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 June 30, 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 (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 August 13, 1999
Common Stock, $5.00 par value 67,527,347
<PAGE>
WESTERN RESOURCES, INC.
INDEX
Page No.
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets 3
Consolidated Statements of Income 4 - 6
Consolidated Statements of Comprehensive Income 7
Consolidated Statements of Cash Flows 8 - 9
Consolidated Statements of Cumulative Preferred Stock 10
Consolidated Statements of Shareholders' Equity 11
Notes to Consolidated Financial Statements 12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 19
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 35
Part II. Other Information
Item 1. Legal Proceedings 36
Item 2. Changes in Securities and Use of Proceeds 36
Item 3. Defaults Upon Senior Securities 36
Item 4. Submission of Matters to a Vote of Security Holders 36
Item 5. Other Information 37
Item 6. Exhibits and Reports on Form 8-K 38
Signatures 39
<PAGE>
<TABLE>
WESTERN RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
<CAPTION>
June 30, December 31,
1999 1998
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents . . . . . . . . . . . . . . . . $ 23,373 $ 16,394
Accounts receivable (net) . . . . . . . . . . . . . . . . 226,894 218,243
Inventories and supplies (net). . . . . . . . . . . . . . 111,896 95,590
Marketable securities . . . . . . . . . . . . . . . . . . 262,480 288,077
Prepaid expenses and other. . . . . . . . . . . . . . . . 79,414 57,225
Total Current Assets. . . . . . . . . . . . . . . . . . 704,057 675,529
PROPERTY, PLANT AND EQUIPMENT (NET) . . . . . . . . . . . . 3,796,126 3,795,143
OTHER ASSETS:
Investment in ONEOK . . . . . . . . . . . . . . . . . . . 615,439 615,094
Customer accounts (net) . . . . . . . . . . . . . . . . . 1,176,605 1,014,428
Goodwill (net). . . . . . . . . . . . . . . . . . . . . . 1,152,307 1,188,253
Regulatory assets . . . . . . . . . . . . . . . . . . . . 360,629 364,213
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 392,874 298,768
Total Other Assets. . . . . . . . . . . . . . . . . . . 3,697,854 3,480,756
TOTAL ASSETS. . . . . . . . . . . . . . . . . . . . . . . . $8,198,037 $7,951,428
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt. . . . . . . . . . . $ 241,143 $ 165,838
Short-term debt . . . . . . . . . . . . . . . . . . . . . 422,390 312,472
Accounts payable. . . . . . . . . . . . . . . . . . . . . 121,727 127,834
Accrued liabilities . . . . . . . . . . . . . . . . . . . 257,621 252,367
Accrued income taxes. . . . . . . . . . . . . . . . . . . 33,398 32,942
Deferred security revenues. . . . . . . . . . . . . . . . 63,921 57,703
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 95,380 85,690
Total Current Liabilities . . . . . . . . . . . . . . . 1,235,580 1,034,846
LONG-TERM LIABILITIES:
Long-term debt (net). . . . . . . . . . . . . . . . . . . 3,107,832 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. . . . . 983,314 938,659
Minority interests. . . . . . . . . . . . . . . . . . . . 203,638 205,822
Deferred gain from sale-leaseback . . . . . . . . . . . . 204,037 209,951
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 290,141 316,245
Total Long-term Liabilities . . . . . . . . . . . . . . 5,008,962 4,953,741
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Cumulative preferred stock. . . . . . . . . . . . . . . . 24,858 24,858
Common stock, par value $5 per share, authorized
85,000,000 shares, outstanding 67,168,740 and
65,909,442 shares, respectively. . . . . . . . . . . . . 335,844 329,548
Paid-in capital . . . . . . . . . . . . . . . . . . . . . 801,860 775,337
Retained earnings . . . . . . . . . . . . . . . . . . . . 791,330 823,590
Accumulated other comprehensive income (net) . . . . . . (397) 9,508
Total Shareholders' Equity. . . . . . . . . . . . . . . 1,953,495 1,962,841
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY . . . . . . . . . $8,198,037 $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
June 30,
1999 1998
<S> <C> <C>
SALES:
Energy. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 325,341 $ 366,260
Security. . . . . . . . . . . . . . . . . . . . . . . . . . 150,801 97,041
Total Sales . . . . . . . . . . . . . . . . . . . . . . . 476,142 463,301
COST OF SALES:
Energy. . . . . . . . . . . . . . . . . . . . . . . . . . . 109,853 140,483
Security. . . . . . . . . . . . . . . . . . . . . . . . . . 41,882 31,480
Total Cost of Sales . . . . . . . . . . . . . . . . . . . 151,735 171,963
GROSS PROFIT. . . . . . . . . . . . . . . . . . . . . . . . . 324,407 291,338
OPERATING EXPENSES:
Operating and maintenance expense . . . . . . . . . . . . . 89,397 81,848
Depreciation and amortization . . . . . . . . . . . . . . . 86,768 68,580
Selling, general and administrative expense . . . . . . . . 75,018 68,616
Write-off international development activities. . . . . . . (4,930) -
Total Operating Expenses. . . . . . . . . . . . . . . . . 246,253 219,044
INCOME FROM OPERATIONS. . . . . . . . . . . . . . . . . . . . 78,154 72,294
OTHER INCOME (EXPENSE):
Investment earnings . . . . . . . . . . . . . . . . . . . . 15,876 11,712
Minority interests. . . . . . . . . . . . . . . . . . . . . 1,149 (200)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . (358) 17,256
Total Other Income (Expense). . . . . . . . . . . . . . 16,667 28,768
EARNINGS BEFORE INTEREST AND TAXES. . . . . . . . . . . . . . 94,821 101,062
INTEREST EXPENSE:
Interest expense on long-term debt. . . . . . . . . . . . . 60,519 39,282
Interest expense on short-term debt and other . . . . . . . 12,979 15,617
Total Interest Expense. . . . . . . . . . . . . . . . . 73,498 54,899
EARNINGS BEFORE INCOME TAXES. . . . . . . . . . . . . . . . . 21,323 46,163
INCOME TAXES. . . . . . . . . . . . . . . . . . . . . . . . . 2,834 16,748
NET INCOME BEFORE EXTRAORDINARY GAIN . . . . . . . . . . . . 18,489 29,415
EXTRAORDINARY GAIN, NET OF TAX. . . . . . . . . . . . . . . . - 1,591
NET INCOME. . . . . . . . . . . . . . . . . . . . . . . . . . 18,489 31,006
PREFERRED AND PREFERENCE DIVIDENDS. . . . . . . . . . . . . . 282 1,797
EARNINGS AVAILABLE FOR COMMON STOCK . . . . . . . . . . . . . $ 18,207 $ 29,209
AVERAGE COMMON SHARES OUTSTANDING . . . . . . . . . . . . . . 66,639,224 65,542,815
BASIC EARNINGS PER AVERAGE COMMON SHARE OUTSTANDING:
EARNINGS AVAILABLE FOR COMMON STOCK BEFORE EXTRAORDINARY GAIN $ .27 $ .42
EXTRAORDINARY GAIN. . . . . . . . . . . . . . . . . . . . . . - .03
EARNINGS AVAILABLE FOR COMMON STOCK . . . . . . . . . . . . . $ .27 $ .45
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>
Six Months Ended
June 30,
1999 1998
<S> <C> <C>
SALES:
Energy. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 637,376 $ 671,807
Security. . . . . . . . . . . . . . . . . . . . . . . . . . 299,348 173,836
Total Sales . . . . . . . . . . . . . . . . . . . . . . . 936,724 845,643
COST OF SALES:
Energy. . . . . . . . . . . . . . . . . . . . . . . . . . . 216,506 246,792
Security. . . . . . . . . . . . . . . . . . . . . . . . . . 83,156 55,473
Total Cost of Sales . . . . . . . . . . . . . . . . . . . 299,662 302,265
GROSS PROFIT. . . . . . . . . . . . . . . . . . . . . . . . . 637,062 543,378
OPERATING EXPENSES:
Operating and maintenance expense . . . . . . . . . . . . . 168,479 159,551
Depreciation and amortization . . . . . . . . . . . . . . . 170,538 129,505
Selling, general and administrative expense . . . . . . . . 146,886 117,233
Write-off international development activities. . . . . . . (4,930) -
Total Operating Expenses. . . . . . . . . . . . . . . . . 480,973 406,289
INCOME FROM OPERATIONS. . . . . . . . . . . . . . . . . . . . 156,089 137,089
OTHER INCOME (EXPENSE):
Investment earnings . . . . . . . . . . . . . . . . . . . . 37,444 26,934
Minority interests. . . . . . . . . . . . . . . . . . . . . 1,850 (271)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . 545 25,623
Total Other Income (Expense). . . . . . . . . . . . . . 39,839 52,286
EARNINGS BEFORE INTEREST AND TAXES. . . . . . . . . . . . . . 195,928 189,375
INTEREST EXPENSE:
Interest expense on long-term debt. . . . . . . . . . . . . 119,290 78,239
Interest expense on short-term debt and other . . . . . . . 25,008 27,060
Total Interest Expense. . . . . . . . . . . . . . . . . 144,298 105,299
EARNINGS BEFORE INCOME TAXES. . . . . . . . . . . . . . . . . 51,630 84,076
INCOME TAXES. . . . . . . . . . . . . . . . . . . . . . . . . 12,394 24,846
NET INCOME BEFORE EXTRAORDINARY GAIN . . . . . . . . . . . . 39,236 59,230
EXTRAORDINARY GAIN, NET OF TAX. . . . . . . . . . . . . . . . - 1,591
NET INCOME. . . . . . . . . . . . . . . . . . . . . . . . . . 39,236 60,821
PREFERRED AND PREFERENCE DIVIDENDS. . . . . . . . . . . . . . 564 3,027
EARNINGS AVAILABLE FOR COMMON STOCK . . . . . . . . . . . . . $ 38,672 $ 57,794
AVERAGE COMMON SHARES OUTSTANDING . . . . . . . . . . . . . . 66,365,731 65,476,577
BASIC EARNINGS PER AVERAGE COMMON SHARE OUTSTANDING:
EARNINGS AVAILABLE FOR COMMON STOCK BEFORE EXTRAORDINARY GAIN $ .58 $ .86
EXTRAORDINARY GAIN. . . . . . . . . . . . . . . . . . . . . . - .02
EARNINGS AVAILABLE FOR COMMON STOCK . . . . . . . . . . . . . $ .58 $ .88
DIVIDENDS DECLARED PER COMMON SHARE . . . . . . . . . . . . . $ 1.07 $ 1.07
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
June 30,
1999 1998
<S> <C> <C>
SALES:
Energy. . . . . . . . . . . . . . . . . . . . . . . . . . . $1,578,528 $1,654,527
Security. . . . . . . . . . . . . . . . . . . . . . . . . . 546,607 262,677
Total Sales . . . . . . . . . . . . . . . . . . . . . . . 2,125,135 1,917,204
COST OF SALES:
Energy. . . . . . . . . . . . . . . . . . . . . . . . . . . 661,182 705,268
Security. . . . . . . . . . . . . . . . . . . . . . . . . . 159,474 60,297
Total Cost of Sales . . . . . . . . . . . . . . . . . . . 820,656 765,565
GROSS PROFIT. . . . . . . . . . . . . . . . . . . . . . . . . 1,304,479 1,151,639
OPERATING EXPENSES:
Operating and maintenance expense . . . . . . . . . . . . . 346,435 352,445
Depreciation and amortization . . . . . . . . . . . . . . . 321,706 264,708
Selling, general and administrative expense . . . . . . . . 292,963 331,409
Write-off international development activities. . . . . . . 93,986 -
Write-off deferred merger costs . . . . . . . . . . . . . . - 48,008
Monitored services special charge . . . . . . . . . . . . . - 24,292
Total Operating Expenses. . . . . . . . . . . . . . . . . 1,055,090 1,020,862
INCOME FROM OPERATIONS. . . . . . . . . . . . . . . . . . . . 249,389 130,777
OTHER INCOME (EXPENSE):
Gain on sale of Tyco securities . . . . . . . . . . . . . . - 864,253
Investment earnings . . . . . . . . . . . . . . . . . . . . 60,307 39,141
Minority interests. . . . . . . . . . . . . . . . . . . . . 2,503 3,886
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . (18,804) 28,924
Total Other Income (Expense). . . . . . . . . . . . . . 44,006 936,204
EARNINGS BEFORE INTEREST AND TAXES. . . . . . . . . . . . . . 293,395 1,066,981
INTEREST EXPENSE:
Interest expense on long-term debt. . . . . . . . . . . . . 211,906 150,846
Interest expense on short-term debt and other . . . . . . . 53,213 47,038
Total Interest Expense. . . . . . . . . . . . . . . . . 265,119 197,884
EARNINGS BEFORE INCOME TAXES. . . . . . . . . . . . . . . . . 28,276 869,097
INCOME TAXES. . . . . . . . . . . . . . . . . . . . . . . . . 2,105 375,717
NET INCOME BEFORE EXTRAORDINARY GAIN. . . . . . . . . . . . . 26,171 493,380
EXTRAORDINARY GAIN. . . . . . . . . . . . . . . . . . . . . . - 1,591
NET INCOME. . . . . . . . . . . . . . . . . . . . . . . . . . 26,171 494,971
PREFERRED AND PREFERENCE DIVIDENDS. . . . . . . . . . . . . . 1,128 5,487
EARNINGS AVAILABLE FOR COMMON STOCK . . . . . . . . . . . . . $ 25,043 $ 489,484
AVERAGE COMMON SHARES OUTSTANDING . . . . . . . . . . . . . . 66,074,665 65,400,416
BASIC EARNINGS PER AVERAGE COMMON SHARE OUTSTANDING:
EARNINGS AVAILABLE FOR COMMON STOCK BEFORE EXTRAORDINARY GAIN $ .38 $ 7.46
EXTRAORDINARY GAIN. . . . . . . . . . . . . . . . . . . . . . - .02
EARNINGS AVAILABLE FOR COMMON STOCK . . . . . . . . . . . . . $ .38 $ 7.48
DIVIDENDS DECLARED PER COMMON SHARE . . . . . . . . . . . . . $ 2.14 $ 2.12
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
June 30,
1999 1998
<S> <C> <C>
Net income. . . . . . . . . . . . . . . . . . . . . . . . . $ 18,489 $ 31,006
Other comprehensive income, before tax:
Unrealized holding gains on marketable
securities arising during the period. . . . . . . . . . 6,215 6,552
Less: Reclassification adjustment for losses
included in net income. . . . . . . . . . . . . . . . . 140 -
Unrealized gain on marketable securities (net). . . . . . 6,355 6,552
Unrealized on currency translation. . . . . . . . . . . . (439) -
Other comprehensive income, before tax. . . . . . . . . . . 5,916 6,552
Income tax expense. . . . . . . . . . . . . . . . . . . . . (2,350) (2,606)
Other comprehensive income, net of tax. . . . . . . . . . . 3,566 3,946
Comprehensive income. . . . . . . . . . . . . . . . . . . . $ 22,055 $ 34,952
Six Months Ended
June 30,
1999 1998
Net income. . . . . . . . . . . . . . . . . . . . . . . . . $ 39,236 $ 60,821
Other comprehensive (loss) income, before tax:
Unrealized holding (losses) gains on marketable
securities arising during the period. . . . . . . . . . (15,167) 21,018
Less: Reclassification adjustment for losses
included in net income. . . . . . . . . . . . . . . . . 140 -
Unrealized (loss) gain on marketable securities (net) . . (15,027) 21,018
Unrealized (loss) on currency translation . . . . . . . . (1,541) -
Other comprehensive (loss) income, before tax . . . . . . . (16,568) 21,018
Income tax benefit (expense). . . . . . . . . . . . . . . . 6,663 (8,361)
Other comprehensive (loss) income, net of tax . . . . . . . (9,905) 12,657
Comprehensive income. . . . . . . . . . . . . . . . . . . . $ 29,331 $ 73,478
Twelve Months Ended
June 30,
1999 1998
Net income. . . . . . . . . . . . . . . . . . . . . . . . . $ 26,171 $494,971
Other comprehensive (loss) income, before tax:
Unrealized holding (losses) gains on marketable
securities arising during the period. . . . . . . . . . (53,429) 46,266
Less: Reclassification adjustment for losses
included in net income. . . . . . . . . . . . . . . . . 14,168 -
Unrealized (loss) gain on marketable securities (net) . . (39,261) 46,266
Unrealized (loss) on currency translation . . . . . . . . ( 2,567) -
Other comprehensive (loss) income, before tax . . . . . . . (41,828) 46,266
Income tax benefit (expense). . . . . . . . . . . . . . . . 16,655 (21,490)
Other comprehensive (loss) income, net of tax . . . . . . . (25,173) 24,776
Comprehensive income. . . . . . . . . . . . . . . . . . . . $ 998 $519,747
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>
Six Months Ended
June 30,
1999 1998
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income. . . . . . . . . . . . . . . . . . . . . . . . $ 39,236 $ 60,821
Adjustments to reconcile net income to net cash
provided by operating activities:
Extraordinary gain. . . . . . . . . . . . . . . . . . . . - (1,591)
Depreciation and amortization . . . . . . . . . . . . . . 170,538 131,278
Equity in earnings from investments . . . . . . . . . . . (6,492) (5,502)
Accretion of discount note interest . . . . . . . . . . . (3,345) -
Write-off international development activities. . . . . . (4,930) -
Changes in working capital items (net of effects from
acquisitions):
Accounts receivable (net) . . . . . . . . . . . . . . . (6,329) 75,816
Inventories and supplies. . . . . . . . . . . . . . . . (16,128) (7,089)
Prepaid expenses and other. . . . . . . . . . . . . . . (27,122) (34,458)
Accounts payable. . . . . . . . . . . . . . . . . . . . (6,107) (8,801)
Accrued liabilities . . . . . . . . . . . . . . . . . . (12,786) (5,844)
Accrued income taxes. . . . . . . . . . . . . . . . . . 456 24,332
Deferred revenue. . . . . . . . . . . . . . . . . . . . 6,218 -
Other . . . . . . . . . . . . . . . . . . . . . . . . . (11,116) (21,992)
Changes in other assets and liabilities . . . . . . . . . (12,771) 32,269
Net cash flows from operating activities. . . . . . . 109,322 239,239
CASH FLOWS USED IN INVESTING ACTIVITIES:
Additions to property, plant and equipment (net). . . . . (88,619) (69,547)
Customer account acquisition. . . . . . . . . . . . . . . (154,571) (126,589)
Security alarm monitoring acquisitions, net of cash
acquired . . . . . . . . . . . . . . . . . . . . . . . (20,722) (361,039)
Purchases of marketable securities. . . . . . . . . . . . (11,999) -
Proceeds from sale of marketable securities . . . . . . . 21,699 -
Investment in Paradigm. . . . . . . . . . . . . . . . . . (32,009) -
Proceeds from issuance of stock by subsidiary (net) . . . - 45,565
Other investments (net) . . . . . . . . . . . . . . . . . (9,342) (68,601)
Net cash flows (used in) investing activities . . . . (295,563) (580,211)
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term debt (net) . . . . . . . . . . . . . . . . . . 109,918 491,541
Proceeds of long-term debt. . . . . . . . . . . . . . . . 136,479 7,818
Retirements of long-term debt . . . . . . . . . . . . . . (178) (102,179)
Issuance of common stock issued (net) . . . . . . . . . . 18,497 6,717
Redemption of preference stock. . . . . . . . . . . . . . - (50,000)
Cash dividends paid . . . . . . . . . . . . . . . . . . . (71,496) (71,795)
Cash flows from financing activities. . . . . . . . . 193,220 282,102
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS. . . . 6,979 (58,870)
CASH AND CASH EQUIVALENTS:
Beginning of the period . . . . . . . . . . . . . . . . . 16,394 76,608
End of the period . . . . . . . . . . . . . . . . . . . . $ 23,373 $ 17,738
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
CASH PAID FOR:
Interest on financing activities (net of amount
capitalized . . . . . . . . . . . . . . . . . . . . . . $ 152,311 $ 119,076
Income taxes. . . . . . . . . . . . . . . . . . . . . . . 831 23,595
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
June 30,
1999 1998
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income. . . . . . . . . . . . . . . . . . . . . . . . $ 26,171 $ 494,971
Adjustments to reconcile net income to net cash
provided by operating activities:
Extraordinary gain. . . . . . . . . . . . . . . . . . . . - (1,591)
Depreciation and amortization . . . . . . . . . . . . . . 319,933 266,481
Equity in earnings from investments . . . . . . . . . . . (7,054) (5,116)
Gain or loss on sale of securities. . . . . . . . . . . . 14,029 (864,253)
Accretion of discount note interest . . . . . . . . . . . (3,345) -
Write-off of deferred merger costs. . . . . . . . . . . . - 48,008
Write-off international development activities. . . . . . 93,986 24,292
Changes in other working capital:
Accounts receivable (net) . . . . . . . . . . . . . . . 36,699 48,682
Inventories and supplies. . . . . . . . . . . . . . . . (17,039) (8,189)
Marketable securities . . . . . . . . . . . . . . . . . 6,293 (10,461)
Prepaid expenses and other. . . . . . . . . . . . . . . (19,652) (23,223)
Accounts payable. . . . . . . . . . . . . . . . . . . . (30,919) (30,061)
Accrued liabilities . . . . . . . . . . . . . . . . . . (49,353) 72,249
Accrued income taxes. . . . . . . . . . . . . . . . . . (18,294) 42,146
Deferred revenue. . . . . . . . . . . . . . . . . . . . 6,218 -
Other . . . . . . . . . . . . . . . . . . . . . . . . . 10,876 (42,080)
Changes in other assets and liabilities . . . . . . . . . (98,254) (28,102)
Net cash flows from (used in) operating activities. . 270,295 (16,247)
CASH FLOWS USED IN INVESTING ACTIVITIES:
Additions to property, plant and equipment (net). . . . . (201,957) (174,800)
Customer account acquisitions . . . . . . . . . . . . . . (305,649) (150,618)
Security business acquisitions. . . . . . . . . . . . . . (208,879) (799,756)
Purchases of marketable securities. . . . . . . . . . . . (273,035) -
Proceeds from sale of marketable securities . . . . . . . 49,594 1,579,095
Investment in Paradigm. . . . . . . . . . . . . . . . . . (32,009) -
Proceeds from issuance of stock by subsidiary (net) . . . - (107,961)
Other investments (net) . . . . . . . . . . . . . . . . . (32,192) -
Net cash flows (used in) from investing activities. . (1,004,127) 345,960
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term debt (net) . . . . . . . . . . . . . . . . . . (305,651) (544,617)
Proceeds of long-term debt. . . . . . . . . . . . . . . . 1,224,899 526,412
Retirements of long-term debt . . . . . . . . . . . . . . (65,067) (119,686)
Issuance of common stock (net). . . . . . . . . . . . . . 29,064 17,763
Redemption of preference stock. . . . . . . . . . . . . . - (50,000)
Cash dividends paid . . . . . . . . . . . . . . . . . . . (143,778) (143,746)
Net cash flows from (used in) from financing
activities. . . . . . . . . . . . . . . . . . . . . 739,467 (313,874)
NET INCREASE IN CASH AND CASH EQUIVALENTS . . . . . . . . . 5,635 15,839
CASH AND CASH EQUIVALENTS:
Beginning of the period . . . . . . . . . . . . . . . . . 17,738 1,899
End of the period . . . . . . . . . . . . . . . . . . . . $ 23,373 $ 17,738
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
CASH PAID FOR:
Interest on financing activities (net of amount
capitalized). . . . . . . . . . . . . . . . . . . . . . $ 268,805 $ 182,392
Income taxes. . . . . . . . . . . . . . . . . . . . . . . 24,743 386,713
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>
June 30, 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 SHAREHOLDERS' EQUITY
(Dollars in Thousands)
(Unaudited)
<CAPTION>
Three Months Ended Six Months Ended Twelve Months Ended
June 30, June 30, June 30,
1999 1998 1999 1998 1999 1998
<S> <C> <C> <C> <C> <C> <C>
Cumulative Preferred and
Preference Stock:
Beginning balance. . . . . . . $ 24,858 $ 74,858 $ 24,858 $ 74,858 $ 24,858 $ 74,858
Redemption of preference stock - (50,000) - (50,000) - (50,000)
Ending balance . . . . . . . . 24,858 24,858 24,858 24,858 24,858 24,858
Common Stock:
Beginning balance. . . . . . . 330,768 327,048 329,548 327,048 327,865 325,408
Issuance of common stock . . . 5,076 817 6,296 817 7,979 2,457
Ending balance . . . . . . . . 335,844 327,865 335,844 327,865 335,844 327,865
Paid-in-Capital:
Beginning balance. . . . . . . 779,809 760,553 775,337 760,553 766,453 751,147
Expenses on common stock . . . - - - - - (5)
Issuance on common stock . . . 22,051 5,900 26,523 5,900 35,407 15,311
Ending balance . . . . . . . . 801,860 766,453 801,860 766,453 801,860 766,453
Retained Earnings:
Beginning balance. . . . . . . 808,678 913,500 823,590 919,911 907,634 556,826
Net income . . . . . . . . . . 18,489 31,006 39,236 60,821 26,171 494,971
Dividends on preferred and
preference stock . . . . . . (282) (1,797) (564) (3,027) (1,128) (5,487)
Dividends on common stock. . . (35,555) (35,075) (70,932) (70,071) (141,347) (138,676)
Ending balance . . . . . . . . 791,330 907,634 791,330 907,634 791,330 907,634
Accumulated Other Comprehensive
Income (net):
Beginning balance. . . . . . . (3,963) 20,830 9,508 12,119 24,776 -
Unrealized gain (loss) on
equity securities. . . . . . 6,355 6,552 (15,027) 21,018 (39,261) 46,266
Unrealized loss on
currency translation . . . . (439) - (1,541) - (2,567) -
Income tax benefit (expense) . (2,350) ( 2,606) 6,663 (8,361) 16,655 (21,490)
Ending balance . . . . . . . . (397) 24,776 (397) 24,776 (397) 24,776
Total Shareholders' Equity $1,953,495 $2,051,586 $1,953,495 $2,051,586 $1,953,495 $2,051,586
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 (GAAP) 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 GAAP have been condensed or omitted. These consolidated
financial statements and notes should be read in conjunction with the
Consolidated Financial Statements and the notes included in the company's 1998
Annual Report on Form 10-K.
In management's opinion, all adjustments, consisting only of normal
recurring adjustments considered necessary for a fair presentation, have been
included. The results of operations for the three and six months ended June 30,
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.
These financials statements do not reflect the effect, if any, of any
change which may occur as a result of Protection One's discussions with the SEC
staff and any resulting accounting changes or adjustments to the company's
financial statements. See Note 5 for additional discussion.
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 $3.3 million for
the six months ended June 30, 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
Limited Co. (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 half of
1999, as contemplated in the exit plan, included closing Wing offices and
handling other matters related to terminating the activity of this subsidiary.
Through June 30, 1999, approximately $16.5 million has been expended for exit
activities of which $13.4 million was incurred for employee settlement costs and
$0.7 million was incurred for severance costs. All amounts expended during the
six months ended June 30, 1999, were charged to the exit cost accruals
established as of December 31, 1998. These exit cost accruals were reduced by
$4.9 million during the second quarter of 1999 due to the actual employee
settlement amounts being less than the amounts originally estimated. The impact
of this accrual reversal increased pre-tax income.
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 June 30, 1999, approximately $1.5 million of accrued exit fees and shut
down costs are included in other current liabilities on the accompanying
Consolidated Balance Sheet. 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. At an administrative
meeting on August 11, 1999, the KCC Commissioners generally indicated their
support of the merger, however, they could not approve the merger under the
terms of the Stipulation and Agreement reached in May. The KCC is expected to
issue an order in October 1999.
In July 1999, a Settlement Agreement was reached with the Missouri Public
Service Commission (MPSC) staff, the Office of Public Counsel and other key
parties in connection with the KCPL merger. The stipulation and agreement have
been filed with the MPSC for its review and approval. Significant terms of the
Missouri settlement are as follows:
- An electric rate moratorium of three years beginning on the date the
transaction closes
- Westar Energy would make a one-time rate credit in the amount of $5
million to its Missouri retail customers at the beginning of the second
year of the merger
- Westar Energy's executive headquarters would be located in Kansas City.
<PAGE>
The company is currently negotiating with the Federal Energy Regulatory
Commission (FERC) staff and intervenors. Hearings before FERC, if necessary,
are scheduled to begin October 25, 1999.
The company and KCPL have filed an application with the Nuclear Regulatory
Commission to approve the Western Resources/KCPL merger and the formation of
Westar Energy.
For additional information on the Merger Agreement with Kansas City Power
& Light Company, see Note 21 to the Consolidated Financial Statements in 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 in this investigation.
Since April 1999, four alleged class action litigations have been 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 two of
the actions, Western Resources, Inc. was also named as a defendant. The four
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); "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) and "Mike Ringel v. Protection One, Inc., Western Resources, Inc.,
James M. McKenzie, Jr., John W. Hesse, and John E. Mack, III," No. 99-CV-5534
(C.D. Cal.) (filed May 28, 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" and "Ringel"), February 12, 1998
("Shaev"), or April 23, 1998, ("Lyons") and ending April 1, 1999. All four
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. By an order dated August 2, 1999, the
District Court consolidated the four actions and appointed Ronald Cats as lead
plaintiff in the consolidated actions. The Court further ordered that
plaintiffs will file a single consolidated amended complaint within sixty days.
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 disposition
of such matters will not have a material adverse effect upon the company's
overall financial position or results of operations.
<PAGE>
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 June 30, 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, as recorded in investment earnings on the accompanying
Consolidated Income Statements, could be impacted by these costs if insurance
and rate allowances do not cover these potential contingencies.
SEC Review of Protection One: Protection One received a letter from the
Division of Corporation Finance of the SEC on August 11, 1999. The letter
raised questions about Protection One's financial statements and stated that, in
the view of the staff, there are errors in Protection One's financial statements
which are material and which have had the effect of inflating earnings
commencing with the year 1997. These questions relate to the methodology used
by Protection One to amortize customer accounts, and to the purchase price
allocation to customer accounts in the Network Multifamily acquisition. If a
change from the average estimated life of 10 years used to amortize accounts is
determined to be appropriate, Protection One estimates that a one-year to
three-year reduction in estimated useful life would result in additional
amortization expense of approximately $14 million to $54 million per year.
Any such increased amortization expense would reduce earnings, but would not
affect cash flow from operations. Protection One is discussing these issues
with the SEC staff. Protection One cannot predict the timing or impact on its
financial statements of these discussions. Protection One is reconsidering the
accounting used for amortization of customer accounts and the purchase
accounting for prior acquisitions. Such changes may require a restatement of
prior year financial statements and may require Protection One to perform an
asset impairment evaluation.
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 six months ended June 30, 1999, the
related liability decreased about $10 million.
For additional information on Commitments and Contingencies, see Note 10
to Consolidated Financial Statements in the company's 1998 Annual Report on Form
10-K.
<PAGE>
6. DEBT
Protection One borrows to fund operations in excess of internally generated
cash under its existing $500 million senior credit facility. Protection One's
ability to borrow under the facility is subject to compliance with certain
financial covenants, including a debt to annualized EBITDA ratio ("leverage
ratio") of 5.0 to 1.0 and an annualized EBITDA to interest expense ratio
("interest coverage ratio") of 2.75 to 1.0. As of June 30, 1999, the ratios
were approximately 4.7 to 1.0 and 3.3 to 1.0. At year end 1999, the leverage
ratio will be reduced to 4.5 to 1.0. Protection One currently borrows
approximately $20 million per month, principally to fund the purchase of
customer accounts. Protection One currently believes it is likely, absent
successful implementation of alternatives discussed below, that it will be
unable to satisfy the current leverage and interest coverage ratio covenants
in the credit facility following the third quarter of 1999. The resolution
of the accounting issues raised by the SEC of Protection One's accounting
practices would most likely cause Protection One and the company to need to
obtain waivers or consents under their credit facilities and could impact
Protection One and the company's ability to meet the financial covenants
contained in their credit facilities. Protection One is exploring alternatives
to address these covenant restrictions, including the sale of assets to
reduce debt, seeking waivers or renegotiating these covenants with lenders,
or refinancing the facility. The company's credit facility contains a cross
default provision which would be triggered in the event of a Protection One
default. Protection One believes it will be able to address this matter in a
manner so that there is no default under the credit facility or significant
impact on its liquidity, but no assurance can be given that Protection One will
be able to do so or the terms thereof. If Protection One is unable to maintain
adequate liquidity, the company may choose to make additional investments in
Protection One, but is not obligated to do so.
7. 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 13.3%, 24.0% and 7.4% for the three, six and
twelve month periods ended June 30, 1999 compared to 36.3%, 29.6% and 43.2% for
the three, six and twelve month periods ended June 30, 1998. The effective tax
rate has been reduced from 31% as of March 31, 1999, to 24% as of June 30, 1999,
which represents the currently expected effective tax rate for 1999. The
benefit recorded in the second quarter for this change in estimate approximated
$2.3 million. This change in estimate was necessary based on revisions in
forecasted earnings for 1999. The effective income tax rates vary from the
Federal statutory rate primarily due to the receipt of non-taxable proceeds from
our corporate owned life insurance policies, the tax benefit of excluding 70% of
the dividends received from ONEOK, the generation and utilization of tax credits
from Affordable Housing investments, and the amortization of prior years'
investment tax credits.
<PAGE>
8. 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.
<TABLE>
Three Months Ended June 30, 1999:
Eliminating/
Fossil Nuclear Power Monitored Reconciling
Generation Generation Delivery Services (1)Other Items Total
(Dollars in Thousands)
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
External sales. . . $ 78,140 $ - $ 246,881 $ 150,801 $ 323 $ (3) $ 476,142
Allocated sales . . 137,724 20,598 70,269 - - (228,591) -
Earnings before
interest and taxes 46,696 (11,114) 23,842 13,975 23,510 (2,088) 94,821
Interest expense. . 73,498
Earnings before
income taxes . . . 21,323
Three Months Ended June 30, 1998:
Eliminating/
Fossil Nuclear Power Monitored Reconciling
Generation Generation Delivery Services Other Items Total
(Dollars in Thousands)
External sales. . . $ 102,355 $ - $ 263,576 $ 97,041 $ 334 $ (5) $ 463,301
Allocated sales . . 128,683 29,288 16,623 - - (174,594) -
Earnings before
interest and taxes 41,600 (5,586) 36,009 15,861 10,937 2,241 101,062
Interest expense. . 54,899
Earnings before
income taxes . . . 46,163
Six Months Ended June 30, 1999:
Eliminating/
Fossil Nuclear Power Monitored Reconciling
Generation Generation Delivery Services (2)Other Items Total
(Dollars in Thousands)
External sales. . . $ 157,502 $ - $ 479,220 $ 299,348 $ 654 $ - $ 936,724
Allocated sales . . 263,385 49,816 139,649 - - (452,850) -
Earnings before
interest and taxes 93,921 (15,339) 39,473 31,518 51,322 (4,967) 195,928
Interest expense. . 144,298
Earnings before
income taxes . . . 51,630
Six Months Ended June 30, 1998:
Eliminating/
Fossil Nuclear Power Monitored Reconciling
Generation Generation Delivery Services (3)Other Items Total
(Dollars in Thousands)
External sales. . . $ 176,522 $ - $ 494,651 $ 173,836 $ 647 $ (13) $ 845,643
Allocated sales . . 248,574 58,527 33,246 - - (340,347) -
Earnings before
interest and taxes 81,855 (9,532) 59,185 27,194 24,422 6,251 189,375
Interest expense. . 105,299
Earnings before
income taxes . . . 84,076
Twelve Months Ended June 30, 1999:
Eliminating/
Fossil Nuclear Power Monitored Reconciling
Generation Generation Delivery Services (4)Other Items Total
(Dollars in Thousands)
External sales. . . $ 506,954 $ - $1,070,280 $ 546,607 $ 1,349 $ (55) $2,125,135
Allocated sales . . 532,174 108,806 172,895 - - (813,875) -
Earnings before
interest and taxes 156,423 (26,727) 176,686 61,051 (75,088) 1,050 293,395
Interest expense. . 265,119
Earnings before
income taxes . . . 28,276
Twelve Months Ended June 30, 1998:
Eliminating/
Fossil Nuclear Power Monitored Reconciling
Generation Generation Delivery (5)Services (6,7)Other (8)Items Total
(Dollars in Thousands)
External sales. . . $ 317,317 $ - $1,041,179 $ 262,678 $ 292,165 $ 3,865 $1,917,204
Allocated sales . . 523,490 103,731 66,492 - - (693,713) -
Earnings before
interest and taxes 155,152 (49,030) 168,205 (21,967) 863,354 (48,732) 1,066,982
Interest expense. . 197,885
Earnings before
income taxes . . . 869,097
(1) Earnings before interest and taxes (EBIT) includes investment earnings of $15.8 million.
(2) Earnings before interest and taxes (EBIT) includes investment earnings of $37.4 million.
(3) Earnings before interest and taxes (EBIT) includes investment earnings of $26.9 million.
(4) Earnings before interest and taxes (EBIT) includes investment earnings of $60.3 million and
write-off of international power development activities of $94.0 million.
(5) EBIT includes monitored services special charge of $24.3 million.
(6) EBIT includes investment earnings of $39.1 million and gain on sale of Tyco securities of
$864.2 million.
(7) 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.
(8) 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 of Financial Condition and Results
of Operations 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, six and twelve month
periods ending June 30, 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, the outcome of accounting issues
being reviewed by the SEC staff regarding Protection One, possible corporate
restructurings, mergers, acquisitions, dispositions, liquidity and capital
resources, compliance with debt covenants, 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 and regulatory developments; our regulatory and
competitive markets; and other circumstances affecting anticipated operations,
sales and costs. We disclaim any obligation to update any forward-looking
statements as a result of developments occurring after the date this Form 10-Q
is filed with the SEC.
<PAGE>
OPERATING RESULTS
Western Resources, Inc. Consolidated
Three Months Ended June 30, 1999 Compared to Three Months Ended June 30,
1998: Basic earnings per share for the second quarter in 1999 were $O.27 per
common share compared to $O.45 per common share in the second quarter of 1998.
The primary reasons for this decline are cooler weather compared to last year,
the effect of the $10 million annual electric rate decreases that were
implemented on June 1, 1998, and June 1, 1999, our 85% of Protection One's $7.4
million net loss, higher long-term interest expense on higher long-term debt
balances in the second quarter of 1999, and non-recurring gains that were
recorded in the second quarter of 1998. These non-recurring gains were related
to proceeds received in 1998 from corporate owned life insurance (COLI) policies
and to a gain on the repurchase of customer contracts in our monitored services
business segment.
Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 1998:
Basic earnings per share for the six months ended June 30, 1999, were $O.58 per
common share compared to $O.88 per common share for the same period in 1998.
The primary reasons for this decline are the effects of the electric rate
decreases, our 85% share of Protection One's $12.0 million net loss,
non-recurring gains that were recorded in the first half of 1998 and higher
long-term interest expense on higher long-term debt balances in the first half
of 1999.
Twelve Months Ended June 30,1999 Compared to Twelve Months Ended June 30,
1998: Operating results are difficult to compare primarily 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, Inc.
(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 June 30, 1998, were $293 million and $212 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 June 30, 1998, energy sales included natural gas sales
through November 1997, and energy cost of sales included natural gas purchased
through November 1997.
<PAGE>
Net income from our electric utility business decreased 16% and 5% for the
three and six months ended June 30, 1999 compared to the same periods last year
due to lower retail electric sales. We experienced weather which was 44% cooler
during second quarter 1999 compared to second quarter 1998 and 25% cooler than
normal.
Electric rate decreases implemented on June 1, 1998, and June 1, 1999, also
contributed to the decrease in electric sales. The cumulative effect of the
electric rate decreases reduced net income by $1.4 million for the three months
ended June 30, 1999, and $2.7 million for the six months ended June 30, 1999.
Net income for the twelve months ended June 30, 1999, was $62 million
higher than the comparable period in 1998. The primary reason for the increase
was charges incurred during the twelve months ended June 30, 1998, that were not
incurred in the same period of 1999. These charges included a charge totaling
approximately $48 million in December 1997 to write-off the original merger
costs associated with the KCPL merger. Additionally, we had $7 million in storm
related restoration expenses recorded during the second quarter of 1998. Our
twelve months ended June 30, 1999, net income would have been $6 million higher
had we not had the effect of our electric rate decreases.
The following table reflects the (decreases)/increases in electric sales
volumes for the three, six and twelve months ended June 30, 1999, from the
comparable periods of 1998.
Three Months Six Months Twelve Months
Ended Ended Ended
Residential. . . . . (12.9)% (6.3)% 2.0 %
Commercial . . . . . (0.6)% 0.6 % 3.8 %
Industrial . . . . . (3.9)% (2.3)% (0.9)%
Other. . . . . . . . 0.8 % 0.4 % 0.9 %
Total retail . . . (5.6)% (2.5)% 1.6 %
Wholesale. . . . . . 3.8 % 10.1 % 5.2 %
Total. . . . . . . (3.5)% 0.2 % 2.4 %
Three Months Ended June 30, 1999 Compared to Three Months Ended June 30,
1998: Electric sales, other than power marketing sales, decreased $17 million.
The effect of cooler weather this year compared to last year lowered customer
demand and decreased sales by $19 million. Also contributing to the reduced
electric sales was the effect of the electric rate decreases implemented on June
1, 1998, and June 1, 1999 which reduced sales by approximately $2 million.
Customer growth increased sales by approximately $3 million. Power marketing
sales were $23 million lower also due to cooler weather compared to last year.
Total cost of sales were lower due to a $7 million decrease in purchased
power expense and a $26 million decrease in power marketing cost of sales. In
the second quarter of 1998, we had higher purchased power expense because a
coal-fired generation station was unavailable.
Higher fuel costs of $2 million partially offset these decreases. Fuel
cost was higher due to Wolf Creek being off-line for a scheduled refueling and
maintenance outage during the second quarter of 1999 and the availability in
1999 of the coal-fired station that was unavailable in 1998. Coal-fired
generating stations were used to meet generation demands while Wolf Creek was
off-line.
<PAGE>
Coal is more expensive to use than nuclear fuel.
Total operating expenses increased slightly. We had higher operating and
maintenance expense of $8 million primarily due to the restarting of our Neosho
generation station, a boiler outage at our Gordon Evans generation station, and
preliminary refueling expenses at Wolf Creek. Partially offsetting this
increase was $7 million in storm related restoration expenses that were recorded
during the second quarter of 1998.
Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 1998:
Electric sales, other than power marketing sales, decreased $12 million due
primarily to 2.5% lower retail electric sales volumes. The effect of cooler
weather compared to last year lowered customer demand and decreased sales by $21
million. Also contributing to the decreased electric sales was the effect of the
electric rate decrease which reduced sales by $5 million. Customer growth of
approximately $6 million and increased wholesale sales of $4 million partially
offset these decreases. Power marketing sales were $22 million lower also due to
cooler weather compared to last year resulting in lower demand.
Total cost of sales were lower due to an $8 million decrease in purchased
power expense and a $27 million decrease in power marketing cost of sales
partially offset by higher fuel costs of $5 million. The reasons for these
changes are discussed above.
Twelve Months Ended June 30, 1999 Compared to Twelve Months Ended June 30,
1998: Electric sales, excluding power marketing sales, increased $40 million due
primarily to a 1.6% increase in retail sales volumes as a result of warmer
summer temperatures in the third quarter 1998 than in the third quarter 1997.
The effect of warmer weather increased customer demand and increased sales by $5
million. Partially offsetting this increase was the effect of the electric rate
decreases in 1999 and 1998 which reduced sales by $10 million. Customer growth
and increased wholesale sales also contributed to the increase. Power marketing
sales were $178 million higher due to the warmer weather and increased power
marketing activity.
Total electric cost of sales increased 36% due primarily to higher power
marketing cost of sales. Total operating expenses decreased for several
reasons. Depreciation and amortization expense decreased $13 million, or 7%,
primarily because we had fully amortized a regulatory asset during 1997. In
December 1997, we recorded a charge totaling approximately $48 million to
write-off the original merger costs associated with the KCPL merger.
Additionally, we had $7 million in storm related restoration expenses recorded
during the second quarter of 1998.
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 power
delivery segment consists of the transmission and distribution of power to our
Kansas electric customers and the customer service provided to them. The
following discussion identifies key factors affecting our electric business
segments.
<PAGE>
<TABLE>
Fossil Generation
<CAPTION>
Three Months Ended Six Months Ended Twelve Months Ended
June 30, June 30, June 30,
1999 1998 1999 1998 1999 1998
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
External sales. . . $ 78,140 $102,355 $157,502 $176,522 $506,954 $317,317
Allocated sales . . 137,724 128,683 263,385 248,574 532,174 523,490
EBIT. . . . . . . . 46,696 41,600 93,921 81,855 156,423 155,152
</TABLE>
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 June 30, 1999 Compared to Three Months Ended June 30,
1998: External sales decreased $24 million due to lower sales because of cooler
weather this year compared to last. Allocated sales and EBIT were higher due to
an increase in the internal transfer price Fossil Generation received from Power
Delivery.
Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 1998:
External sales decreased $19 million due to lower sales because of cooler
weather this year compared to last. Allocated sales and EBIT were higher due to
an increase in the internal transfer price Fossil Generation received from Power
Delivery.
Twelve Months Ended June 30, 1999 Compared to Twelve Months Ended June 30,
1998: External sales increased mostly because power marketing sales were $178
million higher due to increased power marketing activity.
<TABLE>
Nuclear Generation
Three Months Ended Six Months Ended Twelve Months Ended
June 30, June 30, June 30,
1999 1998 1999 1998 1999 1998
(Dollars in Thousands)
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Allocated sales . . $ 20,598 $ 29,288 $ 49,816 $ 58,527 $108,806 $103,731
EBIT. . . . . . . . (11,114) (5,586) (15,339) (9,532) (26,727) (49,030)
</TABLE>
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.
Three Months Ended June 30, 1999 Compared to Three Months Ended June 30,
1998: Allocated sales and EBIT decreased due to a 36-day scheduled refueling and
maintenance outage at Wolf Creek during the second quarter of 1999.
Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 1998:
Allocated sales and EBIT decreased due to the scheduled refueling and
maintenance outage at Wolf Creek.
Twelve Months Ended June 30, 1999 Compared to Twelve Months Ended June 30,
1998: Allocated sales and EBIT were higher because Wolf Creek had a 36-day
scheduled refueling and maintenance outage in 1999 compared to a 58 day
scheduled refueling and maintenance outage in 1998. EBIT was also higher
because depreciation and amortization expense decreased because we had fully
amortized a regulatory asset during 1997.
<PAGE>
<TABLE>
Power Delivery
Three Months Ended Six Months Ended Twelve Months Ended
June 30, June 30, June 30,
1999 1998 1999 1998 1999 1998
(Dollars in Thousands)
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
External sales. . . $246,811 $263,576 $479,220 $494,651 $1,070,280 $1,041,179
Allocated sales . . 70,269 16,623 139,649 33,246 172,895 66,492
EBIT. . . . . . . . 23,842 36,009 39,473 59,185 176,686 168,205
</TABLE>
Three Months Ended June 30, 1999 Compared to Three Months Ended June 30,
1998: External sales decreased $17 million primarily due to 6% lower retail
electric sales volumes. The reasons for lower electric sales volumes are
discussed above in "Operating Results, Electric Utility".
Allocated sales were $54 million higher due to a change in the intra-
segment transfer pricing involving the use of the distribution lines and
transformers.
EBIT decreased $12 million due to lower external sales.
Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 1998:
External sales decreased $15 million due primarily to 3% lower retail electric
sales volumes. The reasons for lower electric sales volumes are discussed above
in "Operating Results, Electric Utility".
Allocated sales were $106 million higher due to a change in the intra-
segment transfer pricing involving the use of the distribution lines and
transformers.
EBIT decreased $20 million due to lower external sales.
Twelve Months Ended June 30, 1999 Compared to Twelve Months Ended June 30,
1998: In addition to our normal customer growth, we experienced warmer weather
during the third quarter 1998 than we did in 1997 which improved external sales,
allocated sales and EBIT.
Monitored Services Business Segment
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 June 30, 1999.
<TABLE>
Three Months Ended Six Months Ended Twelve Months Ended
June 30, June 30, June 30,
1999 1998 1999 1998 1999 1998
(Dollars in Thousands)
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
External sales. . . $150,801 $ 97,041 $299,348 $173,836 $546,607 $262,678
EBIT. . . . . . . . 13,975 15,861 31,518 27,194 61,051 (21,967)
</TABLE>
Compared to prior periods, external sales for all periods ended June 30,
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. EBIT for the three months ended June 30, 1999 was lower than EBIT
for the prior period due to an approximate $10.2 million gain in the prior
period on the repurchase of customer contracts covered by a financing
agreement.
<PAGE>
A charge of approximately $24 million adversely affected EBIT in the
twelve months ended June 30, 1998. The charge was made to recognize higher than
expected customer attrition and to record costs related to the acquisition of
Protection One. Partially offsetting this charge was a non-recurring gain of
approximately $13 million on the repurchase of customer contracts covered by a
financing arrangement.
Protection One received a letter from the Division of Corporation Finance
of the SEC on August 11, 1999. The letter raised questions about Protection
One's financial statements and stated that, in the view of the staff, there are
errors in Protection One's financial statements which are material and which
have had the effect of inflating earnings commencing with the year 1997. These
questions relate to the methodology used by Protection One to amortize customer
accounts, and to the purchase price allocation to customer accounts in the
Network Multifamily acquisition. If a change from the average estimated life of
10 years used to amortize accounts is determined to be appropriate, Protection
One estimates that a one-year to three-year reduction in estimated useful life
would result in additional amortization expense of approximately $14 million to
$54 million per year. Any such increased amortization expense would reduce
earnings, but would not affect cash flow from operations. Protection One is
discussing these issues with the SEC staff. Protection One cannot predict the
timing or impact on its financial statements of these discussions. Protection
One is reconsidering the accounting used for amortization of customer accounts
and the purchase accounting for prior acquisitions. Such changes may require a
restatement of prior year financial statements and may require Protection One to
perform an asset impairment evaluation.
Protection One has historically amortized the assets related to its
customer base as a composite pool on a straight-line basis over a period of ten
years. Protection One is presently reconsidering the appropriateness of using
a composite pool, straight-line amortization, and the ten-year period. Any
significant change in accounting policy or in the pattern of Protection One's
historical attrition experience would have a material effect on the company's
results of operations.
During the second quarter of 1999, there were indicators at Protection One
that attrition was exceeding expected levels. Attrition for the twelve months
ending June 30, 1999, was 10.5% compared to 9.7% at the end of March 31, 1999.
Annualized attrition for the quarter ended June 30, 1999, was 14.3%.
The sale of Protection One's Mobile Division to ATX Technologies (ATX) was
announced on June 28, 1999. The sales price is approximately $20 million in
cash plus a note and a preferred stock investment in ATX. Protection One will
continue to deliver mobile services through a reseller arrangement with ATX. It
is anticipated the sale will be completed in the third quarter of 1999.
In 1998, Protection One expanded the Dealer Program (Dealer Program) for
its North American single family residential market. As part of the Dealer
Program, Protection One entered into contracts with dealers, typically
independent alarm companies, providing for the purchase of customer accounts
generated by the dealer on an ongoing basis. Protection One currently has a
limited internal sales capability and relies on the Dealer Program for the
generation of substantially all new customer accounts except those acquired as
part of the acquisition of other security companies.
<PAGE>
In the second quarter, Protection One established a goal of identifying
steps that could be taken to reduce the cost of acquired accounts and reduce
attrition by acquiring higher quality accounts. As a result, Protection One has
begun notifying dealers that it does not intend to renew their contracts under
their current terms and conditions when they expire. The term of dealer
contracts ranges from one to five years and automatically renews unless notice
of non-renewal is given by either party as provided in the contract. Protection
One is attempting to renew contracts with terms providing for a lower cost for
acquired customer accounts based upon the multiple of monthly recurring revenue
and other revised terms that improve the quality of the acquired customer
accounts. Protection One cannot predict whether it will be successful in
renewing existing dealer contracts, or entering into contracts with new dealers,
on acceptable terms. This could result in a loss of dealers and fewer customer
accounts available for purchase. The failure to replace customer accounts could
have a material adverse impact on Protection One's financial condition.
Certain Protection One dealers have complained, and in some cases
threatened or filed litigation, because of Protection One's interpretation of
its dealer contracts and the calculation of holdback amounts. Protection One
believes it has complied with the terms of these contracts and intends to
vigorously defend its position. Protection One cannot currently predict the
impact of these disputes with dealers which could be material to Protection
One.
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 approximately $20 million to $25 million per month to
purchase these customer accounts.
Other Operating Expenses
Twelve Months Ended June 30, 1999 Compared to Twelve Months Ended June 30,
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 June 30, 1999 Compared to Three Months Ended June 30,
1998: Other income decreased because we did not receive COLI death proceeds in
the second quarter of 1999 compared to the $6 million that we received in second
quarter 1998. Protection One also recognized a non-recurring gain of
approximately $10 million on the repurchase of customer contracts covered by a
financing arrangement in the second quarter of 1998. Partially offsetting this
decrease was an increase of $4 million in investment earnings based on higher
balances of marketable securities.
<PAGE>
Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 1998:
Other income decreased because we did not receive COLI death proceeds in the
first half of 1999, compared to the $13 million that we received in the first
half of 1998. Protection One also recognized a non-recurring gain of
approximately $13 million on the repurchase of customer contracts covered by a
financing arrangement in the first half of 1998. Partially offsetting these
decreases was an increase of $11 million in investment earnings based on higher
balances of marketable securities.
Twelve Months Ended June 30, 1999 Compared to Twelve Months Ended June 30,
1998: Other income decreased $892 million primarily due to the gain on the sale
of our Tyco common stock.
Interest Expense
Three Months Ended June 30, 1999 Compared to Three Months Ended June 30,
1998: Interest expense increased 34% primarily because Protection One borrowed
additional long-term debt to fund acquisitions and to acquire customer accounts.
Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 1998:
Interest expense increased 37% primarily because Protection One borrowed
additional long-term debt to fund acquisitions and to acquire customer accounts.
Twelve Months Ended June 30, 1999 Compared to Twelve Months Ended June 30,
1998: Our interest expense increased 34% 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. The long-term debt had a
higher weighted average interest rate than the short-term debt that it replaced.
Income Taxes
Three Months Ended June 30, 1999 Compared to Three Months Ended June 30,
1998: Income tax expense decreased 83% and the effective tax rate decreased from
36% to 13%. These decreases are primarily due to lower earnings before taxes in
1999. Earnings before taxes decreased due to lower electric operating income as
discussed above, a net loss from Protection One, and higher interest expense.
Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 1998:
Income tax expense decreased 50% and the effective tax rate decreased from 30%
to 24%. These decreases are primarily due to lower earnings before taxes in
1999. Earnings before taxes decreased due to lower electric operating income as
discussed above, a net loss from Protection One, and higher interest expense.
Twelve Months Ended June 30, 1999 Compared to Twelve Months Ended June 30,
1998: Income tax expense decreased significantly due to the decline in taxable
earnings. For twelve months ended June 30, 1999, the charge to income to exit
the international power development business, significantly lowered tax expense.
Tax expense for the twelve months ended June 30, 1998, included taxes related to
the gain on the sale of Tyco common stock.
<PAGE>
Our effective tax rate also declined from 43% to 7%. This decline is
largely attributable to the gain on the sale of Tyco common stock in the twelve
months ended June 30, 1998, and lower taxable income for the twelve months ended
June 30, 1999, and the benefit of excluding 70% of ONEOK dividends received from
the determination of taxable income.
LIQUIDITY AND CAPITAL RESOURCES
We had $23 million in cash and cash equivalents at June 30, 1999. We
consider highly liquid debt instruments purchased with a maturity of three
months or less to be cash equivalents. At June 30, 1999, we had approximately
$422 million of short-term debt outstanding, of which $223 million was
commercial paper. We also have arrangements with certain banks to provide
unsecured short-term lines of credit on a committed basis totaling approximately
$821 million. The unsecured portion of these lines of credit are used to
provide support for commercial paper. Current maturities of long-term debt
were $241 million at June 30, 1999.
In July 1999, we announced a stock repurchase program for up to $25 million
of our common stock. The program authorizes us to make purchases of our common
stock in the open market. The timing and terms of purchases, and the number of
shares actually purchased, will be determined by management based on market
conditions and other factors. The purchased shares would be held in treasury
and will be available for general corporate purposes or resale at a future date,
or will be retired. Any purchases will be financed with short-term debt, or
made from available funds.
Protection One borrows to fund operations in excess of internally generated
cash under its existing $500 million senior credit facility. Protection One's
ability to borrow under the facility is subject to compliance with certain
financial covenants, including a debt to annualized EBITDA ratio ("leverage
ratio") of 5.0 to 1.0 and an annualized EBITDA to interest expense ratio
("interest coverage ratio") of 2.75 to 1.0. As of June 30, 1999, the ratios
were approximately 4.7 to 1.0 and 3.3 to 1.0. At year end 1999, the leverage
ratio will be reduced to 4.5 to 1.0. Protection One currently borrows
approximately $20 million per month, principally to fund the purchase of
customer accounts. Protection One currently believes it is likely, absent
successful implementation of alternatives discussed below, that it will be
unable to satisfy the current leverage and interest coverage ratio covenants in
the credit facility following the third quarter of 1999. The resolution of the
accounting issues raised by the SEC of Protection One's accounting practices
would most likely cause Protection One and the company to need to obtain waivers
or consents under their credit facilities and could impact Protection One and
the company's ability to meet the financial covenants contained in their credit
facilities. Protection One is exploring alternatives to address these covenant
restrictions, including the sale of assets to reduce debt, seeking waivers or
renegotiating these covenants with lenders, or refinancing the facility. The
company's credit facility contains a cross default provision which would be
triggered in the event of a Protection One default. Protection One believes it
will be able to address this matter in a manner so that there is no default
under the credit facility or significant impact on its liquidity, but no
assurance can be given that Protection One will be able to do so or the terms
thereof. If Protection One is unable to maintain adequate liquidity, the
company may choose to make additional investments in Protection One, but is
not obligated to do so.
<PAGE>
Cash Flows from Operating Activities
Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 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 and reduced earnings in 1999.
Twelve Months Ended June 30, 1999 Compared to Twelve Months Ended June 30,
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 June 30, 1998, operating cash flow.
Secondly, twelve months ended June 30, 1999, includes the first full year of
Protection One operations.
Cash Flows Used In Investing Activities
Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 1998:
Cash used in investing activities decreased significantly primarily due to more
acquisitions of monitored services companies in the six months of 1998.
Twelve Months Ended June 30, 1999 Compared to Twelve Months Ended June 30,
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 June 30,
1998.
Cash Flows from Financing Activities
Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 1998:
Cash from financing activities decreased 32% because we issued less debt as a
result of fewer acquisitions in the six months ending June 30, 1999.
Twelve Months Ended June 30, 1999 Compared to Twelve Months Ended June 30,
1998: Cash from financing activities increased significantly primarily due to
additional borrowings incurred for the acquisitions of monitored services
companies.
OTHER INFORMATION
Outlook
While second-quarter results are less than a year ago, we believe that for
1999, electric operations should contribute approximately $129 to $132 million
in earnings, assuming normal weather and operations. ONEOK is expected to yield
earnings of approximately $36 to $38 million and unallocated interest costs, net
of investment income, should reduce earnings by approximately $36 million. For
purposes of this information, unallocated interest is interest not included in
these estimates for electric operations, ONEOK or Protection One.
Protection One has had a net loss of $12 million for the six months ended
June 30, 1999, and is expected to continue to have a net loss. Due to the
outstanding issues relating to Protection One described in the Monitored
Services Business Segment above, no estimates are available for Protection One.
<PAGE>
These anticipated results from operations are conditioned by the discussion
in "Forward-Looking Statements" discussed in the Introduction above and the
discussion regarding potential accounting changes and liquidity at Protection
One. See "Forward-Looking Statements," "Monitored Services Business Segment,"
"Liquidity and Capital Resources," and Notes 4 and 5 to the Consolidated
Financial Statements for additional discussion.
Merger Agreement with Kansas City Power & Light Company
In May 1999, a Stipulation and Agreement was reached with the KCC staff
which resulted in a set of settlement recommendations in connection with the
KCPL merger. At an administrative meeting on August 11, 1999, the KCC
Commissioners generally indicated their support of the merger, however, they
could not approve the merger under the terms of the Stipulation and Agreement
reached in May. The KCC is expected to issue an order in October 1999.
In July 1999, a Settlement Agreement was reached with the MPSC staff, the
Office of Public Counsel and other key parties in connection with the KCPL
merger. The stipulation and agreement have been filed with the MPSC for its
review and approval. Significant terms of the Missouri settlement are as
follows:
- An electric rate moratorium of three years beginning on the date the
transaction closes
- Westar Energy would make a one-time rate credit in the amount of $5
million to its Missouri retail customers at the beginning of the second
year of the merger
- Westar Energy's executive headquarters would be located in Kansas City.
We are currently negotiating with the FERC staff and intervenors. Hearings
before FERC, if necessary, are scheduled to begin October 25, 1999.
We and KCPL have filed an application with the Nuclear Regulatory
Commission to approve the Western Resources/KCPL merger and the formation of
Westar Energy.
For additional information on the Merger Agreement with Kansas City Power
& Light Company, see Note 3 to Consolidated Financial Statements for further
discussion.
Investment in ONEOK, Inc.
In April 1999, ONEOK and Southwest Gas Corporation (Southwest Gas) agreed
to a merger under which ONEOK would pay $30 a share in cash for each Southwest
Gas share. The merger has been approved in the state of Nevada, has passed the
Hart-Scott-Rodino Act and has been approved by Southwest Gas shareholders.
ONEOK and Southwest Gas have reached agreement with the regulatory staff and the
consumer advocate organization in Arizona, and with the California Public
Utilities Commission staff and one set of intervenors. The acquisition is
scheduled to be completed by the end of the year.
<PAGE>
Investment in Hanover Compressor Company
We own approximately 11% of the outstanding common stock of Hanover
Compressor Company through our Westar Capital subsidiary. We have determined
that this investment is not strategic to our ongoing business and are reviewing
our alternatives to monetize or liquidate this investment.
Collective Bargaining Agreement
Our contract with the International Brotherhood of Electrical Workers
(IBEW) expired on July 1, 1999. The contract covered approximately 1,440
employees who are currently working under the terms of the contract. We have
reached a tentative agreement with the IBEW leadership. The IBEW employees
will vote on the contract on September 1, 1999. We have experienced no strikes
or work stoppages as a result of the expiration of the contract.
Competition
On August 10, 1999, the Wichita City Council adopted a resolution
authorizing a study to determine the feasibility of creating a municipal
electric utility. KGE has an exclusive franchise with the City of Wichita that
expires March 2002. Customers within the City of Wichita account for
approximately 57% of the sales of KGE.
KGE will oppose any attempt by the City of Wichita to eliminate KGE as the
electric provider to Wichita customers. In order to municipalize KGE's Wichita
electric facilities, the City of Wichita would be required to purchase KGE's
facilities or build a separate independent system.
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: As of June 30, 1999, we have completed the
remediation and testing of mission critical systems necessary to continue
providing electric service to our customers. On June 30, we reported to the
North American Electric Reliability Council (NERC), that based on its standards,
we are 100% Year 2000 ready. However, additional testing and remediation of
non-mission critical systems, project administration and contingency planning
will continue through December 31, 1999. Based on manhours as a measure of work
effort, we believe we are approximately 85% 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 June 30,
1999, based on percentage of completion in manhours and mission critical
systems, is as follows:
<PAGE>
Mission
Department/Business Unit Manhours Critical
Fossil Fuel . . . . . . . . . . 76% 100%
Power Delivery . . . . . . . . 79% 100%
Information Technology. . . . . 88% 100%
Administrative. . . . . . . . . 84% 100%
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 $4.4 million
represents IT costs and $2.5 million represents non-IT costs. As of June 30,
1999, we have expended approximately $5.5 million of these costs, of which $3.7
million represent IT costs and $1.8 million represent non-IT costs. We expect
to incur the remaining $1.4 million, of which $0.7 million represents IT costs
and $0.7 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 June 30, 1999.
Percentage
Phase Completion
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 100%
Comprehensive testing guidelines 100%
Comprehensive testing 100%
Contingency planning guidelines 100%
Contingency planning individual plans 100%
Additional non-mission critical remediations continue with a goal to be
95% ready by September 30, 1999, and 100% ready by December 31, 1999.
WCNOC has estimated the costs to complete the Year 2000 project at $3.8
million ($1.8 million, our share). As of June 30, 1999, $2.7 million ($1.3
million, our share) had been spent on the project. A summary of the projected
costs to complete and actual costs incurred through June 30, 1999, is as
follows:
Projected Actual
Costs Costs
(Dollars in Thousands)
Wolf Creek Labor and Expenses. . $ 499 $ 367
Contractor Costs . . . . . . . . 1,254 920
Remediation Costs. . . . . . . . 1,995 1,390
Total. . . . . . . . . . . . . $3,748 $2,677
<PAGE>
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.
The total projected Year 2000 costs have decreased from the total projected
costs of $4.6 million at December 31, 1998, as alternate remediation paths have
been identified which have eliminated the need for extensive equipment
changeouts. 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: Protection One has estimated the total cost to update
all critical operating systems for Year 2000 readiness to be approximately $5.0
million. As of June 30, 1999, approximately $2.5 million of these costs had
been incurred. These costs include labor for both Protection One employees and
contract personnel used in the Year 2000 program and non-labor costs for
software tools used in the remediation and testing efforts, replacement
software, replacement hardware, replacement embedded devices, and other such
costs associated with testing and replacement. Management continues to review
the projected costs associated with the Year 2000 readiness. To date, the costs
of the Year 2000 readiness program have been substantially
information-technology related. Non-information technology systems are highly
critical to Protection One's business, but are largely beyond our ability to
control. This includes telephones, electricity, water, transportation, and
governmental infrastructure.
The costs of the Year 2000 project and the date on which Protection One
plans to complete the Year 2000 modification, estimated to be during 1999, are
based on the best estimates, which were derived utilizing numerous assumptions
of future events including the continued availability of certain resources,
third party modification plans, and other factors. However, there can be no
guarantee that these estimates will be achieved; actual results could differ
materially from those plans. Specific factors that might cause such material
differences include, but are not limited to, the availability and cost of
personnel trained in this area, the ability to locate and correct all relevant
computer codes, and similar uncertainties.
Protection One's Year 2000 policy requires testing as a method for
verifying the Year 2000 readiness of business-critical items. For those items
that are impossible to test, other methods may be used to identify the readiness
status, provided adequate contingency plans are established to provide a work
around or backup for the item. Development of contingency plans commenced in
January 1999 and is scheduled to conclude in September, 1999. Testing of
contingency plans, and mobilization for "Millennium Day", will be done in the
third and fourth quarters of 1999. Protection One North America's equipment
testing is scheduled to be completed by December 20, 1999.
The table below summarizes the status of the components of Protection One's
Year 2000 Readiness Program as of June 30, 1999:
<PAGE>
North American Network Multi- Protection One
Phase: Monitoring Family Europe
Identification and
assessment Completed Completed 85% Complete
Remediation and unit
testing 95% Complete Completed 83% Complete
Comprehensive Y2K
readiness verification:
Guidelines and tools Completed Completed Completed
Testing 50% Complete 90% Complete 80% Complete
Contingency planning:
Guidelines and tools Completed Completed Completed
Plan development 70% Complete Completed 20% Complete
Contingency plan testing
and resourcing:
Guidelines and tools Completed Completed Completed
Testing and resourcing To do Sept-Nov To do Sept-Nov To do Sept-Nov
1999 1999 1999
Mobilization, alert, To do Nov-Dec To do Nov-Dec To do Nov-Dec
and standby 1999 1999 1999
<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
Since April 1999, four alleged class action litigations have been 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 two of
the actions, Western Resources, Inc. was also named as a defendant. The four
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); "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) and "Mike Ringel v. Protection One, Inc., Western Resources, Inc., James
M. McKenzie, Jr., John W. Hesse, and John E. Mack, III," No. 99-CV-5534 (C.D.
Cal.) (filed May 28, 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" and "Ringel"), February 12, 1998 ("Shaev"), or
April 23, 1998, ("Lyons") and ending April 1, 1999. All four 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. By an order dated August 2, 1999, the District Court
consolidated the four actions and appointed Ronald Cats as lead plaintiff in the
consolidated actions. The Court further ordered that plaintiffs will file a
single consolidated amended complaint within sixty days. 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
The company's Annual Meeting of Shareholders was held on June 30, 1999.
At the meeting, the shareholders, representing 57,138,300 shares either in
person or by proxy, voted to:
<PAGE>
Elect the following directors to serve a term of three years:
Votes
For Against
Frank J. Becker. . . . . . . . 55,818,136 1,320,943
Louis W. Smith . . . . . . . . 55,826,365 1,312,714
Jane Dresner Sadaka. . . . . . 55,645,818 1,493,261
The following directors will continue to serve their unexpired terms:
Thomas R. Clevenger, John C. Dicus, David H. Hughes, Russell W. Meyer, Jr., and
David C. Wittig.
Amend the Restated Articles of Incorporation to increase the authorized
shares of common stock.
Votes
For Against Abstain
48,059,791 8,212,953 866,335
Adopt an Employee Stock Purchase Plan.
Votes
For Against Abstain
53,725,163 2,518,017 895,499
Adopt a Short Term Incentive Plan.
Votes
For Against Abstain
48,619,313 7,185,783 1,333,583
Amend the 1996 Long Term Incentive and Share Award Plan.
Votes
For Against Abstain
46,465,395 9,199,353 1,474,331
ITEM 5. OTHER INFORMATION
None
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit 10.1 - Amendment to Western Resources, Inc. 1996
Long Term Incentive and Share Award Plan
Exhibit 10.2 - Western Resources, Inc. 1999 Short Term
Incentive Plan
Exhibit 12 - Computation of Ratio of Consolidated Earnings
to Fixed Charges for 12 Months Ended
June 30, 1999 (filed electronically)
Exhibit 27 - Financial Data Schedule (filed electronically)
(b) Reports on Form 8-K:
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.
Form 8-K filed July 23, 1999 - Press release and employee update
reporting Western Resources and KCPL reach agreement in
Missouri. Press release and employee update reporting Western
Resources announces stock repurchase plan.
Form 8-K filed August 12, 1999 - Press release reporting Western
Resources second quarter earnings.
<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 August 16, 1999 By /s/ WILLIAM B. MOORE
William B. Moore, Executive
Vice President, Chief Financial
Officer and Treasurer
Date August 16, 1999 By /s/ LEROY P. WAGES
Leroy P. Wages, Controller
<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
June 30, Year Ended December 31,
1999 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C> <C>
Net Income . . . . . . . . . . . $ 26,171 $ 47,756 $ 499,518 $168,950 $181,676 $187,447
Taxes on Income. . . . . . . . . 2,105 14,557 382,987 86,102 83,392 99,951
Net Income Plus Taxes. . . . 28,276 62,313 882,505 255,052 265,068 287,398
Fixed Charges:
Interest on Long-Term Debt . . 211,906 170,855 119,972 105,741 95,962 98,483
Interest on Other Indebtedness 35,138 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. . 37,405 38,236 36,167 35,151 32,325 26,932
Interest Applicable to
Rentals. . . . . . . . . . . 32,505 32,796 34,514 32,965 31,650 29,003
Total Fixed Charges. . . . 335,029 297,152 264,489 220,667 187,796 174,557
Preferred and Preference Dividend
Requirements:
Preferred and Preference
Dividends. . . . . . . . . . 1,128 3,591 4,919 14,839 13,419 13,418
Income Tax Required. . . . . . 91 1,095 3,771 7,562 6,160 7,155
Total Preferred and
Preference Dividend
Requirements . . . . . . 1,219 4,686 8,690 22,401 19,579 20,573
Total Fixed Charges and Preferred
and Preference Dividend
Requirements. . . . . . . . . 336,248 301,838 273,179 243,068 207,375 195,130
Earnings (1) . . . . . . . . . . $363,305 $359,465 $1,146,994 $475,719 $452,864 $461,955
Ratio of Earnings to Fixed
Charges . . . . . . . . . . . . 1.08 1.21 4.34 2.16 2.41 2.65
Ratio of Earnings to Combined Fixed
Charges and Preferred and
Preference Dividend Requirements 1.08 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 JUNE 30, 1999 AND THE CONSOLIDATED STATEMENT OF
INCOME AND THE CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE SIX MONTHS ENDED
JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 23373
<SECURITIES> 262480
<RECEIVABLES> 261792
<ALLOWANCES> 34898
<INVENTORY> 111896
<CURRENT-ASSETS> 704057
<PP&E> 5892545
<DEPRECIATION> 2096419
<TOTAL-ASSETS> 8198037
<CURRENT-LIABILITIES> 1235580
<BONDS> 3107832
220000
24858
<COMMON> 335844
<OTHER-SE> 1592793
<TOTAL-LIABILITY-AND-EQUITY> 8198037
<SALES> 936724
<TOTAL-REVENUES> 936724
<CGS> 299662
<TOTAL-COSTS> 299662
<OTHER-EXPENSES> 480973
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 144298
<INCOME-PRETAX> 51630
<INCOME-TAX> 12394
<INCOME-CONTINUING> 39236
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 39236
<EPS-BASIC> .58
<EPS-DILUTED> .58
</TABLE>
Exhibit 10.1
FIRST AMENDMENT TO
WESTERN RESOURCES, INC.
1996 LONG TERM INCENTIVE AND SHARE AWARD PLAN
The Western Resources, Inc. 1996 Long Term Incentive and Share Award
Plan is hereby amended in the following respects:
1. Subsection (a) of Section 4 is amended to read in its
entirety as follows:
"(a) Subject to adjustment as provided in Section 4(c)
hereof, the total number of Shares reserved for issuance
in connection with Awards and Director's Shares under
the Plan shall be 5,000,000. No Award or Director's
Shares may be granted if the number of Shares to which
such Award or Director's Share relates, when added to
the number of Shares previously issued under the Plan,
exceeds the number of Shares reserved under preceding
sentence. If any Awards or Director's Shares are
forfeited, canceled, terminated, exchanged or surrendered
or such Award or Director's Shares is settled in cash or
otherwise terminates without a distribution of Shares to
the Participant, any Shares counted against the number of
Shares reserved and available under the Plan with respect
to such Award or Director's Shares shall, to the extent
of any such forfeiture, settlement, termination,
cancellation, exchange or surrender, again be available
for Awards or Director's Shares under the Plan. Upon the
exercise of any Award granted in tandem with any other
Awards, such related Awards shall be canceled to the
extent of the number of Shares as to which the Award is
exercised. Subject to adjustment as provided in Section
4(c) hereof, the maximum number of Shares with respect to
which Options or SARs may be granted during a calendar
year to any Eligible Employee under this Plan shall be
350,000 Shares or with respect to Performance Shares,
Performance Units, Restricted Shares and Restricted Share
Units intended to qualify as performance-based
compensation within the meaning of Section 162(m)(4)(C)
of the Code, the equivalent of 60,000 shares during a
calendar year to any Eligible Employee."
2. Subsection (d)(i) of Section 5 is amended by adding the following
sentence at the end thereof:
"If the lapse of restrictions is conditioned on the
achievement of performance criteria, the Committee shall
select the criterion or criteria from the list of criteria
set forth in Section 5(f)(i)."
<PAGE>
3. Subsection (e)(i) of Section 5 is amended by adding the following
sentence at the end thereof:
"If the lapse of restrictions is conditioned on the
achievement of performance criteria, the Committee shall
select the criterion or criteria from the list of
criteria set forth in Section 5(f)(i)."
4. Subsection (f)(i) of Section 5 is amended to read in its entirety
as follows:
"(i) Performance Period and Criteria. The Committee shall
determine a performance period (the "Performance Period")
of one or more years and shall determine the performance
objective for grants of Performance Shares and Performance
Units. Performance objectives may very from Eligible
Employee to Eligible Employee and shall be based upon such
one or more of the following performance criteria as the
Committee may deem appropriate: 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
objectives may be determined by reference to the
performance of the Company, or of a subsidiary or
Affiliate, or of a division or unit of any of the
foregoing. Performance Periods may overlap and Eligible
Employees may participate simultaneously with respect to
Performance Shares and Performance Units for which
different Performance Periods are prescribed."
Approved at Annual Meeting of Shareholders Held on June 30, 1999.
Exhibit 10.2
WESTERN RESOURCES, INC.
1999 SHORT TERM INCENTIVE PLAN
AS EFFECTIVE JANUARY 1, 1999
<PAGE>
WESTERN RESOURCES, INC.
1999 SHORT TERM INCENTIVE PLAN
The purpose of the Western Resources, Inc. 1999 Short Term Incentive
Plan (Plan) is to motivate key executives, managers, and select exempt
employees to achieve the highest level of performance to further the
achievement of Western Resources' goals, objectives, and strategies. This
Plan is designed to reward exceptional performance using financial incentives
to supplement base compensation. Also, the Plan will enhance the ability of
the Company to attract new executive talent when needed. In addition, the
Plan is intended to benefit the Company in the pursuit of its 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.
1. Definitions. As used herein the following words and phrases shall
have the following respective meanings unless the context clearly indicates
otherwise:
(a) Award: A Regular Award or Insurance-Related Award under the Plan.
(b) Base Compensation: The annualized salary or hourly rate of pay paid
to a Participant, excluding shift differentials, overtime, bonuses,
commissions, or any pay element other than the base rate.
(c) Beneficiary: The person or persons designated by a Participant or
otherwise determined pursuant to Section 8 to receive any payment which under
the terms and conditions of a Regular Award may be made on behalf of the
Participant on or after the Participant's death.
(d) Board of Directors: The Board of Directors of the Company.
(e) Code: The Internal Revenue Code of 1986, as amended.
(f) Committee: The Committee established by the Board of Directors
pursuant to Section 2 to administer the Plan.
(g) Company: Western Resources, Inc. a Kansas corporation, and its
successors and assigns.
(h) Covered Employee: An employee of the Company described in Section
162(m)(3) of the Code (or any successor provision).
(i) Insurance-Related Award: An award granted to a Participant under
the terms of the Plan entitling such Participant to the purchase of a Policy
<PAGE>
on the Participant's life conditioned upon attainment of specified performance
goals.
(j) Participant: An employee who is eligible to receive an Award
pursuant to Section 3 and to whom an individual Award has been made under the
Plan, but which has not been paid, canceled, or otherwise terminated or
satisfied under the terms of the Award.
(k) Plan: The Plan herein set forth, and as from time to time amended.
(l) Policy: A life insurance policy on the life of a Participant in
which the Company and the Participant each have an interest.
(m) Regular Award: An award granted to a Participant under the terms of
the Plan entitling such Participant to payment as set forth in the award
conditioned upon attainment of specified performance goals.
(n) Split-Dollar Agreement: The Split-Dollar Agreement entered into by
the Participant and the Company pursuant to Section 6(b).
2. Administration. A committee of at least two directors, all of whom
shall be "outside directors" within the meaning of Section 162(m) of the Code
and the regulations thereunder, shall be responsible for administering the
Plan, determining whether actual individual compensation Awards have been
earned, approving the amount of the actual individual compensation Awards, and
establishing the terms of any Policy or Split-Dollar Agreement.
The Committee shall have full and complete discretion (subject to the
terms of the Plan) to determine the persons to whom Awards shall be granted,
to determine whether to grant Regular Awards or Insurance-Related Awards or
both, to grant Awards, to determine the terms, conditions, restriction and
performance goals relating to any Award, to adopt, alter and repeal
administrative rules, guidelines and practices governing the operation of the
Plan, to decide questions of fact under the Plan, or any Policy or Split-
Dollar Agreement, and to interpret and apply the terms and provisions of the
Plan and any Policy and Split-Dollar Agreement in all respects.
The members of the Committee and all directors, agents, officers,
fiduciaries, and employees of the Company shall not be liable for any act,
omission, interpretation, construction, or determination made in good faith in
connection with their responsibilities with respect to the Plan or any Policy
or Split-Dollar Agreement; and the Company hereby agrees to indemnify the
members of the Committee and all directors, agents, officers, fiduciaries, and
employees of the Company in respect to any claim, loss, damage, or expense
(including counsel fees) arising from any such act, omission, interpretation,
construction, or determination to the full extent permitted by law.
<PAGE>
3. Eligibility to Participate. The persons who are eligible to
receive Awards under the Plan are all Covered Employees and such other
salaried employees or groups of salaried employees of the Company as the
Committee shall designate.
4. Awards. (a) 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 to establish performance-based annual incentive award
targets), the Committee will determine the persons to whom Awards shall be
made for that calendar year, determine whether the Awards shall be Regular
Awards, Insurance-Related Awards or a combination thereof, select one or more
performance measures, establish the 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 a
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 the Company or of a
division or unit of the Company. The selected goals may be different for
different Participants.
(b) In the case of Regular Awards, performance goals shall include a
threshold level below which no payment shall be made, a level of performance
at which the target payment shall be made and a maximum level of performance
above which no additional amount shall be paid. Unless the Committee
determines otherwise, a Participant's Regular Award opportunity shall be
expressed in terms of a percentage of the Participant's Base Compensation for
the applicable calendar year.
(c) The Committee may adjust the performance goals established for a
particular calendar year, to the extent consistent with Section 162(m) of the
Code, to account for extraordinary events which may affect the determination
of performance by the Participant, in order to avoid distortions in the
operation of the Plan. Such events may include, without limitation, special
charges and other extraordinary items or significant acquisitions or
divestitures.
(d) The maximum amount payable to any Participant in respect of all
Regular Awards under the Plan in respect of any calendar year is $2.8 million.
(e) The maximum amount of compensation that may be earned by any
Participant in respect of all Insurance-Related Awards for any calendar year
is $10 million.
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5. Payment of Regular Awards.
(a) Generally. Payment in respect of Regular Awards that have been
earned shall be made in cash following the calendar year for which the Regular
Award was granted. Before payment is made to any Participant in respect of
any Regular Award, the Committee must certify in writing the extent to which
the Participant has satisfied the performance goals established for the
Participant in the Regular Award, and payment shall be made only to the extent
the Regular Award has been earned on account of attainment of such performance
goals. The Committee may not increase the amount payable under the Regular
Award above the amount actually earned pursuant to the terms of the Regular
Award.
(b) Termination of Employment. If a Participant ceases to be
continually employed by the Company (other than as a result of a Company-
approved leave of absence or the Participant's death, disability, or
retirement under the Company pension plan's early or normal retirement
provisions), the Participant shall forfeit all rights to a Regular Award for
the calendar year not yet ended.
(c) Payment in the Event of Death, Disability, or Retirement. If a
Participant dies, becomes disabled, or retires under the Company pension
plan's early or normal retirement provisions during a calendar year, his or
her Regular Award for that calendar year shall be reduced to reflect only
participation prior to termination. This reduction is based on the number of
months the individual was an active participant in the Plan in the calendar
year of termination. In the event of the Participant's death while a Regular
Award is outstanding, payments of any amounts due under such Regular Award
shall be made to the Participant's Beneficiary.
6. Insurance-Related Awards
(a) Generally. Following the calendar year for which an Insurance-
Related Award is granted, the Committee shall determine the amount of the
Insurance-Related Award earned by the Participant that is to be applied toward
the purchase of a 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 established for the
Participant in the Insurance-Related Award, and the purchase shall be made
only to the extent the Insurance-Related Award has been earned on account of
attainment of such performance goals. The Committee may not increase the
amount to be applied to the purchase of a Policy pursuant to the Insurance-
Related Award above the amount actually earned pursuant to the terms of the
Insurance-Related Award.
(b) Terms of Split-Dollar Agreement. As a condition to the purchase of
a Policy on the life of a Participant, the Participant must enter into a
Split-Dollar Agreement with the Company in such form as the Committee shall,
in its sole discretion, determine. Unless the Committee determines otherwise,
such Agreement shall include the following:
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(i) The Company shall be the owner of the Policy and shall be
entitled to designate the beneficiary of the portion of the
death benefit to which it is entitled as provided in (iii)
below.
(ii) The Participant shall be entitled to designate the
beneficiary or beneficiaries to receive a portion of the
Policy death benefit as provided in (iii) below.
(iii) Upon the death of the Participant, the Company shall have
the right to receive the portion of the death benefit equal
to the sum of (A) the greater of the total amount of the
premiums paid by the Company 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 the Company by the Participant
as described in (iv) below. The balance of the death
benefit shall be payable to the beneficiary or
beneficiaries designed by the Participant.
(iv) The Participant shall have the right to sell to the Company
at a price determined under a formula established in the
Split-Dollar 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;
provided, however, that any amounts payable to the
Participant in connection with any such sale shall be
subject to satisfaction of the performance goals
established for the Participant in the Insurance-Related
Award.
7. Withholding for Taxes. The Company will provide for the
withholding of any taxes required by any governmental authority with respect
to any income earned under the Plan. The amount withheld shall be paid over
by the Company to such governmental authority for the account of the
Participant entitled to the payment.
8. Designation of Beneficiary. A Participant shall designate a
Beneficiary or Beneficiaries on the Beneficiary Designation form prescribed by
the Committee (which may be designated contingently and which may be an entity
other than a natural person) to receive any amounts which may become payable
on or after the Participant's death under a Regular Award. Any such
designation may, unless the Participant has waived such right, from time to
time and at any time, be changed or canceled by the Participant without the
consent of a Beneficiary. Any such designation must be in writing and filed
with the Committee. If a Participant designates more than one Beneficiary,
any payments under a Regular Award to such Beneficiaries shall be
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made in equal shares unless the Participant has designated otherwise, in which
case the payments shall be made in the shares designated by the Participant.
If a Participant does not designate a Beneficiary or there is no proper
designation of a Beneficiary or no person designated as a Beneficiary shall
survive the Participant by 30 days, the Participant's Beneficiary shall be his
or her estate.
9. No Rights to Corporate Assets. Nothing contained herein shall be
construed as giving a Participant, his or her Beneficiary, or any other person
any equity or other interest of any kind in any assets of the Company (except
an interest in a Policy to the extent provided in a Split-Dollar Agreement) or
creating a trust of any kind or a fiduciary relationship of any kind between
the Company and any such person. As to any claim for any unpaid amounts under
the Plan or a Split-Dollar Agreement, a Participant, his or her beneficiary,
and any other person having a claim for payments shall be unsecured creditors.
10. Non-Assignability. Except for the designation of a beneficiary
pursuant to Section 6 or 8, neither a Participant nor a Participant's
beneficiary shall have the power or right to transfer, assign, anticipate,
mortgage, or otherwise encumber his or her interest in the Plan; nor shall
such interest be subject to seizure for the payment of a Participant's or
beneficiary's debts, judgments, alimony, or separate maintenance or be
transferable by operation of law in the event of a Participant's or
beneficiary's bankruptcy or insolvency.
The Company's obligations under the Plan are not assignable or
transferable except to a company which acquires all or substantially all
of the assets of the Company or to any corporation into which the Company may
be merged or consolidated.
11. Amendment and Termination. The Board of Directors may from time
to time and at any time alter, amend, suspend, discontinue, or terminate the
Plan; provided, however, that no amendment which requires stockholder approval
in order for the Plan to continue to comply with Code Section 162(m) shall be
effective unless such amendment shall be approved by the stockholders of the
Company. Nothing contained in the Plan shall be construed to prevent the
Company from taking any corporate action which is deemed by the Company to be
appropriate or in its best interest, whether or not such action would have an
adverse effect on the Plan or any Participant's interest in the Plan. Neither
any Participant nor any other person shall have any claim against the Company
as a result of any such action. Notwithstanding the foregoing, the Board of
Directors may not modify (or terminate) the Plan to the extent doing so would
adversely affect the rights of Participants to an outstanding Award at the
time of the modification.
12. No Right of Employment. Nothing contained in the Plan shall be
construed as conferring upon a Participant the right to continue in the employ
of the Company.
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13. Interpretation. The Plan is designed and intended to comply with
Section 162(m) of the Code, to the extent applicable, and all provisions
hereof shall be construed in a manner to so comply.
14. Governing Law. All rights and obligations under the Plan shall be
governed by, and the Plan shall be construed in accordance with, the laws of
the State of Kansas.
15. Titles and Headings. Titles and headings to sections herein are
for purposes of reference only and shall in no way limit, define, or otherwise
affect the meaning or interpretation of any provisions of the Plan.
16. Effective Date. The Plan shall become effective January 1, 1999,
subject to approval of the Plan by an affirmative vote of the holders of a
majority of the shares of the Company's common stock present or represented
and entitled to vote at the 1999 annual meeting of stockholders of the
Company. Awards may be made prior to such approval by stockholders, but each
such Award shall be subject to the approval of the Plan by the stockholders of
the Company, and if the Plan is not so approved, all Awards granted under the
Plan shall be of no effect.
