|
Ongoing Investigations
Grand Jury Subpoena
On September 17, 2002, we were served
with a federal grand jury subpoena by
the United States Attorney’s Office
in Topeka, Kansas, requesting information
concerning the use of aircraft and our
annual shareholder meetings. Since that
date, the United States Attorney’s Office
has served additional subpoenas on us
and certain of our employees requesting
further information concerning the use
of aircraft; executive compensation
arrangements with Mr. Wittig, Mr. Lake
and other former and present officers;
the proposed rights offering of Westar
Industries stock; and the company in
general. We are providing information
in response to these requests and are
fully cooperating in the investigation.
We have not been informed that we are
a target of the investigation. We are
unable to predict the ultimate outcome
of the investigation or its impact on
us.
Securities
and Exchange Commission Inquiry
On November 1, 2002, the SEC notified
us that it would be conducting an inquiry
into the matters involved in the restatement
of our first and second quarter 2002
financial statements. Our counsel has
communicated with the SEC about these
matters and other matters within the
scope of the grand jury investigation.
We are unable to predict the ultimate
outcome of the inquiry or its impact
on us.
Special
Committee Investigation
Our board of directors appointed a Special
Committee of directors to investigate
management matters and matters that
are the subject of the grand jury investigation
and SEC inquiry. The Special Committee
retained counsel and other advisors.
The Special Committee investigation
has been completed and has not resulted
in adjustments to our consolidated financial
statements.
FERC
Subpoena
On December 16, 2002, we received
a subpoena from FERC seeking details on power trades with Cleco
Corporation (Cleco) and its affiliates, documents concerning power
transactions between our system and our marketing operations and
information on power trades in which we or other trading companies
acted as intermediaries.
We have provided information to FERC in
response to the subpoena. We believe that our participation in these
transactions did not violate FERC rules and regulations. However,
we are unable to predict the ultimate outcome of the investigation.
See Note 19 of the Notes to Consolidated Financial Statements, “Ongoing
Investigations — FERC Subpoena,” for additional information.
Call Option
In
August 1998, we entered into a call
option with an investment bank related
to the issuance of $400 million of our
putable/callable notes. This call option
is required to be settled by August
2003 through either a cash payment or
a remarketing or refinancing of the
putable/callable notes. The ultimate
value of the call option will be based
on the difference between the 10-year
United States treasury rate on August
12, 2003 and 5.44%. If the 10-year United
States treasury rate on August 12, 2003
is less than 5.44%, we will have a liability
to the investment bank at that time.
At December 31, 2002, our potential
liability under the call option was
$62.2 million. Based on the 10-year
forward treasury rate on March 14, 2003
of 3.91%, we would be obligated to make
a cash payment of approximately $69.1
million
to settle the call option if we did
not remarket or
|
|
refinance the notes. The amount of our
liability will increase or decrease approximately $5 million for
every 10-basis point change in the 10-year forward treasury rate.
If settled through a remarketing or refinancing, any liability related
to the call option will be amortized as a credit to interest expense
over the term of the new debt. The investment bank will price the
notes to yield a market premium adequate to allow the investment
bank to retain proceeds equal to the fair value of the call option
at settlement.
At the time of issuance of the notes in
1998, we were not required by generally accepted accounting principles
(GAAP) to account separately for the call option. However, when
we began retiring these notes as a part of our overall debt reduction
strategy, the portion of the call option associated with the retired
notes became a freestanding option required to be treated as a derivative
instrument under SFAS No. 133, “Accounting for Derivative Instruments
and Hedging Activities,” as amended by SFAS Nos. 137 and 138 (collectively,
SFAS No. 133). In addition, under SFAS No. 133, we are required
to mark to market changes in the anticipated amount of the liability
related to the portion of the $400 million in notes that have been
retired so that our balance sheet reflects the current fair value
of the free standing portion of the call option. For 2002, we recognized
a loss of $10.1 million, net of $6.7 million tax benefit, related
to the fair value of the call option associated with the putable/callable
notes at the time the notes were retired. This loss is included
in our consolidated statements of income as part of the gain on
extinguishment of debt line item of other income. For 2002, we also
recorded an additional non-cash charge of $13.6 million, net of
$9.0 million tax benefit, to reflect mark to market changes in the
fair value of the call option associated with the retired notes.
This charge is reflected in the other line item of other income
in our consolidated statements of income. In total, the loss recorded
related to the fair value of the call option for the year ended
December 31, 2002 was $23.7 million, net of $15.7 million tax benefit.
We intend to repurchase or provide for
the repayment of the putable/callable notes on or prior to June
15, 2003. Any repurchase of these notes will require us to mark
to market additional amounts of the call option. From January 1,
2003 through March 14, 2003, we purchased $35.3 million face value
of our putable/callable notes. We cannot predict changes in the
market value of the call option and therefore cannot estimate amounts
of future mark-to-market non-cash charges associated with the call
option or the impact on our earnings.
Impairment Charges
Effective January 1, 2002, we adopted
SFAS No. 142, “Accounting for Goodwill and Other Intangible Assets,”
and SFAS No. 144, “Accounting for the Impairment and Disposal of
Long-Lived Assets.” As a result of implementing the new standards,
we recorded a charge for the first quarter of 2002 of approximately
$749.3 million (net of tax benefit and minority interests), of which
$555.4 million was related to goodwill and $193.9 million was related
to customer accounts.
In addition, in the fourth quarter of
2002 we recorded a $79.7 million impairment charge, net of tax benefit
and minority interests, to reflect the additional impairment of
all remaining goodwill of Protection One’s North America segment.
We also recorded a $36 million impairment charge to reflect the
impairment of all remaining goodwill at Protection One Europe. These
accounting standards, the related charges and other related information
are discussed in Note 23 of the Notes to Consolidated Financial
Statements, “Impairment Charges.”
|
