Form 10-Q for further information on this financial plan and related KCC orders. The KCC rejected this plan on November 8, 2002 and issued an order that directed us to file a new financial plan, to reverse specified intercompany transactions, to reduce debt by $100 million annually in each of the next two years from internally generated cash flow, and to restructure our organizational structure so that KPL would be placed in a separate subsidiary with the amount of debt held by the utility not exceeding $1.47 billion. The order further established standstill protections requiring that we seek KCC approval before we enter into certain transactions with a non-utility affiliate. Following our filing of a motion for reconsideration and clarification of this order, the KCC issued an order on December 23, 2002 directing that no later than August 1, 2003, KPL be held within a separate utility-only subsidiary and that the consolidated debt for all of our utility businesses not exceed $1.67 billion.

The standstill provisions of the December 23, 2002 KCC order potentially could have had a material impact on Protection One. These standstill provisions are described in Note 3 of the Notes to Consolidated Financial Statements, “Rate Matters and Regulation.” On March 11, 2003, the KCC issued an order permitting us to make the payment due to Protection One in 2003 under a tax sharing agreement and to continue making loans to Protection One under a revolving credit facility. In addition, the order permitted us to reimburse Protection One approximately $4.4 million for information technology and aviation services, subject to certain conditions.

The KCC staff and other parties to the KCC docket considering the Debt Reduction Plan have filed comments on the Debt Reduction Plan. The KCC has not yet established a procedural schedule for considering the Debt Reduction Plan and the related comments. We are unable to predict what action the KCC will take with respect to the Debt Reduction Plan.

The KCC Orders dated November 8, 2002, December 23, 2002, February 10, 2003 and March 11, 2003 and the Debt Reduction Plan are exhibits to this Annual Report on Form 10-K. All of such exhibits are incorporated by reference herein. All of the documents concerning these matters, including the KCC Orders, can also be reviewed at the website of the KCC at www.kcc.state.ks.us (the website information is not incorporated herein or otherwise made a part of this Annual Report on Form 10-K). We refer you to these documents for further information concerning these matters.

Changes in ONEOK Ownership
On February 5, 2003, ONEOK repurchased from Westar Industries 9,038,755 shares of its Series A Convertible Preferred Stock, which were convertible into 18,077,511 shares of common stock. We received $300 million as a result of this sale, which was previously approved by the KCC. We anticipate using all or a portion of the net proceeds to repurchase or provide for the repayment of all of the putable/callable notes and a portion of our 6.875% senior unsecured notes.

Westar Industries also exchanged its remaining shares of Series A Convertible Preferred Stock for 21,815,386 new shares of ONEOK’s Series D Convertible Preferred Stock. ONEOK has agreed to file a shelf registration statement covering the Series D Convertible Preferred and common stock held by Westar Industries. Future sales will be subject to various conditions including the effectiveness of such registration, the required waiver or expiration of a 180-day lock-up period ending on July 22, 2003, and future market conditions. As of

 

  

March 14, 2003, Westar Industries holds an approximate 27.5% ownership interest in ONEOK, assuming conversion of the Series D Convertible Preferred Stock.

In 2002 and prior periods, we accounted for our ONEOK common stock investment under the equity method of accounting. During 2003, we will account for our ONEOK common stock investment as an available-for-sale security under Statement of Financial Accounting Standards (SFAS) No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” and mark to market its fair value through other comprehensive income. We will begin accounting for our ONEOK Series D Convertible Preferred Stock investment under this method if and when a public market for these securities develops.

Sale of Protection One and Protection One Europe
On January 13, 2003, we announced that our board of directors authorized management to explore alternatives for disposing of our investments in Protection One and Protection One Europe. The Debt Reduction Plan provides for the sale of our interests in Protection One Europe with a targeted closing of mid-2003 and the sale of our interest in Protection One with a targeted closing by late 2003 or early 2004. As a result, these operations were classified as discontinued operations during the first quarter of 2003 pursuant to the provisions of SFAS No. 144, “Accounting for the Impairment and Disposal of Long-Lived Assets.”

As discontinued operations, we will be required to determine the fair value of our investment, which will be the net amount we expect to realize from the sale of the investment. The investment must be reported at the lesser of our recorded basis or the estimated fair value. If the fair value is less than our recorded basis, we will be required to record an expense equal to the amount, which could be material, by which our basis exceeds the estimated fair value.

We solicited and received indications of value for Protection One Europe from potential buyers. These indications of value are within a range we would be willing to accept. They indicated the recorded goodwill for Protection One Europe had no value. Accordingly, we recorded a $36 million impairment charge in the fourth quarter of 2002 to reflect the impairment of all remaining goodwill at Protection One Europe. We are willing to accept offers in the indicated range due to our ability to use the tax loss on this sale to offset the taxes that would otherwise be due from our sale of other investments. We will recognize a $58 million tax benefit in the first quarter of 2003 when Protection One Europe is classified as a discontinued operation.

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.

 

 

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