SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________________ to ______________________
Commission File Number 1-3523
WESTERN RESOURCES, INC.
(Exact Name of Registrant as Specified in Its Charter)
KANSAS 48-0290150
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
818 KANSAS AVENUE, TOPEKA, KANSAS 66612
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (785) 575-6300
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at May 17, 1999
Common Stock, $5.00 par value 66,398,457
WESTERN RESOURCES, INC.
INDEX
Page No.
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets 3
Consolidated Statements of Income 4 - 5
Consolidated Statements of Comprehensive Income 6
Consolidated Statements of Cash Flows 7 - 8
Consolidated Statements of Cumulative Preferred
and Preference Stock 9
Consolidated Statements of Shareholders' Equity 10
Notes to Consolidated Financial Statements 11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16
Item 3. Quantitative and Qualitative Disclosures About 27
Market Risk
Part II. Other Information
Item 1. Legal Proceedings 28
Item 2. Changes in Securities and Use of Proceeds 28
Item 3. Defaults Upon Senior Securities 28
Item 4. Submission of Matters to a Vote of Security Holders 28
Item 5. Other Information 28
Item 6. Exhibits and Reports on Form 8-K 29
Signature 30
<PAGE>
<TABLE>
WESTERN RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
<CAPTION>
March 31, December 31,
1999 1998
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents . . . . . . . . . . . . . . . . $ 26,272 $ 16,394
Accounts receivable (net) . . . . . . . . . . . . . . . . 188,750 222,715
Inventories and supplies (net). . . . . . . . . . . . . . 104,146 95,590
Marketable securities . . . . . . . . . . . . . . . . . . 274,218 288,077
Prepaid expenses and other. . . . . . . . . . . . . . . . 49,613 57,225
Total Current Assets. . . . . . . . . . . . . . . . . . 642,999 680,001
PROPERTY, PLANT AND EQUIPMENT (NET) . . . . . . . . . . . . 3,788,263 3,795,143
OTHER ASSETS:
Investment in ONEOK . . . . . . . . . . . . . . . . . . . 619,690 615,094
Customer accounts (net) . . . . . . . . . . . . . . . . . 1,073,772 1,014,428
Goodwill (net). . . . . . . . . . . . . . . . . . . . . . 1,181,450 1,188,253
Regulatory assets . . . . . . . . . . . . . . . . . . . . 362,245 364,213
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 319,351 294,296
Total Other Assets. . . . . . . . . . . . . . . . . . . 3,556,508 3,476,284
TOTAL ASSETS. . . . . . . . . . . . . . . . . . . . . . . . $7,987,770 $7,951,428
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt. . . . . . . . . . . $ 235,009 $ 165,838
Short-term debt . . . . . . . . . . . . . . . . . . . . . 368,125 312,472
Accounts payable. . . . . . . . . . . . . . . . . . . . . 86,526 127,834
Accrued liabilities . . . . . . . . . . . . . . . . . . . 262,661 252,367
Accrued income taxes. . . . . . . . . . . . . . . . . . . 45,849 32,942
Deferred security revenues. . . . . . . . . . . . . . . . 61,329 57,703
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 85,201 85,690
Total Current Liabilities . . . . . . . . . . . . . . . 1,144,700 1,034,846
LONG-TERM LIABILITIES:
Long-term debt (net). . . . . . . . . . . . . . . . . . . 3,070,428 3,063,064
Western Resources obligated mandatorily redeemable
preferred securities of subsidiary trusts holding
solely company subordinated debentures. . . . . . . . . 220,000 220,000
Deferred income taxes and investment tax credits. . . . . 931,384 938,659
Minority interests. . . . . . . . . . . . . . . . . . . . 204,697 205,822
Deferred gain from sale-leaseback . . . . . . . . . . . . 206,994 209,951
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 269,417 316,245
Total Long-term Liabilities . . . . . . . . . . . . . . 4,902,920 4,953,741
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Cumulative preferred and preference stock . . . . . . . . 24,858 24,858
Common stock, par value $5 per share, authorized
85,000,000 shares, outstanding 66,153,689 and
65,909,442 shares, respectively. . . . . . . . . . . . . 330,768 329,548
Paid-in capital . . . . . . . . . . . . . . . . . . . . . 779,809 775,337
Retained earnings . . . . . . . . . . . . . . . . . . . . 808,678 823,590
Accumulated other comprehensive income (net) . . . . . . (3,963) 9,508
Total Shareholders' Equity. . . . . . . . . . . . . . . 1,940,150 1,962,841
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY. . . . . . . . . $7,987,770 $7,951,428
The Notes to Consolidated Financial Statements are an integral part of these statements.
</TABLE>
<PAGE>
<TABLE>
WESTERN RESOURCES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands, Except Per Share Amounts)
(Unaudited)
<CAPTION>
Three Months Ended
March 31,
1999 1998
<S> <C> <C>
SALES:
Energy. . . . . . . . . . . . . . . . . . . . . . . . . . $ 312,035 $ 305,548
Security. . . . . . . . . . . . . . . . . . . . . . . . . 148,547 76,795
Total Sales . . . . . . . . . . . . . . . . . . . . . . 460,582 382,343
COST OF SALES:
Energy. . . . . . . . . . . . . . . . . . . . . . . . . . 106,653 106,310
Security. . . . . . . . . . . . . . . . . . . . . . . . . 41,274 23,993
Total Cost of Sales . . . . . . . . . . . . . . . . . . 147,927 130,303
GROSS PROFIT. . . . . . . . . . . . . . . . . . . . . . . . 312,655 252,040
OPERATING EXPENSES:
Operating and maintenance expense . . . . . . . . . . . . 79,082 77,702
Depreciation and amortization . . . . . . . . . . . . . . 83,770 60,925
Selling, general and administrative expense . . . . . . . 71,868 48,618
Total Operating Expenses. . . . . . . . . . . . . . . . 234,720 187,245
INCOME FROM OPERATIONS. . . . . . . . . . . . . . . . . . . 77,935 64,795
OTHER INCOME (EXPENSE):
Investment earnings . . . . . . . . . . . . . . . . . . . 22,890 19,356
Minority interest . . . . . . . . . . . . . . . . . . . . 700 (72)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . (418) 4,232
Total Other Income (Expense). . . . . . . . . . . . . 23,172 23,516
EARNINGS BEFORE INTEREST AND TAXES. . . . . . . . . . . . . 101,107 88,311
INTEREST EXPENSE:
Interest expense on long-term debt. . . . . . . . . . . . 59,151 38,957
Interest expense on short-term debt and other . . . . . . 11,649 11,443
Total Interest Expense. . . . . . . . . . . . . . . . 70,800 50,400
EARNINGS BEFORE INCOME TAXES. . . . . . . . . . . . . . . . 30,307 37,911
INCOME TAXES. . . . . . . . . . . . . . . . . . . . . . . . 9,560 8,098
NET INCOME. . . . . . . . . . . . . . . . . . . . . . . . . 20,747 29,813
PREFERRED AND PREFERENCE DIVIDENDS. . . . . . . . . . . . . 282 1,230
EARNINGS AVAILABLE FOR COMMON STOCK . . . . . . . . . . . . $ 20,465 $ 28,583
AVERAGE COMMON SHARES OUTSTANDING . . . . . . . . . . . . . 66,089,199 65,409,603
BASIC EARNINGS PER AVERAGE COMMON SHARE OUTSTANDING . . . . $ 0.31 $ 0.44
DIVIDENDS DECLARED PER COMMON SHARE . . . . . . . . . . . . $ .535 $ .535
The Notes to Consolidated Financial Statements are an integral part of these statements.
</TABLE>
<PAGE>
<TABLE>
WESTERN RESOURCES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands, Except Per Share Amounts)
(Unaudited)
<CAPTION>
Twelve Months Ended
March 31,
1999 1998
<S> <C> <C>
SALES:
Energy. . . . . . . . . . . . . . . . . . . . . . . . . . $1,619,446 $1,711,054
Security. . . . . . . . . . . . . . . . . . . . . . . . . 492,847 196,856
Total Sales . . . . . . . . . . . . . . . . . . . . . . 2,112,293 1,907,910
COST OF SALES:
Energy. . . . . . . . . . . . . . . . . . . . . . . . . . 691,811 738,337
Security. . . . . . . . . . . . . . . . . . . . . . . . . 149,072 43,739
Total Cost of Sales . . . . . . . . . . . . . . . . . . 840,883 782,076
GROSS PROFIT. . . . . . . . . . . . . . . . . . . . . . . . 1,271,410 1,125,834
OPERATING EXPENSES:
Operating and maintenance expense . . . . . . . . . . . . 338,887 368,878
Depreciation and amortization . . . . . . . . . . . . . . 303,518 256,972
Selling, general and administrative expense . . . . . . . 286,560 311,755
Write-off international development activities. . . . . . 98,916 -
Write-off deferred merger costs . . . . . . . . . . . . . - 48,008
Monitored services special charge . . . . . . . . . . . . - 24,292
Total Operating Expenses. . . . . . . . . . . . . . . . 1,027,881 1,009,905
INCOME FROM OPERATIONS. . . . . . . . . . . . . . . . . . . 243,529 115,929
OTHER INCOME (EXPENSE):
Gain on sale of Tyco securities . . . . . . . . . . . . . - 864,253
Investment earnings . . . . . . . . . . . . . . . . . . . 53,331 31,392
Minority interest . . . . . . . . . . . . . . . . . . . . 1,154 3,786
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 1,624 35,891
Total Other Income (Expense). . . . . . . . . . . . . 56,109 935,322
EARNINGS BEFORE INTEREST AND TAXES. . . . . . . . . . . . . 299,638 1,051,251
INTEREST EXPENSE:
Interest expense on long-term debt. . . . . . . . . . . . 191,049 135,134
Interest expense on short-term debt and other . . . . . . 55,471 59,589
Total Interest Expense. . . . . . . . . . . . . . . . 246,520 194,723
EARNINGS BEFORE INCOME TAXES. . . . . . . . . . . . . . . . 53,118 856,528
INCOME TAXES. . . . . . . . . . . . . . . . . . . . . . . . 16,019 368,230
NET INCOME BEFORE EXTRAORDINARY GAIN. . . . . . . . . . . . 37,099 488,298
EXTRAORDINARY GAIN, NET OF TAX. . . . . . . . . . . . . . . 1,591 -
NET INCOME. . . . . . . . . . . . . . . . . . . . . . . . . 38,690 488,298
PREFERRED AND PREFERENCE DIVIDENDS. . . . . . . . . . . . . 2,643 4,919
EARNINGS AVAILABLE FOR COMMON STOCK . . . . . . . . . . . . $ 36,047 $ 483,379
AVERAGE COMMON SHARES OUTSTANDING . . . . . . . . . . . . . 65,801,314 65,276,370
BASIC EARNINGS PER AVERAGE COMMON SHARE OUTSTANDING:
EARNINGS AVAILABLE FOR COMMON STOCK BEFORE
EXTRAORDINARY GAIN. . . . . . . . . . . . . . . . . . . . $ 0.53 $ 7.41
EXTRAORDINARY GAIN. . . . . . . . . . . . . . . . . . . . . 0.02 -
EARNINGS AVAILABLE FOR COMMON STOCK . . . . . . . . . . . . $ 0.55 $ 7.41
DIVIDENDS DECLARED PER COMMON SHARE . . . . . . . . . . . . $ 2.14 $ 2.11
The Notes to Consolidated Financial Statements are an integral part of these statements.
</TABLE>
<PAGE>
<TABLE>
WESTERN RESOURCES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in Thousands)
(Unaudited)
<CAPTION>
Three Months Ended
March 31,
1999 1998
<S> <C> <C>
Net income. . . . . . . . . . . . . . . . . . . . . . . . . $20,747 $29,813
Other comprehensive (loss) income, before tax:
Unrealized (loss) gain on marketable securities (net) . . (21,382) 14,465
Unrealized (loss) on currency translation . . . . . . . . (1,102) -
Other comprehensive (loss) income, before tax . . . . . . . (22,484) 14,465
Income tax benefit (expense). . . . . . . . . . . . . . . . 9,013 (5,754)
Other comprehensive (loss) income, net of tax . . . . . . . (13,471) 8,711
Comprehensive income. . . . . . . . . . . . . . . . . . . . $ 7,276 $38,524
The Notes to Consolidated Financial Statements are an integral part of these statements.
WESTERN RESOURCES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in Thousands)
(Unaudited)
Twelve Months Ended
March 31,
1999 1998
Net income. . . . . . . . . . . . . . . . . . . . . . . . . $ 38,690 $488,298
Other comprehensive (loss) income, before tax:
Unrealized holding (losses) gains on marketable
securities arising during the period. . . . . . . . . . (53,091) 39,713
Less: Reclassification adjustment for losses
included in net income. . . . . . . . . . . . . . . . . 14,029 -
Unrealized (loss) gain on marketable securities (net) . . (39,062) 39,713
Unrealized (loss) on currency translation . . . . . . . . (2,128) -
Other comprehensive (loss) income, before tax . . . . . . . (41,190) 39,713
Income tax benefit (expense). . . . . . . . . . . . . . . . 16,397 (18,883)
Other comprehensive (loss) income, net of tax . . . . . . . (24,793) 20,830
Comprehensive income. . . . . . . . . . . . . . . . . . . . $13,897 $509,128
The Notes to Consolidated Financial Statements are an integral part of these statements.
</TABLE>
<PAGE>
<TABLE>
WESTERN RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
<CAPTION>
Three Months Ended
March 31,
1999 1998
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income. . . . . . . . . . . . . . . . . . . . . . . . $ 20,747 $ 29,813
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization . . . . . . . . . . . . . . 83,770 60,925
Equity in earnings from investments . . . . . . . . . . . (5,644) (5,576)
Accretion of discount note interest. . . . . . . . . . . . (1,659) -
Changes in working capital items (net of effects
from acquisitions):
Accounts receivable (net) . . . . . . . . . . . . . . . 28,069 146,248
Inventories and supplies (net). . . . . . . . . . . . . (8,379) (5,709)
Prepaid expenses and other. . . . . . . . . . . . . . . 9,088 3,348
Accounts payable. . . . . . . . . . . . . . . . . . . . (41,308) (56,099)
Accrued liabilities . . . . . . . . . . . . . . . . . . (22,691) 12,112
Accrued income taxes. . . . . . . . . . . . . . . . . . 12,907 10,435
Deferred revenue. . . . . . . . . . . . . . . . . . . . 3,691 (422)
Other . . . . . . . . . . . . . . . . . . . . . . . . . (2,195) 20,532
Changes in other assets and liabilities . . . . . . . . . (18,052) (1,869)
Net cash flows from operating activities. . . . . . . 58,344 213,738
CASH FLOWS USED IN INVESTING ACTIVITIES:
Additions to property, plant and equipment (net). . . . . (41,571) (33,908)
Customer account acquisitions . . . . . . . . . . . . . . (78,601) (64,703)
Monitored services acquisitions, net of cash acquired . . (20,722) (274,030)
Purchases of marketable securities. . . . . . . . . . . . (10,464) -
Proceeds from sales of marketable securities. . . . . . . 2,887 -
Other investments (net) . . . . . . . . . . . . . . . . . (7,264) (59,041)
Net cash flows (used in) investing activities . . . . (155,735) (431,682)
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term debt (net) . . . . . . . . . . . . . . . . . . 55,653 225,750
Proceeds of long-term debt. . . . . . . . . . . . . . . . 81,583 764
Retirements of long-term debt . . . . . . . . . . . . . . - (35,732)
Issuance of common stock (net). . . . . . . . . . . . . . 5,692 -
Cash dividends paid . . . . . . . . . . . . . . . . . . . (35,659) (35,570)
Net cash flows from financing activities. . . . . . . 107,269 155,212
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS. . . . 9,878 (62,732)
CASH AND CASH EQUIVALENTS:
Beginning of the period . . . . . . . . . . . . . . . . . 16,394 76,608
End of the period . . . . . . . . . . . . . . . . . . . . $ 26,272 $ 13,876
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
CASH PAID FOR:
Interest on financing activities (net of amount
capitalized). . . . . . . . . . . . . . . . . . . . . . $ 78,882 $ 56,591
Income taxes. . . . . . . . . . . . . . . . . . . . . . . 256 161
The Notes to Consolidated Financial Statements are an integral part of these statements.
</TABLE>
<PAGE>
<TABLE>
WESTERN RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
<CAPTION>
Twelve Months Ended
March 31,
1999 1998
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income. . . . . . . . . . . . . . . . . . . . . . . . $ 38,690 $ 488,298
Extraordinary gain. . . . . . . . . . . . . . . . . . . . (1,591) -
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization . . . . . . . . . . . . . . 303,518 256,972
Loss (gain) on sale of securities . . . . . . . . . . . . 14,029 (864,253)
Accretion of discount note interest . . . . . . . . . . . (1,659) -
Equity in earnings from investments . . . . . . . . . . . (6,132) (17,804)
Write-off of deferred merger costs. . . . . . . . . . . . - 48,008
Write-off of international development activities . . . . 98,916 -
Monitored services special charge . . . . . . . . . . . . - 24,292
Changes in working capital items (net of effects
from acquisitions):
Accounts receivable (net) . . . . . . . . . . . . . . . 665 112,980
Inventories and supplies. . . . . . . . . . . . . . . . (10,670) (24,824)
Marketable securities . . . . . . . . . . . . . . . . . 6,293 (10,461)
Prepaid expenses and other. . . . . . . . . . . . . . . (21,248) 5,038
Accounts payable. . . . . . . . . . . . . . . . . . . . (18,822) (39,043)
Accrued liabilities . . . . . . . . . . . . . . . . . . (77,214) 67,497
Accrued income taxes. . . . . . . . . . . . . . . . . . 8,054 2,367
Deferred revenue. . . . . . . . . . . . . . . . . . . . 4,113 (422)
Other . . . . . . . . . . . . . . . . . . . . . . . . . (22,727) 17,814
Changes in other assets and liabilities . . . . . . . . . (69,397) (57,057)
Net cash flows from operating activities. . . . . . . 244,818 9,402
CASH FLOWS USED IN INVESTING ACTIVITIES:
Additions to property, plant and equipment (net). . . . . (190,548) (202,160)
Customer account acquisition. . . . . . . . . . . . . . . (291,565) (106,510)
Purchases of marketable securities. . . . . . . . . . . . (271,500) -
Proceeds from sales of securities . . . . . . . . . . . . 30,782 1,533,530
Monitored services acquisitions, net of cash acquired . . (295,888) (712,747)
Proceeds from issuance of stock by subsidiary (net) . . . 45,565 -
Other investments (net) . . . . . . . . . . . . . . . . . (39,674) (85,560)
Net cash flows (used in ) from investing activities . (1,012,828) 426,553
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term debt (net) . . . . . . . . . . . . . . . . . . (94,125) (764,487)
Proceeds of long-term debt. . . . . . . . . . . . . . . . 1,177,057 519,357
Retirements of long-term debt . . . . . . . . . . . . . . (131,336) (54,102)
Issuance of common stock (net). . . . . . . . . . . . . . 22,976 17,656
Redemption of preference stock. . . . . . . . . . . . . . (50,000) -
Cash dividends paid . . . . . . . . . . . . . . . . . . . (144,166) (142,792)
Net cash flows from (used in) financing activities. . 780,406 (424,368)
NET INCREASE IN CASH AND CASH EQUIVALENTS . . . . . . . . . 12,396 11,587
CASH AND CASH EQUIVALENTS:
Beginning of the period . . . . . . . . . . . . . . . . . 13,876 2,289
End of the period . . . . . . . . . . . . . . . . . . . . $ 26,272 $ 13,876
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
CASH PAID FOR:
Interest on financing activities (net of amount
capitalized). . . . . . . . . . . . . . . . . . . . . . $ 258,380 $ 168,413
Income taxes. . . . . . . . . . . . . . . . . . . . . . . 47,602 59,809
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
During the fourth quarter of 1997 the company contributed the net assets of its natural gas
business totaling approximately $594 million to ONEOK in exchange for a 45% ownership interest
in ONEOK.
The Notes to Consolidated Financial Statements are an integral part of these statements.
</TABLE>
<PAGE>
<TABLE>
WESTERN RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CUMULATIVE PREFERRED STOCK
(Dollars in Thousands)
(Unaudited)
<CAPTION>
March 31, December 31,
1999 1998
<S> <C> <C>
Preferred stock not subject to mandatory redemption,
Par value $100 per share, authorized
600,000 shares, outstanding -
4 1/2% Series, 138,576 shares. . . . . . . . . . $ 13,858 $ 13,858
4 1/4% Series, 60,000 shares . . . . . . . . . . 6,000 6,000
5% Series, 50,000 shares . . . . . . . . . . . . 5,000 5,000
Total Preferred Stock. . . . . . . . . . . . . . . . $ 24,858 $ 24,858
The Notes to Consolidated Financial Statements are an integral part of these statements.
</TABLE>
<PAGE>
<TABLE>
WESTERN RESOURCES, INC.
CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDERS' EQUITY
(Dollars in Thousands)
(Unaudited)
<CAPTION>
Three Months Ended Twelve Months Ended
March 31, March 31,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Cumulative Preferred and
Preference Stock:
Beginning balance. . . . . . . $ 24,858 $ 74,858 $ 74,858 $ 74,858
Redemption of preference stock - - (50,000) -
Ending balance . . . . . . . . 24,858 74,858 24,858 74,858
Common Stock:
Beginning balance. . . . . . . 329,548 327,048 327,048 324,361
Issuance of common stock . . . 1,220 - 3,720 2,687
Ending balance . . . . . . . . 330,768 327,048 330,768 327,048
Paid-in-Capital:
Beginning balance. . . . . . . 775,337 760,553 760,553 745,584
Expenses on common stock . . . - - - (5)
Issuance on common stock . . . 4,472 - 19,256 14,974
Ending balance . . . . . . . . 779,809 760,553 779,809 760,553
Retained Earnings:
Beginning balance. . . . . . . 823,590 919,911 913,500 567,882
Net income . . . . . . . . . . 20,747 29,813 38,690 488,298
Dividends on preferred and
preference stock . . . . . . (282) (1,230) (2,643) (4,919)
Dividends on common stock. . . (35,377) (34,994) (140,869) (137,761)
Ending balance . . . . . . . . 808,678 913,500 808,678 913,500
Accumulated Other Comprehensive
Income (net):
Beginning balance. . . . . . . 9,508 12,119 20,830 -
Unrealized gain (loss) on
equity securities. . . . . . (21,382) 14,465 (39,062) 39,713
Unrealized gain (loss) on
currency translation . . . . (1,102) - (2,128) -
Income tax benefit (expense) . 9,013 (5,754) 16,397 (18,883)
Ending balance . . . . . . . . (3,963) 20,830 (3,963) 20,830
Total Shareholders' Equity $1,940,150 $2,096,789 $1,940,150 $2,096,789
The Notes to Consolidated Financial Statements are an integral part of these statements.
</TABLE>
<PAGE>
WESTERN RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business: Western Resources, Inc. (the company) is a
publicly traded consumer services company. The company's primary business
activities are providing electric generation, transmission and distribution
services to approximately 620,000 customers in Kansas and providing monitored
services to approximately 1.6 million customers in North America, the United
Kingdom and Continental Europe. In addition, through the company's 45%
ownership interest in ONEOK, Inc. (ONEOK), natural gas transmission and
distribution services are provided to approximately 1.4 million customers in
Oklahoma and Kansas. Rate regulated electric service is provided by KPL, a
division of the company and Kansas Gas and Electric Company (KGE),
a wholly-owned subsidiary. Monitored services are provided by
Protection One, Inc. (Protection One), a publicly-traded, approximately
85%-owned subsidiary.
Principles of Consolidation: The company's unaudited consolidated
financial statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and in accordance with
the instructions to Form 10-Q. Accordingly, certain information and footnote
disclosures normally included in financial statements presented in accordance
with generally accepted accounting principles have been condensed or omitted.
These consolidated financial statements and notes should be read in conjunction
with the financial statements and the notes included in the company's 1998
Annual Report on Form 10-K.
In the opinion of the company's management, all adjustments, consisting
only of normal recurring adjustments considered necessary for a fair
presentation, have been included. The results of operations for the three
months ended March 31, 1999, are not necessarily indicative of the results to be
expected for the full year. Certain purchase price allocations for acquisitions
made in 1998 by Protection One were made on a preliminary basis and are subject
to change based on the final determination of net asset values and completion of
appraisals.
New Pronouncements: On January 1, 1999, the company adopted Emerging Issues
Task Force Issue No. 98-10, "Accounting for Contracts Involved in Energy Trading
and Risk Management Activities" (EITF Issue 98-10). EITF Issue 98-10 requires
energy trading contracts to be recorded at fair value on the balance sheet, with
the changes in the fair value included in earnings. Adoption of EITF 98-10
resulted in an increase in operating income of approximately $800,000 for the
first quarter of 1999.
Reclassifications: Certain amounts in prior years have been reclassified
to conform with classifications used in the current year presentation.
<PAGE>
2. INTERNATIONAL POWER DEVELOPMENT ACTIVITIES
The company terminated the employment of employees of the Wing Group (Wing)
during the first quarter of 1999, in accordance with the company's previously
announced plans to exit the international power development business. In
addition to these terminations, all development activity was discontinued.
Certain exit activities which occurred during the first quarter, as contemplated
in the exit plan, included closing Wing offices and handling other matters
related to terminating the activity of this subsidiary. Through March 31, 1999,
approximately $1.7 million has been expended as costs to exit these activities
of which $0.2 million was incurred for severance costs. All amounts expended
during the quarter ended March 31, 1999, were charged to the exit cost accruals
established as of December 31, 1998.
Management is not aware of any factors which would change its conclusions
regarding the write-down of equity investments recorded during the fourth
quarter of 1998. The company is evaluating all of its options in regard to
these equity investments including selling or otherwise terminating the
company's participation in these investments.
At March 31, 1999, approximately $21.2 million of accrued exit fees and
shut down costs are included in accrued liabilities on the accompanying
Consolidated Balance Sheet. Exit fees for the former principal officers of Wing
represent the largest outstanding obligation related to the company's remaining
exit plan. The company plans to complete all significant aspects of this
closure by the end of 1999.
3. MERGER AGREEMENT WITH KANSAS CITY POWER & LIGHT COMPANY (KCPL)
In May 1999, a Stipulation and Agreement was reached with the Kansas
Corporation Commission (KCC) staff which resulted in a set of settlement
recommendations in connection with the KCPL merger. These recommendations have
not been accepted by all parties and must be approved by the KCC. The KCC will
review the Stipulation and Agreement and issue an order based on the agreement
and the results of the technical hearings, which are in progress. Significant
terms of the recommended settlement are as follows:
- An electric rate moratorium would be implemented for four years
beginning on the day the merger closes
- Westar Energy would make three rate rebates of $15 million each to
its Kansas retail customers on July 1 of 2001, 2002 and 2003
- Westar Energy would be allowed to include $300 million of the
acquisition premium (amount is net of related deferred income taxes
to be recorded) in its Kansas rate base
- The company and KCPL would be allowed to earn a deferred return on
certain new generating facilities that will be completed during the
rate moratorium period. The deferred return would be calculated from
the date of commercial operation of these generating assets until the
earlier of the end of the rate moratorium or March 31, 2004.
Estimated expenditures by the company that qualify for the deferred
return approximate $270 million.
<PAGE>
For additional information on the Merger Agreement with Kansas City Power
& Light Company, see Note 21 of the company's 1998 Annual Report on Form 10-K.
4. LEGAL PROCEEDINGS
The Securities and Exchange Commission (SEC) has commenced a private
investigation relating, among other things, to the timeliness and adequacy of
disclosure filings with the SEC by the company with respect to securities of ADT
Ltd. The company is cooperating with the SEC staff relating to the
investigation.
In April 1999, three alleged class action litigations were filed in the
United States District Court for the Central District of California against
Protection One, Inc. and certain of its present and former officers. In one of
the actions, Western Resources, Inc. was also named as a defendant. The three
actions are: "David Lyons v. Protection One., Inc., Western Resources, Inc.,
James M. Mackenzie, Jr., John W. Hesse, and John E. Mack, III," No. 99-CV-3755
(C.D.Cal.) (filed April 7, 1999); "Randall Karkutt v. Protection One, Inc.,
James M. Mackenzie, Jr., and John W. Hesse," No. 99-CV-3798 (C.D.Cal.) (filed
April 8, 1999); and "David Shaev v.Protection One, Inc., John E. Mack, III,
James H. Mackenzie, Jr., and John Hesse," No. 99-CV-4147 (C.D.Cal.) (filed
April 20, 1999). The actions are purportedly brought on behalf of purchasers
of the common stock of Protection One, Inc. during periods beginning
February 10, 1998 ("Karkutt"), February 12, 1998 ("Shaev"), or April 23, 1998,
("Lyons") and ending April 1, 1999. All three complaints assert claims under
Sections 10(b) and 20 of the Securities Exchange Act of 1934 based on
allegations that various statements made by the defendants concerning the
financial results of Protection One, Inc. were false and misleading and not in
compliance with generally accepted accounting principles. The complaints seek
unspecified amounts of damages and an award of fees and expenses, including
attorneys fees. The company and Protection One believe these actions are
without merit and intend to defend against them vigorously.
The company and its subsidiaries are involved in various other legal,
environmental and regulatory proceedings. Management believes that adequate
provision has been made and accordingly believes that the ultimate dispositions
of these matters will not have a material adverse effect upon the company's
overall financial position or results of operations.
5. COMMITMENTS AND CONTINGENCIES
Manufactured Gas Sites: The company has been associated with 15 former
manufactured gas sites located in Kansas which may contain coal tar and other
potentially harmful materials. The company and the Kansas Department of Health
and Environment (KDHE) entered into a consent agreement governing all future
work at the 15 sites. The terms of the consent agreement will allow the company
to investigate these sites and set remediation priorities based upon the results
of the investigations and risk analysis. At March 31, 1999, the costs incurred
for preliminary site investigation and risk assessment have been minimal. In
accordance with the terms of the strategic alliance with ONEOK, ownership of
twelve of these sites and the responsibility for clean-up of these sites were
transferred to ONEOK. The ONEOK agreement limits the company's future
liability associated with these sites to an immaterial amount. The company's
investment earnings from ONEOK could be impacted by these costs.
<PAGE>
Amortization of Customer Accounts: The SEC staff has questioned the
appropriateness of the amortization method used by Protection One for its
intangible asset, customer accounts. These costs are currently amortized on a
straight-line basis over a 10-year period which Protection One believes is
appropriate and consistent with industry practices and its attrition experience.
Protection One routinely evaluates historical loss rates for customer accounts
on an aggregate basis and, when necessary, adjusts amortization over the
remaining estimated useful life. A change in Protection One's present
amortization method which would materially accelerate the recognition of
amortization expense would have a material adverse effect on the company's
results of operations. Protection One anticipates resolution of this issue
during the second quarter of 1999.
Split Dollar Life Insurance Program: Obligations under the company's split
dollar life insurance program can increase and decrease based on the company's
total return to shareholders. During the first quarter of 1999, the related
liability decreased about $4 million.
For additional information on Commitments and Contingencies, see Note 10
of the company's 1998 Annual Report on Form 10-K.
6. INCOME TAXES
Total income tax expense included in the Consolidated Statements of Income
reflects the Federal statutory rate of 35%. The Federal statutory rate produces
effective income tax rates of 31.5% and 30.2% for the three and twelve month
periods ended March 31, 1999 compared to 21.4% and 43.0% for the three and
twelve month periods ended March 31, 1998. The effective income tax rates vary
from the Federal statutory rate due to permanent differences, including dividend
income, the amortization of investment tax credits, and accelerated amortization
of certain deferred income taxes.
7. SEGMENTS OF BUSINESS
In 1998, 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, production processes, and management
responsibility. Based on this approach, the company has identified four
reportable segments: fossil generation, nuclear generation, power delivery and
monitored services.
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended March 31, 1999:
Eliminating/
Fossil Nuclear Power Monitored Reconciling
Generation Generation Delivery Services Other Items Total
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
External sales. . . $ 79,361 $ - $ 232,340 $ 148,547 $ 331 $ 3 $ 460,582
Allocated sales . . 125,662 29,218 69,380 - - (224,260) -
Earnings before
interest and taxes 47,225 (4,225) 15,631 17,542 27,813 (2,879) 101,107
Interest expense. . 70,800
Earnings before
income taxes . . . 30,307
Three Months Ended March 31, 1998:
Eliminating/
Fossil Nuclear Power Monitored Reconciling
Generation Generation Delivery Services Other Items Total
(Dollars in Thousands)
External sales. . . $ 74,167 $ - $ 231,076 $ 76,795 $ 313 $ (8) $ 382,343
Allocated sales . . 119,891 29,239 16,623 - - (165,753) -
Earnings before
interest and taxes 40,255 (3,946) 23,176 11,333 13,483 4,010 88,311
Interest expense. . 50,400
Earnings before
income taxes . . . 37,911
Twelve Months Ended March 31, 1999:
Eliminating/
Fossil Nuclear Power Monitored Reconciling
Generation Generation Delivery Services (1)Other Items Total
(Dollars in Thousands)
External sales. . . $ 531,168 $ - $1,086,975 $ 492,847 $ 1,360 $ (57) $2,112,293
Allocated sales . . 523,134 117,496 119,249 - - (759,879) -
Earnings before
interest and taxes 151,327 (21,199) 188,853 62,936 (87,658) 5,379 299,638
Interest expense. . 246,520
Earnings before
income taxes . . . 53,118
Twelve Months Ended March 31, 1998:
Eliminating/
Fossil Nuclear Power Monitored Reconciling
Generation Generation Delivery (2)Services (3,4)Other (5)Items Total
(Dollars in Thousands)
External sales. . . $ 246,225 $ - $1,020,752 $ 196,856 $ 442,116 $ 1,961 $1,907,910
Allocated sales . . 517,366 102,449 66,492 - - (686,307) -
Earnings before
interest and taxes 148,239 (54,588) 170,089 (33,833) 875,884 (54,540) 1,051,251
Interest expense. . 194,723
Earnings before
income taxes . . . 856,528
(1) Earnings before interest and taxes (EBIT) includes investment earnings of $22.4 million and
write-off of international power development activities of $98.9 million.
(2) EBIT includes monitored services special charge of $24.3 million.
(3) EBIT includes investment earnings of $41.6 million and gain on sale of Tyco securities of
$864.2 million.
(4) Includes natural gas operations. The company contributed substantially all of its natural
gas business in exchange for a 45% equity interest in ONEOK in November 1997.
(5) EBIT includes write-off of deferred merger costs of $48 million.
</TABLE>
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
In Management's Discussion and Analysis we explain the general financial
condition and the operating results for Western Resources, Inc. and its
subsidiaries. We explain:
- What factors impact our business
- What our earnings and costs were for the three and twelve month
periods ending March 31, 1999, and 1998
- Why these earnings and costs differed from period to period
- How our earnings and costs affect our overall financial condition
- Any other items that particularly affect our financial condition or
earnings
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations updates the information provided in the 1998 Annual
Report on Form 10-K and should be read in conjunction with Management's
Discussion and Analysis of Financial Condition and Results of Operations in our
1998 Annual Report on Form 10-K.
Forward-Looking Statements
Certain matters discussed here and elsewhere in this Form 10-Q 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,
litigation, rate and other regulatory matters, possible corporate
restructurings, mergers, acquisitions, dispositions, liquidity and capital
resources, interest and dividend rates, Year 2000 Issue, environmental matters,
changing weather, nuclear operations, ability to enter new markets successfully
and capitalize on growth opportunities in nonregulated businesses, events in
foreign markets in which investments have been made, and accounting matters.
What happens in each case could vary materially from what we expect because of
such things as electric utility deregulation, including ongoing state and
federal activities; future economic conditions; legislative developments; our
regulatory and competitive markets; and other circumstances affecting
anticipated operations, sales and costs.
OPERATING RESULTS
Western Resources Consolidated
Three Months Ended March 31, 1999 Compared to Three Months Ended March 31,
1998: Basic earnings per share for the first quarter in 1999 were $O.31 per
common share compared to $O.44 per common share in the first quarter of 1998.
The primary reasons for this decline are the electric rate decreases that were
implemented on June 1, 1998, and certain non-recurring gains that were recorded
in the first quarter of 1998. These non-recurring gains were related to
proceeds received in 1998 from corporate owned life insurance policies and to a
gain on the repurchase of certain customer contracts in our monitored services
business segment.
<PAGE>
Twelve Months Ended March 31, 1999 Compared to Twelve Months Ended March
31, 1998: Operating results are difficult to compare because of Protection
One's acquisition activity in 1998, a $99 million charge to income in the fourth
quarter of 1998 to exit the international power development business and the
pre- tax gain on the sale of Tyco International Ltd. (Tyco) common stock of $864
million recorded in the third quarter of 1997.
In addition to the gain on the sale of Tyco common stock recorded in 1997,
we recorded charges in the fourth quarter of 1997 which included $48 million of
deferred KCPL merger costs and approximately $24 million recorded by Protection
One to recognize higher than expected customer attrition and to record costs
related to the acquisition of Protection One.
In November 1997, we completed our strategic alliance with ONEOK and
contributed substantially all of our natural gas business to ONEOK in exchange
for a 45% ownership interest in ONEOK. Following the strategic alliance, the
consolidated sales, related cost of sales and operating expenses for our former
natural gas business have been replaced by investment earnings from ONEOK.
Sales and cost of sales from our former natural gas business for the twelve
months ended March 31, 1998, were $284 million and $172 million.
Electric Utility
The sales and cost of sales of the electric utility business are included
in energy sales and cost of sales in the Consolidated Statements of Income. For
the twelve months ended March 31, 1998, energy sales includes natural gas sales
through November 1997, and energy cost of sales includes natural gas purchased
through November 1997.
Net income from our electric utility business improved 8% to $20 million
for the three months ended March 31, 1999, due to increased wholesale sales
volumes.
Net income for the twelve months ended March 31, 1999, were $72 million
higher than the comparable period in 1998 because of higher sales. We
experienced warmer weather during the summer months in 1998 than we did in 1997
which resulted in increased net income by $20 million. The effect of our
electric rate decrease lowered twelve month net income by $5 million. Also, in
December 1997, we recorded a charge totaling approximately $48 million to write-
off the original merger costs associated with the KCPL merger.
<PAGE>
The following table reflects the increases in electric sales volumes for
the three and twelve months ended March 31, 1999, from the comparable periods of
1998.
Three Months Twelve Months
Ended Ended
Residential. . . . . 1.4 % 9.4%
Commercial . . . . . 1.8 % 6.4%
Industrial . . . . . (0.6)% 0.8%
Other. . . . . . . . - 0.5%
Total retail . . . 0.8 % 5.4%
Wholesale. . . . . . 17.8 % 4.4%
Total. . . . . . . 4.3 % 5.2%
Three Months Ended March 31, 1999 Compared to Three Months Ended March 31,
1998: Sales between periods remained relatively constant. Sales volume
increased 4% due to wholesale sales volumes and power marketing sales. The
increase in volume, however, was offset by the effect of the electric rate
decrease implemented on June 1, 1998. This rate decrease had an effect of
reducing sales for the first quarter of 1999 by $2.3 million. This rate
decrease was implemented in accordance with a 1997 order from the Kansas
Corporation Commission.
Twelve Months Ended March 31, 1999 Compared to Twelve Months Ended March
31, 1998: Total electric sales increased 28%. Electric utility sales increased
7% due to increased retail sales volumes as a result of warmer summer
temperatures and a power marketing sales increase of 229%. A $10 million
electric rate decrease implemented on June 1, 1998, partially offset this
increase.
Total electric cost of sales increased 66% due mostly to higher power
marketing cost of sales. Depreciation and amortization expense decreased $17
million, or 10%, primarily because we had fully amortized a regulatory asset
during 1997.
Electric Utility Business Segments
We manage our electric utility business segments' performance based on
their earnings before interest and taxes (EBIT).
Allocated sales are external sales collected from customers by our power
delivery segment that are allocated to our fossil generation and nuclear
generation business segments based on demand and energy cost. The following
discussion identifies key factors affecting our electric business segments.
Fossil Generation
Three Months Ended Twelve Months Ended
March 31, March 31,
1999 1998 1999 1998
(Dollars in Thousands)
External sales. . . . . . . $ 79,361 $ 74,167 $531,168 $246,225
Allocated sales . . . . . . 125,662 119,891 523,134 517,366
EBIT. . . . . . . . . . . . 47,225 40,255 151,327 148,239
<PAGE>
Fossil generation's external sales reflect power produced for sale to
external wholesale customers outside our historical marketing territory and
internally to the power delivery segment.
Three Months Ended March 31, 1999 Compared to Three Months Ended March 31,
1998: External sales increased $5 million due primarily to higher wholesale
sales. Allocated sales increased $5 million because of increases in demand for
power and energy related to increased retail customer sales. Higher sales
partially offset by higher operating expenses increased EBIT by $7 million.
Twelve Months Ended March 31, 1999 Compared to Twelve Months Ended March
31, 1998: External sales increased mostly because of increased power marketing
sales of $384 million compared to $117 million. Through March 31, 1999, our
power marketing activity has had an insignificant effect on EBIT.
Nuclear Generation
Three Months Ended Twelve Months Ended
March 31, March 31,
1999 1998 1999 1998
(Dollars in Thousands)
Allocated sales . . . . . . $ 29,218 $ 29,239 $117,496 $102,449
EBIT. . . . . . . . . . . . (4,225) (3,946) (21,199) (54,588)
Nuclear generation has no external sales because it provides all of its
power to its co-owners KGE, KCPL and Kansas Electric Power Cooperative, Inc.
The amounts above are our 47% share of Wolf Creek's operating results.
Twelve Months Ended March 31, 1999 Compared to Twelve Months Ended March
31, 1998: Allocated sales and EBIT were higher because Wolf Creek operated the
entire period without any outages. In the fourth quarter of 1997, the Wolf
Creek facility was off-line for 58 days for a scheduled maintenance outage.
EBIT was also higher because depreciation and amortization expense
decreased because we had fully amortized a regulatory asset during 1997.
On April 3, 1999, Wolf Creek was taken off-line for a schedule maintenance
outage. The outage was completed 36 days later on May 9, 1999.
Power Delivery
Three Months Ended Twelve Months Ended
March 31, March 31,
1999 1998 1999 1998
(Dollars in Thousands)
External sales. . . . . . . $232,340 $231,076 $1,086,975 $1,020,752
Allocated sales . . . . . . 69,380 16,623 119,249 66,492
EBIT. . . . . . . . . . . . 15,631 23,176 188,853 170,089
Three Months Ended March 31, 1999 Compared to Three Months Ended March 31,
1998: Allocated sales were $53 million higher because the customer service
operations of Power Delivery are now allocated a fee for use of the distribution
lines and transformers. Allocated sales to other business segments increased $5
<PAGE>
million because of increases in demand for power and energy related to increased
retail customer sales.
EBIT decreased $8 million. Five percent milder weather than same quarter
last year decreased EBIT by $3 million. Higher sales allocated to other
business segments also decreased EBIT by $5 million.
Twelve Months Ended March 31, 1999 Compared to Twelve Months Ended March
31, 1998: In addition to our normal customer growth, we experienced warmer
weather during the summer months in 1998 than we did in 1997 which improved
external sales, allocated sales and EBIT.
Monitored Services
Protection One operates and manages our monitored services business. The
results discussed below reflect Protection One on a stand-alone basis and do not
take into consideration the minority interest of about 15% at March 31, 1999.
Three Months Ended Twelve Months Ended
March 31, March 31,
1999 1998 1999 1998
(Dollars in Thousands)
External sales. . . . . . . $148,547 $ 76,795 $492,847 $196,856
EBIT. . . . . . . . . . . . 17,542 11,333 62,936 (33,833)
External sales, EBIT and operating results for both the three and twelve
months ended March 31, 1999, have increased significantly following Protection
One's acquisitions of security businesses in Europe in the second quarter and
late in the third quarter of 1998 and the continued growth of Protection One's
North American operations. Results for the three and twelve months ended March
31, 1998, reflect only the operations of Protection One's North American
operations. During the first quarter of 1998, Protection One added
approximately 374,000 customers through acquisitions.
Included in twelve months ended March 31, 1999, EBIT is a non-recurring
gain approximating $16 million on the repurchase of customer contracts covered
by a financing arrangement. A charge of approximately $24 million adversely
affected twelve months ended March 31, 1998, EBIT. The charge was needed to
recognize higher than expected customer attrition and to record costs related to
the acquisition of Protection One.
<PAGE>
The following table reflects the change in Protection One's operating
results for the three months ended March 31, 1999, compared to the three months
ended March 31, 1998:
Increase/ %
(Decrease) Change
(Dollars in Thousands)
Sales. . . . . . . . . . . . . . . . $71,752 93%
Cost of sales. . . . . . . . . . . . 17,281 72%
Gross profit . . . . . . . . . . . 54,471 103%
Selling, general and administrative. 20,093 98%
Amortization of intangibles and
depreciation . . . . . . . . . . . 21,886 106%
Other operating expenses . . . . . . 3,399 98%
Operating expenses . . . . . . . . 45,378 102%
Operating income . . . . . . . . . 9,093 112%
Other income (expense) . . . . . . . (2,884) (89%)
Earnings before interest and taxes $6,209 55%
The SEC staff is reviewing Protection One's amortization methodology used
for customer accounts. The SEC staff has questioned the appropriateness of the
current accounting method which Protection One believes is appropriate and
consistent with industry practices and its attrition experience. A change in
Protection One's present amortization method which would materially accelerate
the recognition of amortization expense would have a material adverse effect on
the company's results of operations. The intangible amortization represents a
non-cash charge to income. Protection One anticipates resolution of this issue
during the second quarter of 1999.
Other Operating Expenses
Twelve Months Ended March 31, 1999 Compared to Twelve Months Ended March
31, 1998: In December 1998, we recorded a $99 million charge to income
associated with our decision to exit the international power project development
business.
In December 1997, we recorded a charge totaling approximately $48 million
to write-off the original merger costs associated with the KCPL transaction and
Protection One recorded a charge of approximately $24 million to recognize
higher than expected customer attrition and to record costs related to the
acquisition of Protection One.
Other Income (Expense)
Other income (expense) includes miscellaneous income and expenses not
directly related to our operations.
Three Months Ended March 31, 1999 Compared to Three Months Ended March 31,
1998: Investments earnings increased due to more income earned on higher
balances of marketable securities. This increase was partially offset by lower
other income due to less COLI death proceeds received.
<PAGE>
Twelve Months Ended March 31, 1999 Compared to Twelve Months Ended March
31, 1998: Other income decreased $879 million due to the following factors:
(Dollars in
Millions )
Twelve Months Ended March 31, 1998
Other income (expense). . . . . . . . . . . $935
Twelve Months Ended March 31, 1998
Non-recurring gain on the sale of our
TYCO common stock. . . . . . . . . . . . (864)
Investment earnings recorded on Hanover
and ADT investments. . . . . . . . . . . (22)
Twelve Months Ended March 31, 1999
Increase in earnings from the investment
in ONEOK . . . . . . . . . . . . . . . . 23
Recorded investment losses . . . . . . . . (22)
Non-recurring Protection One gains. . . . . 16
Other miscellaneous . . . . . . . . . . . . (10)
Twelve Months Ended March 31, 1999
Other income (expense). . . . . . . . . . . $56
Interest Expense
Three Months Ended March 31, 1999 Compared to Three Months Ended March 31,
1998: Interest expense increased 40% primarily because Protection One borrowed
additional long-term debt to fund acquisitions and to acquire customer accounts.
During the first quarter of 1999, Protection One added approximately 113,000
customers.
Twelve Months Ended March 31, 1999 Compared to Twelve Months Ended March
31, 1998: Our long-term debt interest expense increased $56 million due to our
and Protection One's issuance of new long-term debt used to reduce existing
short-term debt, to fund nonregulated operations and to finance a substantial
portion of Protection One's customer account growth. Lower short-term debt
interest expense partially offset the higher long-term debt interest expense.
Our short-term debt had a lower weighted average interest rate than the
long-term debt which replaced it.
Income Taxes
Three Months Ended March 31, 1999 Compared to Three Months Ended March 31,
1998: Income tax expense increased slightly. The effective tax rate increased
from 21% to 31% primarily due to non-taxable proceeds from our corporate-owned
life insurance policies received in the first quarter of 1998.
Twelve Months Ended March 31, 1999 Compared to Twelve Months Ended March
31, 1998: Income tax expense decreased significantly due to the decline in
taxable earnings. For twelve months ended March 31, 1999, the charge to income
to exit the international power development business, significantly lowered tax
expense. Tax expense for twelve months ended March 31, 1998, included taxes
related to the gain on the sale of Tyco common stock.
Our effective tax rate also declined. This decline is largely attributable
to non-taxable proceeds from our corporate-owned life insurance policies and the
benefit of excluding 70% of ONEOK dividends received from the determination of
taxable income.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
We had $26 million in cash and cash equivalents at March 31, 1999. We
consider highly liquid debt instruments purchased with a maturity of three
months or less to be cash equivalents. At March 31, 1999, we had approximately
$368 million of short-term debt outstanding, of which $199 million was
commercial paper. An additional $821 million of short-term debt was available
from committed credit arrangements. Current maturities of long-term debt were
$235 million at March 31, 1999.
CASH FLOW DISCUSSION
Cash Flows from Operating Activities
Three Months Ended March 31, 1999 Compared to Three Months Ended March 31,
1998: Cash from operations decreased significantly primarily because of
receivables collected in the first quarter of 1998 as part of the settlement of
our strategic alliance with ONEOK.
Twelve Months Ended March 31, 1999 Compared to Twelve Months Ended March
31, 1998: Cash from operations increased significantly because of two factors.
First, taxes paid of approximately $345 million on the gain on the sale of Tyco
common stock reduced twelve months ended March 31, 1998, operating cash flow.
Secondly, twelve months ended March 31, 1999, includes the first full year of
Protection One operations.
Cash Flows Used In Investing Activities
Three Months Ended March 31, 1999 Compared to Three Months Ended March 31,
1998: Cash used in investing activities decreased significantly primarily due
to more acquisitions of monitored services companies in the first quarter of
1998.
Twelve Months Ended March 31, 1999 Compared to Twelve Months Ended March
31, 1998: Cash used in investing activities increased significantly primarily
due to the proceeds received in the third quarter of 1997 from the gain on sale
of Tyco common stock offsetting the cash used during the twelve months ended
March 31, 1998.
Cash Flows from Financing Activities
Three Months Ended March 31, 1999 Compared to Three Months Ended March 31,
1998: Cash from financing activities decreased 27% because we issued less short-
term debt.
Twelve Months Ended March 31, 1999 Compared to Twelve Months Ended March
31, 1998: Cash from financing activities increased significantly primarily due
to additional borrowings incurred for the acquisitions of monitored services
companies.
<PAGE>
OTHER INFORMATION
Investment in ONEOK, Inc.
In December 1998, ONEOK and Southwest Gas Corporation (Southwest Gas)
agreed to a merger under which ONEOK would pay $28.50 a share in cash for each
Southwest Gas share. In February 1999, Southwest Gas advised ONEOK that it had
received an unsolicited offer of $32 per share of common stock from Southern
Union Company (Southern Union). Also in February, Southwest Gas's board of
directors authorized Southwest Gas's management to begin substantive discussions
regarding Southern Union's unsolicited offer of $32 a share. On April 25, 1999,
Southwest Gas accepted a revised purchase price of $30 a share from ONEOK, and
terminated negotiations with Southern Union. On April 27, 1999, Southern Union
announced an increased bid of $33.50 a share for Southwest Gas. On May 4, 1999,
Southwest Gas rejected the revised unsolicited bid by Southern Union saying it
does not believe Southern Union could finance the transaction or gain regulatory
approval in a timely manner. A federal judge has issued a temporary restraining
order blocking Southern Union from pursuing a takeover of Southwest Gas.
Year 2OOO Issue
We are currently addressing the effect of the Year 2000 Issue on
information systems and operations. We face the Year 2000 Issue because many
computer systems and applications abbreviate dates by eliminating the first two
digits of the year, assuming that these two digits are always "19". On January
1, 2000, some computer programs may incorrectly recognize the date as January 1,
1900. Some computer systems and applications may incorrectly process critical
information or may stop processing altogether because of the date abbreviation.
Calculations using dates beyond December 31, 1999, may affect computer
applications before January 1, 2000.
Electric Utility Operations: Overall, based on manhours as a measure of
work effort, we believe we are approximately 76% complete with our readiness
efforts.
The estimated progress of our departments and business units, exclusive of
Protection One and Wolf Creek Nuclear Operating Corporation (WCNOC), at
March 31, 1999, based on manhours, is as follows:
Percentage
Department/Business Unit Completion
Fossil Fuel . . . . . . . . . . . . . . . 50%
Power Delivery . . . . . . . . . . . . . 74%
Information Technology. . . . . . . . . . 87%
Administrative. . . . . . . . . . . . . . 76%
<PAGE>
We estimate that total costs to update all of our electric utility
operating systems for Year 2000 readiness, excluding costs associated with WCNOC
discussed below, to be approximately $6.9 million, of which $4.3 million
represents IT costs and $2.6 million represents non-IT costs. As of March 31,
1999, we have expended approximately $5.0 million of these costs, of which $3.7
million represent IT costs and $1.3 million represent non-IT costs. We expect
to incur the remaining $1.9 million, of which $0.6 million represents IT costs
and $1.3 million represents non-IT costs, by the end of 1999.
Wolf Creek Nuclear Operating Corporation:
The table below sets forth estimates of the status of the components of
WCNOC's Year 2000 readiness program at March 31, 1999.
<TABLE>
<CAPTION>
Estimated
Completion Percentage
Phase Date Completion
<S> <C> <C>
Identification and assessment of plant components 100%
Identification and assessment of computers/software 100%
Identification and Assessment of Other Areas 100%
Identified critical remediations complete (Note 1) Oct 99 60%
Comprehensive testing guidelines 100%
Comprehensive testing (Note 2) Jun 99 55%
Contingency planning guidelines 100%
Contingency planning individual plans Jun 99 80%
Note 1 - Two major modifications are currently scheduled to be completed after June 1999,
the remaining remediations are presently scheduled for completion prior to July 1999.
Note 2 - These tests are being used to define the options available for minor remediations.
Several other post-remediation tests will also be performed.
</TABLE>
WCNOC has established a goal of completing all assessments of affected
systems by the end of the second quarter of 1999, and has a goal to complete
critical remediations by the end of the third quarter, except for one scheduled
for October, 1999.
WCNOC has estimated the costs to complete the Year 2000 project at $3.9
million ($1.8 million, our share). As of March 31, 1999, $2.0 million ($0.9
million, our share) had been spent on the project. A summary of the projected
costs to complete and actual costs incurred through March 31, 1999, is as
follows:
Projected Actual
Costs Costs
(Dollars in Thousands)
Wolf Creek Labor and Expenses. . $ 499 $ 319
Contractor Costs . . . . . . . . 1,004 733
Remediation Costs. . . . . . . . 2,245 966
Total. . . . . . . . . . . . . $3,748 $2,018
Approximately $2.9 million ($1.4 million, our share) of WCNOC's total Year
2000 cost is purchased items and installation costs associated with remediation.
Of these remediation costs, $1.8 million ($0.8 million, our share) are
associated with seven major jobs which are completed or in progress. All of
these costs are being expensed as they are incurred and are being funded on a
daily basis along with our normal costs of operations.
Monitored Services Operations: Protection One estimates the total cost to
update all critical operating systems for Year 2000 readiness will be
approximately $5 million. As of March 31, 1999, approximately $1.8 million of
these costs had been incurred.
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The company has not experienced any significant changes in its exposure to
market risk since December 31, 1998. For additional information on the
company's market risk, see the Form 10-K dated December 31, 1998.
<PAGE>
WESTERN RESOURCES, INC.
Part II Other Information
Item 1. Legal Proceedings
In April 1999, three alleged class action litigations were filed in the
United States District Court for the Central District of California against
Protection One, Inc. and certain of its present and former officers. In one of
the actions, Western Resources, Inc. was also named as a defendant. The three
actions are: "David Lyons v. Protection One., Inc., Western Resources, Inc.,
James M. Mackenzie, Jr., John W. Hesse, and John E. Mack, III," No. 99-CV-3755
(C.D.Cal.) (filed April 7, 1999); "Randall Karkutt v. Protection One, Inc.,
James M. Mackenzie, Jr., and John W. Hesse," No. 99-CV-3798 (C.D.Cal.) (filed
April 8, 1999); and "David Shaev v.Protection One, Inc., John E. Mack, III,
James H. Mackenzie, Jr., and John Hesse," No. 99-CV-4147 (C.D.Cal.) (filed April
20, 1999). The actions are purportedly brought on behalf of purchasers of the
common stock of Protection One, Inc. during periods beginning February 10, 1998
("Karkutt"), February 12, 1998 ("Shaev") or April 23, 1998 ("Lyons") and ending
April 1, 1999. All three complaints assert claims under Sections 10(b) and 20
of the Securities Exchange Act of 1934 based on allegations that various
statements made by the defendants concerning the financial results of Protection
One, Inc. were false and misleading and not in compliance with generally
accepted accounting principles. The complaints seek unspecified amounts of
damages and an award of fees and expenses, including attorneys fees. The
company and Protection One believe these actions are without merit and intend to
defend against them vigorously.
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 12 - Computation of Ratio of Consolidated Earnings
to Fixed Charges for 12 Months Ended
March 31, 1999 (filed electronically)
Exhibit 27 - Financial Data Schedule (filed electronically)
(b) Reports on Form 8-K:
Form 8-K filed January 28, 1999 - Press release regarding annual
earnings and dividend declared.
Form 8-K filed April 1, 1999 - Press release reporting Western
Resources extends filing period for 10-K.
Form 8-K filed May 11, 1999 - Press release and employee update
reporting Western Resources and KCPL Reach Merger Settlement
with KCC staff and others.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Western Resources, Inc.
Date May 17, 1999 By /s/ WILLIAM B. MOORE
William B. Moore, Executive
Vice President, Chief Financial
Officer and Treasurer
<PAGE>
<TABLE>
Exhibit 12
WESTERN RESOURCES, INC.
Computations of Ratio of Earnings to Fixed Charges and
Computations of Ratio of Earnings to Combined Fixed Charges
and Preferred and Preference Dividend Requirements
(Dollars in Thousands)
<CAPTION>
Unaudited
Twelve
Months
Ended
March 31, Year Ended December 31,
1999 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C> <C>
Net Income . . . . . . . . . . . $ 38,690 $ 47,756 $ 499,518 $168,950 $181,676 $187,447
Taxes on Income. . . . . . . . . 16,019 14,557 382,987 86,102 83,392 99,951
Net Income Plus Taxes. . . . 54,709 62,313 882,505 255,052 265,068 287,398
Fixed Charges:
Interest on Long-Term Debt . . 191,049 170,855 119,972 105,741 95,962 98,483
Interest on Other Indebtedness 37,396 37,190 55,761 34,685 27,487 20,139
Interest on Other Mandatorily
Redeemable Securities. . . . 18,075 18,075 18,075 12,125 372 -
Interest on Corporate-owned
Life Insurance Borrowings. . 37,371 38,236 36,167 35,151 32,325 26,932
Interest Applicable to
Rentals. . . . . . . . . . . 32,651 32,796 34,514 32,965 31,650 29,003
Total Fixed Charges. . . . 316,542 297,152 264,489 220,667 187,796 174,557
Preferred and Preference Dividend
Requirements:
Preferred and Preference
Dividends. . . . . . . . . . 2,643 3,591 4,919 14,839 13,419 13,418
Income Tax Required. . . . . . 1,094 1,095 3,771 7,562 6,160 7,155
Total Preferred and
Preference Dividend
Requirements . . . . . . 3,737 4,686 8,690 22,401 19,579 20,573
Total Fixed Charges and Preferred
and Preference Dividend
Requirements. . . . . . . . . 320,279 301,838 273,179 243,068 207,375 195,130
Earnings (1) . . . . . . . . . . $371,251 $359,465 $1,146,994 $475,719 $452,864 $461,955
Ratio of Earnings to Fixed
Charges . . . . . . . . . . . . 1.17 1.21 4.34 2.16 2.41 2.65
Ratio of Earnings to Combined Fixed
Charges and Preferred and
Preference Dividend Requirements 1.16 1.19 4.20 1.96 2.18 2.37
(1) Earnings are deemed to consist of net income to which has been added income taxes (including net
deferred investment tax credit) and fixed charges. Fixed charges consist of all interest on
indebtedness, amortization of debt discount and expense, and the portion of rental expense which
represents an interest factor. Preferred and preference dividend requirements consist of an
amount equal to the pre-tax earnings which would be required to meet dividend requirements on
preferred and preference stock.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AT MARCH 31, 1999 AND THE CONSOLIDATED STATEMENT OF
INCOME AND THE CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE THREE MONTHS ENDED
MARCH 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 26272
<SECURITIES> 274218
<RECEIVABLES> 220039
<ALLOWANCES> 31289
<INVENTORY> 104146
<CURRENT-ASSETS> 642999
<PP&E> 5855585
<DEPRECIATION> 2067322
<TOTAL-ASSETS> 7987770
<CURRENT-LIABILITIES> 1144700
<BONDS> 3070428
220000
24858
<COMMON> 330768
<OTHER-SE> 1584524
<TOTAL-LIABILITY-AND-EQUITY> 7987770
<SALES> 460582
<TOTAL-REVENUES> 460582
<CGS> 147927
<TOTAL-COSTS> 147927
<OTHER-EXPENSES> 234720
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 70800
<INCOME-PRETAX> 30307
<INCOME-TAX> 9560
<INCOME-CONTINUING> 20747
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 20747
<EPS-PRIMARY> 0.31
<EPS-DILUTED> 0.31
</TABLE>
