necessarily indicative of the results that may be expected for a twelve-month
period. For further information, refer to the consolidated financial statements
and footnotes thereto included in the Company's Form 10-K for the year ended
August 31, 1999.
C. Significant Events
On January 20, 2000, the Board of Directors of the Company voted unanimously
to terminate the merger agreement with Southwest Gas Corporation (Southwest) in
accordance with the terms of the merger agreement.
Costs in the amount of $4.7 million related to the transaction have been
deferred on the Company's Balance Sheet for December 31, 1999. These costs and
other costs incurred since December 31, 1999 will be charged to expense during
the first quarter of fiscal 2000. The pro forma effect of these costs being
charged to expense during the Transition Period would be to reduce Diluted
Earnings Per Share to $0.64 for the Transition Period from $0.70.
On February 1, 2000, the Company announced the purchase of assets located in
Oklahoma, Kansas, and the Texas Panhandle from Dynegy, Inc. for a cash purchase
price of $307.7 million. The assets include gathering systems, gas processing
facilities, and transmission pipelines. Closing of the transaction is expected
by the end of the first quarter of 2000.
On February 8, 2000, the Company announced the purchase of gathering and
processing assets located in Oklahoma, Kansas and West Texas from Kinder
Morgan, Inc. (KMI). The marketing and trading business of KMI as well as
certain storage and transmission pipelines in the mid-continent region will
also be purchased. The Company will pay approximately $114.0 million plus an
amount equal to net working capital at closing.
A July, 1999 order from the Oklahoma Corporation Commission (OCC) removed
the Company's Oklahoma gathering and storage assets from utility regulation
effective November 1, 1999. These assets are now included in the Transportation
and Storage segment where they are being utilized in the competitive
marketplace. An August, 1999 order from the OCC distinguished between upstream
(transportation) and downstream (distribution) assets and cleared the way for
future unbundling activities including competitive bidding for transportation
services in Oklahoma. The Distribution segment issued bids for these services
in Oklahoma during the Transition Period with contracts to be awarded in the
spring of 2000.
B-4
<PAGE>
ONEOK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
D. Regulatory Assets
The table is a summary of regulatory assets, net of amortization, at
December 31, 1999, and August 31, 1999.
<TABLE>
<CAPTION>
December, August 31,
1999 1999
--------- ----------
(Thousands of
Dollars)
<S> <C> <C>
Recoupable take-or-pay................................ $ 84,343 $ 85,996
Pension costs......................................... 19,487 20,881
Postretirement costs other than pension............... 62,207 61,830
Transition costs...................................... 22,746 22,903
Reacquired debt costs................................. 24,068 22,413
Income taxes.......................................... 23,337 24,114
Other................................................. 11,298 8,521
-------- --------
Regulatory assets, net.............................. $247,486 $246,658
======== ========
</TABLE>
E. Supplemental Cash Flow Information
The table is supplemental information relative to the Company's cash flows
for the four months ended December 31, 1999 and 1998.
<TABLE>
<CAPTION>
1999 1998
------- -------
(Thousands of
Dollars)
<S> <C> <C>
Cash paid during the year
Interest (including amounts capitalized)................ $16,605 $13,039
Income taxes............................................ $ -- $21,500
Noncash transactions
Treasury stock transferred to compensation plans........ $ 2,071 $ --
------- -------
</TABLE>
F. Earnings per Share Information
The following is a reconciliation of the basic and diluted EPS computations.
<TABLE>
<CAPTION>
Four Months Ended
December 31, 1999
------------------------
Per Share
Income Shares Amount
------- ------ ---------
(Thousands, except per
share amounts)
<S> <C> <C> <C>
Basic EPS
Income available to common stockholders....... $22,977 30,425 $0.76
=====
Effect of Dilutive Securities
Options....................................... -- 13
Convertible preferred stock................... 12,367 19,946
------- ------
Diluted EPS
Income available to common stockholders +
assumed conversions.......................... $35,344 50,384 $0.70
======= ====== =====
</TABLE>
B-5
<PAGE>
ONEOK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
<TABLE>
<CAPTION>
Four Months Ended
December 31, 1998
------------------------
Per Share
Income Shares Amount
------- ------ ---------
(Thousands, except per
share amounts)
<S> <C> <C> <C>
Basic EPS
Income available to common stockholders....... $22,396 31,535 $0.71
=====
Effect of Dilutive Securities
Options....................................... -- 42
Convertible preferred stock................... 12,432 20,071
------- ------
Diluted EPS
Income available to common stockholders +
assumed conversions.......................... $34,828 51,648 $0.67
======= ====== =====
</TABLE>
G. Commitments and Contingencies
During the year ended August 31, 1999, the Company and Southwest entered
into a merger agreement, as amended, in which the Company agreed to acquire
Southwest for $30 per share of common stock in an all cash transaction valued
at $918 million. On January 20, 2000, the Company terminated the merger
agreement in accordance with the terms of the merger agreement.
The Company and certain of its officers as well as Southwest have been named
as defendants in a lawsuit brought by Southern Union Company (Southern Union).
The complaint asks for $750 million and damages to be trebled for racketeering
and unlawful violations, compensatory damages of not less than $750 million and
rescission of the Confidentiality and Standstill Agreement.
Southwest has filed a complaint against the Company and Southern Union in
the United States District Court in Arizona. Southwest seeks actual,
consequential, incidental and punitive damages in an amount in excess of
$75,000 and a declaration that the Company has breached the merger agreement.
It is anticipated that Southern Union and Southwest will continue their
litigation against the Company. If any of the plaintiffs should be successful
in any of their claims against the Company and substantial damages are awarded,
it could have a material adverse effect on the Company's operations, cash flow
and financial position. The Company intends to vigorously defend against the
claims asserted by Southern Union and Southwest and all other matters relating
to the now terminated merger with Southwest.
On February 3, 2000, two substantially identical derivative actions were
filed in the District Court in Tulsa, Oklahoma by shareholders against the
members of the Board of Directors of the Company for alleged violation of their
fiduciary duties to the Company by causing or allowing the Company to engage in
certain fraudulent and improper schemes relating to the planned merger with
Southwest. Such conduct allegedly caused the Company to be sued by both
Southwest and Southern Union which exposed the Company to millions of dollars
in liabilities. The plaintiffs seek an award of compensatory and punitive
damages and costs, disbursements and reasonable attorney fees. The Company
intends to vigorously defend against these allegations.
The Company has responsibility for 12 manufactured gas sites located in
Kansas which may contain potentially harmful materials that are classified as
hazardous material. Hazardous materials are subject to control or remediation
under various environmental laws and regulations. A consent agreement with the
B-6
<PAGE>
ONEOK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
Kansas Department of Health and Environment presently governs all future work
at these sites. The terms of the consent agreement allow the Company to
investigate these sites and set remediation priorities based upon the results
of the investigations and risk analysis. The prioritized sites will be
investigated over a ten year period. At December 31, 1999, the costs of the
investigations and risk analysis have been minimal. Limited information is
available about the sites. Management's best estimate of the cost of
remediation ranges from $100 thousand to $10 million per site based on a
limited comparison of costs incurred to remediate comparable sites. These
estimates do not give effect to potential insurance recoveries, recoveries
through rates or from third parties. The Kansas Corporation Commission (KCC)
has permitted others to recover remediation costs through rates. It should be
noted that additional information and testing could result in costs
significantly below or in excess of the amounts estimated above. To the extent
that such remediation costs are not recovered, the costs could be material to
the Company's results of operations and cash flows depending on the remediation
done and number of years over which the remediation is completed.
The Company is a party to other litigation matters and claims which are
normal in the course of its operations, and while the results of litigation and
claims cannot be predicted with certainty, management believes the final
outcome of such matters will not have a materially adverse effect on
consolidated results of operations, financial position, or liquidity.
H. Segments
In fiscal 1999, the Company adopted SFAS 131, "Disclosures about Segments of
an Enterprise and Related Information." This statement required the Company to
define and report the Company's business segments based on how management
currently evaluates its business. Management has segmented its business based
on differences in products and services and management responsibility.
The Company conducts its operations through six segments: (1) the
Distribution segment distributes natural gas to residential, commercial and
industrial customers, leases pipeline capacity to others and provides
transportation services for end-use customers; (2) the Transportation and
Storage segment transports and stores natural gas for others; (3) the Marketing
segment markets natural gas to wholesale and retail customers and markets
electricity to wholesale customers; (4) the Gathering and Processing segment
gathers and processes natural gas and natural gas liquids; (5) the Production
segment develops and produces natural gas and oil; and (6) the Other segment
primarily operates and leases the Company's headquarters building and a related
parking facility.
Intersegment oil and gas sales are recorded on the same basis as sales to
unaffiliated customers. All corporate overhead costs relating to a reportable
segment have been allocated for the purpose of calculating operating income.
The Company's equity method investments do not represent operating segments of
the Company. The Company has no single external customer from which it receives
ten percent or more of its revenues.
B-7
<PAGE>
ONEOK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
<TABLE>
<CAPTION>
Four Months Ended December 31, 1999
-----------------------------------------------------------------------------------
Gathering
Transportation and Eliminations
Distribution and Storage Marketing Processing Production and Other Total
------------ -------------- --------- ---------- ---------- ------------ ----------
(Thousands of Dollars)
<S> <C> <C> <C> <C> <C> <C> <C>
Sales to unaffiliated
customers.............. $ 337,890 $ 14,357 $365,224 $ 63,869 $ 20,014 $ 7,520 $ 808,874
Intersegment sales...... 1,334 25,868 17,825 15,032 4,779 (64,838) --
---------- -------- -------- -------- -------- -------- ----------
Total Revenues........ $ 339,224 $ 40,225 $383,049 $ 78,901 $ 24,793 $(57,318) $ 808,874
---------- -------- -------- -------- -------- -------- ----------
Net Revenues............ $ 133,662 $ 40,225 $ 11,493 $ 78,901 $ 24,793 $ (3,733) $ 285,341
Operating Costs......... $ 73,247 $ 14,844 $ 3,344 $ 68,076 $ 7,245 $(10,606) $ 156,150
Depreciation, depletion
and amortization....... $ 24,815 $ 5,124 $ 242 $ 2,513 $ 9,715 $ 818 $ 43,227
Operating Income........ $ 35,600 $ 20,257 $ 7,907 $ 8,312 $ 7,833 $ 6,055 $ 85,964
Income from Equity
Investments............ $ -- $ 1,074 $ -- $ -- $ 1,322 $ -- $ 2,396
Total Assets............ $1,776,273 $437,561 $306,705 $368,904 $352,912 $ (2,780) $3,239,575
Capital Expenditures.... $ 38,994 $ 5,938 $ 13,454 $ 26,863 $ 7,206 $ 1,534 $ 93,989
---------- -------- -------- -------- -------- -------- ----------
</TABLE>
<TABLE>
<CAPTION>
Four Months Ended December 31, 1998
-----------------------------------------------------------------------------------
Gathering
Transportation and Eliminations
Distribution and Storage Marketing Processing Production and Other Total
------------ -------------- --------- ---------- ---------- ------------ ----------
(Thousands of Dollars)
<S> <C> <C> <C> <C> <C> <C> <C>
Sales to unaffiliated
customers.............. $ 307,424 $ 9,387 $237,927 $10,165 $ 10,694 $ 5,104 $ 580,701
Intersegment sales...... 3,029 26,610 8,319 4,341 6,968 (49,267) --
---------- -------- -------- ------- -------- --------- ----------
Total Revenues........ $ 310,453 $ 35,997 $246,246 $14,506 $ 17,662 $ (44,163) $ 580,701
---------- -------- -------- ------- -------- --------- ----------
Net Revenues............ $ 133,450 $ 35,997 $ 12,436 $14,506 $ 17,662 $ (2,133) $ 211,918
Operating Costs......... $ 76,796 $ 13,010 $ 2,730 $10,650 $ 5,227 $ (6,369) $ 102,044
Depreciation, depletion
and amortization....... $ 24,603 $ 4,554 $ 103 $ 681 $ 10,292 $ 1,503 $ 41,736
Operating Income........ $ 32,051 $ 18,433 $ 9,603 $ 3,175 $ 2,143 $ 2,733 $ 68,138
Income from Equity
Investments............ $ -- $ 620 $ -- $ -- $ 14 $ -- $ 634
Total Assets............ $1,804,631 $507,573 $141,733 $45,709 $275,840 $(218,348) $2,557,138
Capital Expenditure..... $ 24,636 $ 13,163 $ 605 $ 3,724 $ 39,533 $ 2,575 $ 84,236
---------- -------- -------- ------- -------- --------- ----------
</TABLE>
I. Paid in Capital
Paid in Capital at December 31, 1999, is $330.8 million and $564.2 million
for common stock and convertible preferred stock, respectively.
B-8
<PAGE>
EXHIBIT C
<PAGE>
ONEOK, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- -------------------
2000 1999 2000 1999
---------- -------- ---------- --------
(Thousands of Dollars)
(Unaudited)
<S> <C> <C> <C> <C>
Operating Revenues................... $1,387,130 $390,323 $2,211,079 $937,494
Cost of gas.......................... 1,020,233 239,194 1,578,529 570,265
---------- -------- ---------- --------
Net Revenues....................... 366,897 151,129 632,550 367,229
---------- -------- ---------- --------
Operating Expenses
Operations and maintenance........... 239,988 79,793 352,018 141,041
Depreciation, depletion, and
amortization........................ 37,161 34,168 71,488 66,260
General taxes........................ 12,116 9,953 24,355 20,251
---------- -------- ---------- --------
Total Operating Expenses........... 289,265 123,914 447,861 227,552
---------- -------- ---------- --------
Operating Income................... 77,632 27,215 184,689 139,677
---------- -------- ---------- --------
Other income and (expenses).......... (2,517) -- 11,764 --
Interest expense..................... 28,343 14,337 50,328 26,919
Income taxes......................... 19,610 3,397 58,056 42,827
---------- -------- ---------- --------
Income before cumulative effect of a
change in accounting principle...... 27,162 9,481 88,069 69,931
Cumulative effect of a change in
accounting principle, net of tax
(Note J)............................ -- -- 2,115 --
Net Income........................... 27,162 9,481 90,184 69,931
Preferred Stock Dividends............ 9,275 9,307 18,550 18,631
---------- -------- ---------- --------
Income Available for Common Stock.... $ 17,887 $ 174 $ 71,634 $ 51,300
========== ======== ========== ========
Earnings Per Share of Common Stock
(Note F)
Basic.............................. $ 0.61 $ 0.01 $ 2.45 $ 1.62
========== ======== ========== ========
Diluted............................ $ 0.55 $ 0.01 $ 1.83 $ 1.35
========== ======== ========== ========
Average Shares of Common Stock
(Thousands)
Basic.............................. 29,196 31,590 29,219 31,609
Diluted............................ 49,146 31,603 49,167 51,731
</TABLE>
See accompanying notes to consolidated condensed financial statements.
C-1
<PAGE>
ONEOK, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December
2000 31, 1999
---------- ----------
(Thousands of
Dollars)
(Unaudited)
<S> <C> <C>
Assets
Current Assets
Cash and cash equivalents............................ $ 7,137 $ 72
Trade accounts and notes receivable.................. 841,290 371,313
Inventories.......................................... 161,018 134,871
Assets from price risk management activities......... 649,444 --
Restricted deposits.................................. 81,839 40,928
Other current assets................................. 46,135 46,537
---------- ----------
Total Current Assets................................ 1,786,863 593,721
---------- ----------
Property, Plant and Equipment.......................... 3,980,877 3,143,693
Accumulated depreciation, depletion and
amortization........................................ 1,061,365 1,021,915
---------- ----------
Net Property......................................... 2,919,512 2,121,778
---------- ----------
Deferred Charges and Other Assets
Regulatory assets, net (Note D)...................... 257,573 247,486
Goodwill............................................. 91,523 80,743
Assets from price risk management activities......... 106,259 --
Investments and other................................ 210,374 195,847
---------- ----------
Total Deferred Charges and Other Assets............. 665,729 524,076
---------- ----------
Total Assets........................................ $5,372,104 $3,239,575
========== ==========
Liabilities
Current Liabilities
Current maturities of long-term debt................. $ 10,767 $ 21,767
Notes payable........................................ 247,103 462,242
Accounts payable..................................... 777,079 237,653
Accrued taxes........................................ 36,112 359
Accrued interest..................................... 28,643 16,628
Liabilities from price risk management activities.... 702,641 --
Other................................................ 67,546 48,064
---------- ----------
Total Current Liabilities........................... 1,869,891 786,713
---------- ----------
Long Term Debt, Excluding Current Maturities........... 1,357,869 775,074
---------- ----------
Deferred Credits and Other Liabilities
Deferred income taxes................................ 371,394 348,218
Liabilities from price risk management activities.... 263,796 --
Lease obligation..................................... 124,718 --
Other deferred credits............................... 188,801 178,046
---------- ----------
Total Deferred Credits and Other Liabilities........ 948,709 526,264
---------- ----------
Total Liabilities................................... 4,176,469 2,088,051
Commitments and Contingencies (Note G)
Shareholders' Equity
Convertible Preferred Stock, $0.01 par value: Series
A authorized 20,000,000 shares; issued and
outstanding 19,946,448 shares....................... 199 199
Common stock, $0.01 par value: authorized 100,000,000
shares; issued 31,599,305 shares and outstanding
29,200,781 and 29,554,623 shares.................... 316 316
Paid in capital (Note I)............................. 894,976 894,976
Unearned compensation................................ (1,577) (1,825)
Retained earnings.................................... 370,815 317,964
Treasury stock at cost: 2,398,524 and 2,044,682
shares.............................................. (69,094) (60,106)
---------- ----------
Total Shareholders' Equity.......................... 1,195,635 1,151,524
---------- ----------
Total Liabilities and Shareholders' Equity.......... $5,372,104 $3,239,575
========== ==========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
C-2
<PAGE>
ONEOK, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
June 30,
--------------------
2000 1999
--------- ---------
(Thousands of
Dollars)
(Unaudited)
<S> <C> <C>
Operating Activities
Net income.............................................. $ 90,184 $ 69,931
Depreciation, depletion and amortization................ 71,488 66,260
Gain on sale of assets.................................. (27,050) --
Net income from equity investments...................... (2,801) (1,262)
Deferred income taxes................................... 13,320 12,921
Changes in assets and liabilities....................... 72,192 61,100
--------- ---------
Cash Provided by Operating Activities................. 217,333 208,950
--------- ---------
Investing Activities
Changes in other investments, net....................... (6,840) (62,582)
Acquisitions, net....................................... (460,472) (296,287)
Capital expenditures, net of retirements................ (110,044) (105,288)
Proceeds from sale of property.......................... 60,659 --
--------- ---------
Cash Used in Investing Activities..................... (516,697) (464,157)
--------- ---------
Financing Activities
(Payment) borrowing of notes payable, net............... (215,139) 130,000
Issuance of debt........................................ 589,429 199,494
Payment of debt......................................... (21,395) (17,249)
Issuance of common stock................................ -- 1,381
Issuance of treasury stock.............................. 1,997 --
Acquisition of treasury stock........................... (11,813) (5,507)
Dividends paid.......................................... (36,650) (38,262)
--------- ---------
Cash Provided by Financing Activities................. 306,429 269,857
--------- ---------
Change in Cash and Cash Equivalents..................... 7,065 14,650
Cash and Cash Equivalents at Beginning of Period........ 72 --
--------- ---------
Cash and Cash Equivalents at End of Period.............. $ 7,137 $ 14,650
========= =========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
C-3
<PAGE>
ONEOK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
A. Change in Fiscal Year End
In October 1999, the Board of Directors of ONEOK, Inc. (the Company)
approved a change in the Company's fiscal year-end from August 31 to December
31 beginning January 1, 2000. The consolidated condensed financial statements
for the second quarter and fiscal year to date under the new fiscal year are
presented in this Form 10-Q. A transition report was filed on Form 10-Q for the
period September 1, 1999, through December 31, 1999.
B. Summary of Significant Accounting Policies
Interim Reporting. The interim consolidated condensed financial statements
reflect all adjustments which, in the opinion of management, are necessary for
a fair presentation of the results for the interim periods presented. All such
adjustments are of a normal recurring nature. Due to the seasonal nature of the
business, the results of operations for the six months ended June 30, 2000 are
not necessarily indicative of the results that may be expected for a twelve-
month period. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's Form 10-K for the
year ended August 31, 1999.
C. Significant Events
On April 5, 2000, the Company acquired certain natural gas gathering and
processing assets located in Oklahoma, Kansas and West Texas from Kinder
Morgan, Inc. (KMI). The Company also acquired KMI's marketing and trading
operations, as well as some storage and transmission pipelines in the mid-
continent region. The Company paid approximately $109 million for these assets
plus an adjustment for working capital of approximately $53 million. The
Company also assumed certain liabilities including those related to an
operating lease for a processing plant for which the Company established a
liability for uneconomic lease obligation terms and some firm capacity lease
obligations to third parties for which the Company established a reserve for
out-of-market terms of those obligations. The assets and liabilities acquired
have been recorded at preliminary fair values. As additional information is
obtained, there could be significant adjustments to the purchase price
allocation. The acquisition was accounted for as a purchase. The results of
operations of this acquisition are included in the consolidated condensed
statement of income subsequent to the purchase date.
The table of unaudited pro forma information, set forth below, presents a
summary of consolidated results of operations of the Company as if the
acquisition of the businesses acquired from KMI had occurred at the beginning
of the periods presented. The results do not necessarily reflect the results
which would have been obtained if the acquisition had actually occurred on the
dates indicated or the results which may be expected in the future.
<TABLE>
<CAPTION>
Pro Forma Six Months
Ended June 30,
---------------------
2000 1999
---------- ----------
(Thousands of
Dollars)
<S> <C> <C>
Operating revenues.................................. $3,164,888 $2,829,571
Net income.......................................... $ 97,342 $ 69,743
Income available for common shareholders............ $ 78,792 $ 51,112
Earnings Per Share of Common Stock--Diluted......... $ 1.98 $ 1.35
</TABLE>
The Company received a final order (the Order), on May 30, 2000, in the rate
case before the Oklahoma Corporation Commission (OCC). The Order provided a $20
million net revenue reduction in rates which will be offset by an annual
reduction in depreciation expense of $11.4 million. The Order also transferred
the Oklahoma assets and customers of Kansas Gas Service Company Division (KGS)
to Oklahoma Natural Gas
C-4
<PAGE>
ONEOK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
Company Division (ONG), separated the distribution assets of ONG and the
transmission and storage assets of ONEOK Gas Transportation, L.L.C. (OGT), and
related affiliates into two separate public utilities, adjusted rates for the
removal of the gathering and storage assets no longer collected in base rates
and provided for the recovery of gas purchase operations and maintenance
expenses and line losses through a rider rather than base rates. Additionally,
the Order approved a contract between ONG and OGT and affiliates for
transportation and storage services.
In March 2000, the Company completed the sale of its 42.4 percent interest
in Indian Basin Gas Processing Plant and gathering system for $55 million.
In March 2000, the Company completed the acquisition of assets located in
Oklahoma, Kansas, and the Texas panhandle from Dynegy, Inc. for $305 million in
cash which included a $3 million preliminary adjustment for working capital.
The working capital adjustment is expected to be finalized in November 2000.
The assets include gathering systems, gas processing facilities, and
transmission pipelines.
On January 20, 2000, the Board of Directors of the Company voted unanimously
to terminate the merger agreement with Southwest Gas Corporation (Southwest) in
accordance with ther terms of the merger agreement. The Company charged $9.5
million of previously deferred transaction and ongoing litigation costs to
Other income and expense during the first half of 2000.
D. Regulatory Assets
The following table is a summary of the Company's regulatory assets, net of
amortization.
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
-------- ------------
(Thousands of
Dollars)
<S> <C> <C>
Recoupable take-or-pay............................... $ 81,849 $ 84,343
Pension costs........................................ 17,396 19,487
Post-retirement costs other than pension............. 63,512 62,207
Transition costs..................................... 22,500 22,746
Reacquired debt costs................................ 23,639 24,068
Income taxes......................................... 32,561 23,337
Other................................................ 16,116 11,298
-------- --------
Regulatory assets, net............................. $257,573 $247,486
======== ========
</TABLE>
C-5
<PAGE>
ONEOK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
E. Supplemental Cash Flow Information
The following table is supplemental information relative to the Company's
cash flows.
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-------------------
2000 1999
--------- --------
(Thousands of
Dollars)
<S> <C> <C>
Cash paid during the year
Interest (including amounts capitalized).............. $ 35,932 $ 22,073
Income taxes.......................................... $ 3,651 $ 52,698
Acquisitions
Plant, property and equipment....................... $ 782,970 $289,931
Current assets...................................... 74,012 --
Current liabilities................................. (20,996) --
Goodwill............................................ 14,459 10,817
Lease obligation.................................... (139,000) --
Price risk management activities.................... (239,660) --
Deferred credits.................................... (11,313) --
Deferred income taxes............................... -- (4,461)
--------- --------
Cash paid......................................... $ 460,472 $296,287
========= ========
</TABLE>
F. Earnings per Share Information
The following is a reconciliation of the basic and diluted EPS computations.
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
June 30, 2000 June 30, 1999
------------------------ ------------------------
Per Share Per Share
Income Shares Amount Income Shares Amount
------- ------ --------- ------- ------ ---------
(Thousands, except per share amount)
<S> <C> <C> <C> <C> <C> <C>
Basic EPS
Income available for common
stock..................... $17,887 29,196 $0.61 $ 174 31,590 $0.01
===== =====
Effect of Dilutive Securities
Options..................... -- 4 -- 13
Convertible preferred
stock..................... 9,275 19,946 -- --
------- ------ ------- ------
Diluted EPS
Income available for common
stock + assumed
conversion................ $27,162 49,146 $0.55 $ 174 31,603 $0.01
======= ====== ===== ======= ====== =====
<CAPTION>
Six Months Ended Six Months Ended
June 30, 2000 June 30, 1999
------------------------ ------------------------
Per Share Per Share
Income Shares Amount Income Shares Amount
------- ------ --------- ------- ------ ---------
(Thousands, except per share amount)
<S> <C> <C> <C> <C> <C> <C>
Basic EPS
Income available for common
stock..................... $71,634 29,219 $2.45 $51,300 31,609 $1.62
===== =====
Effect of Dilutive Securities
Options..................... -- 2 -- 13
Convertible preferred
stock..................... 18,550 19,946 18,631 20,109
------- ------ ------- ------
Diluted EPS
Income available for common
stock + assumed
conversion................ $90,184 49,167 $1.83 $69,931 51,731 $1.35
======= ====== ===== ======= ====== =====
</TABLE>
C-6
<PAGE>
ONEOK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
There were 180,597 and 86,871 option shares excluded from the calculation of
Diluted Earnings per Share for the three months ended June 30, 2000 and 1999,
respectively, due to being antidilutive for the periods. There were 19,946,448
shares of convertible preferred stock excluded from the calculation of Diluted
Earnings per Share due to being antidilutive for the three months ended June
30, 1999. For the six months ended June 30, 2000 and 1999, there were 229,559
and 83,496 option shares excluded from the calculation of Diluted Earnings per
Share, respectively, due to being antidilutive.
The following is a reconciliation of the basic and diluted EPS computations
on income before the cumulative effect of a change in accounting principle to
net income.
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-----------------------
Basic EPS Diluted EPS
----------- -----------
2000 1999 2000 1999
----- ----- ----- -----
(Per share amount)
<S> <C> <C> <C> <C>
Income available for common stock before
cumulative effect of a change in accounting
principle........................................ $2.38 $1.62 $1.79 $1.35
Cumulative effect of a change in accounting
principle, net of tax............................ 0.07 -- 0.04 --
----- ----- ----- -----
Income available for common stock................. $2.45 $1.62 $1.83 $1.35
===== ===== ===== =====
</TABLE>
G. Commitments and Contingencies
The Company and Southwest entered into a merger agreement, as amended, in
which the Company agreed to acquire Southwest for $30 per share of common stock
in an all cash transaction valued at $918 million. On January 20, 2000, the
Company terminated the merger in accordance with the terms of the merger
agreement.
The Company and certain of its officers as well as Southwest have been named
as defendants in a lawsuit brought by Southern Union Company (Southern Union).
The complaint asks for $750 million damages to be trebled for racketeering and
unlawful violations, compensatory damages of not less than $750 million and
rescission of the Confidentiality and Standstill Agreement.
Southwest has filed a complaint against the Company and Southern Union in
the United States District Court in Arizona. Southwest seeks actual,
consequential, incidental and punitive damages in an amount in excess of
$75,000 and a declaration that the Company has breached the merger agreement.
On February 3, 2000, two substantially identical derivative actions were
filed in the District Court in Tulsa, Oklahoma by shareholders against the
members of the Board of Directors of the Company for alleged violation of their
fiduciary duties to the Company by causing or allowing the Company to engage in
certain fraudulent and improper schemes relating to the planned merger with
Southwest. In June 2000, these cases were consolidated into one case. Such
conduct allegedly caused the Company to be sued by both Southwest and Southern
Union which exposed the Company to millions of dollars in liabilities. The
plaintiffs seek an award of compensatory and punitive damages and costs,
disbursements and reasonable attorney fees.
It is anticipated that Southern Union and Southwest will continue their
litigation against the Company. If any of the plaintiffs should be successful
in any of their claims against the Company and substantial damages are awarded,
it could have a material adverse effect on the Company's operations, cash flow
and financial position. The Company intends to vigorously defend against the
claims asserted by Southern Union and Southwest and all other matters relating
to the now terminated merger with Southwest.
The Company has responsibility for 12 manufactured gas sites located in
Kansas which may contain potentially harmful materials that are classified as
hazardous substances. Hazardous substances are subject to control or
remediation under various environmental laws and regulations. A consent
agreement with the Kansas
C-7
<PAGE>
ONEOK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
Department of Health and Environment presently governs all future work at these
sites. The terms of the consent agreement allow the Company to investigate
these sites and set remediation priorities based upon the results of the
investigations and risk analysis. The prioritized sites will be investigated
over a ten-year period. At June 30, 2000, the costs of the investigations and
risk analysis have been minimal. Limited information is available about the
sites. Management's best estimate of the cost of remediation ranges from $100
thousand to $10 million per site based on a limited comparison of costs
incurred to remediate comparable sites. These estimates do not give effect to
potential insurance recoveries, recoveries through rates or from third parties.
The Kansas Corporation Commission (KCC) has permitted others to recover
remediation costs through rates. It should be noted that additional information
and testing could result in costs significantly below or in excess of the
amounts estimated above. To the extent that such remediation costs are not
recovered, the costs could be material to the Company's results of operations
and cash flows depending on the remediation done and number of years over which
the remediation is completed.
The Company is a party to other litigation matters and claims which are
normal in the course of its operations, and while the results of litigation and
claims cannot be predicted with certainty, management believes the final
outcome of such matters will not have a materially adverse effect on
consolidated results of operations, financial position, or liquidity.
H. Segments
The Company conducts its operations through six segments: (1) the Marketing
segment markets natural gas to wholesale and retail customers and markets
electricity to wholesale customers; (2) the Gathering and Processing segment
gathers and processes natural gas and natural gas liquids; (3) the
Transportation and Storage segment transports and stores natural gas for others
and sells natural gas; (4) the Distribution segment distributes natural gas to
residential, commercial and industrial customers, leases pipeline capacity to
others and provides transportation services for end-use customers; (5) the
Production segment develops and produces natural gas and oil; and (6) the Other
segment primarily operates and leases the Company's headquarters building and a
related parking facility.
Intersegment sales are recorded on the same basis as sales to unaffiliated
customers. All corporate overhead costs relating to a reportable segment have
been allocated for the purpose of calculating operating income. The Company's
equity method investments do not represent operating segments of the Company.
The Company has no single external customer from which it receives ten percent
or more of its revenues.
<TABLE>
<CAPTION>
Three Months Ended June 30, 2000
------------------------------------------------------------------------------------
Gathering
and Transportation Other and
Marketing Processing and Storage Distribution Production Eliminations Total
--------- ---------- -------------- ------------ ---------- ------------ -----
(Thousands of Dollars)
<S> <C> <C> <C> <C> <C> <C> <C>
Sales to unaffiliated
customers.............. $ 954,791 $198,040 $ 32,842 $187,772 $13,821 $ (136) $1,387,130
Intersegment sales...... 53,262 24,921 14,357 915 4,648 (98,103) --
---------- -------- -------- -------- ------- -------- ----------
Total Revenues......... 1,008,053 222,961 47,199 188,687 18,469 (98,239) 1,387,130
---------- -------- -------- -------- ------- -------- ----------
Net Revenues............ 29,190 222,961 39,512 75,511 18,469 (19,466) 366,897
Operating Costs......... 4,161 186,952 17,188 56,417 5,879 (18,493) 252,104
Depreciation, depletion
and amortization....... 314 6,402 5,004 16,802 7,990 649 37,161
Operating income........ 25,435 29,607 17,320 2,292 4,600 (1,622) 77,632
Income from equity
Investments............ -- -- 1,543 -- 22 -- 1,565
Capital expenditures,
including
acquisitions........... $ 10,183 $298,321 $191,866 $ 27,306 $10,014 $ 9,940 $ 547,630
========== ======== ======== ======== ======= ======== ==========
</TABLE>
C-8
<PAGE>
ONEOK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended June 30, 1999
------------------------------------------------------------------------------------
Gathering
and Transportation Other and
Marketing Processing and Storage Distribution Production Eliminations Total
--------- ---------- -------------- ------------ ---------- ------------ -----
(Thousands of Dollars)
<S> <C> <C> <C> <C> <C> <C> <C>
Sales to unaffiliated
customers.............. $ 181,710 $ 23,895 $ 7,474 $ 162,848 $13,259 $ 1,137 $ 390,323
Intersegment sales...... 11,851 2,387 19,786 1,689 6,637 (42,350) --
---------- ---------- -------- ---------- ------- --------- ----------
Total Revenues......... 193,561 26,282 27,260 164,537 19,896 (41,213) 390,323
---------- ---------- -------- ---------- ------- --------- ----------
Net Revenues............ 6,651 26,282 27,260 75,200 19,896 (4,160) 151,129
Operating Costs......... 2,501 17,950 9,206 60,126 4,901 (4,938) 89,746
Depreciation, depletion
and amortization....... 150 1,334 3,419 19,103 9,595 567 34,168
Operating income........ 4,000 6,998 14,635 (4,029) 5,400 211 27,215
Income from equity
Investments............ -- -- 541 -- 9 -- 550
Capital expenditures,
including
acquisitions........... $ 10 $ 286,595 $ 10,688 $ 33,503 $ 4,365 $ 2,027 $ 337,188
========== ========== ======== ========== ======= ========= ==========
<CAPTION>
Six Months Ended June 30, 2000
------------------------------------------------------------------------------------
Gathering
and Transportation Other and
Marketing Processing and Storage Distribution Production Eliminations Total
--------- ---------- -------------- ------------ ---------- ------------ -----
(Thousands of Dollars)
<S> <C> <C> <C> <C> <C> <C> <C>
Sales to unaffiliated
customers.............. $1,310,915 $ 240,089 $ 47,900 $ 567,482 $28,343 $ 8,350 $2,211,079
Intersegment sales...... 145,978 43,317 28,721 1,827 9,964 (229,807) --
---------- ---------- -------- ---------- ------- --------- ----------
Total Revenues......... 1,456,983 291,406 76,621 569,309 38,307 (221,457) 2,211,079
---------- ---------- -------- ---------- ------- --------- ----------
Net Revenues............ 45,720 291,406 68,934 216,174 38,307 (27,991) 632,550
Operating Costs......... 6,700 245,884 28,607 111,403 11,525 (27,746) 376,373
Depreciation, depletion
and amortization....... 505 8,691 9,197 35,373 16,452 1,270 71,488
Operating income........ 38,515 36,831 31,130 69,398 10,330 (1,515) 184,689
Cumulative effect of a
change in accounting
principle, before tax.. 3,449 -- -- -- -- -- 3,449
Income from equity
Investments............ -- -- 2,772 -- 29 -- 2,801
Total assets............ 1,814,099 1,003,288 615,738 1,633,375 352,681 (47,077) 5,372,104
Capital expenditures,
including
acquisitions........... $ 19,683 $ 601,652 $204,523 $ 53,680 $19,378 $ 11,369 $ 910,285
========== ========== ======== ========== ======= ========= ==========
<CAPTION>
Six Months Ended June 30, 1999
------------------------------------------------------------------------------------
Gathering
and Transportation Other and
Marketing Processing and Storage Distribution Production Eliminations Total
--------- ---------- -------------- ------------ ---------- ------------ -----
(Thousands of Dollars)
<S> <C> <C> <C> <C> <C> <C> <C>
Sales to unaffiliated
customers.............. $ 339,708 $ 30,067 $ 14,602 $ 525,332 $26,483 $ 1,302 $ 937,494
Intersegment sales...... 43,039 5,319 39,322 4,616 12,716 (105,012) --
---------- ---------- -------- ---------- ------- --------- ----------
Total Revenues......... 382,747 35,386 53,924 529,948 39,199 (103,710) 937,494
---------- ---------- -------- ---------- ------- --------- ----------
Net Revenues............ 17,748 35,386 53,924 230,445 39,199 (9,473) 367,229
Operating Costs......... 4,517 25,270 15,954 115,510 9,892 (9,851) 161,292
Depreciation, depletion
and amortization....... 301 1,693 6,834 38,961 18,082 389 66,260
Operating income........ 12,930 8,423 31,136 75,974 11,225 (11) 139,677
Income from equity
Investments............ -- -- 1,225 -- 37 -- 1,262
Total assets............ 172,428 360,032 361,354 1,728,527 361,762 (26,164) 2,957,939
Capital expenditures,
including
acquisitions........... $ 149 $ 287,383 $ 16,955 $ 55,469 $51,847 $ 2,441 $ 414,244
========== ========== ======== ========== ======= ========= ==========
</TABLE>
C-9
<PAGE>
ONEOK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
I. Paid in Capital
Paid in Capital at June 30, 2000 and December 31, 1999, was $330.8 million
for common stock and $564.2 million for convertible preferred stock.
J. Energy Trading and Risk Management
At January 1, 2000, the Company adopted the provisions of Emerging Issues
Task Force Issue No. 98-10, "Accounting for Contracts Involved in Energy
Trading and Risk Management Activities" (EITF 98-10) for certain energy trading
contracts. EITF 98-10 requires entities involved in energy trading activities
to record energy trading contracts using the mark-to-market method of
accounting. Under this methodology, the energy trading contracts with third
parties are reflected at fair market value, net of reserves, with the resulting
unrealized gains and losses recorded as assets and liabilities from price risk
management activities in the consolidated condensed balance sheet. These assets
and liabilities are affected by the actual timing of settlements related to
these contracts and current period changes resulting from newly originated
transactions and the impact of price movements. These changes are recognized in
gross margin on a net basis in the consolidated condensed statement of income
in the period the change occurs. The cumulative effect to January 1, 2000, of
adopting EITF 98-10 was a gain of $3.4 million, $2.1 million, net of tax, or
$0.04 per diluted share of common stock. In prior years, these contracts were
accounted for under the accrual method of accounting, therefore, gains and
losses were recognized as the contracts settled. Energy contracts held by other
Company segments are generally designated as and considered effective as hedges
of non-trading activities and are not considered energy trading contracts.
C-10
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
An estimate of expenses, which will be paid by Western Resources, follows:
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee............... $26,400
NYSE listing fee.................................................. $ .
Printing and engraving expenses................................... $ .
Transfer agent's fees............................................. $ .
Legal fees and expenses........................................... $ .
Blue Sky fees and expenses........................................ $ .
Accountants' fees and expenses.................................... $ .
Miscellaneous expenses............................................ $ .
-------
Total........................................................... $ .
=======
</TABLE>
--------
* All expenses, except the SEC registration fee, are estimated.
Item 14. Indemnification of Directors and Officers.
Article VIII(A) of the registrant's Amended and Restated Articles of
Incorporation, as amended, provides that a director shall not be personally
liable to the corporation or its stockholders for monetary damages for breach
of fiduciary duty as a director except for liability (i) for any breach of the
director's duty of loyalty to the corporation or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or
a knowing violation of law, (iii) for paying a dividend or approving a stock
repurchase in violation of the Kansas General Corporation Law or (iv) for any
transaction from which the director derived an improper personal benefit. This
provision is specifically authorized by Section 17-6002(b)(8) of the Kansas
General Corporation Law.
Section 17-6305 of the Kansas General Corporation Law (the "Indemnification
Statute") provides for indemnification by a corporation of its corporate
officers, directors, employees and agents. The Indemnification Statute provides
that a corporation may indemnify such persons who have been, are, or may become
a party to an action, suit or proceeding due to his or her status as a
director, officer, employee or agent of the corporation. Further, the
Indemnification Statute grants authority to a corporation to implement its own
broader indemnification policy. Article IX of the registrant's By-laws requires
the corporation to indemnify its directors and officers to the fullest extent
provided by Kansas law.
Item 15. Recent Sales of Unregistered Securities.
None.
Item 16. Exhibits.
The Exhibits to this Registration Statement are listed in the Exhibit Index
to this Registration Statement, which Index is incorporated herein by
reference.
Item 17. Undertakings.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described under Item 15 above, or
otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore,
II-1
<PAGE>
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred or
paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
II-2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Topeka, State of Kansas
on October 5, 2000.
WESTAR INDUSTRIES, INC.
(Registrant)
/s/ Paul R. Geist
By: _________________________________
Paul R. Geist
President
Each person whose signature appears below appoints Paul R. Geist, Lee Wages
and Richard D. Terrill and each of them, any of whom may act without the
joinder of the other, as his or her true and lawful attorneys-in-fact and
agents, with full power of substitution and resubstitution, for him or her and
in his or her name, place and stead, in any and all capacities to sign any and
all amendments (including post-effective amendments) to this Registration
Statement on Form S-1 and to file the same, with all exhibits thereto and all
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents full power and
authority to do and perform each and every act and thing requisite and
necessary to be done, as fully to all intents and purposes as he or she might
or could do in person, hereby ratifying and confirming all that said attorneys-
in-fact and agents or their substitute or substitutes may lawfully do or cause
to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons, in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Paul R. Geist Director and President October 5, 2000
____________________________________ (Principal Executive
Paul R. Geist Officer)
/s/ Greg A. Greenwood Treasurer and Secretary October 5, 2000
____________________________________ (Principal Financial
Greg A. Greenwood Officer and Principal
Accounting Officer)
/s/ Lee Wages Director October 5, 2000
____________________________________
Lee Wages
/s/ Douglas T. Lake Director October 5, 2000
____________________________________
Douglas T. Lake
/s/ Carl M. Koupal Director October 5, 2000
____________________________________
Carl M. Koupal
</TABLE>
II-3
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
------- -------
<C> <S>
1.1 Form of Dealer Manager Agreement among Westar Industries, Western
Resources, . and . .*
3.1 Amended and Restated Articles of Incorporation.*
3.2 Bylaws.*
4.1 Form of specimen Common Stock certificate.*
4.2 Rights Agreement dated as of . between Westar Industries and . , as
rights agent.*
4.3 Indenture dated as of May 17, 1995, among Monitoring, as issuer,
Protection One and certain subsidiaries, as guarantors, and The First
National Bank of Boston ("FNBB"), as trustee (incorporated by
reference to Exhibit 4.1 to the Registration Statement on Form S-4
(Registration No. 33-94684) originally filed by Protection One on July
18, 1995).
4.4 First Supplemental Indenture dated as of July 26, 1996, among
Monitoring, as issuer, Protection One and certain subsidiaries, as
guarantors, and State Street Bank and Trust Company ("SSBTC"), as
successor to FNBB, as trustee (incorporated by reference to Exhibit
4.2 to the Annual Report on Form 10-K filed by Protection One and
Monitoring for the year ended September 30, 1996 (the "Protection One
Fiscal 1996 Form 10-K")).
4.5 Second Supplemental Indenture dated as of October 28, 1996, among
Monitoring, as issuer, Protection One and another subsidiary, as
guarantors, and SSBTC, as trustee (incorporated by reference to
Exhibit 4.3 to the Protection One Fiscal 1996 Form 10-K).
4.6 Third Supplemental Indenture dated as of February 14, 2000, among
Monitoring, as issuer, Protection One and certain of its subsidiaries,
as guarantors, and SSBTC, as trustee.*
4.7 Subordinated Debt Shelf Indenture dated as of August 29, 1996, among
Monitoring, as issuer, Protection One, as guarantor, and SSBTC, as
trustee (incorporated by reference to Exhibit 4.3 to the Registration
Statement on Form S-3 (Registration Number 333-09401) originally filed
by Monitoring and, inter alia, Protection One on August 1, 1996).
4.8 Supplemental Indenture No. 1 dated as of September 20, 1996, among
Monitoring, as issuer, Protection One, as guarantor, and SSBTC, as
trustee (incorporated by reference to Exhibit 4.1 to the Current
Report on Form 8-K filed by Protection One and Monitoring and dated
September 20, 1996).
4.9 Supplemental Indenture No. 2 dated as of October 28, 1996, among
Monitoring, as issuer, Protection One, inter alia, as guarantor, and
SSBTC, as trustee (incorporated by reference to Exhibit 4.6 to the
Protection One Fiscal 1996 Form 10-K).
4.10 Supplemental Indenture No. 3 dated as of February 14, 2000, among
Monitoring, as issuer, and certain of its subsidiaries, as guarantors,
and SSBTC, as trustee.*
4.11 Indenture, dated as of August 17, 1998, among Monitoring, as issuer,
Protection One and certain subsidiaries, as guarantors, and The Bank
of New York, as trustee (incorporated by reference to Exhibit 4.1 to
the Registration Statement on Form S-4 filed by Protection One and
Monitoring on September 22, 1998).
4.12 Supplemental Indenture dated as of January 25, 1999, among Monitoring,
as issuer, certain subsidiaries of monitoring, as guarantors, and the
Bank of New York, as trustee.*
4.13 Indenture, dated as of December 21, 1998, among Monitoring, as issuer,
Protection One, as guarantor, and The Bank of New York, as trustee
(incorporated by reference to Exhibit 4.8 to the Annual Report on Form
10-K filed by Protection One and Monitoring for the year ended
December 31, 1998 (the "Protection One Fiscal 1998 Form 10-K")).
5 Opinion of Richard D. Terrill, Esq.*
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
------- -------
<C> <S>
10.1 Westar Industries 2001 Long Term Incentive Compensation and Share
Award Plan.*
10.2 Westar Industries Employee Stock Purchase Plan.*
10.3 Westar Industries Short Term Incentive Plan.*
10.4 Asset Allocation and Separation Agreement between Westar Industries
and Western Resources.*
10.5 Shared Services Agreement between Westar Industries and Western
Resources.*
10.6 Tax Disaffiliation Agreement between Westar Industries and Western
Resources.*
10.7 Stock Purchase Option Agreement between Westar Industries and Western
Resources.*
10.8 Registration Rights Agreement between Westar Industries and Western
Resources.*
10.9 Form of Indemnification Agreement between Westar Industries and each
Executive Officer and Director.*
10.10 Form of Shareholder Agreement dated as of November 26, 1997 between
ONEOK and Westar Industries (incorporated by reference to Appendix B
to the Registration Statement on Form S-4 (Registration No. 333-27467)
of WAI, Inc.).
10.12 Contribution Agreement dated as of July 30, 1997 (the "Contribution
Agreement"), between Western Resources and Protection One
(incorporated by reference to Exhibit 2.1 to the Current Report on
Form 8-K filed by Protection One and Monitoring dated July 30, 1997).
10.13 Amendment No. 1 dated October 2, 1997 to the Contribution Agreement
(incorporated by reference to Exhibit 99.1 to the Current Report of
Form 8-K filed by Protection One and Monitoring dated October 2,
1997).
10.14 Amendment No. 2 dated February 29, 2000 to the Contribution Agreement
(incorporated by reference to Exhibit 10.2 to the Current Report on
Form 8-K filed by Protection One and Monitoring dated February 29,
2000).
10.15 Revolving Credit Agreement among Monitoring, as borrower, NationsBank,
N.A., administrative agent, First Union National Bank, as syndication
agent, Toronto Dominion (Texas), Inc., as documentation agent, and the
Lenders named therein, dated December 21, 1998 (the "Revolving Credit
Agreement") (incorporated by reference to Exhibit 10.11 to the
Protection One Fiscal 1998 Form 10-K).
10.16 First Amendment to the Revolving Credit Agreement, dated as of
February 26, 1999 (incorporated by reference to Exhibit 10.12 to the
Protection One Fiscal 1998 Form 10-K).
10.17 Agreement, dated as of February 29, 2000, by and among Protection One,
Monitoring, and Westar Industries (incorporated by reference to
Exhibit 10.1 to the Current Report on Form 8-K filed by Protection One
and Monitoring dated February 29, 2000).
10.18 Second Amendment to the Revolving Credit Agreement, effective as of
February 29, 2000, between Monitoring and Westar Industries, as
Administrative Agent and a Lender (incorporated by reference to
Exhibit 10.3 to the Current Report on Form 8-K filed by Protection One
and Monitoring dated February 29, 2000).
10.19 Service Agreement between Protection One and Western Resources dated
as of . , 1999.*
10.20 Tax Sharing Agreement between Protection One and Western Resources.*
21.1 Subsidiaries of Westar Industries.
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
------- -------
<C> <S>
23.1 Consent of Richard D. Terrill, Esq. (contained in Exhibit 5).*
23.2 Consent of Arthur Andersen LLP.
23.3 Consent of KPMG LLP.
24 Power of Attorney (set forth on the signature page of this
Registration Statement).
27.1 Financial Data Schedule (for SEC use only).
99.1 Form of Subscription Agent Agreement between Westar Industries and
. , as Transfer Agent.*
99.2 Form of Letter to Western Resources Shareholders.*
99.3 Form of Instructions to Western Resources as to use of Rights
Certificates.*
99.4 Form of Notice of Guaranteed Delivery for Rights Certificates.*
99.5 Form of Letter to Securities Dealers, Commercial Banks, Brokers, Trust
Companies and Other Nominees.*
99.6 Form of Broker Letter to Clients.*
99.7 Form of Special Notice to Eligible Western Resources Shareholders
Whose Addresses are Outside the United States.*
99.8 Form of Nominee Holder Certification Form.*
99.9 Form of Specimen Rights Certificate.*
</TABLE>
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* To be filed by amendment.
3
