<PAGE>
===============================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement
[_] CONFIDENTIAL, FOR USE OF THE
COMMISSION ONLY (AS PERMITTED BY
RULE 14A-6(E)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[_] Soliciting Material Pursuant to (S) 240.14a-11(c) or (S) 240.14a-12
WESTERN RESOURCES, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which
the filing fee is calculated and state how it was determined):
-------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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Notes:
Reg. (S) 240.14a-101.
SEC 1913 (3-99)
<PAGE>
[WESTERN RESOURCES LOGO]
May 11, 2000
Dear Shareholder:
I am pleased to present to you this year's Notice of Annual Meeting of
Shareholders and Proxy Statement detailed on the following pages. The Annual
Meeting of Shareholders will be held on June 15, 2000 at 1:30 p.m. at the
Georgia Neese Grace Hall in the Topeka Performing Arts Center located at 214
S.E. 8th Street, Topeka, Kansas. I want to extend my thanks for your continued
interest in the Company and urge you to participate through your vote.
Please read the material in this Proxy Statement carefully before voting. It
is important that your shares be represented at the meeting whether or not you
are able to attend. By promptly filling out and returning the enclosed proxy,
or following the instructions for one of the other methods of voting, you will
ensure that your votes are counted. Your cooperation is appreciated.
Sincerely,
/s/ David C. Wittig
David C. Wittig
Chairman of the Board, President,
and Chief Executive Officer
<PAGE>
WESTERN RESOURCES, INC.
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
To Be Held June 15, 2000
You are invited, as a shareholder of Western Resources, Inc. (the
"Company"), to be present either in person or by proxy at the Annual Meeting
of Shareholders, which will be held in the Georgia Neese Grace Hall (Topeka
Performing Arts Center) located at 214 S.E. 8th Street, Topeka, Kansas, on
Thursday, June 15, 2000, commencing at 1:30 P.M. Central Standard Time,
including any adjournments, postponements, continuations or reschedulings
thereof, for the purpose of electing three directors to Class I of the
Company's Board of Directors to serve a term of three years. Common and
Preferred Shareholders of record at the close of business on April 26, 2000,
will be entitled to vote at the meeting.
It is important that your shares be represented at this meeting. We urge you
to exercise your right to vote by selecting one of the voting methods
described below and promptly completing the necessary steps to ensure your
vote is counted. The prompt submission of your proxy will save the Company the
additional expense of further requests to ensure the presence of a quorum.
If you are a shareholder of record, you may vote your shares through the
Internet, by telephone, or by mail. You may also revoke your proxy any time
before the meeting. Please help us save time and postage costs by voting
through the Internet or by telephone. Internet and telephone voting is also
available to shareholders who hold their shares in the Company's Direct Stock
Purchase Plan, the Employee Stock Purchase Plan, and the Employees' 401(k)
Savings Plan. Each method is generally available 24 hours a day and will
ensure that your vote is confirmed and posted immediately. Please follow the
instructions that are located on the enclosed proxy card for voting by one of
these methods.
If your shares are held in the name of a bank, broker or other holder of
record, you will receive instructions from the holder of record that you must
follow in order for your shares to be voted.
Your vote is important. Thank you for voting.
By Order of the Board of Directors,
/s/ Richard D. Terrill
Richard D. Terrill
Secretary
Topeka, Kansas
May 11, 2000
<PAGE>
PROXY STATEMENT
GENERAL INFORMATION
The enclosed proxy is solicited by the Board of Directors of Western
Resources, Inc. (the "Company") for use at the Annual Meeting of Shareholders
to be held on Thursday, June 15, 2000 including any adjournments,
postponements, continuations or reschedulings thereof, for the purposes set
forth in the above notice of meeting. Proxies are revocable at any time before
voted. Such right of revocation is not limited or subject to compliance with
any formal procedure. The mailing address for the principal executive offices
of the Company is 818 S. Kansas Avenue, Topeka, Kansas 66612. The approximate
mailing date for proxy materials is May 11, 2000.
The cost of the solicitation of proxies will be borne by the Company. In
addition to the use of the mails, proxies may be solicited personally, or by
telephone or electronic media by regular employees of the Company. The Company
has engaged the services of Georgeson Shareholder Communications, Inc., a
proxy solicitation firm, to aid in the solicitation of proxies for which the
Company will pay an estimated fee up to $9,500 for its services, plus
reimbursement of reasonable out-of-pocket expenses. In addition, the Company
will reimburse brokers and other custodians, nominees or fiduciaries for their
expenses in forwarding proxy material to security owners and obtaining their
proxies.
Common and Preferred Shareholders of record at the close of business on
April 26, 2000 are entitled to vote on matters to come before the meeting. On
that date there were outstanding and entitled to vote 68,646,867 shares of
Common Stock, par value $5 per share; 138,576 shares of Preferred Stock, 4
1/2% Series, par value $100 per share; 60,000 shares of Preferred Stock, 4
1/4% Series, par value $100 per share; and 50,000 shares of Preferred Stock,
5% Series, par value $100 per share.
VOTING RIGHTS
Proxies solicited by the Board of Directors will be voted "for" the proposal
presented herein unless shareholders otherwise specify in their proxies.
Each share of Common and Preferred Stock entitles the holder of record at
the close of business on the record date of the meeting to one vote.
In the event that the votes necessary to approve a proposal have not been
obtained by the date of the meeting, the chairman of the meeting may, in his
discretion, adjourn the meeting from time to time to permit the solicitation
of additional proxies by the Board of Directors.
Instructions to holders of the Company's Common Stock who are participants
in the Company's Direct Stock Purchase Plan and Employee Stock Purchase
Plan. All shares of the Company's Common Stock credited to a shareholder's
account in the Direct Stock Purchase Plan or the Employee Stock Purchase Plan
as of the record date will be voted in accordance with the specifications
indicated on the form of proxy sent to the shareholder if the form of proxy is
returned in a timely manner.
Instructions to holders of the Company's Common Stock who are participants
of the Employees' 401(k) Savings Plan. All shares of the Company's Common
Stock credited to a shareholder's account in the Employees' 401(k) Savings
Plan (the "401(k) Plan") as of the record date will be voted in accordance
with the specifications indicated on instructions provided in a timely manner
to the trustee of the 401(k) Plan. The trustee shall vote, in proportionately
the same manner as the trustee votes shares for which the trustee has received
timely instructions, the shares of Common Stock for which the trustee has not
received timely voting instructions.
1
<PAGE>
SHAREHOLDER PROPOSALS
The 2001 Annual Meeting of Shareholders is tentatively scheduled to be held
on June 7, 2001. Specific proposals of shareholders intended to be presented
at the 2001 meeting must comply with the requirements of the Securities
Exchange Act of 1934 (the "Exchange Act"), and the Company's Restated Articles
of Incorporation, as amended (the "Articles"). In order to be included in the
Company's 2001 proxy materials mailed to shareholders, shareholder proposals
must be received by the Company's Corporate Secretary by January 11, 2001. If
a shareholder intends to present a proposal at the 2001 meeting other than
pursuant to Rule 14a-8 under the Exchange Act, the proposal must be received
by the Company's Corporate Secretary between April 18, 2001 and May 3, 2001.
If the proposal is not received during such period, the proxies designated by
the Board of Directors of the Company for the 2001 Annual Meeting of
Shareholders may vote in their discretion on any such proposal any shares for
which they have been appointed proxies without mention of such matter in the
Proxy Statement for such meeting or on the proxy card for such meeting.
ELECTION OF DIRECTORS
The Board of Directors of the Company is divided into three classes (Class
I, Class II and Class III). At each annual meeting of shareholders, the
directors constituting one class are elected for a three-year term. The
Company's By-Laws provide for the classification of directors into three
classes, which shall be as nearly equal in number as possible, and no class
shall include fewer than two directors. In accordance with the Articles, the
Board of Directors has set the number of directors at ten.
Messrs. Charles Q. Chandler, IV, John C. Dicus, and Owen F. Leonard have
been nominated for election as directors at the Annual Meeting of Shareholders
as Class I directors. Mr. Chandler was appointed a director of the Company in
December of 1999 upon the retirement of Mr. Thomas R. Clevenger. Mr. Dicus was
elected at the Annual Meeting of Shareholders in 1990. Mr. Leonard was
appointed a director of the Company in January of 2000, at which time the
number of directors was increased to ten. Mr. John C. Nettels, Jr. was
appointed a director of the Company upon the retirement of Mr. David H. Hughes
in January of 2000. Mr. Russell W. Meyer, Jr., Chairman of the Board of Cessna
Aircraft Company, Wichita, Kansas, and a director of the Company, will retire
as a director coincident with the meeting, at which time the number of
directors will be reduced to nine.
Directors to be elected at the meeting will be elected by the affirmative
vote of the holders of a plurality of the shares entitled to vote represented
at the meeting in person or by proxy. Any shares not voted (whether by
abstention, broker non-votes or otherwise) have no impact in the election of
directors except to the extent the failure to vote for an individual results
in another individual receiving a larger proportion of the total votes. While
it is not expected that any of the nominees will be unable to qualify or
accept office, if for any reason one or more are unable to do so, the proxies
will be voted for substitute nominees selected by the Board of Directors of
the Company.
2
<PAGE>
The nominees for directors are as follows:
Nominees (Class I)--Term Expiring in 2003
Director (age), year first became a director
Charles Q. Chandler, IV (46), 1999
Mr. Chandler is Chairman of the Board, President, and Chief Executive
Officer of INTRUST Bank, N.A. (since February 1996) and President of
INTRUST Financial Corporation. Mr. Chandler was Executive Vice President
and Vice Chairman of INTRUST Bank, N.A. until 1996. Both companies are
located in Wichita, Kansas. Mr. Chandler is a director of INTRUST Financial
Corporation, the First National Bank of Pratt, Kansas, the Will Rogers Bank
in Oklahoma City, Oklahoma, and the Wesley Medical Center in Wichita,
Kansas, and a trustee for the Kansas State University Endowment Foundation.
John C. Dicus (66), 1990
Mr. Dicus is Chairman of the Board and Chief Executive Officer of Capitol
Federal Savings Bank. Mr. Dicus is also Chairman of the Board and Chief
Executive Officer of Capitol Federal Financial and Capitol Federal Savings
Bank MHC (since March 1999). These companies are located in Topeka, Kansas.
Mr. Dicus is a director for Security Benefit Life Insurance Company and
Columbian National Title Company, and a trustee of the Menninger
Foundation, Stormont-Vail Health Care, and the Kansas University Endowment
Association.
Owen F. Leonard (59), 2000
Mr. Leonard is President of KL Industries, Saddle Brook, New Jersey. KL
Industries is a manufacturing company which provides equipment for the
electronics industry. Mr Leonard is also Chairman of the Board for OMX,
Inc.
Other Directors
(Class II)--Term Expiring in 2001
Director (age), year first became a director
Gene A. Budig (60), 1999
Dr. Budig is Senior Advisor to the Commissioner of Baseball in New York,
New York (since March 2000). Prior to that time, Dr. Budig was President of
the American League of Professional Baseball Clubs. Dr. Budig is a director
of the Harry S. Truman Library Institute, the Ewing Marion Kaufman
Foundation, the Major League Baseball Hall of Fame and the Media Studies
Center-Freedom Forum.
3
<PAGE>
John C. Nettels, Jr. (43), 2000
Mr. Nettels is a Partner with the law firm of Morrison & Hecker, L.L.P. in
Wichita, Kansas.
David C. Wittig (44), 1996
Mr. Wittig is Chairman of the Board, President, and Chief Executive Officer
of the Company (since January 1999, March 1996, and July 1998,
respectively). Prior to that time, Mr. Wittig was Executive Vice President
of Corporate Development. Mr. Wittig is a director of OMX, Inc., and a
trustee of the Kansas University Endowment Association and Boys Harbor,
Inc.
(Class III)--Term Expiring in 2002
Director (age), year first became a director
Frank J. Becker (64), 1992
Mr. Becker is President of Becker Investments, Inc. in Lawrence, Kansas.
Mr. Becker is Chairman of the Kansas Turnpike Authority, a director of the
Douglas County Bank, Martin K. Eby Construction Company, and IMA Insurance,
Inc., and a trustee of the Kansas University Endowment Association.
Louis W. Smith (57), 1991
Mr. Smith is President (since 1995) and Chief Executive Officer (since July
1997) of the Ewing Marion Kauffman Foundation in Kansas City, Missouri. Mr.
Smith is a director of the Foundation, Commerce Bank of Kansas City, Sprint
Corporation, Kansas City Royals Baseball Corporation, and H & R Block, Inc.
Jane Dresner Sadaka (46), 1999
Ms. Sadaka is a retired Special Limited Partner with Kellner, DiLeo & Co.
in New York, New York. Ms. Sadaka is an Advisory Board Member with
Donaldson Lufkin and Jenrette Merchant Banking Fund II and a member of the
New York University Stern School of Business Board of Overseers.
EXECUTIVE OFFICERS OF THE COMPANY
David C. Wittig (44)
Mr. Wittig is Chairman of the Board, President, and Chief Executive Officer
of the Company (since January 1999, March 1996, and July 1998, respectively).
Prior to that Mr. Wittig was Executive Vice President of Corporate
Development.
4
<PAGE>
Douglas T. Lake (49)
Mr. Lake is Executive Vice President and Chief Strategic Officer of the
Company (since September 1998). Prior to that Mr. Lake was Senior Managing
Director at Bear, Stearns & Co. Inc., an investment banking firm. Mr. Lake is
also Chairman of the Board of Protection One, Inc., a subsidiary of the
Company.
Carl M. Koupal, Jr. (46)
Mr. Koupal is Executive Vice President and Chief Administrative Officer of
the Company (since July 1995). Prior to that Mr. Koupal was Executive Vice
President, Corporate Communications, Marketing and Economic Development.
Thomas L. Grennan (48)
Mr. Grennan is Executive Vice President, Electric Operations of the Company
(since November 1998). Prior to that Mr. Grennan was Senior Vice President,
Electric Operations (during 1998), and prior to that, Vice President,
Generation Services.
Richard D. Terrill (45)
Mr. Terrill is Executive Vice President, General Counsel, and Corporate
Secretary of the Company (since May 1999). Prior to that Mr. Terrill was Vice
President, Law and Corporate Secretary (from July 1998 to May 1999), and prior
to that, Corporate Secretary and Associate General Counsel.
William B. Moore (47)
Mr. Moore is Executive Vice President, Chief Financial Officer and Treasurer
of the Company (since October 1998). Prior to that Mr. Moore was Vice
President, Electric Division (from 1996 to October 1998), and prior to that,
Vice President, Finance. Mr. Moore was also President (from June 1995 to
October 1998) and Chairman of the Board (from June 1995 to January 1999) of
Kansas Gas and Electric Company, a wholly-owned subsidiary of the Company.
Rita A. Sharpe (41)
Ms. Sharpe is Vice President, Shared Services of the Company (since October
1998). Prior to that Ms. Sharpe was Chairman of the Board and President (from
February 1997 to October 1998), and prior to that, Vice President of Westar
Energy, Inc., a wholly-owned subsidiary of the Company.
BENEFICIAL OWNERSHIP OF VOTING SECURITIES
Other than as set forth in the following table, the Company knows of no
other beneficial owner of more than 5% of any class of the outstanding voting
stock of the Company.
<TABLE>
<CAPTION>
Amount and
Nature of Percent
Title of Name and Address Beneficial of
Class of Beneficial Owner Ownership Class
- -------- ------------------------------- ------------ -------
<S> <C> <C> <C>
Common Stock, $5 par
value Wallace R. Weitz and Company(1) 4,662,600(1) 6.8%(1)
1125 S. 103rd St., Suite 600
Omaha, NE 68124-6008
</TABLE>
- --------
(1) As reported in a Schedule 13G filing with the Securities and Exchange
Commission on February 4, 2000.
5
<PAGE>
The following information is furnished with respect to each of the director
nominees, each of the other current directors, each of the named executive
officers, and all current directors and executive officers of the Company as a
group as to ownership of shares of the Common Stock of the Company and
Protection One, Inc., a subsidiary of the Company ("Protection One"), as of
April 26, 2000.
<TABLE>
<CAPTION>
Amount and Nature of Amount and Nature of
Beneficial Ownership of Beneficial Ownership of
the Company's Protection One
Name of Beneficial Owner Common Stock (1) Common Stock (2)
- ------------------------ ----------------------- -----------------------
<S> <C> <C>
Frank J. Becker......... 30,078 shares(3) 31,800 shares(4)
Gene A. Budig........... 5,218 shares 0 shares
Charles Q. Chandler,
IV..................... 1,129 shares 0 shares
John C. Dicus........... 4,776 shares(5) 0 shares
Thomas L. Grennan....... 75,336 shares(6)(7) 0 shares
Carl M. Koupal, Jr. .... 135,294 shares(6)(7) 0 shares
Douglas T. Lake......... 180,803 shares(6)(7) 0 shares
Owen F. Leonard......... 20,000 shares 0 shares
Russell W. Meyer, Jr. .. 14,865 shares 0 shares
John C. Nettels, Jr. ... 670 shares 3,000 shares(8)
Jane Dresner Sadaka..... 2,419 shares 0 shares
Louis W. Smith.......... 13,231 shares 0 shares
Richard D. Terrill...... 59,806 shares(6)(7) 0 shares
David C. Wittig......... 655,615 shares(6)(7)(9) 0 shares
All directors and
executive officers as a
group (16
individuals)........... 1,296,632 shares 34,800 shares
</TABLE>
- --------
(1) Each individual owns less than one percent of the outstanding shares of
the Company's Common Stock. The group owns 1.88% of the outstanding
shares of the Company's Common Stock. No director or executive officer
owns any equity securities of the Company other than the Company's Common
Stock. Includes beneficially owned shares held in employee savings plans
and the Employee Stock Purchase Plan, and shares deferred under the 1996
Long Term Incentive and Share Award Plan, the Stock for Compensation
Program, and the Outside Directors Deferred Compensation Plan.
(2) Each individual and the group owns less than one percent of the
outstanding shares of Protection One's Common Stock. No director or
executive officer owns any equity securities of Protection One other than
Protection One's Common Stock.
(3) Includes 2,400 shares of the Company's Common Stock held in trusts, of
which Mr. Becker is a co-trustee with voting and investment power and
excludes stock held in trust by Douglas County Bank, of which Mr. Becker
is a director.
(4) Includes 5,000 shares held in a trust in which Mr. Becker has shared
investment and voting power.
(5) Includes 500 shares of the Company's Common Stock held by Mr. Dicus'
spouse, not subject to his voting or investment power.
(6) Includes shares the following persons have the right to acquire upon the
exercise of stock options exercisable currently or within sixty days: Mr.
Grennan, 20,291 shares; Mr. Koupal, 53,500 shares; Mr. Lake, 23,333
shares; Mr. Terrill, 15,833 shares; Mr. Wittig, 188,333 shares; and
39,435 stock options granted to other executive officers in the group.
(7) Includes restricted shares granted to executive officers as follows: Mr.
Grennan, 46,000 shares; Mr. Koupal, 72,000 shares; Mr. Lake, 108,500
shares; Mr. Terrill, 39,300 shares; Mr. Wittig, 209,500 shares; and
45,000 shares granted to other executive officers in the group.
(8) Includes 500 shares held in a trust in which Mr. Nettels has shared
investment and voting power.
(9) Includes 29,695 shares of the Company's Common Stock held by Mr. Wittig's
spouse, not subject to his voting or investment power.
6
<PAGE>
INFORMATION CONCERNING THE BOARD OF DIRECTORS
During 1999, the Company's Board met fifteen times. Each director attended
at least 75% of the total number of Board and committee meetings held while he
or she served as a director or member of a committee. Members of the Company's
Board serve on the Audit and Finance, Human Resources, Nominating and
Corporate Public Policy Committees.
The Audit and Finance Committee is currently composed of Ms. Sadaka,
Chairperson, Mr. Chandler, and Mr. Meyer. This committee reviews internal and
independent audits and strategic financial programs. It also recommends the
independent auditor for approval by the Company's Board. This Committee held
six meetings during 1999.
The Human Resources Committee is currently composed of Mr. Becker, Chairman,
Dr. Budig, and Mr. Dicus. This committee reviews the performance of corporate
officers and changes in officer compensation and benefits. This committee held
four meetings during 1999.
The Corporate Public Policy Committee is currently composed of Mr. Dicus,
Chairman, Mr. Chandler, and Mr. Smith. This committee reviews major strategic
programs of the Company relating to community relations, customer relations,
corporate contributions and other public affairs issues. This committee held
three meetings during 1999.
The Nominating Committee is currently composed of Mr. Smith, Chairman, Mr.
Becker, and Ms. Sadaka. This committee reviews and recommends nominees for
election to the Company's Board including nominees recommended by shareowners
if submitted in writing to this committee in accordance with the Company's
Restated Articles of Incorporation, Bylaws, and SEC and NYSE rules and
regulations, in care of the Corporate Secretary of the Company. This committee
held two meetings in 1999.
Outside Directors' Compensation. Each director who is not also an employee
of the Company receives an annual retainer fee of $18,500, paid quarterly, and
an annual stock award equal to $18,500. The fee paid for attendance at each
board meeting is $1,200 and $600 for each meeting held by telephone
conference. The fee paid for attendance at each committee meeting is $1,000
and $600 for each meeting held by telephone conference. Directors are also
compensated for expenses incurred by them which are incidental to attending
meetings of the Board and Board committees.
Pursuant to the Company's Outside Directors' Deferred Compensation Plan (the
"Deferred Compensation Plan"), an outside director of the Company may elect to
defer all, part or none of his or her retainer and/or meeting fees. The
Deferred Compensation Plan is a voluntary participation plan. The Deferred
Compensation Plan is administered by the Human Resources Committee of the
Company's Board or by such other committee as may be appointed by the
Company's Board from time to time.
7
<PAGE>
COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth the compensation of the named executive
officers for the last three completed fiscal years of the Company:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
--------------------------------- -----------------------------
Awards Payouts
--------------------- -------
Other Restricted Securities All
Annual Stock Underlying LTIP Other
Name and Salary Bonus Compensation Awards Options Payouts Compensation
Principal Position Year $ $ $(1) $(2) SARs# $ $(3)
- ------------------------ ---- ------- ------- ------------ ---------- ---------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
David C. Wittig 1999 408,683 -- 105,909 1,738,625 114,000 -- 5,756,753
Chairman of the Board, 1998 635,542 114,400 31,312 1,622,250 113,000 -- 79,217
President
and Chief Executive 1997 503,094 376,431 12,339 -- 50,000 46,141 43,096
Officer
Douglas T. Lake 1999 266,849 -- 31,494 948,219 40,000 -- 429,664
Executive Vice President 1998 108,333 15,080 3,348 521,438 30,000 -- 354,839
and Chief Strategic
Officer 1997 -- -- -- -- -- -- --
Carl M. Koupal, Jr. 1999 307,020 -- 13,045 612,313 28,000 -- 42,327
Executive Vice President 1998 250,125 36,720 4,258 502,125 28,000 -- 31,610
and Chief Administrative
Officer 1997 206,833 349,107 2,418 -- 17,000 23,533 17,063
Thomas L. Grennan 1999 187,708 -- 35,965 445,000 20,000 -- 64,292
Executive Vice
President, 1998 163,000 47,481 31,840 -- 12,000 -- 17,761
Electric Operations 1997 141,850 355,436 6,650 -- 3,750 19,213 12,991
Richard D. Terrill 1999 180,000 28,400 12,448 361,563 16,000 -- 36,224
Executive Vice
President, General 1998 130,667 17,160 3,919 -- 9,000 -- 17,177
Counsel and Corporate
Secretary 1997 118,633 181,411 1,873 -- 3,000 17,564 11,434
</TABLE>
- --------
(1) Other Annual Compensation for 1999 includes the following items: (a)
payments for the benefit of each of the named executives for federal and
state taxes associated with personal benefits and financial, tax and legal
planning (Mr. Wittig, $22,673, Mr. Lake, $4,071, Mr. Koupal, $9,614, Mr.
Grennan, $4,592, and Mr. Terrill $7,140); (b) interest (excess of the
applicable federal long term interest rate) on deferred compensation
(Mr. Wittig, $23,894, Mr. Lake, $0, Mr. Koupal, $1,780, Mr. Grennan,
$22,868 and Mr. Terrill $2,073); and (c) value of discounts received on
stock compensation (Mr. Wittig, $59,342, Mr. Lake, $27,423, Mr. Koupal,
$1,651, Mr. Grennan, $8,505, and Mr. Terrill $3,235).
(2) The aggregate restricted shares held by each of the named executives as of
December 31, 1999, are as follows: Mr. Wittig, 98,000 shares; Mr. Lake,
45,500 shares; Mr. Koupal, 33,000 shares; Mr. Grennan, 16,000 shares; and
Mr. Terrill, 13,000 shares. Based on the closing price of the Company's
common stock on December 31, 1999, the shares had an aggregate value on
that date of $1,659,875, $770,656, $558,938, $271,000, and $220,188,
respectively. This value may not represent the ultimate value of such
shares to the employee or the Company. Restrictions on the shares lapse on
the earlier of the ninth anniversary of the grant date or the date on
which the share price of the Company's common stock remains at or above
120% of the grant date market price for thirty (30) consecutive trading
days (but no earlier than the fourth anniversary of the grant date during
which time the employment of the executive must continue unless the
executive's employment terminates due to retirement, death, disability,
termination without cause by the Company, or for good reason by the
executive). Dividends are paid on the restricted shares from the date of
grant.
(3) All Other Compensation for 1999 includes the following items: (a) Company
contributions under the Company's 401(k) savings plan, a defined
contribution plan (Mr. Wittig, $4,094; Mr. Lake, $0; Mr. Koupal,
8
<PAGE>
$4,306; Mr. Grennan, $3,386; and Mr. Terrill, $4,800); (b) car allowances
(Messrs. Wittig, Lake and Koupal, $13,743; Messrs. Grennan and Terrill,
$12,861); (c) premiums paid on term life insurance policies (Messrs.
Wittig, Lake and Koupal, $853; Mr. Grennan, $670 and Mr. Terrill, $563);
(d) imputed income on split dollar life insurance policies of $37,913 for
Mr. Wittig and $14,245 for Mr. Koupal; (e) value of shares received under
the Company's stock for compensation program (Mr. Wittig, $330,150; Mr.
Lake, $152,568; Mr. Koupal, $9,180; Mr. Grennan, $47,375; and Mr. Terrill,
$18,000); (f) a payment to Mr. Wittig of $5,370,000 representing the value
of a life insurance policy on Mr. Wittig's life acquired to compensate him
for lost benefits from his prior employer (the proceeds of the life
insurance policy on Mr. Wittig's life will be paid to the Company and is
anticipated to reimburse the Company for this payment); (g) $262,500 paid
to or on behalf of Mr. Lake under the Company's executive relocation plan;
and (h) for 1998 includes $350,000 paid to Mr. Lake as a hiring bonus.
OPTIONS GRANTED IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
% of Total Exercise
Options or Grant Date
Options Granted to Base Present
Granted Employees Price Expiration Value ($)
Name (#) in Fiscal Year (1) ($/share) Date (2)
- ------------ ------- ------------------ -------- ---------------- ----------
<S> <C> <C> <C> <C> <C>
David C.
Wittig 113,000 14.23% $32.1250 January 27, 2009 $455,390
1,000 $27.8125 May 4, 2009 $ 3,610
Douglas T.
Lake 30,000 4.99% $32.1250 January 27, 2009 $120,900
10,000 $27.8125 May 4, 2009 $ 36,100
Carl M.
Koupal, Jr. 28,000 3.50% $32.1250 January 27, 2009 $112,840
Thomas L.
Grennan 12,000 2.50% $32.1250 January 27, 2009 $ 48,360
8,000 $27.8125 May 4, 2009 $ 28,880
Richard D.
Terrill 9,000 2.00% $32.1250 January 27, 2009 $ 36,270
7,000 $27.8125 May 4, 2009 $ 25,270
</TABLE>
- --------
(1) Percentage shown is aggregated for options granted during 1999.
(2) The grant date valuation was calculated using the Black-Scholes option
pricing model, and assumptions called for by paragraph 19 and Appendix B
of FAS 123. This calculation does not necessarily follow the same method
and assumptions that the Company uses in valuing long term incentives for
other purposes. Please refer to the Human Resource Committee Report for a
description of the 1996 Long Term Incentive and Share Award Plan.
<TABLE>
<CAPTION>
January 27, May 4,
2009 2009
----------- --------
<S> <C> <C>
Annualized stock volatility: 17.11% 17.96%
Time of exercise (option term): 10 Years 10 Years
Risk-Free interest rate: 6.71% 6.77%
Stock price at grant date and exercise price: $32.125 $27.8125
Average dividend yield: 6.13% 6.25%
Vesting restrictions: 3 Years* 3 Years*
</TABLE>
* One third of options become exercisable at each anniversary date for
three years.
9
<PAGE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
Number of Securities
Shares Underlying Unexercised
Acquired Options at
on Value Fiscal Year-End (#)(1) Value of Unexercised
Exercise Realized ------------------------- In-the-Money Options
Name (#) ($) Exercisable Unexercisable at Fiscal Year End ($)(2)
- ---- --------- -------- ----------- ------------- -------------------------
<S> <C> <C> <C> <C> <C>
David C. Wittig 0 0 188,333 113,667 0
Douglas T. Lake 0 0 23,333 46,667 0
Carl M. Koupal, Jr. 0 0 53,499 28,001 0
Thomas L. Grennan 0 0 20,292 17,333 0
Richard D. Terrill 0 0 15,833 13,667 0
</TABLE>
- --------
(1) The number of exercisable and unexercisable stock options held by each of
the named executives is as of December 31, 1999. No stock options were
exercised during 1999 by any of the named executives.
(2) As of December 31, 1999, none of the options granted were "In-the-Money;"
therefore, the exercisable and unexercisable options had no value.
COMPENSATION PLANS
Retirement Plans
The Company maintains a qualified non-contributory defined benefit pension
plan and a non-qualified supplemental retirement plan for certain management
employees of the Company, including executive officers, selected by the
Board's Human Resources Committee. Benefits payable from the qualified pension
plan are limited by provisions of the Internal Revenue Code of 1986, as
amended (the "Code"). The non-qualified supplemental retirement plan provides
for the payment of retirement benefits in addition to those provided under the
qualified pension plan.
The following table sets forth the estimated annual benefits payable to the
named executive officers upon specified remuneration based on retirement at
age 65 as of January 1, 2000. The amounts presented do not take into account
any reduction for joint and survivorship payments.
ANNUAL PENSION BENEFIT FROM QUALIFIED AND SUPPLEMENTAL PLANS
<TABLE>
<CAPTION>
Average Average
Applicable Pension Applicable Pension
Compensation Benefit Compensation Benefit
------------ -------- ------------ --------
<S> <C> <C> <C>
$150,000 $ 92,550 $ 700,000 $431,900
$200,000 $123,400 $ 750,000 $462,750
$250,000 $154,250 $ 800,000 $493,600
$300,000 $185,100 $ 850,000 $524,450
$350,000 $215,950 $ 900,000 $555,300
$400,000 $246,800 $ 950,000 $586,150
$450,000 $277,650 $1,000,000 $617,000
$500,000 $308,500 $1,050,000 $647,850
$550,000 $339,350 $1,100,000 $678,700
$600,000 $370,200 $1,150,000 $709,550
$650,000 $401,050 $1,200,000 $740,400
</TABLE>
The supplemental retirement plan provides a retirement benefit at or after
age 65, or upon disability prior to age 65, in an amount equal to 61.7% of
final three-year average of base compensation, (including share awards under
the stock for compensation program) and annual
10
<PAGE>
incentive bonuses, reduced by the benefits under the qualified pension plan
(but not social security benefits), such amount to be paid to the employee or
his designated beneficiaries for the employee's life with a 15-year term
certain. The percentage of final three-year average compensation to be paid
commencing at age 65, before reduction for qualified pension plan benefits, is
50% for a person retiring at age 50 increasing to 61.7% at age 65. An employee
retiring at or after age 50, but before age 65, may receive a reduced benefit
payable in the same form commencing prior to age 65. The age 65 benefits are
reduced by 5% per year if commenced prior to age 60, but no earlier than age
50. The supplemental plan vests 10% per year after five years of service until
fully vested with 15 years of service or at age 65. Under the qualified plan,
full vesting occurs after 5 years of service. The supplemental plan also pays
a death benefit if death occurs before retirement, equal to 50% of the
employee's previous 3 year average compensation (or the vested retirement
benefit percentage, whichever is higher) payable to his or her beneficiary for
180 months following his death. All of the individuals listed in the
compensation table are covered by the qualified and supplemental retirement
plans. In the event of a change in control of the Company, participants may be
deemed to be 65 years of age as of the date of such change in control for
purposes of vesting and benefits.
The years of service as of January 1, 2000 for the persons named in the cash
compensation table are as follows: Mr. Wittig, 5 years; Mr. Lake, 1 year; Mr.
Koupal, 8 years; Mr. Grennan, 26 years; and Mr. Terrill, 20 years.
Split Dollar Life Insurance Program
The Company established a split dollar life insurance program for the
benefit of the Company and certain of its officers, including executive
officers. Under the split dollar life insurance program, the Company has
purchased a life insurance policy on the insured's life and, upon termination
of the policy or the insured's death, the insured's beneficiary is entitled to
a death benefit in an amount equal to the face amount of the policy reduced by
the greater of (i) all premiums paid by the Company and, (ii) the cash
surrender value of the policy, which amount, at the death of the employee or
termination of the policy, as the case may be, will be returned to the
Company. The Company retains an equity interest in the death benefit and cash
value of the policy to secure this repayment obligation.
Subject to certain conditions, beginning on the earlier of (i) 3 years from
the date of the policy or (ii) the first day of the calendar year next
following the date of the insured's retirement, the insured is allowed to
transfer to the Company from time to time, in whole or in part, his interest
in the death benefit under the policy at a discount equal to $1 for each $1.50
of the portion of the death benefit for which the insured may designate the
beneficiary, subject to adjustment if the participant does not retire within
six months of the date of agreement based on the total return to shareholders
from the date of the policy. Any adjustment would result in an exchange of no
more than one dollar for each dollar of death benefit nor less than one dollar
for each two dollars of death benefit. At March 31, 2000, the Company's
liability under this program was $19 million. The program has been designed
such that upon the insured's death the Company will recover its premium
payments from the policy and any amounts paid by the Company to the insured
for the transfer of his interest in the death benefit.
11
<PAGE>
HUMAN RESOURCES COMMITTEE REPORT
The Company's executive compensation programs are administered by the Human
Resources Committee of the Board of Directors (the "Committee"), which is
composed of three non-employee directors. The Committee reviews and approves
all issues pertaining to executive compensation. The objective of the
Company's three compensation programs (base salary, short term incentive, and
long term incentive) is to provide compensation which enables the Company to
attract, motivate and retain talented and dedicated executives, foster a team
orientation toward the achievement of business objectives, and directly link
the success of the Company's executives with that of the Company's
shareholders.
The Company extends participation in its long term and short term incentive
programs to certain key employees in addition to executive officers based on
the potential to contribute to increasing shareholder value.
The Committee, in structuring the Company's compensation plans, takes into
consideration Section 162(m) (which disallows the deduction of compensation in
excess of $1,000,000 except for certain payments based upon performance goals)
of the Code and other factors the Committee deems appropriate. As a result,
compensation under some but not all of the Company's plans qualify for
deduction under Section 162(m).
Base Salary Compensation
A base salary range is established for each executive position to reflect
the potential contribution of each position to the achievement of the
Company's business objectives and to be competitive with the base salaries
paid for comparable positions in the national market by diversified consumer
services companies, with emphasis on electric energy and monitored security
services with annual total revenues comparable to those of the Company. Some,
but not all, of such companies are included in the Standard & Poor's Electric
Companies Index. The Company utilizes industry information for compensation
purposes. Not all companies comprising such index participate in making
available such industry information. In addition, the Company considers
information of other companies with which the Committee believes it competes
for executives, and is therefore relevant, but is not part of such industry
information. The mid-point for each base salary range is intended to
approximate the average base salary for the relevant position in the national
market. Industry surveys by national industry associations are the primary
source of this market information. The Committee has also utilized the
services of an independent compensation consultant to provide national market
data for executive positions and to evaluate the appropriateness of the
Company's executive compensation and benefit programs.
Within the established base salary ranges, actual base salary is determined
by the Company's financial performance in relation to attainment of specific
goals, such as earnings-per-share and total return to shareholders, and a
subjective assessment of each executive's achievement of individual objectives
and managerial effectiveness. The Committee annually reviews the performance
of the Chairman and Executive Officers. The Committee, after consideration of
the financial performance of the Company, and such other subjective factors as
the Committee deems appropriate for the period being reviewed, establishes the
base compensation of such officers.
In reviewing the annual achievement of each executive and setting the new
base annual salary levels for 1999, the Committee considered each individual's
contribution toward meeting the Board-
12
<PAGE>
approved budgeted financial plan for the previous year, total return to
shareholders, earnings per share, customer satisfaction, compliance with the
Company's capital financial plan, the construction budget, and the operation
and maintenance budgets, the individual's management effectiveness and the
individual's base compensation compared to the national market.
Annual Incentive Compensation
All executive officers are eligible for annual incentive compensation.
The primary forms of short term incentive compensation are provided through
the Company's 1998 and 1999 short term incentive plans. Through these plans,
employees selected by the Committee, including the executive officers listed
in the table, who have an opportunity to directly and substantially contribute
to the Company's achievement of short term objectives, are eligible to receive
short term incentive compensation. Short term incentives are structured so
that potential compensation is comparable with short term compensation granted
to comparable positions in the national market. Short term incentives are
targeted to approximate the median in the national market. Some, but not all,
of such companies are included in the Standard and Poor's Electric Companies
Index.
Mr. Wittig was eligible for an annual short term incentive target of 90% of
base salary. Other participants are eligible for annual short term incentive
targets ranging from 15% to 80% of base salary. For executive officers 20% of
the annual incentive is tied to the attainment of individual goals and
management skill. The balance is based upon the Company's achievement of
financial goals established annually by the Committee. Awards in excess of the
targets may be payable if the financial goals set by the Committee are
exceeded. The Committee may grant performance based awards under the 1999 plan
to the Chief Executive Officer and the other four most highly compensated
officers of the Company who are or may be subject to Section 162(m) of the
Code without being subject to the $1 million limitation on deductibility for
federal income tax purposes.
Changes in annual incentive compensation to the named individuals in 1999
compared to 1998 resulted from the Company failing to meet its earnings per
share and shareholder value goals. Executive officers waived the discretionary
portion of their short term incentive compensation. With respect to Mr.
Terrill, the Committee also took into account Mr. Terrill's base salary
relative to the market value of his position.
Long Term Incentives
Long term incentive compensation is offered to employees who are in
positions which can affect the long term success of the Company, through the
formation and execution of the Company's business strategies. The 1996 Long
Term Incentive and Share Award Plan is the principal method for long term
incentive compensation, and compensation thereunder currently takes the form
of stock options, dividend equivalents, and restricted share grants. The
purposes of long term incentive compensation are to: (a) focus key employees'
efforts on performance which will increase the value of the Company to its
shareholders; (b) align the interests of management with those of the
shareholders; (c) provide a competitive long term incentive opportunity; and
(d) provide a retention incentive for key employees.
The 1996 Long Term Incentive and Share Award Plan has been established to
advance the interests of the Company and its shareholders by providing a means
to attract, retain, and motivate employees and directors upon whose judgment,
initiative and effort the continued success, growth and
13
<PAGE>
development of the Company is dependent. All non-union employees are eligible
for grants under the Long Term Incentive and Share Award Plan. Under the Plan,
at the beginning of each incentive period, stock based awards are provided to
such participants and in such amounts as the Committee deems appropriate. The
number and form of awards vary on the basis of position and pay grade. The
level of total compensation for similar executive positions in comparable
companies was used as a reference in establishing the level of stock options,
dividend equivalents and restricted shares for Company executives.
The use of stock options, restricted shares and stock grants as a
significant component of compensation creates a strong and direct linkage
between the financial outcomes of the employees and the shareholders. Current
options vest and become exercisable ratably over a three year period. Dividend
equivalents are also granted. The value of a single dividend equivalent is
equal to the accumulated dividends that would have been paid or payable on a
share from the date of grant through the date of exercise. Restricted Shares
require the continued employment of the executive for four years unless the
executive's employment terminates due to retirement, death, disability,
termination without cause by the Company, or for good reason by the executive.
Dividends are paid on the restricted shares from the date of grant.
In April 1999 the Committee adopted a stock for compensation program which
requires executive officers and other key employees of the Company to receive
a specified percentage of base compensation in the form of share units. The
percentage of base compensation required to be paid in share units ranges from
approximately 5% to approximately 60% depending on the salary of the
individual and is phased in over three years up to 100% of a participant's
base salary increase. Participants may elect to receive the maximum percentage
in share units. Share units are valued based upon 85% of the closing price for
the Company's Common Stock on the date of grant. Dividend equivalents are
granted on a similar basis. In 1999 Mr. Wittig elected to receive
approximately 60% of his base compensation in share units under the program.
In the event of a change of control, stock options, dividend equivalents and
restricted shares may accelerate and vest.
Chief Executive Officer
Mr. Wittig has been the Chief Executive Officer of the Company since July
1998. Mr. Wittig's base salary and his annual short term incentive
compensation are established annually. While not utilizing any specific
performance formula and without ranking the relative importance of each factor
in reviewing Mr. Wittig's base salary for 1999, the Committee took into
account relevant salary information in the national market and the Committee's
subjective evaluation of Mr. Wittig's overall management effectiveness in his
position as Chairman of the Board, President, and Chief Executive Officer of
the Company and his achievement of individual goals. Factors considered
included his continuing leadership of the Company and his contribution to
strategic direction, management of change in an increasingly competitive
environment, control of expenses, management of operations, and the overall
productivity of the Company. The Committee also took into account the
recommendations made by an independent compensation consultant following a
review of the Company's compensation plans.
With respect to Mr. Wittig's 1999 short term incentive compensation, the
Committee took into account the Company failing to meet its earnings per share
and shareholder value goals. Mr. Wittig
14
<PAGE>
waived the discretionary portion of his short term incentive compensation. The
long term incentive compensation of Mr. Wittig included stock options,
dividend equivalents and restricted shares granted based upon the factors
described under Long Term Incentives above.
Western Resources, Inc. Human Resources
Committee
Frank J. Becker Gene A. Budig
Chairperson John C. Dicus
EMPLOYMENT AND CHANGE OF CONTROL AGREEMENTS
Change in Control Agreements
The Company has entered into change in control agreements with its executive
officers to ensure their continued service and dedication to the Company and
their objectivity in considering on behalf of the Company any transaction
which would result in a change in control of the Company. Under the
agreements, during the twelve-month period after a change in control, the
executive officer would be entitled to receive a lump-sum cash payment and
certain insurance benefits if such officer's employment were terminated by the
Company other than for cause or upon death, disability, or retirement; or by
such executive officer for good reason as those terms are defined therein.
Upon such termination, the Company must make a lump-sum cash payment to the
executive officer, in addition to any other compensation to which the officer
is entitled, of (i) two (three in the case of certain executive officers)
times such officer's base salary, (ii) two (three in the case of certain
executive officers) times the average of the bonuses paid to such executive
officer for the last three fiscal years, and (iii) the actuarial equivalent of
the excess of the executive officer's accrued pension benefits, computed as if
the executive officer had two (three in the case of certain executive
officers) additional years of benefit accrual service, over the executive
officer's vested accrued pension benefits. In addition, the Company must offer
health, disability and life insurance coverage to the executive officer and
his or her dependents on the same terms and conditions that existed
immediately prior to the termination for two (three in the case of certain
executive officers) years, or, if earlier, until such executive officer is
covered by equivalent benefits.
Executive Agreements
In connection with Mr. Lake's employment, the Company agreed to pay him an
initial base salary of $325,000 and a $350,000 signing bonus for beginning his
employment prior to September 1, 1998. Mr. Lake is entitled to participate in
the Company's short and long term incentive plans for officers and all other
benefits customarily provided to executive officers. Mr. Lake received 30,000
stock options and 13,500 shares of restricted stock upon commencement of his
employment with the Company. Mr. Lake was also enrolled in the Company's non-
qualified supplemental retirement plan. In order to attract Mr. Lake to the
Company, the Company agreed to pay him $500,000 if he remains an employee with
the Company through September 1, 2000, and an additional $1,000,000 if he
remains an employee of the Company through September 1, 2002. If Mr. Lake's
employment is terminated by the Company without cause or by Mr. Lake with good
reason, as those terms are defined in the Company's Change in Control
agreements, Mr. Lake will receive $500,000 if such termination is prior to
September 1, 2000, and $1,000,000 if such termination is after September 1,
2000 but before September 1, 2002.
15
<PAGE>
In connection with Mr. Wittig's employment, the Company agreed to acquire a
life insurance policy on Mr. Wittig's life and to pay the premium on such
policy up to $25,000 per year, to compensate him for lost benefits from his
prior employer. In 1999 the Company paid Mr. Wittig the value of such policy,
which is reflected in the compensation table. Upon Mr. Wittig's death the
Company will receive the benefits payable under the life insurance policy which
is expected to reimburse the Company for the benefit paid to Mr. Wittig.
Performance Graph
Shown below is a line-graph presentation comparing the Company's cumulative,
five-year total returns on an indexed basis* with the Standard & Poor's 500
stock index and Standard & Poor's Electric Companies Index.
[GRAPH]
Western Resources S&P 500 S&P Electric Companies
12/31/94 100 100 100
12/31/95 124 138 131
12/31/96 123 169 131
12/31/97 182 226 165
12/31/98 149 290 191
12/31/99 83 351 154
* Assumes $100 invested on December 31, 1994. Total return assumes reinvestment
of dividends.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Based solely on the Company's review of the copies of reports filed under
Section 16(a) of the Exchange Act and written representations that no other
reports were required, the Company believes that, during the fiscal year ended
December 31, 1999, all required filings applicable to its executive officers,
directors and owners of more than ten percent of the Company's Common Stock
were made and that such persons were in compliance with the Exchange Act
requirements, with the following exceptions: in reliance upon regulations which
had previously exempted the reporting of certain acquisitions, but which
subsequently changed, Messrs. Becker, Hughes, Meyer, and Smith each failed
16
<PAGE>
to report acquisitions of phantom stock units acquired during 1996, 1997 and
1998 under the Outside Directors Deferred Compensation Plan. The number of
reports and transactions that were not reported on a timely basis were as
follows: Mr. Becker (9 reports covering 57 transactions); Mr. Hughes, (3
reports covering 10 transactions); Mr. Meyer (9 reports covering 98
transactions); and Mr. Smith (3 reports covering 10 transactions). All such
previously unreported transactions were reported in February of 2000.
OTHER BUSINESS
The Board of Directors does not know of any other matters to come before the
meeting. If, however, any other matters properly come before the meeting, it
is the intention of the persons named in the enclosed proxy to vote the same
in accordance with their judgment on such other matters.
INDEPENDENT PUBLIC ACCOUNTANTS
Arthur Andersen LLP has acted as the Company's independent auditors since
1958, and has been recommended by the Audit and Finance Committee, approved by
the Board of Directors and engaged by the Company as the Company's and its
wholly-owned subsidiaries' independent public accountants for 2000.
Representatives of Arthur Andersen LLP will be in attendance at the Annual
Meeting, will be available to respond to appropriate questions from
shareholders and will be permitted to make a statement at the meeting if they
desire to do so.
ANNUAL REPORT TO THE SHAREHOLDERS
The Summary Annual Report of the Company for the year ended December 31,
1999, was mailed to shareholders on or about April 14, 2000. The appendix to
this proxy statement contains financial statements of the Company audited by
Arthur Andersen LLP, independent public accountants.
Whether or not you expect to be present at the 2000 Annual Meeting, you are
requested to date, sign, and return the enclosed proxy card, or vote using one
of the other methods as described on the enclosed proxy card. Your prompt
response will be much appreciated.
By Order of the Board of Directors,
/s/ Richard D. Terrill
Richard D. Terrill
Secretary
Topeka, Kansas
May 11, 2000
17
<PAGE>
APPENDIX A TO THE PROXY STATEMENT
[Logo] Western Resources (R)
1999 Annual Report
Audited Financial Statements and
Management's Discussion and Analysis
<PAGE>
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
SELECTED FINANCIAL DATA.................................................. 3
MANAGEMENT'S DISCUSSION AND ANALYSIS
Introduction.......................................................... 4
Summary of Significant Items.......................................... 4
Operating Results..................................................... 4
Business Segments..................................................... 5
Western Resources Consolidated........................................ 7
Liquidity and Capital Resources....................................... 8
Other Information..................................................... 10
CONSOLIDATED FINANCIAL STATEMENTS
Balance Sheets........................................................ 14
Statements of Income.................................................. 15
Statements of Comprehensive Income.................................... 16
Statements of Cash Flows.............................................. 17
Statements of Cumulative Preferred Stock.............................. 18
Statements of Shareholders' Equity.................................... 18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.............................. 19
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS................................ 38
DIRECTORS AND OFFICERS.................................................. 39
CORPORATE INFORMATION................................................... 39
</TABLE>
<PAGE>
WESTERN RESOURCES, INC.
<TABLE>
<CAPTION>
SELECTED FINANCIAL DATA
- ------------------------------------------------------------------------------------------------------------------------------------
1999/(1)/ 1998/(2)/ 1997/(3)/ 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, (Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Sales..................................................... $2,036,158 $2,034,054 $2,151,765 $2,046,827 $1,744,274
Net income before extraordinary gain...................... 717 46,165 499,518 168,950 181,676
Earnings available for common stock ...................... 11,330 44,165 494,599 154,111 168,257
- ------------------------------------------------------------------------------------------------------------------------------------
December 31, (Dollars in Thousands)
BALANCE SHEET DATA:
Total assets.............................................. $8,008,206 $7,951,428 $6,959,550 $6,647,781 $5,490,677
Long-term debt, preference stock, and
other mandatorily redeemable securities .................. 3,103,066 3,283,064 2,458,034 1,951,583 1,641,263
- ------------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
COMMON STOCK DATA:
Earnings per share available for common stock
before extraordinary gain ................................ $ (0.01) $ 0.65 $ 7.59 $ 2.41 $ 2.71
Earnings per share available for common stock ............ $ 0.17 $ 0.67 $ 7.59 $ 2.41 $ 2.71
Dividends per share/(4)/.................................... $ 2.14 $ 2.14 $ 2.10 $ 2.06 $ 2.02
Book value per share...................................... $ 27.83 $ 29.40 $ 30.88 $ 25.15 $ 24.71
Average shares outstanding (000's)....................... 67,080 65,634 65,128 63,834 62,157
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Information reflects the impairment of marketable securities and a change
to an accelerated amortization method for Protection One customer accounts.
(2) Information reflects exit costs associated with international power
development activities.
(3) Information reflects the gain on the sale of Tyco common shares, our
strategic alliance with ONEOK and the acquisition of Protection One.
(4) In March 2000, the company announced a new dividend policy. See Note 24 of
Notes to Consolidated Financial Statements for further discussion.
3
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
INTRODUCTION
In Management's Discussion and Analysis we explain the general financial
condition and the operating results for Western Resources, Inc. and its
subsidiaries. We explain:
. What factors impact our business
. What our earnings and costs were in 1999 and 1998
. Why these earnings and costs differed from year to year
. How our earnings and costs affect our overall financial condition
. What our capital expenditures were for 1999
. What we expect our capital expenditures to be for the years 2000 through
2002
. How we plan to pay for these future capital expenditures
. Any other items that particularly affect our financial condition
or earnings
As you read Management's Discussion and Analysis, please refer to our
Consolidated Statements of Income on page 15. These statements show our
operating results for 1999, 1998 and 1997. In Management's Discussion and
Analysis, we analyze and explain the significant annual changes of specific line
items in the Consolidated Statements of Income.
SUMMARY OF SIGNIFICANT ITEMS
Extraordinary Gain on Retirement of Protection One Bonds
In the fourth quarter 1999, Westar Capital purchased Protection One bonds in the
open market. We have recognized an extraordinary gain of $13.4 million, net of
tax, at December 31, 1999 related to the retirement of this debt. These bonds
were transferred to Protection One on February 29, 2000, when Westar Capital
purchased the continental European and United Kingdom operations of Protection
One, and certain investments held by a subsidiary of Protection One.
Marketable Securities
During the fourth quarter of 1999, we decided to sell our remaining marketable
security investments in paging industry companies. These securities have been
classified as available-for-sale; therefore, changes in market value have been
historically reported as a component of other comprehensive income.
The market value for these securities declined during the last six to nine
months of 1999. We determined that the decline in value of these securities was
other than temporary and a charge to earnings for the decline in value was
required at December 31, 1999. Therefore, we recorded a non-cash charge of $76.2
million in the fourth quarter of 1999. This charge to earnings has been
presented separately in the accompanying Consolidated Statements of Income.
In February 2000, Metrocall, Inc. (Metrocall), a paging company whose securities
were included in our investment portfolio at December 31, 1999, made an
announcement that significantly increased the market value of paging company
securities in the public markets. During the first quarter of 2000, we sold
these paging securities and realized a gain of $24.9 million.
Termination of Merger Agreement with Kansas City Power & Light Company
On March 18, 1998, we signed an Amended and Restated Plan of Agreement and Plan
of Merger with the Kansas City Power & Light Company (KCPL) under which KGE,
KPL, and KCPL would have been combined into a new company called Westar Energy,
Inc. KCPL has notified us that it has terminated the contemplated transaction.
We expensed costs related to the KCPL merger of approximately $17.6 million at
December 31, 1999.
Protection One Accounting Change
Protection One performed a review of its amortization policy relating to
customer accounts and identified three distinct pools, each of which has
distinct attributes that effect differing attrition characteristics. The pools
correspond to its North America and Multifamily business segments and its former
European business segment. For the North America and Europe pools, the analyzed
data indicated that a change from a straight-line to a declining balance
(accelerated) method would more closely match future amortization cost with the
estimated revenue stream from these assets. Protection One elected to change to
that method for its North America and Europe pools of customers. No change was
made in the method used for the Multifamily pool. See Note 1 of Notes to
Consolidated Financial Statements for further discussion.
Protection One Impairment Test
Protection One also performed an impairment test of its customer accounts and
related goodwill under the guidance of the Statement of Financial Accounting
Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of (SFAS 121). Paragraph 6 of SFAS 121
indicates that an impairment loss should be recognized only if the sum of the
expected future cash flows (undiscounted and without interest charges) is less
than the carrying amount of the asset(s) grouped at the lowest level of
identifiable cash flows. After performing the test, Protection One determined
that the customer accounts are not currently impaired.
Protection One Change in Estimate of Useful Life of Goodwill
In conjunction with the impairment test for customer accounts, Protection One
also re-evaluated the original assumptions and rationale utilized in the
establishment of its carrying value and estimated useful life of goodwill.
Protection One concluded that due to continued losses and increased levels of
attrition experienced in 1999, the estimated useful life of goodwill should be
reduced from 40 years to 20 years. As of January 1, 2000, the remaining
goodwill, net of accumulated amortization, will be amortized over its remaining
useful life based on a 20-year life. On Protection One's existing account base,
Protection One anticipates that this will result in an increase in annual
goodwill amortization of approximately $34 million prospectively.
OPERATING RESULTS
Western Resources Consolidated
1999 Compared to 1998: Basic earnings per share were $0.17 compared to $0.67 in
1998. The company's 1999 results of operations benefited from the strong
performance of the regulated electric utility operations. However, this strong
performance was not sufficient to compensate for the changes to earnings
discussed above or the performance of our monitored services business. The
impact of the monitored services business on basic earning per share was
$(1.05), compared to $(0.03) in 1998.
1998 Compared to 1997: Basic earnings per share were $0.67 compared to $7.59.
Operating results for 1998 are difficult to compare to 1997 due primarily to
1998 charges to income and the 1997 pre-tax gain on the sale of Tyco
International Ltd. (Tyco) common stock of $864.2 million.
4
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
In addition to the gain on the sale of Tyco common stock recorded in 1997, we
recorded charges which included $48 million of deferred KCPL merger costs and
approximately $24.3 million to reflect the impairment of assets and the closing
of business activities.
In November 1997, we completed our strategic alliance with ONEOK and contributed
substantially all of our natural gas business to ONEOK in exchange for a 45%
ownership interest in ONEOK. Following the strategic alliance, the consolidated
energy sales, related cost of sales and operating expenses in 1997 for our
natural gas business have been replaced by investment earnings in ONEOK.
The following discussion explains significant changes from prior year results in
sales, costs of sales, operating expenses, other income (expense), interest
expense, income taxes, and preferred and preference dividends.
Electric Utility
Electric sales include sales from fossil generation, nuclear generation, power
marketing and power delivery operations. The KCC and the FERC authorize rates
for our electric sales. Power marketing is only regulated by the FERC. We
expanded into both the marketing of electricity and risk management services to
wholesale electric customers and the purchase of electricity for retail
customers. Changing weather affects the amount of electricity our customers use.
Very hot summers and very cold winters prompt more demand, especially among our
residential customers. Mild weather reduces demand.
Many things will affect our future electric sales. They include:
. The weather
. Our electric rates
. Competitive forces
. Customer conservation efforts
. Wholesale demand
. The overall economy of our service area
. The City of Wichita's attempt to create
a municipal electric utility
. The cost of fuel included in base rates
The following tables reflect the changes in electric sales volumes (excluding
power marketing), for the years ended December 31, 1999, 1998 and 1997:
- -----------------------------------------------------------------
1999 1998 % Change
- -----------------------------------------------------------------
(Thousands of MWH)
Residential.......................... 5,551 5,815 (4.5)%
Commercial........................... 6,202 6,199 0.1 %
Industrial........................... 5,743 5,808 (1.1)%
Other................................ 108 108 (0.2)%
----------------------
Total retail........................ 17,604 17,930 (1.8)%
Wholesale............................ 5,617 4,826 16.4 %
----------------------
Total................................ 23,221 22,756 2.0 %
======================
- -----------------------------------------------------------------
1998 1997 % Change
- -----------------------------------------------------------------
(Thousands of MWH)
Residential.......................... 5,815 5,310 9.5 %
Commercial........................... 6,199 5,803 6.8 %
Industrial........................... 5,808 5,714 1.6 %
Other................................ 108 107 1.0 %
-----------------------
Total retail......................... 17,930 16,934 5.9 %
Wholesale............................ 4,826 5,334 (9.5) %
-----------------------
Total................................ 22,756 22,268 2.2 %
=======================
1999 compared to 1998: Electric utility gross profit increased 3%, or $30.5
million. Gross profit as a percentage of sales improved to 67% from 57%. These
improvements are due primarily to increased power marketing profit and increased
wholesale sales. In the summer of 1999, we had increased power plant
availability during hot weather when demand was high which allowed increased
wholesale sales. Power plant availability impacts both gross profit and gross
profit percentage, as it is more profitable for us to generate electricity for
resale than to purchase power for resale. Partially offsetting these increases
were lower retail sales due to weather which was milder in 1999.
1998 compared to 1997: Electric utility gross profit increased 8%, or $68.3
million. This improvement occurred because our retail sales volumes increased
$66 million as a result of warmer summer temperatures but electric cost of sales
only increased $4.6 million because Wolf Creek operated the entire year without
any outages. Our retail sales would have been higher had we not implemented an
electric rate decrease on June 1, 1998. See Note 14 of Notes to Consolidated
Financial Statements for further information on our electric rate decreases.
Gross profit as a percentage of sales decreased to 57% from 69%. In 1997, we
made a strategic decision to expand our power marketing business to better
utilize our generating assets and to reduce risk associated with energy prices.
In 1997, our power marketing activity had an insignificant effect on gross
profit. In 1998, we had power marketing sales of $382.6 million, but our net
profit on power marketing transactions was significantly less than our net
profit on our traditional electric sales.
Items included in energy cost of sales are fuel expense, purchased power expense
(electricity we purchase from others for resale) and power marketing expense.
BUSINESS SEGMENTS
We have defined four business segments: fossil generation, nuclear generation,
power delivery and monitored services, based on how management currently
evaluates our business. Our business segments are based on differences in
products and services, production processes and management responsibility.
We manage our electric utility business segments' performance based on their
earnings before interest and taxes (EBIT). EBIT does not represent cash flow
from operations as defined by generally accepted accounting principles, should
not be construed as an alternative to operating income and is indicative neither
of operating performance nor cash flows available to fund the cash needs of our
company. Items excluded from EBIT are significant components in understanding
and assessing the financial performance of our company. We believe presentation
of EBIT enhances an understanding of financial condition, results of operations
and cash flows because EBIT is used by our company to satisfy its debt service
obligations, capital expenditures, dividends and other operational needs, as
well as to provide funds for growth. Our computation of EBIT may not be
comparable to other similarly titled measures of other companies.
5
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
The following discussion identifies key factors affecting our electric business
segments.
- --------------------------------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------
(Dollars in
Thousands)
Fossil Generation
External sales.................... $ 365,311 $ 525,974 $ 208,836
Internal sales.................... 546,683 517,363 517,167
Depreciation and amortization..... 55,320 53,132 53,831
EBIT.............................. 219,087 144,357 149,825
Nuclear Generation
Internal sales.................... $ 108,445 $ 117,517 $ 102,330
Depreciation and amortization..... 39,629 39,583 65,902
EBIT.............................. (25,214) (20,920) (60,968)
Power Delivery
External sales.................... $ 1,064,385 $1,085,711 $1,021,212
Internal sales.................... 293,522 66,492 66,492
Depreciation and amortization..... 71,717 68,297 63,590
EBIT.............................. 145,603 196,398 173,809
- --------------------------------------------------------------------------------
Fossil Generation
Fossil Generation's external sales include power produced for sale to external
wholesale customers located outside our historical marketing territory. Internal
sales include power produced for sale to Power Delivery. Internal sales are made
at an internal transfer price which is based upon an assumed competitive market
price for capacity and energy.
1999 compared to 1998: External sales decreased $160.7 million, or 31%,
primarily due to lower power marketing sales. Power marketing sales decreased
$192.5 million, or 50%, due to milder weather compared to last year. In 1999 and
1998, the wholesale power market experienced extreme volatility in prices and
supply. This volatility impacts our cost of power purchased and our
participation in power trades.
The decrease in power marketing sales was partially offset by higher wholesale
sales of $29.6 million. Due to warmer than normal weather throughout the Midwest
in July and increased availability of our coal-fired generation stations, we
were able to sell more electricity to wholesale customers in 1999 than in 1998.
During the summer of 1998, one of our coal-fired generation units was
unavailable for an extended period of time, reducing our wholesale sales
capacity.
The internal transfer price Fossil Generation charged Power Delivery was higher
due to a higher forecasted peak demand. Therefore, internal sales and EBIT of
Fossil Generation were higher. EBIT was also higher due to improved net profit
on power marketing transactions.
1998 compared to 1997: External sales increased $317.1 million, mostly because
of increased power marketing sales of $312.8 million.
EBIT for 1998 decreased from 1997 because we had higher cost of sales of $4.6
million due primarily to a coal-fired generation station being unavailable for
the summer. The availability of our generating units and purchased power from
other companies also impact power marketing sales.
Nuclear Generation
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. Internal
sales include the internal transfer price that Nuclear Generation charges to
Power Delivery. The amounts in the table above are our 47% share of Wolf Creek's
operating results. EBIT is negative because internal sales are less than Wolf
Creek's costs.
Wolf Creek has a scheduled refueling and maintenance outage approximately every
18 months. The next outage is scheduled in September 2000. During an outage Wolf
Creek produces no power for its co-owners; therefore internal sales and EBIT
decrease and nuclear fuel expense decreases.
1999 compared to 1998: Internal sales and EBIT decreased primarily due to the
scheduled 36-day refueling and maintenance outage at Wolf Creek in 1999. In
1998, Wolf Creek operated the entire year without any outages.
1998 compared to 1997: Internal sales and EBIT were higher in 1998 than in 1997
because the Wolf Creek facility was off-line for 58 days in 1997 for a scheduled
maintenance outage.
Depreciation and amortization expense decreased $26.3 million because we had
fully amortized a regulatory asset during 1997. This decrease in amortization
expense increased EBIT for 1998.
Power Delivery
Power Delivery's external sales consist of the transmission and distribution of
power to our Kansas electric customers and the customer service provided to
them. Internal sales include an intra-segment transfer price for charges for the
use of the distribution lines and transformers.
1999 compared to 1998: External sales decreased $21.3 million due primarily to
2% lower retail electric sales volume. Retail sales volumes decreased primarily
as a result of milder temperatures in 1999. Our service territories averaged 22%
fewer cooling degree days in 1999. The cumulative effect of the electric rate
decreases implemented on June 1, 1998, and June 1, 1999, reduced sales by
approximately $10 million.
Internal sales were $227 million higher due to a change in the internal transfer
price charged for the use of the distribution lines and transformers.
EBIT decreased $50.8 million primarily due to $21.3 million lower external
sales, a $16.1 million higher internal transfer price charged by Fossil
Generation and $8.3 million in ancillary service fees charged by Fossil
Generation. The increased internal transfer price was due to higher peak demand
to accommodate air conditioning load. No ancillary service fees were charged by
Fossil Generation in 1998.
1998 compared to 1997: External sales and EBIT increased. In addition to our
normal customer growth, we experienced warmer weather during the summer months
in 1998 than we did in 1997 which improved external sales approximately $41.9
million. The effect of our electric rate decrease lowered 1998 external sales
approximately $11 million.
Monitored Services
Protection One operates and manages our monitored services interest. The results
discussed below reflect Protection One on a stand-alone basis and do not take
into consideration the minority interest of approximately 15% at December 31,
1999 and 1998.
- --------------------------------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------
(Dollars in Thousands)
External sales...................... $ 605,176 $ 421,095 $ 152,347
Depreciation and amortization....... 238,803 117,651 41,179
EBIT................................ (24,013) 56,727 (38,517)
- --------------------------------------------------------------------------------
1999 compared to 1998: Protection One had a net increase of 8,595 customers in
1999 as compared to a net increase of 445,156 customers in 1998. Accordingly,
results for 1999 include a full year of operations with
6
<PAGE>
the customers added throughout 1998. The increase in customers is the primary
reason for the $184.1 million increase in external sales.
EBIT decreased $80.7 million due to higher cost of sales as a result of
increased customers, higher depreciation and amortization expense and higher
selling general and administrative expenses.
Depreciation and amortization expense increased $121.2 million. As discussed
above in SUMMARY OF SIGNIFICANT ITEMS, Protection One changed its customer
amortization method from a 10-year straight line method to a 10-year declining
balance method which resulted in an increase in amortization expense of
approximately $50 million. The balance of the increase is primarily attributed
to a full year of amortization expense on customers acquired during 1998.
Selling, general and administrative expenses increased $71.5 million primarily
due to costs associated with the overall increase in the average number of
customers billed, additional bad debt expense of approximately $10.5 million
resulting from higher attrition, costs associated with Year 2000 compliance,
professional fees and salary increases.
1998 compared to 1997: Monitored services sales increased $268.7 million. The
increase is due to acquisitions and new customers purchased through Protection
One's dealer program. The dealer program consists of independent companies with
residential and small commercial sales, marketing and installation skills which
provide Protection One with new monitoring customers for purchase on an ongoing
basis. Monthly recurring revenue represents the monthly fees paid by customers
for on-going monitored security service. At December 31, 1998, monthly recurring
revenue totaled about $37.9 million. Protection One added approximately $16.6
million of monthly recurring revenue from acquisitions and approximately $5.3
million of monthly recurring revenue from its dealer program. Because
acquisitions and purchases from the dealer program occurred throughout the year,
not all of the $21.9 million of acquired monthly recurring revenue is reflected
in 1998 results. Offsetting these revenue increases was Protection One's net
monthly recurring revenue losses of 9%.
Cost of sales increased $93.4 million. Monitoring and related services expenses
increased by $70.9 million, or 217%, due to the acquisition of three major
service centers and three smaller satellite monitoring facilities in the United
States, as well as two service centers in Canada and two in Europe.
Monitoring and service activities at existing facilities increased as well due
to new customers generated by Protection One's dealer program.
Selling, general and administrative expenses rose $31 million. The increase in
expenses resulted primarily from acquisitions, offset by a decrease in sales and
related expenses. Selling, general and administrative expenses as a percentage
of total sales declined from 56% in 1997, to 27% in 1998. The transition of
Protection One's primary distribution channel from an internal sales force to
the dealer program resulted in sales commissions declining by approximately $9
million. Protection One also reduced advertising and telemarketing activities
that formerly supported the internal sales force.
Amortization of intangibles and depreciation expense totaled $117.7 million in
1998. Protection One recorded $582 million of customer intangibles and $549
million in cost allocated to goodwill during 1998 from its purchases of
monitored services companies, portfolios of customer accounts and individual new
customers through its dealer program.
EBIT increased $95.2 million. Included in 1998 EBIT is a non-recurring gain
approximating $16.3 million on the repurchase of customer contracts covered by
a financing arrangement. A charge of approximately $24.3 million adversely
affected 1997 EBIT. The charge was needed to reflect the impairment of certain
assets and the closing of business activities.
WESTERN RESOURCES CONSOLIDATED
Other Operating Expenses
In 1999, we recorded a charge of $17.6 million for deferred KCPL merger costs
related to the termination of the KCPL merger.
In 1998, we recorded a $98.9 million charge to income associated with our
decision to exit the international power project development business.
Activities associated with the exit plan were substantially complete at December
31, 1999. See Note 16 of Notes to Consolidated Financial Statements for further
discussion.
In 1997, we recorded a charge totaling $48 million to write-off the original
merger costs associated with the KCPL transaction. In addition, Protection One
recorded a charge of $24.3 million to reflect the impairment of certain assets
and the closing of business activities.
Other Income (Expense)
Compared to 1998, other income for 1999 decreased $69.5 million primarily due to
the other than temporary decline in the value on marketable securities recorded
in 1999. Compared to 1997, other income for 1998 decreased $865.4 million
primarily due to the gain recognized in 1997 on the sale of our Tyco common
stock.
Interest Expense
1999 compared to 1998: Interest expense represents the interest we paid on
outstanding debt. Interest expense increased 30% because Protection One borrowed
additional long-term debt primarily to fund purchases of customer accounts.
Western Resources also had higher long-term debt interest expense because of the
6.25% and 6.8% unsecured senior notes due 2018 that we issued in third quarter
of 1998. Short-term debt interest expense was $2.4 million higher due to higher
average balances of short-term debt in 1999.
1998 compared to 1997: Interest expense increased 17% due to higher long-term
debt. Our long-term debt balance increased $875 million due to our and
Protection One's issuance of new long-term debt used to reduce existing
short-term debt, to fund nonregulated operations and to finance a substantial
portion of Protection One's customer account growth. Lower short-term debt
interest expense partially offset the higher long-term debt interest expense.
Our short-term debt had a lower weighted average interest rate than the
long-term debt which replaced it.
Income Taxes
1999 compared to 1998: We have recorded an income tax benefit in 1999 of $33
million and income tax expense in 1998 of $15 million. This change is primarily
due to lower earnings before income taxes in 1999. Earnings before income taxes
decreased primarily due to operating results at Protection One, an impairment of
the marketable securities discussed above and the charge related to the
termination of the KCPL merger.
7
<PAGE>
We also had tax expense of $7.2 million related to Westar Capital's
extraordinary gain on the purchase of Protection One bonds, which is presented
separately on the consolidated statement of income after income from continuing
operations.
Our effective income tax rates are affected by the receipt of non-taxable
proceeds from our corporate owned life insurance policies, the tax benefit from
excluding 70% of the dividends received from ONEOK, the generation and
utilization of tax credits from Affordable Housing investments, the amortization
of prior years' investment tax credits, and the amortization of non-deductible
goodwill.
1998 compared to 1997: Income tax expense declined significantly due to the
decline in taxable net income. Tax expense for 1997 included taxes related to
the gain on the sale of Tyco common stock. Our effective tax rate also declined
from 1997.
Preferred and Preference Dividends
On April 1, 1998, we redeemed the 7.58% preference stock due 2007. This
redemption has resulted in a significant decline in preferred and preference
dividends since 1997.
LIQUIDITY AND CAPITAL RESOURCES
Overview
Most of our cash requirements consist of capital expenditures and maintenance
costs associated with the electric utility business, cash needs of our monitored
services business for customer account growth and infrastructure, debt service
and cash payments of common stock dividends. Our ability to attract necessary
financial capital on reasonable terms is critical to our overall business plan.
Historically, we have paid for these items with cash on hand, the issuance of
stock or short-term debt. Our ability to provide the cash, stock or debt to fund
our capital expenditures depends upon many things, including available
resources, our financial condition and current market conditions.
We had $15.8 million in cash and cash equivalents at December 31, 1999. We
consider highly liquid debt instruments purchased with a maturity of three
months or less to be cash equivalents. At December 31, 1999, we had
approximately $705.4 million of short-term debt outstanding, of which $535.4
million was commercial paper. Current maturities of long-term debt were $111.7
million at December 31, 1999.
As of December 31, 1999, we had arrangements with certain banks to provide
unsecured short-term lines of credit on a committed basis totaling approximately
$1.1 billion. The unused portion of these lines of credit was used to provide
support for commercial paper.
The unsecured short-term lines of credit included three revolving credit
facilities with various banks as follows:
- --------------------------------------------------------------------------------
Amount Facility Termination Date
- --------------------------------------------------------------------------------
$300 million 364-day March 15, 2000
500 million 5-year March 17, 2003
250 million 6 1/2-month June 30, 2000
- --------------------------------------------------------------------------------
In March 2000, we amended the $300 million facility to reduce the commitment to
$242 million and to extend the maturity date to June 30, 2000. We also amended
all of these credit facilities to reflect the possibility of borrowing from them
rather than using them to provide support for commercial paper borrowings. As a
result of these amendments our cost of borrowing will be higher. A one percent
increase in our interest rate on our outstanding short-term debt balance as of
December 31, 1999, would have increased our annual interest expense by $7
million. We cannot predict the market conditions or our credit ratings at the
time we may borrow from these facilities; and therefore, cannot predict how much
higher our interest expense might be.
Amendments to the credit facilities include increased pricing to reflect credit
quality and the potential drawn nature of credit facilities rather than support
for commercial paper, redefinition of the total debt to capital financial
covenant, limitation on use of proceeds from sale of first mortgage bonds
requiring repayment of debt outstanding under the credit facilities before
proceeds may be used for other purposes, and a commitment to use our "best
efforts" to pledge first mortgage bonds to support our credit facilities if our
senior unsecured credit rating drops below "investment grade" (bonds rated below
BBB by Standard & Poor's (S&P) and Fitch and below Baa by Moody's Investors
Service (Moody's)).
In order to maintain adequate short-term borrowing capacity, we expect to
replace or further amend these credit facilities prior to their termination.
In January 2000, we reached an agreement with our banks under our current credit
facilities to eliminate a cross-default provision relating to Protection One and
its subsidiaries, provided we do not increase our investment in Protection One
by more than $225 million or $125 million if our senior unsecured credit ratings
drop below investment grade as determined by S&P and Moody's. We borrowed $225
million in short-term debt in 1999 to fund Westar Capital's revolving credit
agreement to Protection One. We may borrow additional short-term debt from time-
to-time to fund Protection One's revolving credit agreement.
We have registered securities for sale with the Securities and Exchange
Commission (SEC). As of December 31, 1999, these included $400 million of
unsecured senior notes, $50 million of KGE first mortgage bonds and
approximately 11.2 million Western Resources common shares.
Our ability to issue additional debt and equity securities is restricted under
limitations imposed by the charters and the Mortgage and Deed of Trusts of
Western Resources and KGE.
Our mortgage prohibits additional first mortgage bonds from being issued (except
in connection with certain refundings) unless our unconsolidated net earnings
available for interest, depreciation and property retirement for a period of 12
consecutive months within 15 months preceding the issuance are not less than the
greater of twice the annual interest charges on, or 10% of the principal amount
of, all first mortgage bonds outstanding after giving effect to the proposed
issuance. Based on our results for the 12 months ended December 31, 1999, $410
million of first mortgage bonds could be issued (8.25% interest rate assumed).
Our bonds may be issued, subject to the restrictions in the preceding paragraph,
on the basis of property additions not subject to an unfunded prior lien and on
the basis of bonds which have been retired. As of December 31, 1999, we had
approximately $365 million of net bondable property additions not subject to an
unfunded prior lien entitling us to issue up to $219 million principal amount of
additional bonds. As of December 31, 1999, $125 million in additional first
mortgage bonds could be issued on the basis of retired bonds.
KGE's mortgage prohibits additional first mortgage bonds from being issued
(except in connection with certain refundings) unless KGE's net earnings before
income taxes and before provision for retirement and depreciation of property
for a period of 12 consecutive months within 15 months preceding the issuance
are not either less than two and one-half
8
<PAGE>
times the annual interest charges on, or 10% of the principal amount of, all KGE
first mortgage bonds outstanding after giving effect to the proposed issuance.
In addition, the issuance of bonds is subject to limitations based upon the
amount of bondable property additions. Based on KGE's results for the 12 months
ended December 31, 1999, approximately $1.0 billion principal amount of
additional KGE first mortgage bonds could be issued (8.25% interest rate
assumed) under the most restrictive tests in the mortgage. As of December 31,
1999, $17 million in additional bonds could be issued on the basis of retired
bonds.
We plan to sell, subject to market and other conditions, up to $500 million of
first mortgage bonds in 2000.
S&P, Fitch Investors Service (Fitch) and Moody's are independent credit-rating
agencies that rate our debt securities. These ratings indicate the agencies'
assessment of our ability to pay interest and principal on these securities.
As of March 24, 2000, ratings with these agencies were as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
Protection
Western Western KGE's Protection One
Resource Western Resources KGE's Senior one Senior
Mortgage Resources' Short-term Mortgage Unsecured Senior Subordinated
Bond Unsecured Debt Bond Debt Unsecured Unsecured
Rating Agency Rating Debt Rating Rating Rating debt Debt
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
S&P............. A- BBB A-2 BBB+ BBB BB- B
Fitch........... A- BBB+ F-2 A- -- BB B+
Moody's......... A3 Baa1 P-2 A3 Baa3 B2 Caa1
- --------------------------------------------------------------------------------------------------
</TABLE>
Credit rating agencies are applying more stringent guidelines when rating
utility companies due to increasing competition and utility investment in non-
utility businesses. In January 2000, in response to the terminated KCP&L merger
and unprofitable operations and liquidity issues at Protection One, Moody's
announced they were placing Western Resources and KGE ratings on review for
possible downgrade, S&P affirmed its ratings of Western Resources and KGE, but
said the outlook is negative, and Fitch placed the ratings of Western Resources
and KGE on RatingAlert - Negative. We anticipate that these rating agencies will
complete their reviews and lower our credit ratings in the near future, but we
cannot predict our new ratings.
In response to liquidity and operational issues and our announcement that we are
exploring strategic alternatives for Protection One, in November 1999, Moody's,
S&P and Fitch downgraded their ratings on Protection One's credit facility and
outstanding securities. On March 24, 2000, Moody's further downgraded their
ratings on Protection One's outstanding securities with outlook remaining
negative.
Should our short-term debt ratings be lowered, access to the commercial paper
market, when available, would be more costly and may require borrowing from our
existing revolving credit facilities.
Cash Flows from Operating Activities
Cash from operations decreased 6% in 1999 compared to 1998. This decrease was
primarily due to lower net income in 1999 and higher amortization expense
recorded by Protection One.
Cash Flows Used In Investing Activities
Cash used in investing activities decreased 62% primarily due to fewer
acquisitions of monitored services companies and customer accounts and fewer
purchases of marketable securities than in 1998. This decrease was offset by
higher capital expenditures in 1999.
Cash Flows from Financing Activities
Cash from financing activities decreased 86% because we issued less debt as a
result of fewer acquisitions by Protection One in 1999 compared to 1998. The
decrease in long-term debt proceeds was offset by increased short-term
borrowings used to fund Westar Capital's revolving credit agreement to
Protection One.
In July 1999, we announced a stock repurchase program for up to $25 million of
our common stock. In 1999, we purchased 900,000 shares of common stock at an
average price of $17.55 per share. In January 2000, we purchased another 540,000
shares of common stock at an average price of $17.01 per share to complete our
repurchase of approximately $25 million in common stock. All of these purchased
shares will be held in treasury and will be available for general corporate
purposes or resale at a future date. We may make additional repurchases of
shares from time-to-time in the open market or in private transactions. We may
also make additional purchases of Protection One bonds from time to time in the
open market.
Future Cash Requirements
We believe that internally generated funds and access to capital markets will be
sufficient to meet our operating and capital expenditure requirements, debt
service and dividend payments through the year 2002. Uncertainties affecting our
ability to meet these requirements with internally generated funds include the
factors affecting sales described above, the impact of inflation on operating
expenses, regulatory actions, and compliance with future environmental
regulations, and the impact of Protection One's operations and financial
condition.
Additionally, our ability to access capital markets will affect the new and
existing credit agreements we have available to meet our operating and capital
expenditure requirements, debt service and dividend payments.
We plan to install three new combustion turbine generators with an installed
capacity of approximately 300 MW. The first two units are scheduled to be placed
in operation in June 2000, and the third is scheduled to be placed in operation
in mid-2001. We estimate that the project will require $126 million in capital
resources through the completion of the projects in 2001.
In July 1999, we agreed with Empire to construct jointly a 500-megawatt combined
cycle generating plant, which Empire will operate. We estimate that our share of
the project will require an estimated $86 million in capital resources and that
we will own 40% of the generating plant. Construction of the plant began in the
fall of 1999 with operation expected to begin in the second quarter of 2001.
Our business requires a significant capital investment. We currently expect that
through the year 2002, we will need cash mostly for:
. Ongoing utility construction and maintenance programs designed to maintain
and improve facilities providing electric service.
. Improving operations within the monitored services business and the
acquisition of customer accounts.
Capital expenditures for 1999 and anticipated capital expenditures for 2000
through 2002 are as follows:
- --------------------------------------------------------------------------------
Fossil Nuclear Power Monitored
Generation Generation Delivery Services Other Total
- --------------------------------------------------------------------------------
(Dollars in Thousands)
1999.......... $ 143,900 $ 10,000 $ 89,200 $ 273,600 $ 20,200 $ 536,900
2000.......... 162,800 31,600 86,100 93,400 3,900 377,800
2001.......... 84,400 19,600 86,700 132,800 100 323,600
2002.......... 54,800 20,300 85,500 135,600 -- 296,200
- --------------------------------------------------------------------------------
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
Monitored Services includes capital expenditures for Protection One North
America and Protection One Europe, including purchases of customer accounts.
Other represents our commitment to fund our Affordable Housing Tax Credit
program.
These estimates are prepared for planning purposes and may be revised (See Note
12 of Notes to Consolidated Financial Statements). Actual expenditures may
differ from our estimates.
Maturities of long-term debt through 2004 are as follows:
- --------------------------------------------------------------------------------
Year Principal Amount
- --------------------------------------------------------------------------------
(Dollars in Thousands)
2000................................................................. $111,667
2001................................................................. 32,246
2002................................................................. 106,472
2003................................................................. 240,568
2004................................................................. 370,457
- --------------------------------------------------------------------------------
Capital Structure
Our capital structures at December 31, 1999 and 1998, were as follows:
- --------------------------------------------------------------------------------
1999 1998
- --------------------------------------------------------------------------------
Shareholders' Equity........................................... 37% 37%
Preferred stock................................................ 1% 1%
Western Resources obligated mandatorily
redeemable preferred securities of subsidiary
trust holding solely company subordinated
debentures................................................... 4% 4%
Long-term debt................................................. 58% 58%
------------
Total.......................................................... 100% 100%
- --------------------------------------------------------------------------------
Dividend Policy
Our board of directors reviews our dividend policy on an annual basis. Among the
factors the board of directors considers in determining our dividend policy are
earnings, cash flows, capitalization ratios, competition and regulatory
conditions. In January 2000, our board of directors declared a first-quarter
2000 dividend of 53 1/2 cents per share. In March 2000, we announced a new
dividend policy. See Note 24 of Notes to Consolidated Financial Statements for
further discussion.
OTHER INFORMATION
Electric Utility
City of Wichita Proceeding: In December 1999, the Wichita, Kansas, City Council
authorized the hiring of an outside consultant to determine the feasibility of
creating a municipal electric utility to replace KGE as the supplier of
electricity in Wichita. KGE's rates are currently 7% below the national average
for retail customers. The average rates charged to retail customers in
territories served by our KPL division are 19% lower than KGE's rates. The City
of Wichita has filed a complaint with the FERC requesting the FERC to equalize
the generation costs between KGE and KPL, in addition to other matters (see also
FERC Proceeding below). Customers within the Wichita metropolitan area account
for approximately 25% of our total energy sales.
KGE has an exclusive franchise with the City of Wichita to provide retail
electric service that expires March 2002. Under Kansas law, KGE will continue to
have the exclusive right to serve the customers in Wichita following the
expiration of the franchise, assuming the system is not municipalized.
KGE will oppose any attempt by the City of Wichita to eliminate it 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.
KCC Proceeding: On March 16, 2000, the Kansas Industrial Consumers (KIC), an
organization of commercial and industrial users of electricity in Kansas, filed
a complaint with the KCC requesting an investigation of Western Resources' and
KGE's rates. The KIC alleges that these rates are not based on current costs. We
will oppose this request vigorously but are unable to predict whether the KCC
will open an investigation.
FERC Proceeding: In September 1999, the City of Wichita filed a complaint with
the FERC against us, alleging improper affiliate transactions between KPL, one
of our divisions, and KGE, our wholly-owned subsidiary. The City of Wichita
requests the FERC to equalize the generation costs between KPL and KGE, in
addition to other matters. FERC has issued an order setting this matter for
hearing and has referred the case to a settlement judge. The hearing has been
suspended pending settlement discussions between the parties. We believe that
the City of Wichita's complaint is without merit and intend to defend against it
vigorously.
Competition and Deregulation: The United States electric utility industry is
evolving from a regulated monopolistic market to a competitive marketplace. The
1992 Energy Policy Act began deregulating the electricity market for generation.
The Energy Policy Act permitted the FERC to order electric utilities to allow
third parties the use of their transmission systems to sell electric power to
wholesale customers. A wholesale sale is defined as a utility selling
electricity to a "middleman," usually a city or its utility company, to resell
to the ultimate retail customer. During 1999, wholesale electric sales
represented approximately 14% of total electric sales, excluding power marketing
sales. In 1992, we agreed to open access of our transmission system for
wholesale transactions. FERC also requires us to provide transmission services
to others under terms comparable to those we provide ourselves. In December
1999, FERC issued an order (FERC Order 2000) encouraging formation of regional
transmission organizations (RTOs), whose purpose is to facilitate greater
competition at the wholesale level. Due to our participation in the formation of
the Southwest Power Pool RTO, we anticipate that FERC Order 2000 will not have a
material effect on us or our operations.
Various states have taken steps to allow retail customers to purchase electric
power from providers other than their local utility company. The Kansas
Legislature created a Retail Wheeling Task Force (the Task Force) in 1997 to
study the effects of a deregulated and competitive market for electric services.
Legislators, regulators, consumer advocates and representatives from the
electric industry made up the Task Force. Several bills were introduced to the
Kansas Legislature in the 1999 and 2000 legislative sessions, but none passed in
1999 and none are expected to pass in 2000. When retail wheeling will be
implemented by the legislature in Kansas remains uncertain.
If retail wheeling is implemented in Kansas, increased competition for retail
electricity sales may reduce our future electric utility earnings compared to
our historical electric utility earnings. Wholesale and industrial customers may
pursue cogeneration, self-generation, retail wheeling, municipalization or
relocation to other service territories in an attempt to cut their energy costs.
Our rates range from approximately 75% to 93% of the national average for retail
customers. Because of these reduced rates, we expect to retain a substantial
part of our current volume of sales volumes in a competitive environment. We
also expect we can
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
maintain profitable prices in a competitive environment, given how our current
rates compare to the national average rates. We offer competitive electric rates
for industrial improvement projects and economic development projects in an
effort to maintain and increase electric load.
Stranded Costs: The definition of stranded costs for a utility business is the
investment in and carrying costs on property, plant and equipment and other
regulatory assets which exceed the amount that can be recovered in a competitive
market. We currently apply accounting standards that recognize the economic
effects of rate regulation and record regulatory assets and liabilities related
to our fossil generation, nuclear generation and power delivery operations. If
we determine that we no longer meet the criteria of Statement of Financial
Accounting Standards No. 71, "Accounting for the Effects of Certain Types of
Regulation" (SFAS 71), we may have a material extraordinary non-cash charge to
operations. Reasons for discontinuing SFAS 71 accounting treatment include
increasing competition that restricts our ability to charge prices needed to
recover costs already incurred and a significant change by regulators from a
cost-based rate regulation to another form of rate regulation. We periodically
review SFAS 71 criteria and believe our net regulatory assets, including those
related to generation, are probable of future recovery. If we discontinue SFAS
71 accounting treatment based upon competitive or other events, we may
significantly impact the value of our net regulatory assets and our utility
plant investments, particularly the Wolf Creek nuclear generation facility.
Regulatory changes, including competition, could adversely impact our ability to
recover our investment in these assets. As of December 31, 1999, we have
recorded regulatory assets which are currently subject to recovery in future
rates of approximately $366 million. Of this amount, $218.2 million is a
receivable for income tax benefits previously passed on to customers. The
remainder of the regulatory assets are items that may give rise to stranded
costs, including debt issuance costs, deferred employee benefit costs, deferred
plant costs, and coal contract settlement costs.
In a competitive environment, we may not be able to fully recover our entire
investment in Wolf Creek. KGE presently owns 47% of Wolf Creek. We also may have
stranded costs from an inability to recover our environmental remediation costs
and long-term fuel contract costs in a competitive environment. If we determine
that we have stranded costs and we cannot recover our investment in these
assets, our future net utility income will be lower than our historical net
utility income has been unless we compensate for the loss of such income with
other measures.
Nuclear Decommissioning: Decommissioning is a nuclear industry term for the
permanent shut-down of a nuclear power plant. The Nuclear Regulatory Commission
(NRC) will terminate a plant's license and release the property for unrestricted
use when a company has reduced the residual radioactivity of a nuclear plant to
a level mandated by the NRC. The NRC requires companies with nuclear power
plants to prepare formal financial plans to fund decommissioning. These plans
are designed so that funds required for decommissioning will be accumulated
during the estimated remaining life of the related nuclear power plant.
The Financial Accounting Standards Board (FASB) is reviewing the accounting for
closure and removal costs, including decommissioning of nuclear power plants.
The FASB has issued an Exposure Draft "Accounting for Obligations Associated
with the Retirement of Long-Lived Assets." The proposed Statement is to be
effective for fiscal years beginning after June 15, 2001. If current accounting
practices for nuclear power plant decommissioning are changed, the following
could occur:
. Our annual decommissioning expense could be higher than in 1999
. The estimated cost for decommissioning could be recorded as a liability
(rather than as accumulated depreciation)
. The increased costs could be recorded as additional investment in the Wolf
Creek plant
We do not believe that such change, if required, would adversely affect our
operating results due to our current ability to recover decommissioning costs
through rates (See Note 12 of Notes to Consolidated Financial Statements).
Collective Bargaining Agreement: Our contract with the International Brotherhood
of Electrical Workers (IBEW) was renewed on January 20, 2000, and will be due
for renewal July 1, 2002. The contract covers approximately 1,475 employees. As
of December 31, 1999, we had 7,049 employees.
Year 2000 Issue: Our electric utility operations experienced no business
disruptions as a result of the transition from December 31, 1999, to January 1,
2000, or as a result of "leap day" on February 29, 2000. We estimated that total
costs to update all of our electric utility operating systems for Year 2000
readiness, excluding costs associated with WCNOC, would be approximately $6.3
million. As of December 31, 1999, we expensed $6.3 million for these purposes.
We expect to incur minimal cost in 2000 to complete remediation of less
important systems. We expect no Year 2000 issues to arise in 2000.
WCNOC experienced no business disruptions as a result of the transition from
December 31, 1999, to January 1, 2000, or as a result of "leap day" on February
29, 2000. WCNOC has estimated the costs to complete the Year 2000 project at
$3.5 million ($1.7 million, our share). As of December 31, 1999, WCNOC expensed
$3.2 million ($1.5 million our share), to complete remediation and testing of
mission critical systems necessary to continue to provide electrical service to
our customers. WCNOC expects to incur $0.2 million (our share) in 2000 to
complete remediation of less important systems. WCNOC expects no Year 2000
issues to arise in 2000.
Monitored Services
Attrition: During 1999, Protection One experienced an increase in customer
attrition. Total attrition for the twelve months ended December 31, 1999 was
14.0% compared to 9.4% for the same period ended December 31, 1998. Annualized
total attrition for the quarter ended December 31, 1999, was 14.7% compared to
16.0% for the quarter ended September 30, 1999.
Customer attrition by Protection One's business segments is summarized below for
the period ended December 31.
- --------------------------------------------------------------------------------
Trailing Twelve Month
December 31,
1999 1998
- --------------------------------------------------------------------------------
North America......................................... 16.0% 11.0%
Multifamily........................................... 7.6% 4.6%
Europe/(1)/........................................... 9.6% --
Total Protection One................................ 14.0% 9.4%
- --------------------------------------------------------------------------------
/(1)/ Protection One acquired the European operations in 1998.
Sale of Mobile Services Group: On August 25, 1999, Protection One sold its
Mobile Services Group to ATX Technologies (ATX). The sales price was
approximately $20 million in cash plus a note and a preferred stock investment
in ATX. In August, Protection One recorded a gain on the sale of approximately
$11 million, net of tax.
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
Year 2000 Issue: Protection One experienced no business disruptions as a result
of the transition from December 31, 1999 to January 1, 2000, or as a result of
"leap day" on February 29, 2000. As of December 31, 1999, Protection One
expensed $4.3 million to complete remediation and testing of mission critical
systems necessary to continue to provide monitored services to its customers.
Protection One expects to incur minimal costs in 2000 to complete remediation of
less important systems. Protection One expects no Year 2000 issues to arise in
2000.
Related Party Transactions
We and ONEOK have shared services agreements in which we provide and bill for
facilities, utility field work, information technology, customer support, bill
processing and human resources services to one another. Payments for these
services are based upon various hourly charges, negotiated fees and out-of-
pocket expenses. In 1999 and 1998, ONEOK paid us $5.6 million and $4.9 million,
net of what we owed ONEOK, for services.
As a result of Protection One not meeting its debt covenants, in December 1999,
Westar Capital, acquired the debt and assumed the lenders' obligations under
Protection One's revolving credit facility. We loaned Westar Capital
approximately $225 million for this purpose.
As of February 29, 2000, we had spent $42.4 million to acquire Protection One
non-convertible debt securities through open market transactions. In the first
quarter of 2000, Westar Capital transferred to Protection One certain
outstanding Protection One debt securities for partial payment of certain
outstanding intercompany amounts owed to Protection One.
On February 29, 2000, Westar Capital purchased the continental European and
United Kingdom operations of Protection One, and certain investments held by a
subsidiary of Protection One for an aggregate purchase price of $244 million.
Westar Capital paid approximately $183 million in cash and transferred
Protection One debt securities with a market value of approximately $61 million
to Protection One. Westar Capital has agreed to pay Protection One a portion of
the net gain, if any, on a subsequent sale of the European businesses on a
declining basis over the four years following the closing. Cash proceeds from
the transaction were used to reduce the outstanding balance owed to Westar
Capital on Protection One's revolving credit facility. Concurrently, Westar
Capital and Protection One amended the revolving credit agreement to reduce the
facility from $250 million to $115 million and to change the maturity date to
January 2, 2001. For approved acquisitions, an additional $40 million could be
made available under the facility. No gain or loss was recorded on this
intercompany transaction and the net book value of the assets was unaffected.
We may acquire additional Protection One debt securities. The timing and terms
of purchases, and the amount of debt actually purchased, will be based on market
conditions and other factors. Purchases are expected to be made in the open
market or through negotiated transactions. Because Protection One's debt
currently trades at less than its carrying value, we would expect to realize an
extraordinary gain on extinguishment of debt on any purchases.
Investment in Gas Compression Company
As of December 31, 1999, we owned less than 10% of the outstanding common stock
of a gas compression company through our Westar Capital subsidiary. We have
determined that this investment is not strategic to our ongoing business and are
selling the common stock. During 1999, we recorded a $9.3 million gain on the
sale of a portion of this investment. During the first quarter of 2000, we sold
a significant portion of this investment and realized a gain of $72.6 million
through March 16, 2000.
Market Risk Disclosure
Market Price Risks: We are exposed to market risk, including changes in
commodity prices, equity instrument investment prices and interest rates.
Commodity Price Exposure: In 1999, we engaged in both trading and non-trading
activities in our commodity price risk management activities. We primarily
traded electricity commodities. We utilized a variety of financial instruments,
including forward contracts involving cash settlements or physical delivery of
an energy commodity, options, swaps which require payments (or receipt of
payments) from counterparties based on the differential between specified prices
for the related commodity, and futures traded on electricity and natural gas.
We were involved in trading activities primarily to minimize risk from market
fluctuations, to maintain a market presence and to enhance system reliability.
We attempted to balance our physical and financial purchase and sale contracts
in terms of quantities and contract terms. Net open positions existed or were
established due to the origination of new transactions and our assessment of,
and response to, changing market conditions. To the extent we had open
positions, we were exposed to the risk that fluctuating market prices could
adversely impact our financial position or results from operations. In 2000, we
expect to operate our trading activities in a similar manner as 1999.
We manage and measure the exposure of our trading portfolio using a
variance/covariance value-at-risk (VAR) model, which simulates forward price
curves in the energy markets to estimate the size of future potential losses.
The quantification of market risk using VAR methodologies provides a consistent
measure of risk across diverse energy markets and products.
The use of the VAR method requires a number of key assumptions including the
selection of a confidence level for losses and the estimated holding period. We
express VAR as a potential dollar loss based on a 95% confidence level using a
one-day holding period. Our Risk Oversight Committee sets the VAR limit. The
high, low and average VAR amounts for the year ended December 31, 1999, were
$395,115, $26,039 and $68,832. We employ additional risk control mechanisms such
as stress testing, daily loss limits, and commodity position limits. We expect
to use the same VAR model and VAR limits in 2000.
We have considered a number of risks and costs associated with the future
contractual commitments included in our energy portfolio. These risks include
credit risks associated with the financial condition of counterparties, product
location (basis) differentials and other risks which management policy dictates.
The counterparties in our portfolio are primarily large energy marketers and
major utility companies. The creditworthiness of our counterparties could
positively or negatively impact our overall exposure to credit risk. We maintain
credit policies with regard to our counterparties that, in management's view,
minimize overall credit risk.
We are also exposed to commodity price changes outside of trading activities. We
use derivatives for non-trading purposes primarily to reduce exposure relative
to the volatility of cash market prices. From 1998 to 1999, we experienced a 27%
increase in price per MW of electricity purchased for utility operations. If we
were to have a similar increase from 1999 to 2000, given the amount of power
purchased
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
for utility operations during 1999, we would have an exposure of approximately
$6.3 million of net income. Due to the volatility of the power market, there are
no indications that past performance can be used to predict the future.
We use a mix of various fuel types to operate our system. From 1998 to 1999, we
experienced a 4% increase in the average price per MMBtu of natural gas
purchased for utility operations. From 1998 to 1999, we experienced less than a
1% change in price per MMBtu for all fuel types purchased for our system. Based
on MMBtu's of natural gas and fuel oil burned during 1999, we would have
exposure in 2000 of approximately $4.7 million of net income for a 10% change in
average price paid per MMBtu. Due to the volatility of natural gas prices, there
are no indications that past performance can be used to predict the future.
Quantities of natural gas and electricity could vary dramatically year to year
based on weather, unit outages and nuclear refueling.
Equity Price Risk: We had approximately $111.9 million of equity securities as
of December 31, 1999. Through March 16, 2000, we sold a material portion of
these equity securities and recognized a $72.6 million gain. Following the sale
of these equity securities, we have $29.9 million of equity securities. We do
not hedge these investments and are exposed to the risk of changing market
prices. We classify these securities as available-for-sale for accounting
purposes and mark them to market on the balance sheet at the end of each period
as an adjustment to shareholders' equity. Declines in market value which are
other than temporary are recognized in income. The market price of equity
securities still owned at December 31, 1999, increased by 34% from 1998 to 1999.
During the first quarter of 2000, the market price of these equity securities
increased 5%. An immediate 10% change in the market price of our remaining
equity securities would have a $3.0 million effect on fair value.
Interest Rate Exposure: We have approximately $827.4 million of variable rate
debt, including current maturities of fixed rate debt, as of December 31, 1999.
Our weighted average interest rate increased from 5.94% at December 31, 1998 to
6.96% at December 31, 1999. A 100 basis point change in each debt series
benchmark rate would impact net income on an annual basis by approximately $9.2
million.
In response to the terminated KCP&L merger and unprofitable operations and
liquidity issues at Protection One, Moody's, S&P, and Fitch are reviewing our
securities ratings. Should our short-term debt ratings be lowered, access to the
commercial paper market, when available, would be more costly and may require
borrowing from our existing revolving credit facilities. We cannot predict the
market conditions or our credit ratings at the time we may borrow from these
facilities; and therefore, cannot predict how much higher our interest expense
might be. Due to Protection One's liquidity and operational issues and the
announcement by Western Resources that we are exploring strategic alternatives
for Protection One, in November 1999, Moody's, S&P and Fitch downgraded their
ratings on Protection One's credit facility and outstanding securities. On March
24, 2000, Moody's further downgraded their ratings on our outstanding securities
with outlook remaining negative.
During the first quarter of 2000, we sold our remaining portfolio of marketable
debt securities and realized a gain of approximately $24.9 million. Therefore,
we have no further interest rate exposure related to marketable debt securities.
Foreign Currency Exchange Rates: We have overseas operations with functional
currencies other than the United States dollar. As of December 31, 1999, the
unrealized loss on currency translation, presented as a separate component of
stockholders' equity and reported within other comprehensive income was
approximately $1.3 million pretax. A 10% change in the currency exchange rates
would have an immaterial effect on other comprehensive income.
Pronouncements Issued but Not Yet Effective
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133).
In June 1999, the FASB issued Statement No. 137 "Accounting for Derivative
Instruments and Hedging Activities-Deferral of the Effective Date of FASB
Statement No. 133." SFAS 133 establishes accounting and reporting standards
requiring that every derivative instrument, including certain derivative
instruments embedded in hybrid contracts, be recorded in the balance sheet as
either an asset or liability measured at its fair value. With respect to hybrid
contracts, a company may elect to apply SFAS 133, as amended, to (1) all hybrid
contracts, (2) only those hybrid contracts that were issued, acquired, or
substantively modified after December 31, 1997, or (3) only those hybrid
contracts that were issued, acquired, or substantively modified after December
31, 1998.
SFAS 133 requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met and that
a company must formally document, designate and assess the effectiveness of
transactions that receive hedge accounting. SFAS 133, in part, allows special
hedge accounting for fair value and cash flow hedges. We have no fair value
hedges as of December 31, 1999. SFAS 133 provides that the effective portion of
the gain or loss on a derivative instrument designated and qualifying as a cash
flow hedging instrument be reported as a component of other comprehensive income
and be reclassified into earnings in the same period or periods during which the
hedged forecasted transaction affects earnings. The remaining gain or loss on
the derivative instrument, if any, must be recognized currently in earnings. If
SFAS 133 were required to be applied to cash flow hedges in place at December
31, 1999, changes in the fair value of options and forwards would contribute
approximately $1.3 million of additional loss to other comprehensive income for
the twelve months ended December 31, 1999, if these hedges were 100% effective.
We are still in the process of evaluating the effectiveness of these hedges.
We use derivatives for non-trading purposes primarily to reduce exposure
relative to the volatility of cash market prices. Specifically, anticipated
purchases of electricity are being hedged using options and forwards. We
currently record our cash flow hedges as assets and liabilities on our
Consolidated Balance Sheet. We mark the hedges to market on the Consolidated
Balance Sheet at the end of each period. We recognize the realized gains and
losses in net income in the period the options and forwards are settled.
SFAS 133, as amended, is effective for fiscal years beginning after June 15,
2000. SFAS 133 cannot be applied retroactively. We are currently evaluating
commodity contracts and financial instruments to determine what, if any, effect
of adopting SFAS 133 might have on our financial statements. We have not yet
quantified all effects of adopting SFAS 133 on our financial statements;
however, SFAS 133 could increase volatility in earnings and other comprehensive
income. We plan to adopt SFAS 133 as of January 1, 2001.
13
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
December 31, (Dollars in Thousands) 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.................................................................... $ 15,827 $ 16,394
Accounts receivable (net).................................................................... 229,200 218,243
Inventories and supplies (net)............................................................... 112,392 95,590
Marketable securities........................................................................ 177,128 288,077
Prepaid expenses and other................................................................... 68,421 57,225
-----------------------------
Total Current Assets....................................................................... 602,968 675,529
-----------------------------
PROPERTY, PLANT AND EQUIPMENT (NET)........................................................... 3,889,444 3,799,916
-----------------------------
OTHER ASSETS:
Investment in ONEOK.......................................................................... 590,109 615,094
Customer accounts (net)...................................................................... 1,138,902 1,014,428
Goodwill (net)............................................................................... 1,102,157 1,188,253
Regulatory assets............................................................................ 366,004 364,213
Other........................................................................................ 318,622 293,995
-----------------------------
Total Other Assets......................................................................... 3,515,794 3,475,983
-----------------------------
TOTAL ASSETS........................................................................... $ 8,008,206 $ 7,951,428
=============================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt......................................................... $ 111,667 $ 165,838
Short-term debt.............................................................................. 705,421 312,472
Accounts payable............................................................................. 132,834 127,834
Accrued liabilities.......................................................................... 226,786 252,367
Accrued income taxes......................................................................... 40,328 32,942
Deferred security revenues................................................................... 61,148 57,703
Other........................................................................................ 73,011 85,690
-----------------------------
Total Current Liabilities.................................................................. 1,351,195 1,034,846
-----------------------------
LONG-TERM LIABILITIES:
Long-term debt (net)......................................................................... 2,883,066 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............................................. 982,548 938,659
Minority interests........................................................................... 193,499 205,822
Deferred gain from sale-leaseback............................................................ 198,123 209,951
Other........................................................................................ 279,451 316,245
-----------------------------
Total Long-Term Liabilities................................................................ 4,756,687 4,953,741
-----------------------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Cumulative preferred stock................................................................... 24,858 24,858
Common stock, par value $5 per share, authorized
150,000,000 shares, outstanding 67,401,657 and
65,909,442 shares, respectively............................................................. 341,508 329,548
Paid-in capital.............................................................................. 820,945 775,337
Retained earnings............................................................................ 691,016 823,590
Accumulated other comprehensive income....................................................... 37,788 9,508
Treasury stock, at cost, 900,000 and 0 shares, respectively.................................. (15,791) --
-----------------------------
Total Shareholders' Equity................................................................. 1,900,324 1,962,841
-----------------------------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY.............................................. $ 8,008,206 $ 7,951,428
=============================
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of this
statement.
14
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
=================================================================================================================
Year Ended December 31, (Dollars in Thousands, Except Per Share Amounts) 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SALES:
Energy............................................................. $ 1,430,982 $1,612,959 $1,999,418
Security........................................................... 605,176 421,095 152,347
--------------------------------------
Total Sales..................................................... 2,036,158 2,034,054 2,151,765
--------------------------------------
COST OF SALES:
Energy............................................................. 478,982 691,468 928,723
Security........................................................... 184,005 131,791 38,800
--------------------------------------
Total Cost of Sales............................................. 662,987 823,259 967,523
--------------------------------------
GROSS PROFIT......................................................... 1,373,171 1,210,795 1,184,242
--------------------------------------
OPERATING EXPENSES:
Operating and maintenance expense.................................. 337,068 337,507 384,313
Depreciation and amortization...................................... 407,007 280,673 256,725
Selling, general and administrative expense........................ 342,652 263,310 316,479
International power development costs.............................. (5,632) 98,916 --
Deferred merger costs.............................................. 17,600 -- 48,008
Monitored services special charge.................................. -- -- 24,292
--------------------------------------
Total Operating Expenses........................................ 1,098,695 980,406 1,029,817
--------------------------------------
INCOME FROM OPERATIONS............................................... 274,476 230,389 154,425
--------------------------------------
OTHER INCOME (EXPENSE):
Impairment of marketable securities................................ (76,166) -- --
Investment earnings................................................ 35,979 49,797 44,978
Gain on sale of Tyco securities.................................... -- -- 864,253
Minority interests................................................. 12,934 382 3,586
Other.............................................................. 14,234 6,274 9,071
---------------------------------------
Total Other Income (Expense).................................... (13,019) 56,453 921,888
---------------------------------------
EARNINGS BEFORE INTEREST AND TAXES................................... 261,457 286,842 1,076,313
---------------------------------------
INTEREST EXPENSE..................................................... 294,104 226,120 193,808
---------------------------------------
(LOSS) EARNINGS BEFORE INCOME TAXES.................................. (32,647) 60,722 882,505
---------------------------------------
INCOME TAX (BENEFIT) EXPENSE......................................... (33,364) 14,557 382,987
---------------------------------------
NET INCOME BEFORE EXTRAORDINARY GAIN................................. 717 46,165 499,518
---------------------------------------
EXTRAORDINARY GAIN, NET OF TAX....................................... 11,742 1,591 --
---------------------------------------
NET INCOME........................................................... 12,459 47,756 499,518
---------------------------------------
PREFERRED AND PREFERENCE DIVIDENDS................................... 1,129 3,591 4,919
---------------------------------------
EARNINGS AVAILABLE FOR COMMON STOCK.................................. $ 11,330 $ 44,165 $ 494,599
=======================================
AVERAGE COMMON SHARES OUTSTANDING.................................... 67,080,281 65,633,743 65,127,803
BASIC EARNINGS PER AVERAGE COMMON SHARE OUTSTANDING:
Earnings available for common stock before extraordinary gain...... $(0.01) $ 0.65 $ 7.59
Extraordinary gain................................................. 0.18 0.02 --
---------------------------------------
EARNINGS AVAILABLE FOR COMMON STOCK.................................. $ 0.17 $ 0.67 $ 7.59
=======================================
DIVIDENDS DECLARED PER COMMON SHARE.................................. $ 2.14 $ 2.14 $ 2.10
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of this
statement.
15
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
=================================================================================================================
Year Ended December 31, (Dollars in Thousands) 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET INCOME........................................................... $ 12,459 $ 47,756 $ 499,518
-------------------------------------
OTHER COMPREHENSIVE INCOME (LOSS), BEFORE TAX:
Unrealized holding (losses) gains on marketable
securities arising during the year............................... (55,420) (17,244) 25,248
Less: Reclassification adjustment for losses
included in net income........................................... 102,417 14,029 --
-------------------------------------
Unrealized gain (loss) on marketable securities (net).............. 46,997 (3,215) 25,248
Unrealized loss on currency translation............................ (115) (1,026) --
-------------------------------------
Other comprehensive income (loss), before tax.................... 46,882 (4,241) 25,248
-------------------------------------
INCOME TAX (BENEFIT) EXPENSE......................................... 18,602 (1,630) 13,129
-------------------------------------
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX........................ 28,280 (2,611) 12,119
-------------------------------------
COMPREHENSIVE INCOME................................................. $ 40,739 $ 45,145 $ 511,637
=====================================
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of this
statement.
16
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, (Dollars in Thousands) 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ...................................................................... $ 12,459 $ 47,756 $ 499,518
Adjustments to reconcile net income to
net cash provided by operating activities:
Extraordinary gain............................................................ (11,742) (1,591) --
Depreciation and amortization ................................................ 407,007 280,673 256,725
Amortization of gain on sale-leaseback ....................................... (11,828) (11,828) (11,281)
Equity in earnings from investments .......................................... (8,199) (6,064) (25,405)
Gain on sale of Mobile Services .............................................. (17,249) -- --
Minority interests ........................................................... (12,934) 382 3,586
(Gain)/loss on sale of securities ............................................ 26,251 14,029 (864,253)
Impairment of marketable securities .......................................... 76,166 -- --
Accretion of debt premium .................................................... (6,799) 3,034 1,026
International development costs .............................................. (5,632) 98,916 --
Net deferred taxes ........................................................... (16,992) (49,317) (25,306)
Deferred merger costs ........................................................ 17,600 -- 48,008
Monitored services special charge ............................................ -- -- 24,292
Changes in working capital items (net of effects from acquisitions):
Accounts receivable (net) ................................................. (3,824) 118,844 14,156
Inventories and supplies (net) ............................................ (15,024) (8,000) 3,249
Prepaid expenses and other ................................................ (17,742) (26,988) 9,230
Accounts payable .......................................................... 5,000 (33,613) (48,298)
Accrued liabilities ....................................................... (20,152) (42,411) 68,623
Accrued income taxes ...................................................... 7,386 5,582 9,869
Deferred revenue .......................................................... 3,479 (2,237) 670
Other ..................................................................... (3,518) 58,519 (9,254)
Changes in other assets and liabilities....................................... (30,485) (45,474) (33,251)
-------------------------------------
Net cash flows from (used in) operating activities......................... 373,228 400,212 (78,096)
-------------------------------------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Additions to property, plant and equipment (net) ................................ (275,744) (182,885) (207,989)
Customer account acquisitions ................................................... (241,000) (277,667) (45,163)
Monitored services acquisitions, net of cash acquired ........................... (27,409) (549,196) (438,717)
Divestiture of Mobile Services .................................................. 19,087 -- --
Proceeds from issuance of stock by subsidiary (net) ............................. -- 45,565 --
Purchases of marketable securities .............................................. (12,003) (261,036) (10,461)
Proceeds from sale of marketable securities ..................................... 73,456 27,895 1,533,530
Investment in Paradigm .......................................................... (35,883) -- --
Sale of ONEOK Stock ............................................................. 28,101 -- --
Purchase of Protection One bonds ................................................ (19,671) -- --
Other investments (net) ......................................................... 4,251 (91,451) (45,318)
-------------------------------------
Net cash flows (used in) from investing activities............................. (486,815) (1,288,775) 785,882
-------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term debt (net) ........................................................... 392,949 75,972 (744,240)
Proceeds of long-term debt ...................................................... 16,000 1,096,238 520,000
Retirements of long-term debt ................................................... (178,350) (167,068) (293,977)
Issuance of common stock (net) .................................................. 43,245 17,284 25,042
Redemption of preference stock .................................................. -- (50,000) --
Cash dividends paid ............................................................. (145,033) (144,077) (141,727)
Acquisition of treasury stock ................................................... (15,791) -- --
-------------------------------------
Net cash flows from (used in) financing activities............................. 113,020 828,349 (634,902)
-------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS .............................. (567) (60,214) 72,884
CASH AND CASH EQUIVALENTS:
Beginning of the period.......................................................... 16,394 76,608 3,724
-------------------------------------
End of the period ............................................................... $ 15,827 $ 16,394 $ 76,608
=====================================
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of this
statement.
17
<PAGE>
CONSOLIDATED STATEMENTS OF CUMULATIVE PREFERRED STOCK
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Year Ended December 31, (Dollars in Thousands) 1999 1998
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CUMULATIVE PREFERRED STOCK:
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 CUMULATIVE PREFERRED STOCK................................................................. $24,858 $24,858
==================
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of this
statement.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, (Dollars in Thousands) 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CUMULATIVE PREFERRED AND PREFERENCE STOCK:
Beginning balance................................................................. $ 24,858 $ 74,858 $ 74,858
Redemption of preference stock.................................................... -- (50,000) --
----------------------------------------
Ending balance.................................................................... 24,858 24,858 74,858
----------------------------------------
COMMON STOCK:
Beginning balance................................................................. 329,548 327,048 323,126
Issuance of common stock.......................................................... 11,960 2,500 3,922
----------------------------------------
Ending balance.................................................................... 341,508 329,548 327,048
----------------------------------------
PAID-IN CAPITAL:
Beginning balance................................................................. 775,337 760,553 739,433
Expenses on common stock.......................................................... -- -- (5)
Issuance of common stock.......................................................... 45,608 14,784 21,125
----------------------------------------
Ending balance.................................................................... 820,945 775,337 760,553
----------------------------------------
RETAINED EARNINGS:
Beginning balance................................................................. 823,590 919,911 562,121
Net income........................................................................ 12,459 47,756 499,518
Dividends on preferred and preference stock....................................... (1,129) (3,591) (4,919)
Dividends on common stock......................................................... (143,904) (140,486) (136,809)
----------------------------------------
Ending balance.................................................................... 691,016 823,590 919,911
----------------------------------------
ACCUMULATED OTHER COMPREHENSIVE INCOME:
Beginning balance................................................................. 9,508 12,119 --
Unrealized (loss) gain on marketable securities................................... 46,997 (3,215) 25,248
Unrealized loss on currency translation........................................... (115) (1,026) --
Income tax benefit (expense)...................................................... (18,602) 1,630 (13,129)
----------------------------------------
Ending balance.................................................................... 37,788 9,508 12,119
----------------------------------------
TREASURY STOCK:
Beginning balance................................................................. -- -- --
Acquisition of treasury stock..................................................... (15,791) -- --
----------------------------------------
Ending balance.................................................................... (15,791) -- --
----------------------------------------
TOTAL SHAREHOLDERS' EQUITY.......................................................... $1,900,324 $1,962,841 $2,094,489
========================================
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of this
statement.
18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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 628,000 customers in Kansas and providing monitored
services to approximately 1.6 million customers in North America, the United
Kingdom and continental Europe. 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. 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. Our investments in Protection One
and ONEOK are owned by Westar Capital, Inc. (Westar Capital), a wholly-owned
subsidiary.
Principles of Consolidation: The company prepares its financial statements in
conformity with accounting principles generally accepted in the United States.
The accompanying consolidated financial statements include the accounts of
Western Resources and its wholly-owned and majority-owned subsidiaries. All
material intercompany accounts and transactions have been eliminated. Common
stock investments that are not majority-owned are accounted for using the equity
method when the company's investment allows it the ability to exert significant
influence.
The company currently applies accounting standards for its rate regulated
electric business that recognize the economic effects of rate regulation in
accordance with Statement of Financial Accounting Standards No. 71, "Accounting
for the Effects of Certain Types of Regulation," (SFAS 71) and, accordingly, has
recorded regulatory assets and liabilities when required by a regulatory order
or when it is probable, based on regulatory precedent, that future rates will
allow for recovery of a regulatory asset.
Use of Management's Estimates: The preparation of financial statements require
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Consolidated Statements of Cash Flows: For purposes of the Consolidated
Statements of Cash Flows, the company considers highly liquid collateralized
debt instruments purchased with a maturity of three months or less to be cash
equivalents. Cash paid for interest and income taxes for each of the years ended
December 31, are as follows:
- -------------------------------------------------------------------------------
1999 1998 1997
- -------------------------------------------------------------------------------
(Dollars in Thousands)
Interest on financing activities
(net of amount capitalized)............... $298,802 $220,848 $193,468
Income taxes.............................. 784 47,196 404,548
- -------------------------------------------------------------------------------
During 1997, the company contributed the net assets of its natural gas business
totaling approximately $594 million to ONEOK in exchange for an ownership
interest of 45% in ONEOK.
Available-for-sale Securities: The company classifies marketable equity and debt
securities accounted for under the cost method as available-for-sale. These
securities are reported at fair value based on quoted market prices. Cumulative,
temporary unrealized gains and losses, net of the related tax effect, are
reported as a separate component of shareholders' equity until realized. Current
temporary changes in unrealized gains and losses are reported as a component of
other comprehensive income.
The following table summarizes the company's investments in marketable
securities as of December 31:
- --------------------------------------------------------------------------------
Gross Unrealized
Cost Gains Losses Fair Value
- --------------------------------------------------------------------------------
(Dollars in Thousands)
1999:
Equity securities................ $ 43,124 $ 70,407 $ (1,628) $111,903
Debt securities.................. 65,225 -- -- 65,225
-------------------------------------------
Total........................... $108,349 $ 70,407 $ (1,628) $177,128
===========================================
1998:
Equity securities................ $ 94,369 $ 45,685 $ (10,182) $129,872
Debt securities.................. 172,129 -- (13,924) 158,205
-------------------------------------------
Total........................... $266,498 $ 45,685 $ (24,106) $288,077
===========================================
Proceeds from the sales of equity and debt securities were $73.5 million in 1999
and $27.9 million in 1998. In 1997, the only available-for-sale security sold
was an investment in Tyco International common stock (See Note 18). The gross
realized gains from sales of equity and debt investments were $12.6 million in
1999 and $2.0 million in 1998. The gross realized losses from sales of equity
and debt investments were $38.8 million in 1999 and $16.1 million in 1998.
Property, Plant and Equipment: Property, plant and equipment is stated at cost.
For utility plant, cost includes contracted services, direct labor and
materials, indirect charges for engineering, supervision, general and
administrative costs and an allowance for funds used during construction
(AFUDC). The AFUDC rate was 6.00% in 1999, 6.00% in 1998 and 5.80% in 1997. The
cost of additions to utility plant and replacement units of property are
capitalized. Maintenance costs and replacement of minor items of property are
charged to expense as incurred. When units of depreciable property are retired,
the original cost and removal cost, less salvage value, are charged to
accumulated depreciation.
In accordance with regulatory decisions made by the Kansas Corporation
Commission (KCC), the acquisition premium of approximately $801 million
resulting from the acquisition of KGE in 1992 is being amortized over 40 years.
The acquisition premium is classified as electric plant in service. Accumulated
amortization totaled $88.1 million as of December 31, 1999, and $68 million as
of December 31, 1998.
Depreciation: Utility plant is depreciated on the straight-line method at rates
approved by regulatory authorities. Utility plant is depreciated on an average
annual composite basis using group rates that approximated 2.92% during 1999,
2.88% during 1998 and 2.89% during 1997. Nonutility property, plant and
equipment is depreciated on a straight-line basis over the estimated useful
lives of the related assets.
19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Inventories and Supplies: Inventories and supplies for the company's utility
business are stated at average cost. Inventories, comprised of alarm systems and
parts, are stated at the lower of average cost or market.
Nuclear Fuel: The cost of nuclear fuel in process of refinement, conversion,
enrichment and fabrication is recorded as an asset at original cost and is
amortized to expense based upon the quantity of heat produced for the generation
of electricity. The accumulated amortization of nuclear fuel in the reactor was
$29.3 million at December 31, 1999, and $39.5 million at December 31, 1998.
Customer Accounts: Customer accounts are stated at cost. The cost includes
amounts paid to dealers and the estimated fair value of accounts acquired in
business acquisitions. Internal costs incurred in support of acquiring customer
accounts are expensed as incurred.
Protection One historically amortized the costs it allocated to its customer
accounts by using the straight-line method over a ten-year life. The
straight-line method, indicated in Accounting Principles Board Opinion No. 17 as
the appropriate method for such assets, has been the predominant method used to
amortize customer accounts in the monitored services industry. Protection One's
management is not aware of whether the economic life or the rate of realization
for Protection One's customer accounts differ materially from other monitored
services companies.
The choice of a ten-year life was based on Protection One's estimates and
judgments about the amounts and timing of expected future revenues from these
assets, the rate of attrition of such revenue over customer life, and average
customer account life. Ten years was used because, in Protection One's opinion,
it would adequately match amortization cost with anticipated revenue from those
assets even though many accounts were expected to produce revenue over periods
substantially longer than ten years. Effectively, it expensed the asset ratably
over an "expected average customer life" that was shorter than the expected life
of the revenue stream, thus implicitly giving recognition to projected revenues
for a period beyond ten years.
Protection One conducted a comprehensive review of its amortization policy
during the third quarter of 1999. This review was performed specifically to
evaluate the historic amortization policy in light of the inherent declining
revenue curve over the life of a pool of customer accounts and Protection One's
historical attrition experience. After completing the review, Protection One
identified three distinct pools, each of which has distinct attributes that
effect differing attrition characteristics. The pools correspond to Protection
One's North America, Multifamily and Europe business segments. For the North
America and Europe pools, the analyzed data indicated that Protection One can
expect attrition to be greatest in years one through five of asset life and that
a change from a straight-line to a declining balance (accelerated) method would
more closely match future amortization cost with the estimated revenue stream
from these assets. Protection One has elected to change to that method. No
change was made in the method used for the Multifamily pool.
Protection One's amortization rates for the North America and Europe customer
pools consider the average estimated remaining life and historical and projected
attrition rates. The average estimated remaining life for each customer pool is
as follows:
- --------------------------------------------------------------------------------
Average
Estimated
Remaining Life
Pool (Years) Method
- --------------------------------------------------------------------------------
North America 8-10 Ten-year 130% declining balance
Europe 10 Ten-year 125% declining balance
Multifamily 12 Ten-year straight-line
- --------------------------------------------------------------------------------
Adoption of the declining balance method effectively shortens the estimated
expected average customer life for these two customer pools, and does so in a
way that does not make it possible to distinguish the effect of a change in
method (straight-line to declining balance) from the change in estimated lives.
In such cases, generally accepted accounting principles require that the effect
of such a change be recognized in operations in the period of the change, rather
than as a cumulative effect of a change in accounting principle. Protection One
changed to the declining balance method in the third quarter of 1999.
Accordingly, the effect of the change in accounting principle increased
Protection One's amortization expense reported in the third quarter of 1999 by
$47 million. Protection One's accumulated amortization recorded on its balance
sheet would have been approximately $41 million higher, through the end of the
second quarter of 1999, if it had historically used the declining balance
method.
In accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of," long-lived assets held and
used by Protection One are evaluated for recoverability on a periodic basis or
as circumstances warrant. An impairment would be recognized when the
undiscounted expected future operating cash flows by customer pool derived from
customer accounts is less than the carrying value of capitalized customer
accounts and goodwill.
Due to the high level of customer attrition experienced in 1999 and the decline
in market value of Protection One's publicly traded equity and debt securities,
Protection One performed an impairment test on its customer account asset in the
fourth quarter and concluded that no impairment has occurred. Protection One
also reevaluated its amortization estimates and concluded no change was needed.
Goodwill: Goodwill represents the excess of the purchase price over the fair
value of net assets acquired by Protection One. Protection One has historically
amortized goodwill on a straight-line basis over 40 years. The carrying value of
goodwill was included in Protection One's evaluation of recoverability of
customer accounts. No reduction in the carrying value was necessary at December
31, 1999.
In conjunction with the impairment test for customer accounts, Protection One
re-evaluated the original assumptions and rationale utilized in the
establishment of the carrying value and estimated useful life of goodwill.
Protection One concluded that due to continued losses and increased levels
20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
of attrition experienced in 1999, the estimated useful life of goodwill should
be reduced from 40 years to 20 years. As of January 1, 2000, the remaining
goodwill, net of accumulated amortization, will be amortized over its remaining
useful life based on a 20-year life. On Protection One's existing account base,
Protection One anticipates that this will result in an increase in annual
goodwill amortization of approximately $34 million prospectively. Accumulated
amortization was $62.7 million and $31.1 million at December 31, 1999 and
December 31, 1998.
Regulatory Assets and Liabilities: Regulatory assets represent probable future
revenue associated with certain costs that will be recovered from customers
through the ratemaking process. The company has recorded these regulatory assets
in accordance with SFAS 71. If the company were required to terminate
application of that statement for all of its regulated operations, the company
would have to record the amounts of all regulatory assets and liabilities in its
Consolidated Statements of Income at that time. The company's earnings would be
reduced by the total amount in the table below, net of applicable income taxes.
Regulatory assets reflected in the consolidated financial statements are as
follows:
- --------------------------------------------------------------------------------
December 31, 1999 1998
- --------------------------------------------------------------------------------
(Dollars in Thousands)
Recoverable taxes................................. $218,239 $ 205,416
Debt issuance costs............................... 68,239 73,635
Deferred employee benefit costs................... 36,251 36,128
Deferred plant costs.............................. 30,306 30,657
Coal contract settlement costs.................... 7,957 12,259
Other regulatory assets........................... 5,012 6,118
---------------------------
Total regulatory assets........................... $366,004 $ 364,213
===========================
Recoverable income taxes: Recoverable income taxes represent amounts due from
customers for accelerated tax benefits which have been previously flowed
through to customers and are expected to be recovered in the future as the
accelerated tax benefits reverse.
Debt issuance costs: Debt reacquisition expenses are amortized over the
remaining term of the reacquired debt or, if refinanced, the term of the new
debt. Debt issuance costs are amortized over the term of the associated debt.
Deferred employee benefit costs: Deferred employee benefit costs are expected
to be recovered from income generated through the company's Affordable
Housing Tax Credit investment program.
Deferred plant costs: Disallowances related to the Wolf Creek nuclear
generating facility.
Coal contract settlement costs: The company deferred costs associated with
the termination of certain coal purchase contracts. These costs are being
amortized over periods ending in 2002 and 2013.
The company expects to recover all of the above regulatory assets in rates
charged to customers. A return is allowed on deferred plant costs and coal
contract settlement costs and approximately $49.1 million of debt issuance
costs.
Minority Interests: Minority interests represent the minority shareholders'
proportionate share of the shareholders'equity and net loss of Protection One.
Sales: Energy sales are recognized as services are rendered and include
estimated amounts for energy delivered but unbilled at the end of each year.
Unbilled sales of $44 million at December 31, 1999, and $38.8 million at
December 31, 1998, are recorded as a component of accounts receivable (net) on
the Consolidated Balance Sheets.
Monitored services sales are recognized when monitoring, extended service
protection, patrol, repair and other services are provided. Deferred revenues
result from customers who are billed for monitoring, extended service protection
and patrol and alarm response services in advance of the period in which such
services are provided, on a monthly, quarterly or annual basis.
The company's allowance for doubtful accounts receivable totaled $35.8 million
at December 31, 1999, and $29.5 million at December 31, 1998.
Income Taxes: Deferred tax assets and liabilities are recognized for temporary
differences in amounts recorded for financial reporting purposes and their
respective tax bases. Investment tax credits previously deferred are being
amortized to income over the life of the property which gave rise to the
credits.
The company has a tax sharing agreement with Protection One. This pro rata tax
sharing agreement allows Protection One to be reimbursed for tax benefits
utilized in the company's consolidated tax return.
Risk Management: The company is involved in trading activities primarily to
minimize risk from market fluctuations, maintain a market presence and to
enhance system reliability. In these activities, the company utilizes a variety
of financial instruments, including forward contracts involving cash settlements
or physical delivery of an energy commodity, options, swaps which require
payments (or receipt of payments) from counterparties based on the differential
between specified prices for the related commodity and futures traded on
electricity and natural gas. The change in market value of these energy trading
contracts is recorded on the Consolidated Balance Sheet, and included in
earnings.
The company is also exposed to commodity price changes outside of trading
activities. The company uses derivatives for non-trading purposes primarily to
reduce exposure relative to the volatility of cash market prices. The company
currently records the change in market value of these cash flow hedges on its
Consolidated Balance Sheet. The company does not recognize gains and losses in
net income until the period these options and forwards are settled.
The company has considered a number of risks and costs associated with the
future contractual commitments included in the company's energy portfolio. These
risks include credit risks associated with the financial condition of
counterparties, product location (basis) differentials and other risks which
management policy dictates. The counterparties in the company's portfolio are
primarily large energy marketers and major utility companies. The
creditworthiness of the company's counterparties could
21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
positively or negatively impact the company's overall exposure to credit risk.
The company maintains credit policies with regard to its counterparties that, in
management's view, minimize overall credit risk.
Cash Surrender Value of Life Insurance: The following amounts related to
corporate-owned life insurance policies (COLI) are recorded in other long-term
assets on the Consolidated Balance Sheets at December 31:
- --------------------------------------------------------------------------------
1999 1998
- --------------------------------------------------------------------------------
(Dollars in Millions)
Cash surrender value of policies/(1)/............... $ 642.4 $ 587.5
Borrowings against policies......................... (608.3) (558.5)
---------------------
COLI (net).......................................... $ 34.1 $ 29.0
=====================
/(1)/ Cash surrender value of policies as presented represents the value of the
policies as of the end of the respective policy years and not as of December 31,
1999 and 1998.
Income was recorded for increases in cash surrender value and net death
proceeds. Interest incurred on amounts borrowed is offset against policy income.
Income recognized from death proceeds is highly variable from period to period.
Death benefits recognized as other income approximated $1.4 million in 1999,
$13.7 million in 1998 and $0.6 in 1997.
New Pronouncements: In June 1998, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards No. 133, "Accounting
for Derivative Instruments and Hedging Activities" (SFAS 133). In June 1999, the
FASB issued Statement No. 137 "Accounting for Derivative Instruments and Hedging
Activities-Deferral of the Effective Date of FASB Statement No. 133." SFAS 133
establishes accounting and reporting standards requiring that every derivative
instrument, including certain derivative instruments embedded in hybrid
contracts, be recorded in the balance sheet as either an asset or liability
measured at its fair value. With respect to hybrid contracts, a company may
elect to apply SFAS 133, as amended, to (1) all hybrid contracts, (2) only those
hybrid contracts that were issued, acquired, or substantively modified after
December 31, 1997, or (3) only those hybrid contracts that were issued,
acquired, or substantively modified after December 31, 1998.
SFAS 133 requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met and that
a company must formally document, designate and assess the effectiveness of
transactions that receive hedge accounting. SFAS 133, in part, allows special
hedge accounting for fair value and cash flow hedges. The company had no fair
value hedges as of December 31, 1999. SFAS 133 provides that the effective
portion of the gain or loss on a derivative instrument designated and qualifying
as a cash flow hedging instrument be reported as a component of other
comprehensive income and be reclassified into earnings in the same period or
periods during which the hedged forecasted transaction affects earnings. The
remaining gain or loss on the derivative instrument, if any, must be recognized
currently in earnings. If SFAS 133 were required to be applied to cash flow
hedges in place at December 31, 1999, changes in the fair value of options and
forwards would contribute approximately $1.3 million of additional loss to other
comprehensive income for the twelve months ended December 31, 1999, if these
hedges were 100% effective. The company is still in the process of evaluating
the effectiveness of these hedges.
SFAS 133, as amended, is effective for fiscal years beginning after June 15,
2000. SFAS 133 cannot be applied retroactively. The company is currently
evaluating commodity contracts and financial instruments to determine what, if
any, effect of adopting SFAS 133 might have on its financial statements. The
company has not yet quantified all effects of adopting SFAS 133 on its financial
statements; however, SFAS 133 could increase of volatility in earnings and other
comprehensive income. The company plans to adopt SFAS 133 as of January 1, 2001.
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.
Reclassifications: Certain amounts in prior years have been reclassified to
conform with classifications used in the current year presentation.
2. MONITORED SERVICES BUSINESS
Protection One acquired a significant number of security companies 1998 and
1997. The largest acquisitions included Protection One November in 1997, Network
Multifamily, Inc. (Multifamily) in January 1998, Multimedia Security Services,
Inc. in March 1998, and Compagnie Europeenne de Telesecurite (CET) in October
1998. All companies acquired have been accounted for using the purchase method.
The principal assets acquired in the acquisitions are customer accounts. The
excess of the purchase price over the estimated fair value of the net assets
acquired is recorded as goodwill. The results of operations of each acquisition
have been included in the consolidated results of operations of Protection One
from the date of the acquisition.
The following table presents the unaudited pro forma financial information
considering Protection One's monitored services acquisitions in 1998 and 1997.
The pro forma information reflects the actual operating results of each company
prior to its acquisition and includes adjustments to interest expense,
intangible amortization, and income taxes. The table assumes acquisitions in
1998 and 1997 occurred as of January 1, 1997.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
Year Ended December 31, 1998 1997
- -----------------------------------------------------------------------------------------------------
(Unaudited)
(Dollars in Thousands, Except Per Share Data)
<S> <C> <C>
Sales............................................... $2,175,089 $2,462,849
Earnings available for common stock................. 33,556 463,264
Earnings per share.................................. $ 0.51 $ 7.11
- -----------------------------------------------------------------------------------------------------
</TABLE>
The unaudited pro forma financial information is not necessarily indicative of
the results of operations had the entities been combined for the entire period
nor do they purport to be indicative of results which will be obtained in the
future.
During 1999, Protection One completed four acquisitions, all in the United
Kingdom, for a combined purchase price of approximately $32 million. Protection
One's purchase price allocations for the 1999 acquisitions are preliminary and
may be adjusted as additional information is obtained.
During the third quarter of 1999, Protection One sold the assets which comprised
its Mobile Services Group. Cash proceeds of this sale
22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
approximated $20 million and Protection One recorded a pre-tax gain of
approximately $17.3 million.
In December 1997, Protection One incurred charges of $12.8 million to write down
the value of the customer account base due to excessive losses associated with a
specific acquisition and $11.5 million to reflect the closing of business
activities that were no longer of continuing value to the combined operations.
3. MARKETABLE SECURITIES
During the fourth quarter of 1999, the company decided to sell its remaining
marketable security investments in paging industry companies. These securities
have been classified as available-for-sale; therefore, changes in market value
have been historically reported as a component of other comprehensive income.
The market value for these securities declined during the last six to nine
months of 1999. The company determined that the decline in value of these
securities was other than temporary and a charge to earnings for the decline in
value was required at December 31, 1999. Therefore, the company recorded a
non-cash charge of $76.2 million in the fourth quarter of 1999. This charge to
earnings has been presented separately in the accompanying Consolidated
Statements of Income. See also Note 24 for subsequent events.
4. CUSTOMER ACCOUNTS
The following is a rollforward of the investment in customer accounts (at cost)
at December 31:
- --------------------------------------------------------------------------------
1999 1998
- --------------------------------------------------------------------------------
(Dollars in Thousands)
Beginning customer accounts, net............... $1,031,956 $ 530,312
Acquisition of customer accounts............... 333,195 601,063
Amortization of customer accounts.............. (189,214) (89,893)
Non-cash charges against purchase holdbacks.... (37,035) (9,526)
-------------------------
Ending customer accounts, net.................. $1,138,902 $1,031,956
=========================
Accumulated amortization of the investment in customer accounts at December 31,
1999 and 1998 was $307.6 million and $118.4 million.
In conjunction with certain purchases of customer accounts, Protection One
withholds a portion of the purchase price as a reserve to offset qualifying
losses of the acquired customer accounts for a specified period as provided for
in the purchase agreements, and as a reserve for purchase price settlements of
assets acquired and liabilities assumed. The estimated expected amount to be
paid at the end of the holdback period is capitalized and an equivalent current
liability established at the time of purchase.
The following is a rollforward of purchase holdbacks at December 31:
- --------------------------------------------------------------------------------
1999 1998
- --------------------------------------------------------------------------------
(Dollars in Thousands)
Balance, beginning of year........................ $ 42,303 $ 11,444
Additions......................................... 26,663 72,673
Non-cash charges against customer accounts........ (37,035) (9,526)
Cash payments to sellers.......................... (11,718) (32,288)
-------------------
Balance, end of year.............................. $ 20,213 $ 42,303
===================
Purchase holdback periods are negotiated between Protection One and sellers or
dealers, but typically range from zero to 12 months. At the end of the period
prescribed by the purchase holdback, Protection One verifies customer losses
experienced during the period and calculates a final payment to the seller or
dealer. The purchase holdback is extinguished at the time of final payment and a
corresponding adjustment is made in the customer intangible to the extent the
final payment varies from the estimated liability established at the time of
purchase.
5. PROPERTY, PLANT AND EQUIPMENT
The following is a summary of property, plant and equipment at December 31:
- --------------------------------------------------------------------------------
1999 1998
- --------------------------------------------------------------------------------
(Dollars in Thousands)
Electric plant in service..................... $ 5,769,401 $ 5,646,176
Less - accumulated depreciation............... 2,141,037 2,015,880
-----------------------
3,628,364 3,630,296
Construction work in progress................. 170,061 82,700
Nuclear fuel (net)............................ 28,013 39,497
-----------------------
Net utility plant.......................... 3,826,438 3,752,493
Non-utility plant in service.................. 92,872 62,324
Less - accumulated depreciation............... 29,866 14,901
-----------------------
Net property, plant and equipment.......... $ 3,889,444 $ 3,799,916
=======================
6. JOINT OWNERSHIP OF UTILITY PLANTS
- --------------------------------------------------------------------------------
Company's Ownership at December 31, 1999
- --------------------------------------------------------------------------------
In-Service Accumulated Net
Dates Investment Depreciation (MW) Percent
- --------------------------------------------------------------------------------
(Dollars in Thousands)
La Cygne 1/(a)/......... Jun 1973 $ 174,450 $ 113,415 344.0 50
Jeffrey 1/(b)/.......... Jul 1978 302,452 138,934 625.0 84
Jeffrey 2/(b)/.......... May 1980 294,502 128,865 622.0 84
Jeffrey 3/(b)/.......... May 1983 407,864 166,298 623.0 84
Jeffrey wind 1/(b)/..... May 1999 855 17 0.5 84
Jeffrey wind 2/(b)/..... May 1999 854 16 0.5 84
Wolf Creek/(c)/......... Sep 1985 1,378,238 460,880 550.0 47
- --------------------------------------------------------------------------------
/(a)/ Jointly owned with KCPL
/(b)/ Jointly owned with UtiliCorp United Inc.
/(c)/ Jointly owned with KCPL and Kansas Electric Power Cooperative, Inc.
Amounts and capacity presented above represent the company's share. The
company's share of operating expenses of the plants in service above, as well as
such expenses for a 50% undivided interest in La Cygne 2 (representing 337 MW
capacity) sold and leased back to the company in 1987, are included in operating
expenses on the Consolidated Statements of Income. The company's share of other
transactions associated with the plants is included in the appropriate
classification in the company's consolidated financial statements.
23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
7. INVESTMENTS ACCOUNTED FOR BY THE EQUITY METHOD
The company's investments which are accounted for by the equity method are as
follows:
- --------------------------------------------------------------------------------
Equity Earnings,
Investment at Year Ended
Ownership at December 31, December 31,
December 31, ---------------- -------------------
1999 1999 1998 1999 1998
- ------------------------------------------------------------------------
(Dollars in Thousands)
ONEOK, Inc./(1)/........ 45% $590,109 $615,094 $6,945 $6,064
Affordable Housing
Tax Credit limited
partnerships/(2)/....... 13% to 29% 79,460 85,461 -- --
Paradigm Direct......... 40% 35,385 -- 1,254 --
International
companies and
joint ventures/(3)/..... 9% to 50% 18,724 10,500 -- --
- ------------------------------------------------------------------------
(1) The company also received approximately $41 million of preferred and common
dividends in 1999.
(2) Investment is aggregated. Individual investments are not material. Based on
an order received by the KCC, equity earnings from these investments are
used to offset costs associated with postretirement and postemployment
benefits offered to the company's employees.
(3) Investment is aggregated. Individual investments are not material. During
1998, the company recognized an other than temporary decline in value of
its foreign equity investments as discussed in Note 16.
The following summarized financial information for the company's investment in
ONEOK is presented as of and for the periods ended December 31, 1999, and
November 30, 1998, the most recent periods for which public information is
available.
- --------------------------------------------------------------------------------
December 31, November 30,
1999 1998
- --------------------------------------------------------------------------------
(Dollars in Thousands)
Balance Sheet:
Current assets................................. $ 593,721 $ 404,358
Non-current assets............................. 2,645,854 2,091,797
Current liabilities............................ 786,713 338,466
Non-current liabilities........................ 1,301,338 993,668
Equity......................................... 1,151,524 1,164,021
- --------------------------------------------------------------------------------
December 31, November 30,
Twelve Months Ended 1999 1998
- --------------------------------------------------------------------------------
(Dollars in Thousands)
Income Statement:
Revenues...................................... $2,070,983 $1,896,178
Gross profit.................................. 760,209 645,606
Net income.................................... 106,873 103,525
- --------------------------------------------------------------------------------
At December 31, 1999, the company's ownership interest in ONEOK is comprised of
approximately 2.3 million common shares and approximately 19.9 million
convertible preferred shares. If all the preferred shares were converted, the
company would own approximately 45% of ONEOK's common shares presently
outstanding.
8. SHORT-TERM DEBT
The company has arrangements with certain banks to provide unsecured short-term
lines of credit on a committed basis totaling approximately $1.1 billion. The
agreements provide the company with the ability to borrow at different market-
based interest rates. The company pays commitment or facility fees in support of
these lines of credit. Under the terms of the agreements, the company is
required, among other restrictions, to maintain a total debt to total
capitalization ratio of not greater than 65% at all times. The unused portion of
these lines of credit are used to provide support for commercial paper, which is
used to fund its short-term borrowing requirements.
Information regarding the company's short-term borrowings, comprised of
borrowings under the credit agreements, bank loans and commercial paper, is as
follows:
- --------------------------------------------------------------------------------
December 31, 1999 1998
- --------------------------------------------------------------------------------
(Dollars in Thousands)
Borrowings outstanding at year end:
Credit agreement.............................. $ 50,000 $ --
Bank loans.................................... 120,000 164,700
Commercial paper notes........................ 535,421 147,772
----------------------------
Total....................................... $ 705,421 $ 312,472
============================
Weighted average interest rate on debt
outstanding at year end (including fees).......... 6.96% 5.94%
Weighted average short-term debt
outstanding during the year....................... $ 455,184 $ 529,255
Weighted daily average interest rates
during the year (including fees).................. 5.76% 5.93%
Unused lines of credit supporting
commercial paper notes............................ $1,021,000 $ 820,900
- --------------------------------------------------------------------------------
The company borrowed $225 million in short-term debt in 1999 to fund Westar
Capital's revolving credit agreement to Protection One.
The company's interest expense on short-term debt was $57.7 million in 1999,
$55.3 million in 1998 and $73.8 million in 1997.
The unsecured short-term lines of credit included three revolving credit
facilities with various banks as follows:
- --------------------------------------------------------------------------------
Amount Facility Termination Date
- --------------------------------------------------------------------------------
$300 million 364-day March 15, 2000
500 million 5-year March 17, 2003
250 million 6 1/2-month June 30, 2000
- --------------------------------------------------------------------------------
In March 2000, the company amended the $300 million facility to reduce the
commitment to $242 million and to extend the maturity date to June 30, 2000. The
company also amended all of these credit facilities to reflect the possibility
of borrowing from them rather than using them to provide support for commercial
paper borrowings.
Amendments to the credit facilities include increased pricing to reflect credit
quality and the potential drawn nature of credit facilities rather than support
for commercial paper, redefinition of the total debt to capital financial
covenant, limitation on use of proceeds from sale of first mortgage bonds to pay
off debt outstanding under the credit facilities before proceeds may be used for
other purposes, and a commitment to use the company's "best efforts" to pledge
first mortgage bonds to support its credit facilities if our senior unsecured
credit rating drops below "investment grade" (bonds rated below BBB by S&P and
Fitch and below Baa by Moody's as determined by Standard & Poor's Ratings Group
(S&P) and Moody's Investors Service (Moody's).
24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
9. LONG-TERM DEBT
Long-term debt outstanding is as follows at December 31:
- --------------------------------------------------------------------------------
1999 1998
- --------------------------------------------------------------------------------
(Dollars in Thousands)
Western Resources
First mortgage bond series:
7 1/4% due 1999.................................. $ -- $ 125,000
8 7/8% due 2000.................................. 75,000 75,000
7 1/4% due 2002.................................. 100,000 100,000
8 1/2% due 2022.................................. 125,000 125,000
7.65% due 2023.................................. 100,000 100,000
-------------------------
400,000 525,000
-------------------------
Pollution control bond series:
Variable due 2032, 4.80% at December 31, 1999.... 45,000 45,000
Variable due 2032, 4.54% at December 31, 1999.... 30,500 30,500
6% due 2033...................................... 58,420 58,420
-------------------------
133,920 133,920
-------------------------
KGE
First mortgage bond series:
7.60% due 2003................................... 135,000 135,000
6 1/2% due 2005.................................. 65,000 65,000
6.20% due 2006................................... 100,000 100,000
-------------------------
300,000 300,000
-------------------------
Pollution control bond series:
5.10% due 2023................................... 13,653 13,673
Variable due 2027, 4.25% at December 31, 1999.... 21,940 21,940
7.0% due 2031.................................... 327,500 327,500
Variable due 2032, 4.199% at December 31, 1999... 14,500 14,500
Variable due 2032, 4.30% at December 31, 1999.... 10,000 10,000
-------------------------
387,593 387,613
-------------------------
Western Resources
6 7/8% unsecured senior notes due 2004........... 370,000 370,000
7 1/8% unsecured senior notes due 2009........... 150,000 150,000
6.80% unsecured senior notes due 2018............ 29,783 29,985
6.25% unsecured senior notes due 2018,
putable/callable 2003............................ 400,000 400,000
-------------------------
949,783 949,985
-------------------------
Protection One
Senior credit facility due 2001,
6.8% at December 31, 1998....................... -- 42,417
Convertible senior subordinated notes
due 2003, fixed rate 6.75%...................... 53,950 53,950
Senior subordinated discount notes due 2005,
effective rate of 6.4%.......................... 87,038 125,590
Senior unsecured notes due 2005,
fixed rate 7.375%............................... 250,000 250,000
Senior subordinated notes due 2009,
fixed rate 8.125%............................... 341,415 350,000
CET recourse financing agreements, average
effective rate 18% and 15%, respectively........ 60,838 93,541
Other............................................ 2,033 2,574
-------------------------
795,274 918,072
-------------------------
Other long-term agreements......................... 21,895 8,325
Unamortized debt premium........................... 13,726 13,918
Less:
Unamortized debt discount.......................... (7,458) (7,931)
Long-term debt due within one year................. (111,667) (165,838)
-------------------------
Long-term debt (net)............................. $2,883,066 $3,063,064
=========================
Debt discount and expenses are being amortized over the remaining lives of each
issue.
The amount of the company's first mortgage bonds authorized by its Mortgage and
Deed of Trust, dated July 1, 1939, as supplemented, is unlimited. The amount of
KGE's first mortgage bonds authorized by the KGE Mortgage and Deed of Trust,
dated April 1, 1940, as supplemented, is limited to a maximum of $2 billion.
Amounts of additional bonds which may be issued are subject to property,
earnings and certain restrictive provisions of each mortgage.
The company's unsecured debt represents general obligations that are not secured
by any of the company's properties or assets. Any unsecured debt will be
subordinated to all secured debt of the company, including the first mortgage
bonds. The notes are structurally subordinated to all secured and unsecured debt
of the company's subsidiaries.
In December 1998, Protection One entered into a revolving credit facility which
provided for borrowings of up to $500 million, subsequently decreased to $250
million, and was to expire in December 2001. As a result of Protection One not
meeting its debt covenants under this facility, in December 1999, Westar Capital
acquired the debt and assumed the lenders' obligations.
In 1998, Protection One issued $350 million of Unsecured Senior Subordinated
Notes. The notes are redeemable at Protection One's option, in whole or in part,
at a predefined price.
Protection One did not complete a required exchange offer during 1999. As a
result, the interest rate on this facility increased to 8.625% in June 1999. If
the exchange offer is completed, the interest rate will revert back to 8.125%.
Interest on this facility is payable semi-annually on January 15 and July 15.
In 1998, Protection One issued $250 million of Senior Unsecured Notes. Interest
is payable semi-annually on February 15 and August 15. The notes are redeemable
at Protection One's option, in whole or in part, at a predefined price.
In 1995, Protection One issued $166 million of Unsecured Senior Subordinated
Discount Notes with a fixed interest rate of 13 5/8%. Interest payments began in
1999 and are payable semi-annually on June 30 and December 31. In connection
with the acquisition of Protection One in 1997, these notes were restated to
fair value reflecting a current market yield of approximately 6.4%. This
resulted in bond premium being recorded to reflect the increase in value of the
notes as a result of the decline in interest rates since the note issuance. The
revaluation has no impact on the expected cash flow to existing noteholders.
In 1998, Protection One redeemed notes with a book value of $69.4 million and
recorded an extraordinary gain on the extinguishment of $1.6 million, net of
tax. The remaining notes are redeemable at Protection One's option in whole or
in part, at anytime on or after June 30, 2000, at a predefined price.
In 1996, Protection One issued $103.5 million of Convertible Senior Subordinated
Notes. Interest is payable semi-annually on March 15 and September 15. The notes
are convertible at any time at a conversion price of $11.19 per share. The notes
are redeemable, at Protection One's option, at a specified redemption price,
beginning September 19, 1999.
25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Protection One's subsidiary CET has recognized as a financing transaction cash
received through the sale of security equipment and future cash flows to be
received under security equipment operating lease agreements with customers to a
third-party financing company. A liability has been recorded for the proceeds of
these sales as the finance company has recourse to CET in the event of
nonpayment by customers of their equipment rental obligations. The average
implicit interest rate in the financing is 18% at December 31, 1999.
Accordingly, the liability is reduced, rental revenue is recognized, and
interest expense is being recorded as these recourse obligations are reduced
through the cash receipts paid to the financing company over the term of the
related equipment rental agreements which averages four years. The liability is
increased as new security monitoring equipment and equipment rental agreements
are sold to the finance company that have recourse provisions.
Protection One's debt instruments contain financial and operating covenants
which may restrict its ability to incur additional debt, pay dividends, make
loans or advances and sell assets. From September 30, 1999 through December 31,
1999, Protection One received waivers from compliance with the then-applicable
leverage and interest coverage ratio covenants under the senior credit facility.
At December 31, 1999 Protection One was in compliance with all financial
covenants governing its debt securities.
The indentures governing Protection One's debt securities require that
Protection One offer to repurchase the securities in certain circumstances
following a change of control.
In the fourth quarter 1999, Westar Capital purchased Protection One bonds on the
open market at amounts less than the carrying amount of the debt. The company
has recognized an extraordinary gain of $13.4 million, net of tax, at December
31, 1999, related to the retirement of this debt.
Maturities of long-term debt through 2004 are as follows:
- --------------------------------------------------------------------------------
Year Principal Amount
- --------------------------------------------------------------------------------
(Dollars in Thousands)
2000................................................................. $111,667
2001................................................................. 32,246
2002................................................................. 106,472
2003................................................................. 240,568
2004................................................................. 370,457
- --------------------------------------------------------------------------------
The company's interest expense on long-term debt was $236.4 million in 1999,
$170.9 million in 1998 and $120 million in 1997.
10. EMPLOYEE BENEFIT PLANS
Pension: The company maintains qualified noncontributory defined benefit pension
plans covering substantially all utility employees. Pension benefits are based
on years of service and the employee's compensation during the five highest paid
consecutive years out of ten before retirement. The company's policy is to fund
pension costs accrued, subject to limitations set by the Employee Retirement
Income Security Act of 1974 and the Internal Revenue Code. The company also
maintains a non-qualified Executive Salary Continuation Program for the benefit
of certain management employees, including executive officers.
Postretirement Benefits: The company accrues the cost of postretirement
benefits, primarily medical benefit costs, during the years an employee provides
service.
The following tables summarize the status of the company's pension and other
postretirement benefit plans:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
Pension Benefits Postretirement Benefits
December 31, 1999 1998 1999 1998
- --------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Change in Benefit Obligation:
Benefit obligation,
beginning of year.................. $ 392,057 $ 462,964 $ 87,519 $ 83,673
Service cost......................... 8,949 7,952 1,609 1,405
Interest cost........................ 26,487 31,278 5,854 5,763
Plan participants'
contributions...................... -- -- 784 858
Benefits paid........................ (21,961) (24,682) (6,990) (5,630)
Assumption changes................... (49,499) 36,268 (9,458) 6,801
Actuarial losses (gains)............. (4,608) 10,095 (31) (5,351)
Acquisitions......................... (676) -- -- --
Plan amendments...................... -- -- -- --
Curtailments, settlements
and special term benefits/(1)/..... -- (131,818) -- --
---------------------------------------------------
Benefit obligation,
end of year........................ $ 350,749 $ 392,057 $ 79,287 $ 87,519
===================================================
Change in Plan Assets:
Fair value of plan assets,
beginning of year.................. $ 441,531 $ 584,792 $ 173 $ 118
Actual return on plan assets......... 85,079 66,106 10 6
Acquisitions......................... -- -- -- --
Employer contribution................ 2,882 2,197 6,284 5,679
Plan participants'
contributions...................... -- -- 784 --
Benefits paid........................ (22,497) (23,910) (6,990) (5,630)
Settlements/(1)/..................... -- (187,654) -- --
---------------------------------------------------
Fair value of plan assets,
end of year........................ $ 506,995 $ 441,531 $ 261 $ 173
===================================================
Funded status........................ $ 156,246 $ 49,474 $ (79,026) $ (87,346)
Unrecognized net
(gain)/loss........................ (205,338) (104,023) (7,733) 1,814
Unrecognized transition
obligation, net.................... 209 244 52,171 56,159
Unrecognized prior
service cost....................... 32,854 36,309 (3,730) (4,131)
---------------------------------------------------
Accrued postretirement
benefit costs...................... $ (16,029) $ (17,996) $ (38,318) $ (33,504)
===================================================
Actuarial Assumptions:
Discount rate........................ 7.75% 6.75% 7.75% 6.75%
Expected rate of return.............. 9.0% 9.0% 9.0% 9.0%
Compensation increase rate........... 4.5% 4.75% 4.5% 4.75%
Components of net periodic
benefit cost:
Service cost......................... $ 8,949 $ 7,952 $ 1,610 $ 1,405
Interest cost........................ 26,487 31,278 5,854 5,763
Expected return on plan assets....... (34,393) (39,069) (16) (11)
Amortization of unrecognized
transition obligation, net......... 34 (32) 3,987 3,988
Amortization of unrecognized
prior service costs................ 3,455 3,455 (466) (461)
Amortization of
(gain)/loss, net................... (3,477) (5,885) 129 (396)
Other................................ -- -- -- --
---------------------------------------------------
Net periodic benefit cost............ $ 1,055 $ (2,301) $ 11,098 $ 10,288
===================================================
</TABLE>
/(1)/ In July 1998, pension plan assets were transferred to ONEOK resulting in a
settlement loss.
26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
For measurement purposes, an annual health care cost growth rate of 7.0% was
assumed for 1999, decreasing 1% per year to 5% in 2001 and thereafter. The
health care cost trend rate has a significant effect on the projected benefit
obligation. Increasing the trend rate by 1% each year would increase the present
value of the accumulated projected benefit obligation by $2.0 million and the
aggregate of the service and interest cost components by $0.2 million.
In accordance with an order from the KCC, the company has deferred
postretirement and postemployment expenses in excess of actual costs paid. In
1997, the company received authorization from the KCC to invest in AHTC
investments. Income from the AHTC investments will be used to offset the
deferred and incremental costs associated with postretirement and postemployment
benefits offered to the company's employees. The income generated from the AHTC
investments replaces the income stream from corporate-owned life insurance
contracts purchased in 1993 and 1992 which was used for the same purpose.
Savings: The company maintains savings plans in which substantially all
employees participate, with the exception of Protection One employees. The
company matches employees' contributions up to specified maximum limits. The
funds of the plans are deposited with a trustee and invested in the company
stock fund. The company's contributions were $3.7 million for 1999, $3.8 million
for 1998 and $5.0 million for 1997.
Protection One also maintains a savings plan. Contributions, made at Protection
One's election, are allocated among participants based upon the respective
contributions made by the participants through salary reductions during the
year. Protection One's matching contributions may be made in Protection One
common stock, in cash or in a combination of both stock and cash. Protection
One's matching contribution to the plan was $802,251 for 1999 and $992,000 for
1998.
Protection One maintains a qualified employee stock purchase plan that allows
eligible employees to acquire shares of Protection One common shares at 85% of
fair market value of the common stock. A total of 650,000 shares of common stock
have been reserved for issuance in this program.
Stock Based Compensation Plans: The company, excluding Protection One, has a
long-term incentive and share award plan (LTISA Plan), which is a stock-based
compensation plan. The LTISA Plan was implemented as a means to attract, retain
and motivate employees and board members (Plan Participants). Under the LTISA
Plan, the company may grant awards in the form of stock options, dividend
equivalents, share appreciation rights, restricted shares, restricted share
units, performance shares and performance share units to Plan Participants. Up
to five million shares of common stock may be granted under the LTISA Plan.
Stock options and restricted shares under the LTISA plan are as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
December 31, 1999 1998 1997
- ------------------------------------------------------------------------------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding,
beginning of year....... 1,590,700 $36.106 665,400 $30.282 205,700 $29.250
Granted................... 981,625 30.613 925,300 40.293 459,700 30.750
Exercised................. -- -- -- -- -- --
Forfeited................. (153,690) 31.985 -- -- -- --
-------------------------------------------------------------------
Outstanding,
end of year............. 2,418,635 $34.139 1,590,700 $36.106 665,400 $30.282
===================================================================
Weighted-average fair
value of options
granted during
the year................ $ 8.22 $ 9.12 $ 3.00
</TABLE>
Stock options and restricted shares issued and outstanding at December 31, 1999,
are as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
Number Weighted- Weighted-
Range of Issued Average Average
Exercise and Contractual Exercise
Price Outstanding Life in Years Price
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Options:
1999.................... $27.813-32.125 800,995 10.0 $30.815
1998.................... 38.625-43.125 763,000 9.0 40.538
1997.................... 30.750 414,520 8.0 30.750
1996.................... 29.250 138,620 6.7 29.250
---------
2,117,135
---------
Restricted shares:
1999.................... 27.813-32.125 165,000 9.0 29.616
1998.................... 38.625 136,500 8.0 38.625
---------
Total issued.............. 301,500
=========
</TABLE>
An equal amount of dividend equivalents is issued to recipients of stock
options. The weighted-average grant-date fair value of the dividend equivalent
was $3.28 in 1999, and $6.88 in 1998. The value of each dividend equivalent is
calculated by accumulating dividends that would have been paid or payable on a
share of company common stock. The dividend equivalents expire after nine years
from date of grant.
The fair value of stock options and dividend equivalents were estimated on the
date of grant using the Black-Scholes option-pricing model. The model assumed
the following at December 31:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
1999 1998
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Dividend yield............................................................ 6.25% 6.32%
Expected stock price volatility........................................... 16.56% 15.95%
Risk-free interest rate................................................... 6.05% 5.67%
- ------------------------------------------------------------------------------------------------
</TABLE>
27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Protection One Stock Warrants and Options: Protection One has outstanding stock
warrants and options which were considered reissued and exercisable upon the
company's acquisition of Protection One on November 24, 1997. The 1997 Long-Term
Incentive Plan (the LTIP), approved by the Protection One stockholders on
November 24, 1997, provides for the award of incentive stock options to
directors, officers and key employees. Under the LTIP, 4.2 million shares are
reserved for issuance subject to such adjustment as may be necessary to reflect
changes in the number or kinds of shares of common stock or other securities of
Protection One. The LTIP provides for the granting of options that qualify as
incentive stock options under the Internal Revenue Code and options that do not
so qualify.
A summary of options issued under the Plan by fiscal year is as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Shares Granted Total Shares
to Officers Granted
- --------------------------------------------------------------------------------
<S> <C> <C>
1998........................................... 690,000 1,246,500
1999........................................... 399,700 1,092,908
- --------------------------------------------------------------------------------
</TABLE>
Each option has a term of 10 years and vests ratably over three years. The
purchase price of the shares issuable pursuant to the options is equal to (or
greater than) the fair market value of the common stock at the date of the
option grant.
A summary of warrant and option activity for Protection One from November 1997
through December 31, 1999, is as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
December 31, 1999 1998 1997
- ------------------------------------------------------------------------------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding,
beginning of year/(1)/.... 3,422,739 $ 7.494 2,366,435 $ 5.805 2,366,741 $5.805
Granted.................... 1,092,908 7.905 1,246,500 11.033 -- --
Exercised.................. -- -- (109,595) 5.564 (306) 0.050
Forfeited.................. (956,511) 10.124 (117,438) 10.770 -- --
Adjustment to May
1995 warrants............. -- -- 36,837 -- -- --
------------------------------------------------------------------
Outstanding,
end of year................ 3,559,136 $12.252 3,422,739 $ 7.494 2,366,435 $5.805
==================================================================
</TABLE>
/(1)/ There was no outstanding stock or options prior to November 24, 1997.
Stock options and warrants issued and outstanding at December 31, 1999, are as
follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
Range of Number Issued Weighted-Average Weighted-Average
Exercise price and Outstanding Contractual Life in Years Exercise Price
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Exercisable:
Fiscal 1995 $ 6.375-$ 9.125 64,800 5.0 $ 6.491
Fiscal 1996 8.000- 10.313 178,400 6.0 8.031
Fiscal 1996 13.750- 15.500 69,000 6.0 14.924
Fiscal 1997 9.500 136,000 7.0 9.500
Fiscal 1997 15.000 25,000 7.0 15.000
Fiscal 1997 14.268 50,000 2.0 14.268
Fiscal 1998 11.000 367,499 8.0 11.000
Fiscal 1998 8.563 16,331 8.0 8.563
Fiscal 1999 8.928 87,600 9.0 8.928
KOP Warrants 3.633 103,697 1.0 3.633
1993 Warrants 0.167 428,400 4.0 0.167
1995 Note Warrants 3.890 786,277 5.0 3.890
Other 0.050 305 7.0 0.050
---------
2,313,309
---------
Not Exercisable:
1998 options $ 11.000 333,001 8.0 $11.000
1998 options 8.563 32,660 8.0 8.563
1999 options 8.928 686,500 9.0 8.928
1999 options 3.875- 6.125 193,666 9.0 5.855
---------
1,245,827
---------
Total outstanding 3,559,136
=========
</TABLE>
The weighted average fair value of options granted during 1999 and 1998 and
estimated on the date of grant were $6.87 and $5.41. The fair value was
calculated using the following assumptions:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Year Ended December 31, 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Dividend yield........................................... 0.00% 0.00%
Expected stock price volatility.......................... 64.06% 61.72%
Risk free interest rate.................................. 6.76% 5.50%
Expected option life..................................... 6 years 6 years
- --------------------------------------------------------------------------------
</TABLE>
28
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Effect of Stock-Based Compensation on Earnings Per Share: The company accounts
for both the company's and Protection One's plans under Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees," and the
related interpretations. Had compensation expense been determined pursuant to
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," the company would have recognized additional compensation costs
during 1999, 1998 and 1997 as shown in the table below.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
Year Ended December 31, 1999 1998 1997
- ---------------------------------------------------------------------------------------------------
(Dollars in Thousands, Except Per Share Amounts)
<S> <C> <C> <C>
Earnings available for common stock:
As reported................................ $ 11,330 $ 44,165 $ 494,599
Pro forma.................................. 8,204 42,640 494,436
Earnings per common share
(basic and diluted):
As reported................................ $ 0.17 $ 0.67 $ 7.59
Pro forma.................................. 0.12 0.65 7.59
- ---------------------------------------------------------------------------------------------------
</TABLE>
Split Dollar Life Insurance Program: The company has established a split dollar
life insurance program for the benefit of the company and certain of its
executives. Under the program, the company has purchased life insurance policies
on which the executive's beneficiary is entitled to a death benefit in an amount
equal to the face amount of the policy reduced by the greater of (i) all
premiums paid by the company or (ii) the cash surrender value of the policy,
which amount, at the death of the executive, will be returned to the company.
The company retains an equity interest in the death benefit and cash surrender
value of the policy to secure this repayment obligation.
Subject to certain conditions, each executive may transfer to the company their
interest in the death benefit based on a predetermined formula, beginning no
earlier than the first day of the calendar year following retirement or three
years from the date of the policy. The liability associated with this program
was $31.9 million as of December 31, 1999, and $57.9 million as of December 31,
1998. The obligations under this program can increase and decrease based on the
company's total return to shareholders. This liability decreased approximately
$10.5 million in 1999 based on the company's total return to shareholders. There
was no change in the liability in 1998. Under current tax rules, payments to
active employees in exchange for their interest in the death benefits may not be
fully deductible by the company for income tax purposes.
11. COMMON STOCK, PREFERRED STOCK, PREFERENCE STOCK, AND OTHER MANDATORILY
REDEEMABLE SECURITIES
The company's Restated Articles of Incorporation, as amended, provide for
150,000,000 authorized shares of common stock. At December 31, 1999, 67,401,657
shares were outstanding.
The company has a Direct Stock Purchase Plan (DSPP). Shares issued under the
DSPP may be either original issue shares or shares purchased on the open market.
The company issued original issue shares under DSPP from January 1, 1995, until
October 15, 1997. Between November 1, 1997 and March 16, 1998, shares for DSPP
were satisfied on the open market. All other shares have been original issue
shares. During 1998, a total of 653,570 shares were issued under DSPP including
499,839 original issue shares and 153,731 shares purchased on the open market.
During 1999, a total of 1,819,856 original issue shares were purchased from the
company. At December 31, 1999, 2,771,191 shares were available under the DSPP
registration statement.
In 1999, the company purchased 900,000 shares of common stock at an average
price of $17.55 per share. The purchased shares were purchased with short-term
debt and available funds. The purchased shares are held in treasury and are
available for general corporate purposes, resale or retirement. These purchased
shares are shown as $15.8 million in treasury stock on the accompanying
Consolidated Balance Sheet.
Preferred Stock Not Subject to Mandatory Redemption: The cumulative preferred
stock is redeemable in whole or in part on 30 to 60 days notice at the option of
the company.
Preference Stock Subject to Mandatory Redemption: On April 1, 1998, the company
redeemed the 7.58% Preference Stock due 2007 at a premium, including dividends,
for $53 million. At December 31, 1999, and 1998, the company had no preference
stock outstanding.
Other Mandatorily Redeemable Securities: On December 14, 1995, Western Resources
Capital I, a wholly-owned trust, issued 4.0 million preferred securities of
7-7/8% Cumulative Quarterly Income Preferred Securities, Series A, for $100
million. The trust interests are redeemable at the option of Western Resources
Capital I on or after December 11, 2000, at $25 per preferred security plus
accrued interest and unpaid dividends. Holders of the securities are entitled to
receive distributions at an annual rate of 7-7/8% of the liquidation preference
value of $25. Distributions are payable quarterly and are tax deductible by the
company. These distributions are recorded as interest expense. The sole asset of
the trust is $103 million principal amount of 7-7/8% Deferrable Interest
Subordinated Debentures, Series A due December 11, 2025.
29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
On July 31, 1996, Western Resources Capital II, a wholly-owned trust, of which
the sole asset is subordinated debentures of the company, sold in a public
offering, 4.8 million shares of 8-1/2% Cumulative Quarterly Income Preferred
Securities, Series B, for $120 million. The trust interests are redeemable at
the option of Western Resources Capital II, on or after July 31, 2001, at $25
per preferred security plus accumulated and unpaid distributions. Holders of the
securities are entitled to receive distributions at an annual rate of 8-1/2% of
the liquidation preference value of $25. Distributions are payable quarterly and
are tax deductible by the company. These distributions are recorded as interest
expense. The sole asset of the trust is $124 million principal amount of 8-1/2%
Deferrable Interest Subordinated Debentures, Series B due July 31, 2036.
In addition to the company's obligations under the Subordinated Debentures
discussed above, the company has agreed to guarantee, on a subordinated basis,
payment of distributions on the preferred securities. These undertakings
constitute a full and unconditional guarantee by the company of the trust's
obligations under the preferred securities.
12. COMMITMENTS AND CONTINGENCIES
Purchase Orders and Contracts: As part of its ongoing operations and
construction program, the company has commitments under purchase orders and
contracts which have an unexpended balance of approximately $190 million at
December 31, 1999.
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 December 31, 1999, the costs
incurred for preliminary site investigation and risk assessment have been
minimal. In accordance with the terms of the strategic alliance with ONEOK,
ownership of twelve of these sites and the responsibility for clean-up of these
sites were transferred to ONEOK. The ONEOK agreement limits the company's future
liability associated with these sites to an immaterial amount. The company's
investment earnings from ONEOK could be impacted by these costs.
Superfund Sites: In December 1999, the company was identified as one of more
than 1,000 potentially responsible parties at an EPA Superfund site in Kansas
City, Kansas (Kansas City site). The company has previously been associated with
other Superfund sites for which the company's liability has been classified as
de minimis and any potential obligations have been settled at minimal cost.
Since 1993, the company has settled Superfund obligations at three sites for a
total of $141,300. No Superfund obligations have been settled since 1994. The
company's obligation, if any, at the Kansas City site is expected to be limited
based upon previous experience and the limited nature of the company's business
transactions with the previous owners of the site. In the opinion of the
company's management, the resolution of this matter is not expected to have a
material impact on the company's financial position or results of operations.
Clean Air Act: The company must comply with the provisions of The Clean Air Act
Amendments of 1990 that require a two-phase reduction in certain emissions. The
company has installed continuous monitoring and reporting equipment to meet the
acid rain requirements. The company does not expect material capital
expenditures to be required to meet Phase II sulfur dioxide and nitrogen oxide
requirements.
Decommissioning: The company accrues decommissioning costs over the expected
life of the Wolf Creek generating facility. The accrual is based on estimated
unrecovered decommissioning costs which consider inflation over the remaining
estimated life of the generating facility and are net of expected earnings on
amounts recovered from customers and deposited in an external trust fund.
In February 1997, the KCC approved the 1996 Decommissioning Cost Study. Based on
the study, the company's share of Wolf Creek's decommissioning costs, under the
immediate dismantlement method, is estimated to be approximately $624 million
during the period 2025 through 2033, or approximately $192 million in 1996
dollars. These costs were calculated using an assumed inflation rate of 3.6%
over the remaining service life from 1996 of 29 years. On September 1, 1999,
Wolf Creek submitted the 1999 Decommissioning Cost Study to the KCC for
approval. Approval of this study by the KCC is pending. The company's share of
the cost for decommissioning in the 1999 study under the dismantlement method is
$221 million in 1999 dollars.
Decommissioning costs are currently being charged to operating expense in
accordance with the prior KCC orders. Electric rates charged to customers
provide for recovery of these decommissioning costs over the life of Wolf Creek.
Amounts expensed approximated $3.9 million in 1999 and will increase annually to
$5.6 million in 2024. These amounts are deposited in an external trust fund. The
average after-tax expected return on trust assets is 5.7% per year.
The company's investment in the decommissioning fund, including reinvested
earnings approximated $58.3 million at December 31, 1999, and $52.1 million at
December 31, 1998. Trust fund earnings accumulate in the fund balance and
increase the recorded decommissioning liability.
Nuclear Insurance: The Price-Anderson Act limits the combined public liability
of the owners of nuclear power plants to $9.5 billion for a single nuclear
incident. If this liability limitation is insufficient, the U.S. Congress will
consider taking whatever action is necessary to compensate the public for valid
claims. The Wolf Creek owners (Owners) have purchased the maximum available
private insurance of $200 million. The remaining balance is provided by an
assessment plan mandated by the
30
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Nuclear Regulatory Commission (NRC). Under this plan, the Owners are jointly and
severally subject to a retrospective assessment of up to $88.1 million ($41.4
million, company's share) in the event there is a major nuclear incident
involving any of the nation's licensed reactors. This assessment is subject to
an inflation adjustment based on the Consumer Price Index and applicable premium
taxes. There is a limitation of $10 million ($4.7 million, company's share) in
retrospective assessments per incident, per year.
The Owners carry decontamination liability, premature decommissioning liability
and property damage insurance for Wolf Creek totaling approximately $2.8 billion
($1.3 billion, company's share). This insurance is provided by Nuclear Electric
Insurance Limited (NEIL). In the event of an accident, insurance proceeds must
first be used for reactor stabilization and site decontamination in accordance
with a plan mandated by the NRC. The company's share of any remaining proceeds
can be used to pay for property damage or decontamination expenses or, if
certain requirements are met including decommissioning the plant, toward a
shortfall in the decommissioning trust fund.
The Owners also carry additional insurance with NEIL to cover costs of
replacement power and other extra expenses incurred during a prolonged outage
resulting from accidental property damage at Wolf Creek. If losses incurred at
any of the nuclear plants insured under the NEIL policies exceed premiums,
reserves and other NEIL resources, the company may be subject to retrospective
assessments under the current policies of approximately $6 million per year.
Although the company maintains various insurance policies to provide coverage
for potential losses and liabilities resulting from an accident or an extended
outage, the company's insurance coverage may not be adequate to cover the costs
that could result from a catastrophic accident or extended outage at Wolf Creek.
Any substantial losses not covered by insurance, to the extent not recoverable
through rates, would have a material adverse effect on the company's financial
condition and results of operations.
Fuel Commitments: To supply a portion of the fuel requirements for its
generating plants, the company has entered into various commitments to obtain
nuclear fuel and coal. Some of these contracts contain provisions for price
escalation and minimum purchase commitments. At December 31, 1999, Wolf Creek's
nuclear fuel commitments (company's share) were approximately $14 million for
uranium concentrates expiring at various times through 2003, $26 million for
enrichment expiring at various times through 2003 and $65.2 million for
fabrication through 2025.
At December 31, 1999, the company's coal contract commitments in 1999 dollars
under the remaining terms of the contracts were approximately $2.3 billion. The
largest coal contract expires in 2020, with the remaining coal contracts
expiring at various times through 2013.
At December 31, 1999, the company's natural gas transportation commitments in
1999 dollars under the remaining terms of the contracts were approximately $29.1
million. The natural gas transportation contracts provide firm service to the
company's gas burning facilities expiring at various times through 2010.
Protection One SEC Matters: As previously disclosed, Protection One has been
advised by the Division of Corporation Finance of the SEC 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. Protection One has had extensive discussions with the SEC staff about
the methodology used by Protection One to amortize customer accounts, the
purchase price allocation to customer accounts in the Multifamily acquisition
and other matters. The SEC staff has not indicated it concurs with, nor has the
SEC staff determined not to object to, the restatements made in 1999 or the
change in accounting principle for customer accounts. Protection One cannot
predict whether the SEC staff will make additional comments or take other action
that will further impact its financial statements or the effect or timing of any
such action.
13. LEGAL PROCEEDINGS
The SEC commenced a private investigation in 1997 relating to, among other
things, 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.
The company, its subsidiary Westar Capital, Protection One, its subsidiary
Protection One Alarm Monitoring, Inc. (Monitoring), and certain present and
former officers and directors of Protection One are defendants in a purported
class action litigation pending in the United States District Court for the
Central District of California, "Ronald Cats, et al., v. Protection One, Inc.,
et. al.," No. CV 99-3755 DT (RCx). Pursuant to an Order dated August 2, 1999,
four pending purported class actions were consolidated into a single action. In
March 2000, plaintiffs filed a Second Consolidated Amended Class Action
Complaint (the Amended Complaint). Plaintiffs purport to bring the action on
behalf of a class consisting of all purchasers of publicly traded securities of
Protection One, including common stock and notes, during the period of February
10, 1998, through November 12, 1999. The Amended Complaint asserts claims under
Section 11 of the Securities Act of 1933 and Section 10(b) of the Securities
Exchange Act of 1934 against Protection One, Monitoring, and certain present and
former officers and directors of Protection One based on allegations that
various statements concerning Protection One's financial results and operations
for 1997 and 1998 were false and misleading and not in compliance with Generally
Accepted Accounting Principals (GAAP). Plaintiffs allege, among other things,
that former employees of Protection One have reported that Protection One lacked
adequate internal accounting controls and that certain accounting information
was unsupported or manipulated by management in order to avoid disclosure of
accurate information. The Amended Complaint further asserts claims against the
company and Westar as controlling persons under Sections 11 and 15 of the
Securities Act of 1933 and Sections 10(b) and 20(a) of the Securities Exchange
Act of 1934. A claim is also asserted under Section 11 of the Securities Act of
1933 against Protection One's auditor, Arthur Andersen LLP. The Amended
Complaint seeks an unspecified amount of compensatory damages and an award of
fees and expenses, including attorneys' fees.
31
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The company and Protection One believe that all the claims asserted in the
Amended Complaint are without merit and intend to defend against them
vigorously. The company and Protection One cannot currently predict the impact
of this litigation which could be material.
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. See also Note 14 for
discussion of the FERC proceeding regarding the City of Wichita complaint.
14. RATE MATTERS AND REGULATION
KCC Proceedings: In January 1997, the KCC entered an order reducing electric
rates for both KPL and KGE. The order required KGE to reduce electric rates by
$65 million cumulative, phased in over three years beginning in 1997. The order
required KPL to reduce electric rates by $10 million in 1997 and issue two
one-time rebates of $5 million in January 1998, and January 1999.
On March 16, 2000, the Kansas Industrial Consumers (KIC), an organization of
commercial and industrial users of electricity in Kansas, filed a complaint with
the KCC requesting an investigation of Western Resources' and KGE's rates. The
KIC alleges that these rates are not based on current costs. The company will
oppose this request vigorously but is unable to predict whether the KCC will
open an investigation.
FERC Proceeding: In September 1999, the City of Wichita filed a complaint with
the Federal Energy Regulatory Commission (FERC) against the company, alleging
improper affiliate transactions between KPL, a division of the company, and KGE,
a wholly-owned subsidiary of the company. The City of Wichita requests the FERC
to equalize the generation costs between KPL and KGE, in addition to other
matters. FERC has issued an order setting this matter for hearing and has
referred the case to a settlement judge. The hearing has been suspended pending
settlement discussions between the parties. The company believes that the City
of Wichita's complaint is without merit and intends to defend against it
vigorously.
15. LEASES
At December 31, 1999, the company had leases covering various property and
equipment. The company currently has no significant capital leases.
Rental payments for operating leases and estimated rental commitments are as
follows:
- --------------------------------------------------------------------------------
Operating
Year Ended December 31, Leases
- --------------------------------------------------------------------------------
(Dollars in Thousands)
Rental payments:
1997.......................................................... $ 71,126
1998.......................................................... 70,796
1999.......................................................... 71,771
Future commitments:
2000.......................................................... 68,431
2001.......................................................... 64,100
2002.......................................................... 59,090
2003.......................................................... 59,655
2004.......................................................... 52,899
Thereafter.................................................... 610,925
--------
Total future commitments.................................... $915,100
========
In 1987, KGE sold and leased back its 50% undivided interest in the La Cygne 2
generating unit. The La Cygne 2 lease has an initial term of 29 years, with
various options to renew the lease or repurchase the 50% undivided interest. KGE
remains responsible for its share of operation and maintenance costs and other
related operating costs of La Cygne 2. The lease is an operating lease for
financial reporting purposes. The company recognized a gain on the sale which
was deferred and is being amortized over the initial lease term.
In 1992, the company deferred costs associated with the refinancing of the
secured facility bonds of the Trustee and owner of La Cygne 2. These costs are
being amortized over the life of the lease and are included in operating
expense. Approximately $19.1 million of this deferral remained on the
Consolidated Balance Sheet at December 31, 1999.
Future minimum annual lease payments, included in the table above, required
under the La Cygne 2 lease agreement are approximately $34.6 million for each
year through 2002, $39.4 million in 2003, $34.6 million in 2004, and $502.6
million over the remainder of the lease. KGE's lease expense, net of
amortization of the deferred gain and refinancing costs, was approximately $28.9
million for 1999, $28.9 million for 1998, and $27.3 m illion for 1997.
32
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
16. INTERNATIONAL POWER DEVELOPMENT COSTS
During the fourth quarter of 1998, management decided to exit the international
power development business. This business had been conducted by the company's
wholly owned subsidiary, The Wing Group (Wing). The company recorded a $98.9
million charge to income in the fourth quarter of 1998 as a result of exiting
this business.
During 1999, the company terminated the employment of all employees, closed
offices, discontinued all development activities, and terminated all other
matters related to the activity of Wing in accordance with the terms of the exit
plan. These activities were substantially completed by December 31, 1999. The
actual costs incurred during 1999 to complete the exit plan approximated $16.9
million, which was $5.6 million less than the amount estimated at December 31,
1998. This was accounted for as a change in estimate in 1999.
At December 31, 1999, approximately $380,000 of accrued exit fees and shut-down
costs were included in other current liabilities on the accompanying
Consolidated Balance Sheet. This amount represents employee settlement and
severance costs expected to be paid in 2000.
The detailed components of the 1999 activity to exit this business are as
follows:
- --------------------------------------------------------------------------------
(Dollars in Thousands)
- --------------------------------------------------------------------------------
Accrued exit fees, shut-down and severance costs,
balance at December 31, 1998................................ $ 22,900
Actual costs incurred......................................... (16,888)
Change in estimate............................................ (5,632)
--------
Accrued exit fees, change in estimate, shut-down and
severance costs, balance at December 31, 1999............... $ 380
========
17. MERGER AGREEMENT WITH KANSAS CITY POWER & LIGHT COMPANY
On March 18, 1998, the company signed an Amended and Restated Plan of Agreement
and Plan of Merger with the Kansas City Power & Light Company (KCPL) under which
KGE, KPL, a division of Western Resources, and KCPL would have been combined
into a new company called Westar Energy, Inc. KCPL has notified the company that
it has terminated the contemplated transaction.
The company expensed costs related to the KCPL merger of approximately $17.6
million at December 31, 1999 and approximately $48 million at December 31, 1997
associated with the original merger agreement.
18. GAIN ON SALE OF EQUITY SECURITIES
During 1996, the company acquired 27% of the common shares of ADT Limited, Inc.
(ADT) and made an offer to acquire the remaining ADT common shares. ADT rejected
this offer and in July 1997, ADT merged with Tyco International Ltd. (Tyco). ADT
and Tyco completed their merger by exchanging ADT common stock for Tyco common
stock.
Following the ADT and Tyco merger, the company's equity investment in ADT became
an available-for-sale security. During the third quarter of 1997, the company
sold its Tyco common shares for approximately $1.5 billion. The company recorded
a pre-tax gain of $864.2 million on the sale and recorded tax expense of
approximately $345 million in connection with this gain.
19. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value as set forth in Statement of Financial Accounting Standards No. 107
"Disclosures about Fair Value of Financial Instruments."
Cash and cash equivalents, short-term borrowings and variable-rate debt are
carried at cost which approximates fair value. The decommissioning trust is
recorded at fair value and is based on the quoted market prices at December 31,
1999 and 1998. The fair value of fixed-rate debt and other mandatorily
redeemable securities is estimated based on quoted market prices for the same or
similar issues or on the current rates offered for instruments of the same
remaining maturities and redemption provisions. The estimated fair values of
contracts related to commodities have been determined using quoted market prices
of the same or similar securities.
The recorded amounts of accounts receivable and other current financial
instruments approximate fair value.
The fair value estimates presented herein are based on information available at
December 31, 1999 and 1998. These fair value estimates have not been
comprehensively revalued for the purpose of these financial statements since
that date and current estimates of fair value may differ significantly from the
amounts presented herein. Because a substantial portion of the company's
operations are regulated, the company believes that any gains or losses related
to the retirement of debt would not have a material effect on the company's
financial position or results of operations.
33
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The carrying values and estimated fair values of the company's financial
instruments are as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Carrying Value Fair Value
------------------------ -----------------------
December 31, 1999 1998 1999 1998
- --------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Decommissioning trust..... $ 58,286 $ 52,093 $ 58,286 $ 52,093
Fixed-rate debt, net of
current maturities....... 2,742,307 2,956,692 2,350,130 3,076,709
Other mandatorily
redeemable securities.... 220,000 220,000 187,950 226,800
- --------------------------------------------------------------------------------
</TABLE>
In its commodity price risk management activities, the company engages in both
trading and non-trading activities. In these activities, the company utilizes a
variety of financial instruments, including forward contracts involving cash
settlements or physical delivery of an energy commodity, options, swaps which
require payments (or receipt of payments) from counterparties based on the
differential between specified prices for the related commodity, and futures
traded on electricity and natural gas. For a discussion of the accounting policy
for these instruments, see Note 1.
The company is involved in trading activities primarily to minimize risk from
market fluctuations, to maintain a market presence and to enhance system
reliability. The company attempts to balance its physical and financial purchase
and sale contracts in terms of quantities and contract terms. Net open positions
can exist or are established due to the origination of new transactions and the
company's assessment of, and response to, changing market conditions.
The company uses derivatives for non-trading purposes primarily to reduce
exposure relative to the volatility of cash market prices.
The notional volumes and estimated fair values of the company's trading forward
contracts and options are as follows at December 31:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
1999 1998
---------------------- ----------------------
Notional Notional
Volumes Estimated Volumes Estimated
(MWH's) Fair Value (MWH's) Fair Value
- -------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Forward Contracts:
Purchased............. 496,800 $ 14,800 1,535,600 $ 46,361
Sold.................. 478,400 14,404 1,535,600 46,141
Options:
Purchased............. 659,200 $ 5,079 148,800 $ 361
Sold.................. 336,480 6,013 64,000 195
</TABLE>
- -------------------------------------------------------------------------------
Forward contracts and options had a net unrealized loss of $73,000 at December
31, 1999, and a net unrealized gain of $40,000 at December 31, 1998.
The notional volumes and estimated fair values of the company's non-trading
forward contract and options for electric positions are as follows at December
31:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1999 1998
---------------------- ---------------------
Notional Notional
Volumes Estimated Volumes Estimated
(MWH's) Fair Value (MWH's) Fair Value
- --------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Forward Contracts:
Purchased............ 640,800 $18,221 -- --
Sold................. 610,400 17,991 -- --
Options:
Purchased............ 285,600 $ 445 -- --
Sold................. 417,720 2,445 -- --
- --------------------------------------------------------------------------------
</TABLE>
Non-trading forward contracts and options for electric positions had a net
unrealized loss of $127,950 at December 31, 1999. No non-trading forward
contracts and options for electric positions were held at December 31, 1998.
The notional volumes and estimated fair values of the company's non-trading
forward contract and options for gas positions are as follows at December 31:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1999 1998
------------------------ ---------------------
Notional Notional
Volumes Estimated Volumes Estimated
(MWH's) Fair Value (MWH's) Fair Value
- --------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Forward Contracts:
Purchased.............. 13,010,000 $31,002 -- --
Sold................... 500,000 1,108 -- --
Options:
Purchased.............. 6,000,000 $ 971 -- --
Sold................... 4,000,000 615 -- --
- --------------------------------------------------------------------------------
</TABLE>
Non-trading forward contracts and options for gas positions had a net unrealized
loss of $1,147,134 at December 31, 1999. No non-trading forward contracts and
options for gas positions were held at December 31, 1998.
20. INCOME TAXES
Income tax expense is composed of the following components at December 31:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C>
Currently payable:
Federal............................. $ 13,907 $ 52,993 $336,150
State............................... 9,622 10,881 72,143
Deferred:
Federal............................. (44,257) (39,067) (15,945)
State............................... (6,582) (4,185) (2,696)
Amortization of investment
tax credits......................... (6,054) (6,065) (6,665)
----------------------------
Total income tax expense (benefit).... $(33,364) $ 14,557 $382,987
============================
</TABLE>
34
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Under Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes," temporary differences gave rise to deferred tax assets and
deferred tax liabilities as follows at December 31:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
1999 1998
- ------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C>
Deferred tax assets:
Deferred gain on sale-leaseback.............. $ 87,220 $ 92,427
Monitored services deferred tax assets....... 59,171 93,571
Other........................................ 125,563 138,506
----------------------
Total deferred tax assets...................... $ 271,954 $ 324,504
======================
Deferred tax liabilities:
Accelerated depreciation and other........... $ 614,309 $ 613,730
Acquisition premium.......................... 283,157 291,156
Deferred future income taxes................. 218,937 206,114
Other........................................ 40,508 48,518
----------------------
Total deferred tax liabilities................. $1,156,911 $1,159,518
======================
Investment tax credits......................... $ 97,591 $ 103,645
======================
Accumulated deferred income taxes, net......... $ 982,548 $ 938,659
======================
</TABLE>
In accordance with various rate orders, the company has not yet collected
through rates certain accelerated tax deductions which have been passed on to
customers. As management believes it is probable that the net future
increases in income taxes payable will be recovered from customers, it has
recorded a deferred asset for these amounts. These assets also are a temporary
difference for which deferred income tax liabilities have been provided.
The effective income tax rates set forth below are computed by dividing total
federal and state income taxes by the sum of such taxes and net income. The
difference between the effective tax rates and the federal statutory income tax
rates are as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Year Ended December 31, 1999 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Effective income tax rate.................... (102.2%) 24.0% 43.4%
Effect of:
State income taxes.......................... (6.0) (4.5) (5.0)
Amortization of investment tax credits...... 18.5 10.0 0.8
Corporate-owned life insurance policies..... 25.4 15.0 0.9
Affordable housing tax credits.............. 28.5 2.1 --
Accelerated depreciation flow through
and amortization, net...................... (11.1) (2.9) (0.4)
Adjustment to tax provision................. 3.9 (11.3) (3.7)
Dividends received deduction................ 31.1 16.0 --
Amortization of goodwill.................... (17.6) (11.4) --
Other....................................... (5.5) (2.0) (1.0)
Statutory federal income tax rate............ (35.0%) 35.0% 35.0%
- --------------------------------------------------------------------------------
</TABLE>
21. RELATED PARTY
The company and ONEOK have shared services agreements in which facilities,
utility field work, information technology, customer support, bill processing,
and human resources services are provided to and billed to one another. Payments
for these services are based upon various hourly charges, negotiated fees and
out-of-pocket expenses. ONEOK paid the company $5.6 million in 1999 and $4.9
million in 1998, net of what the company owed ONEOK, for services.
In 1999, the company sold 984,000 shares of ONEOK stock to ONEOK as a result of
ONEOK's repurchase program. The company reduced its investment in ONEOK for
proceeds received from this sale. All such shares were required to be sold to
ONEOK in accordance with a Shareholder Agreement between the company and ONEOK.
The company's ownership interest remains at approximately 45%.
22. 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.
Fossil generation, nuclear generation and power delivery represent the three
business segments that comprise the company's regulated electric utility
business in Kansas. Fossil generation produces power for sale to external
wholesale customers outside the company's historical marketing territory and
internally to the power delivery segment. Power marketing is a component of the
company's fossil generation segment which attempts to minimize market
fluctuation risk, enhance system reliability and maintain a market presence.
Nuclear generation represents the company's 47% ownership in the Wolf Creek
nuclear generating facility. This segment does not have any external sales. The
power delivery segment consists of the transmission and distribution of power to
the company's wholesale and retail customers in Kansas and the customer service
provided to these customers.
The company's monitored services business was expanded in November 1997 with the
acquisition of a majority interest in Protection One. Protection One provides
monitored services to approximately 1.6 million customers in North America, the
United Kingdom, and continental Europe.
Other represents the company's non-utility operations and natural gas business.
The accounting policies of the segments are substantially the same as those
described in the summary of significant accounting policies. The company
evaluates segment performance based on earnings before interest and taxes.
Unusual items, such as charges to income, may be excluded from segment
performance depending on the nature of the charge or income. The company's ONEOK
investment, marketable securities investments and other equity method
investments do not represent operating segments of the company. The company has
no single external customer from which it receives ten percent or more of its
revenues.
35
<PAGE>
<TABLE>
<CAPTION>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
==================================================================================================================================
- ----------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1999:
Eliminating/
Fossil Nuclear Power Monitored Reconciling
Generation Generation Delivery Services Other (1) Items (2) Total
- ----------------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
External sales............................. $ 365,311 $ -- $1,064,385 $ 605,176 $ 1,284 $ 2 $2,036,158
Internal sales............................. 546,683 108,445 293,522 -- -- (948,650) --
Depreciation and amortization.............. 55,320 39,629 71,717 238,803 1,448 90 407,007
Earnings before interest and taxes......... 219,087 (25,214) 145,603 (24,013) (27,754) (26,252) 261,457
Interest expense........................... 294,104
Earnings before income taxes............... (32,647)
Identifiable assets........................ 1,476,716 1,083,344 1,783,937 2,558,235 1,165,145 (59,171) 8,008,206
- ----------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1998:
Eliminating/
Fossil Nuclear Power Monitored Reconciling
Generation Generation Delivery Services Other (3) Items (2) Total
- ----------------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
External sales............................. $ 525,974 $ -- $1,085,711 $ 421,095 $ 1,342 $ (68) $2,034,054
Internal sales............................. 517,363 117,517 66,492 -- -- (701,372) --
Depreciation and amortization.............. 53,132 39,583 68,297 117,651 2,010 -- 280,673
Earnings before interest and taxes......... 144,357 (20,920) 196,398 56,727 (101,988) 12,268 286,842
Interest expense........................... 226,120
Earnings before income taxes............... 60,722
Identifiable assets........................ 1,360,102 1,121,509 1,788,943 2,511,319 1,269,013 (99,458) 7,951,428
- ----------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1997:
Eliminating/
Fossil Nuclear Power Monitored Reconciling
Generation Generation Delivery Services (4) Other (5,6) Items (2,7) Total
- ----------------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
External sales............................. $ 208,836 $ -- $1,021,212 $ 152,347 $ 769,416 $ (46) $2,151,765
Internal sales............................. 517,167 102,330 66,492 -- -- (685,989) --
Depreciation and amortization.............. 53,831 65,902 63,590 41,179 32,223 -- 256,725
Earnings before interest and taxes......... 149,825 (60,968) 173,809 (38,517) 914,747 (62,583) 1,076,313
Interest expense........................... 193,808
Earnings before income taxes............... 882,505
Identifiable assets........................ 1,337,591 1,154,522 1,721,021 1,593,286 1,238,088 (84,958) 6,959,550
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Earnings before interest and taxes (EBIT) includes investment earnings of
$36.0 million, an impairment of marketable securities of $76.2 million and
the write-off of deferred costs of $17.6 million.
(2) Identifiable assets includes eliminating and reclassing balances to
consolidate the monitored services business.
(3) Earnings before interest and taxes (EBIT) includes investment earnings
of $21.7 million and the write-off of international power development costs
of $98.9 million.
(4) EBIT includes monitored services special charge of $24.3 million.
(5) EBIT includes investment earnings of $37.8 million and gain on sale of Tyco
securities of $864.2 million.
(6) 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.
(7) EBIT includes write-off of deferred merger costs of $48 million.
Geographic Information: Prior to 1998, the company did not have international
sales or international property, plant and equipment. The company's sales and
property, plant and equipment are as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
Year Ended December 31, 1999 1998
- -----------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C>
External sales:
North America operations................................. $1,873,152 $1,990,329
International operations................................. 163,006 43,725
------------------------
Total.................................................. $2,036,158 $2,034,054
========================
Property, plant and equipment, net:
North America operations................................. $3,881,294 $3,792,645
International operations................................. 8,150 7,271
------------------------
Total.................................................. $3,889,444 $3,799,916
========================
</TABLE>
36
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
23. QUARTERLY RESULTS (UNAUDITED)
The amounts in the table are unaudited but, in the opinion of management,
contain all adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of the results of such periods. The electric
business of the company is seasonal in nature and, in the opinion of management,
comparisons between the quarters of a year do not give a true indication of
overall trends and changes in operations.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
First Second Third Fourth
- -------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands, Except Per Share Amounts)
<S> <C> <C> <C> <C>
1999
Sales.............................................................. $ 460,582 $ 476,142 $ 648,998 $ 450,436
Gross profit....................................................... 312,655 324,407 425,087 311,022
Net income before extraordinary gain/(1)/.......................... 20,747 18,489 49,010 (87,529)
Net income/(1)/.................................................... 20,747 18,489 49,010 (75,787)
Basic earnings per share available for common stock before
extraordinary gain................................................. $ 0.31 $ 0.27 $ 0.72 $ (1.31)
Cash dividend per common share..................................... $ 0.535 $ 0.535 $ 0.535 $ 0.535
Market price per common share:
High............................................................ $ 33.875 $ 29.375 $ 27.125 $ 23.8125
Low............................................................. $ 26.6875 $ 23.75 $ 20.375 $ 16.8125
1998
Sales.............................................................. $ 382,343 $ 463,301 $ 701,402 $ 487,008
Gross profit....................................................... 252,040 291,338 365,415 302,002
Net income before extraordinary gain/(2)/.......................... 29,813 29,415 71,421 (84,484)
Net income/(2)/.................................................... 29,813 31,006 71,421 (84,484)
Basic earnings per share available for common stock before
extraordinary gain................................................. $ 0.44 $ 0.42 $ 1.08 $ (1.29)
Cash dividend per common share..................................... $ 0.535 $ 0.535 $ 0.535 $ 0.535
Market price per common share:
High............................................................ $ 44.188 $ 42.688 $ 41.625 $ 43.250
Low............................................................. $ 40.000 $ 36.875 $ 37.688 $ 32.563
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
/(1)/ The effect of Protection One's change in accounting principle effected
income in the third quarter of 1999 by increasing amortization expense by
$47 million.
/(2)/ The loss in the fourth quarter of 1998, is primarily attributable to a
$98.9 million charge to income to exit the company's international power
development business.
24. SUBSEQUENT EVENTS
Marketable Securities: Through March 16, 2000, the company sold a significant
portion of an equity investment in a gas compression company and realized a gain
of $72.6 million.
In February 2000, Metrocall, Inc., a paging company whose securities were
included in our investment portfolio at December 31, 1999, made an announcement
that significantly increased the market value of paging company securities in
the public markets. During the first quarter of 2000, the remainder of these
paging securities were sold and a gain of $24.9 million was realized.
Retirement of Protection One Debt: In the first quarter of 2000, Westar Capital
purchased an additional $46.3 million of Protection One bonds in the open market
and recognized an extraordinary gain of $14.4 million, net of tax.
Protection One European Operations: On February 29, 2000, Westar Capital
purchased the continental European and United Kingdom operations of Protection
One, and certain investments held by a subsidiary of Protection One for an
aggregate purchase price of $244 million. The basis of the net assets sold did
not change and no gain or loss was recorded for this related party transaction.
Terms of the agreement were approved by a special committee of outside directors
of Protection One. The special committee obtained a fairness opinion from an
investment banker.
Dividend Policy: The company's board of directors reviews the company's dividend
policy on an annual basis. Among the factors the board of directors considers in
determining the company's dividend policy are earnings, cash flows,
capitalization ratios, competition and regulatory conditions. In January 2000,
the company's board of directors declared a first-quarter 2000 dividend of 53
1/2 cents per share. In March, the company announced a new dividend policy that
will result in quarterly dividends of $.30 per share or $1.20 per share on an
annual basis to be effective with the anticipated declaration of the July 2000
dividend.
Corporate Restructuring: On March 28, 2000, the company's board of directors
approved the separation of its electric and non-electric utility businesses. The
separation is currently expected to be effected through an exchange offer to be
made to shareholders in the third quarter of 2000. The exchange ratio will be
described in materials furnished to shareholders upon commencement of the
exchange offer. The impact on the company's financial position and operating
results cannot be known until the exchange ratio is determined. The company
expects to complete the separation in the fourth quarter of 2000, but no
assurance can be given that the separation will be completed.
37
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
- --------------------------------------------------------------------------------
TO THE SHAREHOLDERS AND BOARD OF DIRECTORS OF WESTERN RESOURCES, INC.:
We have audited the accompanying consolidated balance sheets and statements of
cumulative preferred stock of Western Resources, Inc., as of December 31, 1999
and 1998, and the related consolidated statements of income, comprehensive
income, cash flows, and shareholders' equity for each of the three years in the
period ended December 31, 1999. These financial statements are the
responsibility of the company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the
audits to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Western Resources, Inc., as of
December 31, 1999 and 1998, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1999, in conformity
with accounting principles generally accepted in the United States.
As explained in Note 1 to the Financial Statements, effective September 1, 1999,
the company changed its method of amortization for customer accounts for its
North American and European customers from the straight-line method to a
declining balance (accelerated) method.
ARTHUR ANDERSEN LLP
Kansas City, Missouri,
March 16, 2000
(except with respect to the Dividend Policy and Corporate Restructuring
discussed in Note 24, as to which the date is March 28, 2000)
38
<PAGE>
DIRECTORS, OFFICERS AND CORPORATE INFORMATION
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
DIRECTORS CORPORATE INFORMATION
Frank J. Becker (63) John C. Dicus (66) Jane Dresner Sadaka (45) CORPORATE ADDRESSES
Elected 1992 Elected 1990 Elected 1999
President Chairman of the Board Retired Partner Western Resources
Becker Investments, Inc. and Chief Executive Officer Kellner, DiLeo & Co. 818 South Kansas Avenue
Lawrence, Kansas Capitol Federal Savings New York, New York Topeka, KS 66612-1203
Committees: Human Resources, Topeka, Kansas Committees: Audit and Finance, 785-575-6300
Nominating Committees: Human Resources, Nominating www.wr.com
Corporate Public Policy
Dr. Gene A. Budig (60) Louis W. Smith (56) COMMON STOCK LISTING
Elected 1999* Owen F. Leonard (59) Elected 1991
Senior Advisor Elected 2000 President and Ticker Symbol (NYSE): WR
to the Commissioner of Baseball President Chief Executive Officer Daily stock table listing: WstnRes
Committee: Human Resources KL Industries, Inc. Ewing Marion Kauffman
Saddle Brook, New Jersey Foundation CONTACTING INVESTOR RELATIONS:
Charles Q. Chandler IV (46) Kansas City, Missouri
Elected 1999 John C. Nettels, Jr. (43) Committees: Corporate E-mail Address: [email protected]
Chairman of the Board, Elected 2000 Public Policy, Nominating James A. Martin
President and Chief Executive Partner Vice President
Officer Morrison & Hecker, L.L.P. David C. Wittig (44) Strategic Planning
INTRUST Bank Attorneys Elected 1996 785-575-6549
Wichita, Kansas Wichita, Kansas Chairman of the Board, FAX: 785-575-8160
Committees: Audit and Finance, President and
Corporate Public Policy Russell W. Meyer, Jr. (67) Chief Executive Officer Carl Ricketts
Elected 1992 Western Resources, Inc. Vice President
Chairman of the Board Topeka, Kansas Investor Relations
Cessna Aircraft Company 785-575-8424
Wichita, Kansas FAX: 785-575-1774
Committee: Audit and Finance
Copies of the Form 10-K/A
Annual Report to the Securities
and Exchange Commission and other
published reports can be obtained
______________________________________________________________________________________________ without charge by contacting
Investor Relations at the above
address or by accessing the
company's home page on the
internet at http://www.wr.com.
OFFICERS
EXECUTIVE OFFICERS UTILITY OPERATIONS CORPORATE MANAGEMENT
David C. Wittig (44) 1995 Douglas J. Henry (46) 1977 Carl A. Ricketts (42) 1982
Chairman of the Board, Vice President, Power Delivery Vice President, Investor Relations
President and
Chief Executive Officer Wayne A. Kitchen (49) 1987 Leroy P. Wages (51) 1977
Vice President, Regulatory Controller
Thomas L. Grennan (47) 1974 and Environmental
Executive Vice President, WESTAR COMMUNICATIONS
Electric Operations Leslie D. Morgan (52) 1970
Vice President, Generation Lori A. Finney (38) 1984
Carl M. Koupal, Jr. (46) 1992 Services President
Executive Vice President and
Chief Administrative Officer SHARED SERVICES
Douglas T. Lake (49) 1998 Anita J. Hunt (37) 1989
Executive Vice President Vice President, Information
and Chief Strategic Officer Technology
William B. Moore (47) 1978 James A. Martin (42) 1983
Executive Vice President, Vice President, Strategic
Chief Financial Officer Planning
and Treasurer
Richard D. Terrill (45) 1980
Executive Vice President, General
Counsel and Corporate Secretary
Rita A. Sharpe (41) 1977
Vice President, Shared Services
</TABLE>
*Dr. Budig also served as a director from 1987 to 1997.
( ) Age as of December 31, 1999 - Year joined Western Resources or predecessor
company
39
<PAGE>
[LOGO OF WESTERN RESOURCES(R) APPEARS HERE]
P.O. Box 889, Topeka, Kansas 66601-0889
http://www.wr.com
<PAGE>
[PROXY CARD]
Please mark
your votes as
indicated in
this example |X|
ELECTION OF DIRECTORS: Nominees for terms ending in 2003:
01 Charles Q. Chandler, IV
02 John C. Dicus
03 Owen F. Leonard
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STATEMENTS, AND ANNUAL REPORTS ELECTRONICALLY ON THE INTERNET INSTEAD OF
RECEIVING THESE MATERIALS BY MAIL.
|_| I (WE) CONSENT TO DISCONTINUE RECEIVING THE ANNUAL REPORT FOR THIS ACCOUNT
BECAUSE ANOTHER COPY IS DELIVERED TO THIS ADDRESS.
Dated: _________________________________, 2000
______________________________________________
SIGNATURE
______________________________________________
SIGNATURE
Please mark, date and sign as your name(s) appear hereon and return in the
enclosed envelope. Give full title if signing for a corporation or as attorney,
executor, administrator, guardian or in any other capacity.
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FOLD AND DETACH HERE
[LOGO] Western Resources
Thank you for being a Western Resources, Inc. Shareholder.
Please take a moment now to vote your shares for the upcoming Annual Meeting of
Shareholders. You can vote in one of three ways:
OPTION #1: Vote by Telephone: Call toll free 1-800-250-9081 using a touch tone
telephone 24 hours a day, 7 days a week, and follow the simple prompts. You will
be asked to enter the Control Number below.
<PAGE>
If you wish to vote "For All Directors" as recommended by the Board
of Directors, simply press 1. Please wait for your confirmation. If
you do not wish to vote as the Board recommends, you need only
respond to a few simple prompts. There is no charge for this call
in the United States.
Your Control Number is
[TELEPHONE GRAPHIC] [COMPUTER GRAPHIC]
For Telephone/Internet Voting
Your telephone or Internet vote authorizes the named proxies to
vote your shares in the same manner as if you had marked, signed
and returned your proxy card.
OPTION #2: Vote by Internet: Access http://www.votefast.com and respond to a few
simple prompts after entering the Control Number above.
OPTION #3: Vote by Mail: If you do not desire to vote by touch tone telephone or
the Internet, please mark, sign, date, and return the proxy card above.
Your telephone or Internet vote must be received by 10:59 p.m. CDT
on June 14, 2000 to be counted in the final tabulation.
If you vote by telephone or Internet, please do not mail this card.
[BACK SIDE OF PROXY CARD]
WESTERN RESOURCES, INC.
Solicited by the Board of Directors for use at the Annual Meeting of
Shareholders of Western Resources, Inc. - June 15, 2000, at 1:30 P.M., at the
Topeka Performing Arts Center, 214 S.E. 8th Street, Topeka, KS.
The undersigned hereby appoints Carl M. Koupal, Jr., William B. Moore, and
Richard D. Terrill and any one or more of them, attorneys and proxies, with the
full power of substitution and revocation in each, for and on behalf of the
undersigned, and with all the powers the undersigned would possess if personally
present, including discretionary power upon other matters properly coming before
the meeting, to vote at the above Annual Meeting and any Adjournment(s) thereof
all shares of Common and Preferred Stock of Western Resources, Inc. that the
undersigned would be entitled to vote at such meeting. This proxy also provides
voting instructions for shares held by the undersigned in the Western Resources,
Inc. 401(k) Employees' Savings Plan and the Employee Stock Purchase Plan. The
undersigned acknowledges receipt of the Notice and Proxy Statement dated May 11,
2000.
The shares represented by this proxy will be voted as directed by the
shareholder. If no direction is given when the duly executed proxy is returned,
such shares will be voted FOR all proposals.
THIS PROXY IS CONTINUED ON THE REVERSE SIDE.
PLEASE SIGN ON THE REVERSE SIDE AND RETURN PROMPTLY.
<PAGE>
Forward this card to Corporate Election Services: P.O. Box 3230, Pittsburgh, PA
15230
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FOLD AND DETACH HERE
______________________________________________________________________________
"E" IS FOR EASY...AND ELECTRONIC
We encourage you to vote electronically, either by touch tone telephone or
through the Internet. Electronic methods cut down on your paperwork and also
reduces our printing and postage costs which achieves greater shareholder value.
If you would like electronic access to the Annual Report and Proxy Statement
next year and not receive them by mail, be sure to indicate this when you vote.
Remember, whether or not you are attending the meeting, we encourage you to vote
your shares. Thank you for being a Western Resources, Inc. Shareholder.
______________________________________________________________________________
WHERE AND WHEN
[LOGO] Western Resources
Annual Meeting of Shareholders
Thursday, June 15, 2000
1:30 p.m.
Topeka Performing Arts Center
214 SE 8th Street
Topeka, KS
