<PAGE> 1
SCHEDULE 14A INFORMATION
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:
<TABLE>
<S> <C>
[X] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to 240.14a-11(c) or 240.14a-12
</TABLE>
PROTECTION ONE, 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:
----------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
----------------------------------------------------------------------
(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:
---------------------------------------------------------------------
(5) Total fee paid:
----------------------------------------------------------------------
[ ] 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:
---------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
---------------------------------------------------------------------
(3) Filing Party:
---------------------------------------------------------------------
(4) Date Filed:
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<PAGE> 2
PRELIMINARY COPY
PROTECTION ONE, INC.
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
To the Stockholders of Protection One, Inc.:
NOTICE IS HEREBY GIVEN that the 1997 Annual Meeting of
Stockholders (the "Meeting") of Protection One, Inc., a Delaware corporation
(the "Company"), will be held at 10:00 a.m., Pacific Standard Time, on
Wednesday, January 29, 1997 at the Company's principal executive offices at 6011
Bristol Parkway, Culver City, California 90230, for the following purposes, all
as set forth in the attached Proxy Statement:
(1) To elect four directors;
(2) To consider and act on the ratification of the selection
by the Board of Directors of Coopers & Lybrand L.L.P. as independent
public accountants for the Company and its subsidiaries for the year
ending September 30, 1997;
(3) To consider and act on a proposed amendment to the
Company's Fifth Restated Certificate of Incorporation to increase the
number of shares of Common Stock, par value $.01 per share, that the
Company is authorized to issue from 24,000,000 shares to 40,000,000
shares;
(4) To consider and act on approval of an amendment to the
Company's 1994 Stock Option Plan to increase the number of shares of
the Company's Common Stock available for issuance under such plan from
944,000 shares to 1,300,000 shares; and
(5) To transact such other business as may properly come
before the Meeting.
The Board of Directors has fixed the close of business on
December 17, 1996 as the record date for the determination of stockholders
entitled to receive notice of, and to vote at, the Meeting and any and all
adjournments thereof.
STOCKHOLDERS ARE CORDIALLY INVITED TO ATTEND THE MEETING IN
PERSON. HOWEVER, WHETHER OR NOT YOU EXPECT TO ATTEND, YOU ARE URGED TO READ THE
ATTACHED PROXY STATEMENT AND TO ASSURE YOUR REPRESENTATION AT THE MEETING BY
COMPLETING, SIGNING, DATING AND RETURNING THE ENCLOSED PROXY CARD AS PROMPTLY AS
POSSIBLE. AN ENVELOPE, WHICH REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES
OR CANADA, IS INCLUDED FOR YOUR CONVENIENCE. IF YOU RECEIVE MORE THAN ONE PROXY
CARD BECAUSE YOU OWN SHARES REGISTERED IN DIFFERENT NAMES OR AT DIFFERENT
ADDRESSES, EACH PROXY CARD SHOULD BE COMPLETED, SIGNED AND RETURNED.
By Order of the Board of Directors
John W. Hesse
Executive Vice President
and Secretary
December 30, 1996
<PAGE> 3
PROTECTION ONE, INC.
6011 Bristol Parkway
Culver City, California 90230
PROXY STATEMENT
- --------------------------------------------------------------------------------
ANNUAL MEETING OF STOCKHOLDERS
To Be Held on January 29, 1997
This Proxy Statement is furnished to holders of shares of the
Common Stock, par value $.01 per share ("Common Stock"), of Protection One,
Inc., a Delaware corporation (the "Company"), in connection with the
solicitation of proxies by the Board of Directors of the Company from holders of
the Common Stock for use at the 1997 Annual Meeting of Stockholders of the
Company (the "Meeting"), for the purposes set forth in the foregoing notice of
the Meeting, and at any and all adjournments of the Meeting. The Meeting will be
held at 10:00 a.m., Pacific Standard Time, on Wednesday, January 29, 1997, at
the Company's principal executive offices at 6011 Bristol Parkway, Culver City,
California 90230.
This Proxy Statement and the enclosed proxy are first being
mailed or otherwise released to stockholders entitled to vote at the Meeting on
or about December 31, 1996. The Company's audited financial statements, together
with the report thereon of Coopers & Lybrand L.L.P. and certain other
information concerning the Company, are included in the Company's Annual Report
on Form 10-K for the year ended September 30, 1996, which is being mailed with
this Proxy Statement.
The Board of Directors requests that you complete, sign, date
and return the enclosed proxy promptly, regardless of whether you plan to attend
the Meeting. Any stockholder attending the meeting may vote in person, even
though he or she previously has returned a proxy.
The date of this Proxy Statement is December 30, 1996.
<PAGE> 4
INTRODUCTION
MATTERS TO BE CONSIDERED
At the Meeting, the stockholders of the Company will vote upon
(i) the election of four directors to serve for one year and until their
successors have been elected and shall have qualified; (ii) the ratification of
the selection of Coopers & Lybrand L.L.P. as the independent public accountants
of the Company and its subsidiaries for the year ending September 30, 1997
("fiscal 1997"); (iii) the approval of an amendment to the Company's Fifth
Restated Certificate of Incorporation as previously amended (the "Certificate of
Incorporation") to increase the number of shares of Common Stock authorized for
issuance from 24,000,000 shares to 40,000,000 shares; (iv) the approval of an
amendment to the Company's 1994 Stock Option Plan (the "Stock Option Plan") to
increase the number of shares of Common Stock available for issuance pursuant to
options granted under such plan from 944,000 shares to 1,300,000 shares; and (v)
such other business as may properly come before the Meeting. The Board of
Directors does not know of any matter to be presented at the Meeting other than
those described in this Proxy Statement.
VOTING RIGHTS AND VOTES REQUIRED
The Board of Directors has fixed December 17, 1996 as the date
(the "Record Date") for the determination of stockholders entitled to notice of,
and to vote at, the Meeting. At the close of business on the Record Date,
__________ shares of Common Stock were outstanding.
A majority of the outstanding shares of Common Stock must be
represented in person or by proxy at the Meeting in order to constitute a quorum
for the transaction of business. Abstentions and shares held by a broker or
other nominee holding shares for a beneficial owner that are not voted on a
particular proposal because the nominee does not have discretionary voting power
with respect to that proposal and has not received instructions from the
beneficial owner (a "broker non-vote") will be counted as present for purposes
of determining the presence of a quorum for the Meeting.
Each holder of record of Common Stock on the Record Date is
entitled to one vote for each share of Common Stock so held on each matter to be
voted upon at the Meeting.
The four directors to be elected at the Meeting will be
elected by the affirmative vote of the holders of a plurality of the shares of
Common Stock represented at the Meeting in person or by proxy. Because the four
directors will be elected by a plurality vote (i.e., the four persons receiving
the highest number of favorable votes will be elected) and assuming such
election is uncontested, votes withheld from any one or more nominees and broker
non-votes will not have any effect on the outcome of the election of directors.
Ratification of the selection of Coopers & Lybrand L.L.P. as
independent public accountants for fiscal 1997, approval of the amendment to the
1994 Stock Option Plan and action with respect to any other matter that may
properly come before the Meeting will require the affirmative vote of the
holders of a majority of the shares of Common Stock represented at the Meeting
in person or by proxy and entitled to vote on the matter. Abstentions will be
counted in determining the total number of shares present and entitled to vote
on each such proposal. Accordingly, although not counted as a vote "for" or
"against" a proposal, an abstention on any such proposal will have the same
effect as a vote "against" that proposal. Broker non-votes will not be counted
in determining the number of shares present and entitled to vote on each such
proposal, and will have no effect on the outcome.
Under Delaware law, approval of the proposed amendment to the
Certificate of Incorporation to increase the number of authorized shares of
Common Stock will require the affirmative vote of the holders of a majority of
the shares of Common Stock outstanding and entitled to vote on this matter.
Abstentions and broker non-votes will be counted in determining the total number
of shares outstanding and entitled to vote and therefore will have the same
effect as votes "against" the proposed amendment.
2
<PAGE> 5
SOLICITATION, VOTING AND REVOCATION OF PROXIES
In connection with the solicitation by the Board of Directors
of proxies for use at the Meeting, the Board of Directors has designated John W.
Hesse and George A. Weinstock as proxies. Shares of Common Stock represented by
proxies in the accompanying form, properly executed, received prior to the
Meeting and not revoked, will be voted at the Meeting in accordance with the
instructions specified thereon. IF NO INSTRUCTIONS ARE SPECIFIED, SHARES OF
COMMON STOCK REPRESENTED BY ANY SUCH PROXY WILL BE VOTED FOR THE ELECTION OF
EACH OF ROBERT M. CHEFITZ, BEN ENIS, JAMES M. MACKENZIE, JR. AND JAMES Q.
WILSON, FOR THE RATIFICATION OF THE SELECTION OF COOPERS & LYBRAND L.L.P. AS THE
INDEPENDENT PUBLIC ACCOUNTANTS OF THE COMPANY AND ITS SUBSIDIARIES FOR FISCAL
1997, FOR THE PROPOSED AMENDMENT TO THE CERTIFICATE OF INCORPORATION INCREASING
THE NUMBER OF SHARES OF COMMON STOCK AUTHORIZED FOR ISSUANCE, FOR THE PROPOSED
AMENDMENT TO THE STOCK OPTION PLAN INCREASING THE NUMBER OF SHARES OF COMMON
STOCK FOR WHICH OPTIONS UNDER SUCH PLAN MAY BE ISSUED, AND IN ACCORDANCE WITH
THEIR BEST JUDGMENT WITH REGARD TO ALL OTHER MATTERS, IF ANY, THAT MAY BE
PRESENTED AT THE MEETING AND MATTERS INCIDENT TO THE CONDUCT OF THE MEETING. The
Board of Directors is not aware of any matter that will come before the Meeting
other than as described above.
A stockholder may revoke his or her proxy at any time prior to
its exercise by filing with the Secretary of the Company at its principal
executive office at 6011 Bristol Parkway, Culver City, California 90230 a notice
of revocation or a duly executed proxy bearing a later date, or by attending the
Meeting and voting in person. Attendance at the Meeting will not, in itself,
constitute revocation of a previously granted proxy.
In the event that the votes necessary to approve any one or
more of the foregoing proposals 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.
The costs of this solicitation, including expenses in
connection with preparing and mailing this Proxy Statement and the enclosed
proxy, will be paid by the Company. The Company has retained Allen Nelson & Co.,
Inc., a proxy soliciting firm ("Allen Nelson"), to assist in the solicitation of
proxies. Allen Nelson's fee for these services will be approximately $2,500,
plus reimbursement of out-of-pocket expenses estimated at $1,000. Original
solicitations of proxies by mail also may be supplemented by telephone,
telegram, facsimile and personal solicitation by directors, officers and other
employees of the Company and its subsidiaries, who will receive no additional
compensation therefor. The Company will reimburse persons holding shares of
Common Stock in their names or the names of their nominees but not owning such
shares beneficially (such as brokerage firms, banks and other fiduciaries) for
their expenses in forwarding soliciting materials to such beneficial owners.
I. ELECTION OF DIRECTORS
NOMINEES FOR ELECTION
Four directors will be elected at the Meeting, each to serve
until the next annual meeting of the Company's stockholders and until his
successor has been duly elected and qualified.
The persons recommended by the Board of Directors for election
as directors at the Meeting are Robert M. Chefitz, Ben Enis, James M. Mackenzie,
Jr. and James Q. Wilson, each of whom is an incumbent director and each of whom
has consented to being named as a nominee in this Proxy Statement and to serving
if elected.
Although the Board of Directors does not know of any reason
why any of the Board of Directors' nominees will be unavailable for election, in
the event any such nominee should be so unavailable at the time of the Meeting,
proxies in the accompanying form will be voted for the election of the balance
of those nominees named and such other person as the Board of Directors may
select.
3
<PAGE> 6
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE FOR
EACH OF THE NOMINEES LISTED BELOW AS A DIRECTOR OF THE
COMPANY.
Certain information concerning each of the persons proposed by
the Board of Directors for election at the Meeting as a director is set forth
below:
<TABLE>
<CAPTION>
Name Age Position(s) with the Company
---- --- ----------------------------
<S> <C> <C>
James M. Mackenzie, Jr. 49 President, Chief Executive Officer and Director
Robert M. Chefitz 37 Director
Dr. Ben Enis 54 Director
James Q. Wilson 65 Director
</TABLE>
James M. Mackenzie, Jr. has been President and Chief Executive
Officer and a director of the Company since September 1991.
Robert M. Chefitz has been a director of the Company since
September 1991. Mr. Chefitz joined Patricof & Co. Ventures, Inc., an investment
management firm ("Patricof"), in 1987, where he currently serves as a Vice
President; Mr. Chefitz also serves as General Partner to various venture capital
partnerships Patricof manages. Mr. Chefitz currently serves on the Board of
Directors of Xpedite Systems, Inc., and is also a director of several private
companies (including Casi-Rusco, Inc., R.E. Harrington, Inc. and TME, Inc.) and
of the New York Venture Capital Forum.
Dr. Ben Enis has been a director of the Company since October
1994. He has been a Professor of Marketing at the University of Southern
California since 1982. Dr. Enis currently serves on the Board of Directors of
Countrywide Credit Industries, Inc.
James Q. Wilson has been a Director of the Company since June
1996. Mr. Wilson has been a Professor of Management at the University of
California at Los Angeles since 1986. Mr. Wilson is currently a director of New
England Electric System, the RAND Corporation and State Farm Mutual Life
Insurance Company.
Each director has been elected to hold office until his
successor has been duly elected or he sooner dies, resigns or is removed in
accordance with applicable law. There is no family relationship between any two
directors, nominees for director or executive officers of the Company.
Committees of the Board of Directors; Board and Committee Meetings
The Board of Directors has a Compensation Committee and an
Audit Committee, each of which is currently comprised of Mr. Chefitz and Dr.
Enis. The Compensation Committee establishes, subject to approval by the Board
of Directors, the salaries and bonuses for executive officers of the Company,
and together with the Board of Directors administers the Company's employee
stock option, stock purchase and 401(k) plans. The Audit Committee selects,
subject to approval by the Board of Directors, independent public accountants
to audit the consolidated financial statements of the Company and its
subsidiaries and reviews the results and scope of the audits and other services
provided by the Company's independent auditors. The Board of Directors does
not currently have a nominating committee.
During the year ended September 30, 1996, the Board of
Directors held nine meetings and acted twice by written consent, and each of the
Compensation Committee and the Audit Committee held three meetings. Each
director attended at least 75% of the aggregate of the meetings of the Board of
Directors and of the committees of the Board of Directors of which he was a
member.
4
<PAGE> 7
Compensation of Directors
Each of Dr. Enis and Mr. Wilson receives a fee of $10,000 per
year as compensation for his services as a director. In addition, Dr. Enis was
granted on November 15, 1995 an option under the Stock Option Plan to purchase
6,000 shares of Common Stock at a price of $8.00 per share, and Mr. Wilson was
granted an option under the Stock Option Plan on June 18, 1996 to purchase 6,000
shares of Common Stock at a price of $13.875 per share. Each of these options
has a 10-year term and an exercise price equal to the closing price reported on
the Nasdaq National Market on the grant date; each option becomes exercisable
with respect to 20% of the shares subject thereto beginning one year after the
grant date and as to an additional 20% of such shares on each subsequent
anniversary date. (For a description of provisions of the Stock Option Plan
regarding acceleration of the vesting of these options in certain circumstances
and certain other option terms, see "Approval of Proposed Amendment to Stock
Option Plan" below.)
In February 1996, the Company entered into a consulting
agreement with Dr. Enis pursuant to which Dr. Enis advises and assists the
Company and its wholly owned subsidiary, Protection One Alarm Monitoring, Inc.
("Monitoring"), in formulating and implementing advertising and marketing
objectives and strategies, and is compensated for such services at a rate of
$7,500 per month. The consulting agreement expires in March 1997.
All directors are reimbursed for travel and other
out-of-pocket expenses incurred in attending meetings of the Board of Directors.
EXECUTIVE OFFICERS
The name, age and current position(s) with the Company of each
executive officer of the Company are as set forth below. Each individual other
than Mr. Weinstock also serves in the same capacities for Monitoring.
<TABLE>
<CAPTION>
Name Age Position(s)
---- --- -----------
<S> <C> <C>
James M. Mackenzie, Jr. 49 President and Chief Executive Officer and Director
John W. Hesse 47 Executive Vice President, Chief Financial Officer and Secretary
John E. Mack, III 37 Executive Vice President -- Business Development and Assistant
Secretary
Thomas K. Rankin 39 Executive Vice President -- Branch Management and Assistant
Secretary
George A. Weinstock 59 Executive Vice President and Assistant Secretary
</TABLE>
For additional information with respect to the positions with
the Company held by, and the business experience of, Mr. Mackenzie, see
"Nominees for Election" above.
John W. Hesse has been Executive Vice President, Chief
Financial Officer and Secretary of the Company since September 1991.
John E. Mack, III was Vice President -- Business Development
of the Company from September 1991 until August 1996, and has been the Company's
Executive Vice President - Business Development since August 1996 and Assistant
Secretary of the Company since October 1994.
5
<PAGE> 8
Thomas K. Rankin was Vice President - Branch Management of the
Company from September 1991 to August 1996, and has been the Company's Executive
Vice President -- Branch Management since August 1996 and Assistant Secretary of
the Company since October 1994.
George A. Weinstock has been Executive Vice President of
Monitoring since November 1993 and Executive Vice President of the Company since
June 1994, and was a director of the Company from November 1993 to May 1994.
Prior to November 1993, Mr. Weinstock served as President of American Home
Security, Inc.
All officers of the Company are appointed by the Board of
Directors and hold their respective offices until their respective successors
have been appointed, or their earlier death, resignation or removal by the Board
of Directors.
EXECUTIVE COMPENSATION AND OTHER RELATED INFORMATION
The following table summarizes the compensation for the fiscal
years ended September 30, 1996, 1995 and 1994 of the Company's Chief Executive
Officer and the four other executive officers of the Company.
<TABLE>
<CAPTION>
Long-Term Compensation
---------------------- All
Restricted Securities Other
Annual Compensation Stock Underlying Compen-
Name and --------------------- Award(s) Options Granted sation
Principal Position(s) Year Salary($) Bonus($) ($)(1) (#) ($)(2)
- --------------------- ---- --------- -------- ------ --- ------
<S> <C> <C> <C> <C> <C> <C>
James M. Mackenzie, Jr 1996 298,104 60,000 40,000(3) 100,000 1,818
President and 1995 267,347 80,000 20,000(4) -- --
Chief Executive Officer 1994 264,995 65,000 -- 18,000 --
John W. Hesse 1996 250,728 60,000 40,000(3) 100,000 1,706
Executive Vice President, 1995 226,600 80,000 20,000(4) -- --
Chief Financial Officer 1994 202,834 65,000 -- 30,000 --
and Secretary
John E. Mack, III 1996 186,128 60,000 40,000(3) 100,000 263
Executive Vice President 1995 162,000 80,000 20,000(4) -- --
- Business Development and 1994 144,881 65,000 -- 36,000 --
Assistant Secretary(5)
Thomas K. Rankin 1996 186,128 60,000 40,000(3) 100,000 2,288
Executive Vice President 1995 162,000 80,000 20,000(4) -- --
- Branch Management and 1994 144,881 65,000 -- 36,000 --
Assistant Secretary(6)
George A. Weinstock 1996 163,500 25,000 -- -- 2,096
Executive Vice President and 1995 157,500 25,000 -- -- --
Assistant Secretary 1994 136,750 50,000 -- 12,000 --
</TABLE>
- --------------------
1 Restricted stock is fully vested when awarded. The executive officer
owning such shares will receive the same dividends on these shares as
are received by all other holders of the Common Stock; however, the
Company has never paid any cash dividend on the Common Stock and does
not anticipate paying any such dividend in the foreseeable future.
6
<PAGE> 9
2 Amounts stated reflect contributions made by the Company to such
executive officer's account under the Company's 401(k) plan.
3 Awarded and to be paid in fiscal 1997 in the form of 4,156 shares of
Common Stock. As no consideration was paid for these shares, the value
set forth in the chart is calculated by multiplying the closing price
of the Common Stock as reported on the Nasdaq National Market on the
date awarded ($9.625) by the number of shares awarded.
4 Awarded and paid in fiscal 1996 in the form of 2,500 shares of Common
Stock. As no consideration was paid for these shares, the value set
forth in the chart is calculated by multiplying the closing price of
the Common Stock as reported on the Nasdaq National Market on the date
of award ($8.00) by the number of shares awarded. As of September 30,
1996, the value of such 2,500 shares was $31,562.50, based upon the
closing price of the Common Stock on that date as reported on the
Nasdaq National Market ($12.625 per share).
5 As described in "-Executive Officers" above, prior to August 1996 Mr.
Mack was Vice President - Business Development of the Company.
6 As described in "-Executive Officers" above, prior to August 1996 Mr.
Rankin was Vice President - Branch Management of the Company.
Other compensation in the form of perquisites and other personal
benefits has been omitted from the above table as the aggregate amount of such
perquisites and other personal benefits constituted the lesser of $50,000 or 10%
of the total annual salary and bonus of the named executive officer for such
year.
Performance Warrants
On September 16, 1991, the Company granted to each of the
following executive officers a Common Stock Performance Warrant (collectively,
the "Performance Warrants") to purchase the following number of shares of Common
Stock, in each case at a price of $.167 per share: Mr. Mackenzie (180,621), Mr.
Hesse (131,703), Mr. Mack (94,074) and Mr. Rankin (94,074). The Performance
Warrants originally were to become exercisable over a five-year period upon the
Company's attainment of certain return on investment objectives. On June 29,
1994, the Board of Directors modified the performance and vesting criteria to
provide that the Performance Warrants would be immediately exercisable in full.
However, each of Messrs. Mackenzie, Hesse, Mack and Rankin agreed in connection
with such modifications that such officer would not exercise his Performance
Warrant (i) prior to September 16, 1995, for more than 40% of the shares subject
to such warrant, and (ii) prior to September 16, 1996, for more than 70% of such
shares, subject to earlier termination of such restrictions on exercise in the
event the Company engaged in a merger, sale of assets or other business
combination in which the other party to the transaction was the survivor or
purchaser and consideration was distributed to holders of the Common Stock. In
the event the holder of a Performance Warrant ceases to be an employee of the
Company, the Performance Warrant may be exercised in whole or in part by the
holder or his estate during the 90 days following the Company's receipt of
notice of the termination, and to the extent not exercised will terminate on
such 90th day. The Performance Warrants will expire on September 16, 2002.
The following table sets forth certain information concerning
the value of the Performance Warrants as of September 30, 1996. No Performance
Warrant was exercised during the fiscal year ended September 30, 1996.
7
<PAGE> 10
FISCAL YEAR-END PERFORMANCE WARRANT VALUES
<TABLE>
<CAPTION>
Value of
Number of Unexercised
Shares of In-the-Money
Stock Underlying Performance
Performance Warrants Warrants($)
as of 9/30/96 as of 9/30/96
Exercisable/ Exercisable/
Name Unexercisable* Unexercisable*
---- -------------- --------------
<S> <C> <C>
James M. Mackenzie, Jr 180,621/0 2,227,599/0
John W. Hesse 131,703/0 1,624,293/0
John E. Mack, III 28,222/0 348,062/0
Thomas K. Rankin 94,074/0 1,160,215/0
</TABLE>
- --------------------
* Value is calculated by subtracting the exercise price from the fair
market value of the Common Stock at September 30, 1996 and multiplying
the result by the number of shares for which the Performance Warrant is
in the money. Fair market value is calculated based upon the average of
the high and low sales prices of the Common Stock as reported by the
NASDAQ National Market on September 30, 1996 ($12.50). There is no
guarantee that if and when any Performance Warrant is exercised, such
warrant will have this value.
Stock Option Grants
The following table sets forth certain information concerning
grants of stock options made during the fiscal year ended September 30, 1996 to
the executive officers named in the Summary Compensation Table. For a
description of the Stock Option Plan and the proposed amendment thereto, see
"Approval of Amendment to Stock Option Plan" below. The option grants disclosed
in the following table are also included in the "New Plan Benefits" table
included in such section.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Individual Grants
----------------------------- Potential Realizable Value
Number of Percent of At Assumed Annual Rates of
Securities Total Options/ Stock Price Appreciation
Underlying SARs Granted to Exercise or for Option Term (3)
Options/SARs Employees Base Price Expiration ---------------------------
Name Granted(#)(1) in Fiscal Year ($/Sh)(2) Date 5%($) 10%($)
---- -------------- -------------- ----------- ---------- ----- ------
<S> <C> <C> <C> <C> <C> <C>
James M. Mackenzie, Jr. 70,000 11.4% 8.00 11/15/05 352,181 892,496
James M. Mackenzie, Jr. 30,000 4.9% 15.00 11/15/05 -0- 172,498
John W. Hesse 70,000 11.4% 8.00 11/15/05 352,181 892,496
John W. Hesse 30,000 4.9% 15.00 11/15/05 -0- 172,498
John E. Mack, III 70,000 11.4% 8.00 11/15/05 352,181 892,496
John E. Mack, III 30,000 4.9% 15.00 11/15/05 -0- 172,498
Thomas K. Rankin 70,000 11.4% 8.00 11/15/05 352,181 892,496
Thomas K. Rankin 30,000 4.9% 15.00 11/15/05 -0- 172,498
</TABLE>
- --------------------
1 Options were granted on November 15, 1996. Such grants were subject to
approval by the stockholders of the Company, which approval was
obtained on January 26, 1996.
2 All stock options granted have 10-year terms and will become
exercisable with respect to 20% of the shares subject thereto beginning
one year after the date of grant and 20% on each anniversary date
thereafter, with full vesting occurring on the fifth anniversary of the
date of
8
<PAGE> 11
grant. See also "Approval of Amendment to Stock Option Plan" below for
provisions regarding acceleration of the vesting for options in certain
circumstances.
3 The exercise price was determined by reference to the closing price of
the Common Stock reported on the Nasdaq National Market on the date of
grant ($8.00).
4 The amounts shown for potential realizable values are based upon the
arbitrary assumption that the Common Stock appreciates at the annual
rates shown (compounded annually) from the date of grant until the
expiration of the option term. These numbers are calculated based upon
the requirements promulgated by the Securities and Exchange Commission
(the "SEC"), and not represent an estimate by the Company of future
stock price growth.
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End
Option Values
The following table sets forth, for each of the executive
officers named in the Summary Compensation Table above, certain information
regarding the value of stock options held at fiscal year end. No stock option
was exercised by any such executive officer during the fiscal year ended
September 30, 1996. The options disclosed in the following table are also
included in the "New Plan Benefits" table included under the caption "Approval
of Amendment to Stock Option Plan" below.
AGGREGATED OPTION/SAR EXERCISES AND FISCAL YEAR-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
Number of Shares
of Stock Underlying Value of Unexercised
Unexercised In-the-Money Options/SARs
Options/SARs at 9/30/96 at 9/30/96 ($)(2)
Name Exercisable/Unexercisable(1) Exercisable/Unexercisable
---- ---------------------------- -------------------------
<S> <C> <C>
James M. Mackenzie, Jr 30,800/87,200 127,800/295,200
John W. Hesse 38,000/92,000 171,000/324,000
John E. Mack, III 41,600/94,400 192,600/338,400
Thomas K. Rankin 41,600/94,400 192,600/338,400
George A. Weinstock
</TABLE>
- --------------------
1 The vesting of options may be accelerated as a result of a change in
control of the Company. See "Approval of Proposed Amendment to Stock
Option Plan" below.
2 Value is calculated by subtracting the exercise price from the assumed
fair market value of the securities underlying the option at fiscal
year end and multiplying the result by the number of shares for which
the option is in the money. Fair market value was calculated based upon
the average of the high and low sales prices of the Common Stock as
reported on the Nasdaq National Market on September 30, 1996 ($12.50).
There is no guarantee that if and when any such option is exercised,
the option will have this value.
Employment Contracts, including Termination of Employment and
Change-of-Control Arrangements
The Company has entered into employment agreements with each of
the Company's executive officers.
The term of each of the employment agreements with
Messrs. Mackenzie, Mack and Rankin is continually extended so as to cause each
such agreement to have a remaining term of three years; the term of the
employment agreement with Mr. Hesse expires on September 30, 1998. Each of
Messrs. Mackenzie, Mack and Rankin may terminate their employment by the Company
for any reason at any time after May 24, 1999 upon not less than six months
prior notice to the Company. The Company may terminate the employment of
Messrs. Mackenzie, Hess, Mack or Rankin for cause, including: (a) unauthorized
prolonged or repeated absence from duty (for reasons other than health);
(b) habitual neglect of duties; (c) engagement in any activity which is in
conflict with or adverse to the Company's business interests; (d) violation
in any material respect of any provision of
9
<PAGE> 12
such employment agreement; (e) willful or serious misconduct by such officer
relating to the performance of duties or otherwise injurious to the Company; or
(f) conviction of a felony or crime involving moral turpitude. Each of Messrs.
Mackenzie, Mack and Rankin has agreed not to compete with the Company and not to
solicit any Company employee, or hire any Company employee whose annual base
salary and fixed or guaranteed bonus would be more than $50,000 (a "highly
compensated employee"), prior to the later of the first anniversary of the date
on which his employment by the Company terminates and May 24, 1999 (with respect
to the restrictions on competition) or May 24, 2000 (as to the solicitation of
employees). Mr. Hesse has agreed not to compete with the Company prior to March
2, 1999 and not to solicit any Company employee, or hire any Company employee if
such employee would be a highly compensated employee, prior to March 22, 2000.
Each of Messrs. Mackenzie, Hesse, Mack and Rankin will be compensated for such
covenants in an amount based upon his compensation earned while employed by
the Company during the 12-month period immediately preceding termination of
his employment, net of any termination payment he may receive.
The Company's employment agreement with Mr. Weinstock has an
initial term that expires in November 1998; thereafter, the agreement will be
automatically extended for successive one-year periods unless prior notice of
cancellation is given. The agreement provides for annual compensation to Mr.
Weinstock in the amount of $150,000 per year, subject to cost of living
adjustments, and an annual bonus in the amount of $50,000 in the first year and
thereafter as determined by the Board of Directors. The Company may terminate
Mr. Weinstock's employment for cause, including: (a) his disability for a period
in excess of one year; (b) his conviction of a felony involving moral turpitude;
or (c) material breach of or default under his related non-competition
agreement. If Mr. Weinstock's employment agreement is terminated (i) by the
Company without cause, (ii) due to a material breach of the employment agreement
by the Company, or (iii) as a result of a change of control of the Company, then
the Company shall pay Mr. Weinstock an amount equal to 50% of all compensation
and benefits that would have been due to Mr. Weinstock under his employment
agreement for the remainder of the unexpired term, discounted to its present
value. Mr. Weinstock has also agreed not to compete with the Company or its
subsidiaries until November 1998 and is compensated for his covenant not to
compete in the amount of $2,500 per month for a period of 60 months.
401(k) Plan
The Company maintains a tax-qualified, defined contribution
plan that meets the requirements of Section 401(k) of the Internal Revenue Code
(the "401(k) Plan"). Each employee who is at least 21 years old and who has
provided services to the Company or any of its subsidiaries for at least six
months may elect to contribute to the 401(k) Plan each year, on a pre-tax basis,
up to the lesser of 16% of that employee's salary or $9,500 (the current federal
limit). The Company at its election also may make contributions to the 401(k)
Plan, which contributions will be allocated among participants based upon the
respective contributions made by the participants through salary reductions
during the applicable plan year. The Company's matching contribution may be made
in shares of Common Stock, in cash or in a combination of both stock and cash.
Amounts contributed to the 401(k) Plan for the benefit of the participants are
invested by the plan trustee in one or more of various investment alternatives
selected by the participants, and vest at the rate of 20% after two years of
service and an additional 20% after each additional year of service. Plan
contributions generally are not available to plan participants until their
employment with the Company terminates. The amount ultimately received by a
participant or by a participant's beneficiary may be more or less than the
amount contributed by the participant to the 401(k) Plan, depending upon the
investment experience of the fund chosen by the participant, and the amount of
Company contributions, if any, made on behalf of the participant.
Directors and Officers Liability Insurance
In June 1996, the Company purchased a policy of directors and
officers liability insurance covering all directors and officers of the Company
and its subsidiaries. The policy has a term extending from June 1, 1996 to June
1, 1997, has a total premium of approximately $113,000 and a limit of liability
of $5,000,000 for all insured losses. No claim has been paid under this policy.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The compensation of the Company's executive officers is
determined by the Compensation Committee of the Board of Directors based on the
goals and policies established by the Board of Directors.
10
<PAGE> 13
The Company has entered into employment agreements with each
of the executive officers. The base salary for each of the executive officers is
set forth in his employment agreement, subject to cost of living and other
adjustments pursuant to the policies established by the Compensation Committee.
Salaries for executive officers are supplemented by bonuses paid in cash and in
common stock, as well as warrants and options.
Since the inception of the Company in September 1991, the
Compensation Committee has used common stock, warrants and options as a means of
providing performance-based compensation to all executive officers. For example,
unregistered common stock comprised 20% and 40% of the bonuses paid to executive
officers for fiscal year 1995 and 1996 performance, respectively. Of the options
issued to executive officers in fiscal year 1996, 30% are exercisable at a price
equal to a 87.5% premium to the common stock price at the grant date. The
Compensation Committee carefully considers the type of security used in
executive compensation to encourage long-term commitment on the part of the
executive officers. For instance, the shortest vesting schedule for executive
officer options is five years. The Compensation Committee believes linking
executive compensation to the performance of the Company's common stock aligns
the interests of the executive officers with those of shareholders.
In determining the compensation of the Company's executive
officers, the Compensation Committee considers a combination of objective and
subjective performance criteria, all of which the Compsensation Commitee
believes contribute to shareholder value. Objective criteria include:
* Revenue and EBITDA* growth
* Subscriber growth
* Margin expansion
* Subscriber and MRR attrition
The Compensation Committee, in conjunction with the Board of
Directors, reviews the business plans and projections prepared by management and
compares the Company's actual performance to the objective criteria set forth in
such plans and projections.
Subjective criteria considered by the Compensation Committee
in determining executive officer compensation include the consummation of
acquisitions, growth in the Company's dealer program, strategic alliance, joint
venture and affinity program activities, management and Company infrastructure
enhancements and success in capital formation. The Compensation Committee also
considers compensation paid to other persons with comparable skills and
experience in the security industry and other service industries, the Company's
performance in comparison to its competitors and performance in each officer's
specific area of responsibility.
ROBERT CHEFITZ
BEN ENIS
- --------------
* EBITDA is earnings before interest, taxes, depreciation and amortization.
PERFORMANCE GRAPH
The following chart compares the cumulative total stockholder
returns on the Common Stock since September 29, 1994 (the date on which the
Common Stock was first traded on the Nasdaq Stock Market) to the cumulative
total returns over the same period of the Russell 2000 index and a peer group
index comprised of the common stock of ADT Ltd., Borg Warner Security
Corporation and Holmes Protection Group, Inc. and The Pittston Brinks Group
Common Stock of The Pittston Company (the "Peer Group"). The Peer Group is based
on the selection of companies operating in the security alarm monitoring
business. The annual returns for the Peer Group index are weighted based on the
capitalization of each company within the Peer Group at the beginning of each
period for which a return is indicated. The chart assumes the value of the
investment in the Common Stock and each index was $100 at September 29, 1994 and
that all dividends were reinvested.
11
<PAGE> 14
Comparison of Cumulative Total Stockholder Return
[Graph appears here]
<TABLE>
<CAPTION>
Cumulative Total Return
-------------------------------------------
9/29/94 9/30/94 9/30/95 9/30/96
------- ------- ------- -------
<S> <C> <C> <C> <C>
Protection One, Inc. 100 101 140 193
Peer Group 100 100 107 139
Russell 2000 100 100 123 139
</TABLE>
The materials contained in the foregoing Compensation Committee Report
on Executive Compensation and included under the caption "Performance Graph" are
not "soliciting material," are not deemed filed with the Securities and Exchange
Commission and are not to be incorporated by reference in any filing of the
Company under the Securities Act of 1933, as amended, or the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), whether made before or after the
date of this Proxy Statement and irrespective of any general incorporation
provision contained therein.
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth certain information with
respect to beneficial ownership of the Common Stock as of December 1, 1996 by
each of the Company's directors, by each of the Company's executive officers
named in the Summary Compensation Table and by all directors and executive
officers of the Company as a group. Unless otherwise indicated below, each
individual named in the table has sole voting power and sole investment power
with respect to all the shares beneficially owned, subject to community property
laws, where applicable.
<TABLE>
<CAPTION>
Amount and Nature of Beneficial Ownership(1)
Name Number of Shares Percent of Class
---- ---------------- ----------------
<S> <C> <C>
James M. Mackenzie, Jr 315,025(2) 2.3
John W. Hesse 225,466(3) 1.7
John E. Mack, III 148,284(4) 1.1
Thomas K. Rankin 151,033(5) 1.1
George A. Weinstock 49,932(6) *
Robert M. Chefitz 2,515,444(7) 18.7
Ben Enis 1,200(8) *
James Q. Wilson 100 *
All directors and executive officers 3,406,484(9) 24.2
as a group (8 individuals)
</TABLE>
- ------------------
* Less than one percent.
12
<PAGE> 15
1 Based upon shares of Common Stock outstanding at December 1, 1996
(13,466,671 shares), as adjusted for shares of Common Stock subject to
options and warrants held that are currently exercisable or that become
exercisable within 60 days after of the date of this Proxy Statement.
2 Includes 180,621 shares issuable upon exercise of a Performance Warrant
and 30,800 shares issuable upon exercise of stock options.
3 Includes 131,703 shares issuable upon exercise of a Performance Warrant
and 38,000 shares issuable upon exercise of stock options.
4 Includes 28,222 shares issuable upon exercise of a Performance Warrant
and 41,600 shares issuable upon exercise of stock options.
5 Includes 94,074 shares issuable upon exercise of a Performance Warrant
and 41,600 shares issuable upon exercise of stock options.
6 Includes 7,200 shares issuable upon exercise of a stock option.
7 Mr. Chefitz, a director of the Company, is also General Partner of APA
Excelsior III L.P. and APA Excelsior III/Offshore, L.P. and an officer
of Patricof & Co. Ventures, Inc., the manager of or investment adviser
to such funds and to CIN Venture Nominees, Ltd. See "Security Ownership
of Certain Beneficial Owners" below. Mr. Chefitz disclaims beneficial
ownership of the shares listed in the table as owned by him, all of
which shares are owned by APA Excelsior III L.P., APA Excelsior
III/Offshore, LP. or CIN Ventures Nominees, Ltd.
8 All of such shares are issuable upon exercise of a stock option.
9 Includes an aggregate of 434,620 shares issuable upon exercise of
Performance Warrants and 160,400 shares issuable upon exercise of stock
options. See also note (7) above.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Pursuant to Section 16(a) of the Exchange Act and the rules
issued thereunder, the Company's executive officers and directors are required
to file with the SEC and the Nasdaq Stock Market reports of ownership and
changes in ownership of the Common Stock. Copies of such reports are required to
be furnished to the Company. Based solely on the Company's review of the copies
of such reports furnished to the Company or on written representations to the
Company that no such reports were required, the Company believes that during the
year ended September 30, 1996, all of the Company's executive officers and
directors and all beneficial owners of more than 10% of the Common Stock filed
on a timely basis all reports, if any, required by Section 16(a) of the Exchange
Act.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth certain information with
respect to beneficial ownership of the Common Stock as of December 1, 1996 by
each person known to the Company to beneficially own more than 5% of the
outstanding Common Stock. Unless otherwise indicated below, each entity named in
the table has sole voting power and sole investment power with respect to all
the shares beneficially owned, subject to community property laws, where
applicable.
<TABLE>
<CAPTION>
Amount and Nature of Beneficial Ownership
Name and Address Number of Shares Percent of Class(1)
---------------- ---------------- -------------------
<S> <C> <C>
APA Excelsior III, L.P. 1,756,008(2) 13.0
c/o Patricof & Co. Ventures, Inc.
445 Park Avenue, 11th Floor
</TABLE>
13
<PAGE> 16
<TABLE>
<S> <C> <C>
New York, New York 10022
FMR Corp.
82 Devonshire Street 1,747,510(3) 12.3
Boston, MA 02109
Morgan Stanley Group Inc. 1,214,953(4) 8.8
1585 Broadway
New York, New York 10020
APA Excelsior III/Offshore, L.P. 669,082(2) 5.0
c/o Patricof & Co. Ventures, Inc.
445 Park Avenue, 11th Floor
New York, New York 10022
CIN Venture Nominees, Ltd. 90,354(2) *
c/o Patricof & Co. Ventures, Inc.
445 Park Avenue, 11th Floor
New York, New York 10022
</TABLE>
- ------------------
* Less than one percent.
1 Based upon shares of Common Stock outstanding as of December 1, 1996
(13,466,671 shares), as adjusted for shares subject to warrants held
that are currently exercisable or that become exercisable within 60
days after of the date of this Proxy Statement and shares of Common
Stock issuable upon conversion of 6-3/4% Convertible Senior
Subordinated Notes due 2003 issued by Monitoring (the "Convertible
Notes") held.
2 Patricof & Co. Ventures, Inc. ("Patricof") is the manager of or
investment adviser to this stockholder and therefore may be deemed a
beneficial owner of these shares. See also note (7) to the "Security
Ownership of Management" table above.
3 Based upon a Schedule 13G dated November 8, 1996, which states as
follows: Various investment companies (the "Funds") for which Fidelity
Management & Research Company ("Fidelity"), a wholly owned subsidiary
of FMR Corp. and an investment adviser registered under Section 203 of
the Investment Advisers Act of 1940, acts as adviser, beneficially own
1,512,901 shares of Common Stock, including 74,650 shares issuable at
October 31, 1996 upon exercise of warrants and 395,541 shares issuable
at such date upon conversion of Convertible Notes. Fidelity Management
Trust Company, a wholly owned subsidiary of FMR Corp., serves as
investment manager for certain institutional account(s) that
beneficially owned at October 31, 1996 221,167 shares of Common Stock
issuable upon conversion of Convertible Notes and 13,440 shares of
Common Stock issuable upon exercise of warrants. FMR Corp. has sole
voting power as to 181,318 shares of Common Stock and sole dispositive
power as to 1,747,510 shares of Common Stock; FMR Corp. does not have
shared voting or dispositive power as to any shares. Each of Edward C.
Johnson, III, Chairman of FMR Corp., and Abigail P. Johnson, a Director
of FMR Corp., has sole voting power as to 1,747,510 shares of Common
Stock and not have sole or shared voting power or shared dispositive
power as to any shares of Common Stock.
4 Pursuant to certain written materials provided by Morgan Stanley & Co.
Incorporated ("MS&Co.") to the Company in October 1996, the Company was
advised that as of October 4, 1996, Morgan Stanley Group Inc. ("Morgan
Stanley"), through its affiliates, beneficially owned 1,214,953 shares
of Common Stock, including 187,600 shares of Common Stock issuable upon
the exercise of warrants.
14
<PAGE> 17
Amendment No. 1 to Schedule 13D dated February 14, 1996, filed by
Morgan Stanley Venture Capital Fund L.P. ("MSVCF"), Morgan Stanley
Venture Partners L.P. ("MSVP"), Morgan Stanley Venture Capital Inc.
("MSVC") and Morgan Stanley stated as follows: MSVCF is the record
owner of 875,275 shares of Common Stock; Morgan Stanley Asset
Management, Inc. ("MSAM"), a wholly owned subsidiary of Morgan Stanley,
was the owner of record of warrants to acquire 36,800 shares of Common
Stock purchased on behalf of MSAM's discretionary client accounts; and
MS&Co., a wholly owned subsidiary of Morgan Stanley, was the record
owner of warrants to acquire 159,000 shares of Common Stock. MSVP, as
the sole general partner of MSVCF, has the power, on behalf of MSVCF,
to vote or direct the vote and to dispose or direct the disposition of
all of the shares of Common Stock owned by MSVCF; MSVC, as the managing
general partner of MSVCF, has the power to control the actions of MSVP
on behalf of MSVCF; and Morgan Stanley, as the sole shareholder of
MSVC, has the power to control the actions of MSVC with respect to MSVP
and MSVCF. Accordingly, each of MSVP, MSVC and Morgan Stanley may be
deemed to beneficially own the shares of Common Stock owned of record
by MSVCF, as to all of which shares each of MSVCF, MSVP, MSVC and
Morgan Stanley have shared voting and dispositive power. In addition,
Morgan Stanley, as the sole shareholder of MSAM and MS&Co., has the
power to control the actions of MSAM with respect to the disposition of
the warrants to purchase 36,800 shares of Common Stock then owned by
MSAM and the power to control the actions of MS&Co. with respect to the
disposition of the warrants to purchase 159,600 shares of Common Stock
then owned by MS&Co. Accordingly, Morgan Stanley may be deemed to own
beneficially the warrants and underlying shares of Common Stock
beneficially owned by MSAM and MS&Co., as to all of which shares Morgan
Stanley has shared voting and dispositive power.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In May 1995, Monitoring and the Company offered and sold an
aggregate of $166 million principal amount of Monitoring's Senior Subordinated
Discount Notes due 2005, and warrants (the "1995 Warrants") to purchase an
aggregate of 531,200 shares of Common Stock from the Company at a price of $6.60
per share. Pursuant to a registration rights agreement entered into in
connection with such offering, including 61,600 shares of Common Stock offered
by MS&Co., the 531,200 shares of Common Stock underlying the 1995 Warrants,
including 61,600 shares of Common Stock offered by MS&Co., were registered by
the Company under the Securities Act for resale.
MS&Co. was the managing underwriter of an offering made
pursuant to a registration statement dated February 6, 1996 filed by the Company
with the SEC for an underwritten public offering of 2,500,000 shares of Common
Stock offered by the Company and an aggregate of 1,500,000 shares offered by
certain stockholders, including 382,447 shares offered by MSVCF. MS&Co. received
underwriting discounts and commissions of approximately $880,000 as managing
underwriter of the public offering.
In addition, MS&Co. was the managing underwriter of a public
offering made pursuant to a registration statement dated September 16, 1996 by
Monitoring of the Convertible Notes, which notes are unconditionally guaranteed
by, the Company. MS&Co. received underwriting discounts and commissions of
aggregating $2,173,500 (including fees and commissions resulting from the
underwriters' purchase of all of the additional notes available from Monitoring
under the offering to cover over-allotments) as managing underwriter of the
public offering.
II. RATIFICATION OF INDEPENDENT PUBLIC ACCOUNTANTS
The Audit Committee of the Board of Directors has selected
Coopers & Lybrand L.L.P. as the independent public accountants to audit the
consolidated financial statements of the Company and its subsidiaries for fiscal
1997. A representative of that firm is expected to be present at the Meeting,
will have an opportunity to make a statement if so desired, and will be
available to respond to appropriate questions.
15
<PAGE> 18
If the stockholders of the Company do not ratify the selection
of Coopers & Lybrand L.L.P., if such firm should decline to act or otherwise
become incapable of acting, or if such firm's employment is discontinued, the
Audit Committee will select other independent public accountants for the
Company.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE PROPOSAL TO
RATIFY THE SELECTION OF COOPERS & LYBRAND L.L.P. AS THE
COMPANY'S INDEPENDENT PUBLIC ACCOUNTANTS FOR FISCAL 1997.
III. APPROVAL OF PROPOSED AMENDMENT TO CERTIFICATE OF INCORPORATION
The Board of Directors has determined that it is advisable to
increase the Company's authorized Common Stock from 24,000,000 shares to
40,000,000 shares, and recommends that shareholders approve an amendment to
Article Fourth of the Company's Fifth Restated Certificate of Incorporation
effecting the proposed increase.
As of December 1, 1996, of the currently authorized shares of
Common Stock, 13,466,671 shares were outstanding, 1,914,216 unissued shares were
reserved for issuance under the Company's employee benefit plans, 1,351,158
shares were reserved for issuance pursuant to the exercise of outstanding
warrants and 5,766,017 shares were reserved for issuance upon conversion of the
Convertible Notes. Accordingly, a total of only 1,501,938 shares of Common Stock
were available for future issuances.
Although currently authorized shares are sufficient to meet
all currently known needs, the Board of Directors believes that it is in the
best interests of the Company to increase the authorized but unissued shares of
Common Stock in order to provide flexibility for corporate action in the future.
Management believes that the availability of additional authorized shares for
issuance from time to time in the discretion of the Board of Directors in
connection with possible acquisitions of the assets or stock of other companies,
future financings, investment opportunities, possible stock splits or dividends
or for other corporate purposes is desirable in order to avoid repeated separate
amendments to the Certificate of Incorporation and the delay and expense
incurred in holding special meetings of the Company's stockholders to approve
such amendments.
The Company has no present understanding or commitment, nor
has the Company taken any formal action, to issue currently authorized but
unissued shares or the additional shares to be authorized, except pursuant to
the Company's existing employee benefit plans and upon exercise of the Company's
outstanding warrants and conversion of the Convertible Notes.
No further authorization by vote of the Company's stockholders
will be solicited for the issuance of additional shares of Common Stock proposed
to be authorized, except as might be required by law, regulatory authority or
the rules of the Nasdaq Stock Market or any stock exchange on which the
Company's securities then may be listed. Shares of Common Stock could be issued
in one or more transactions. The issuance of additional shares of Common Stock
could have an effect on the potential realizable value of a stockholder's
investment. In the absence of a proportionate increase in the Company's book
value and earnings, if any, an increase in the aggregate number of outstanding
shares of Common Stock caused by the issuance of additional shares would dilute
the book value and earnings per share, if any, of all outstanding shares of
Common Stock. If such factors were reflected in the price per share of Common
Stock, the potential realizable value of a stockholder's investment could be
adversely affected. In addition, although the Company is not aware of any
pending or threatened effort to obtain control of the Company, the availability
for issuance of additional shares of Common Stock could enable the Board of
Directors to render more difficult or to discourage an attempt to do so. For
example, the issuance of shares of Common Stock in a public or private sale,
merger or similar transaction would increase the number of outstanding shares,
thereby diluting the interest of a party attempting to obtain control of the
Company.
16
<PAGE> 19
Holders of shares of Common Stock do not have any preemptive
or other rights to subscribe for or purchase additional securities that may be
issued by the Company.
Pursuant to the Delaware General Corporation Law, holders of
the Common Stock are not entitled to dissenter's rights of appraisal with
respect to the amendment to increase the authorized number of shares of Common
Stock.
III. APPROVAL OF PROPOSED AMENDMENT TO STOCK OPTION PLAN
The Stock Option Plan was adopted by the Company's Board of
Directors and approved by the stockholders of the Company in June 1994. The
purposes of the Stock Option Plan are to provide directors, officers and key
employees of the Company with an opportunity to acquire equity interests in the
Company as a long-term incentive for them to remain in the Company's service and
to align those individuals' interests with those of the Company's stockholders.
The Board of Directors believes that stock options are a significant factor in
the ability of the Company and its subsidiaries to attract and retain the
services of key individuals who are critical to the Company's long-range growth
and success.
In November 1995, the Board of Directors adopted an amendment
to the Stock Option Plan increasing the number of shares of Common Stock for
which options may be granted under such plan from 354,000 shares to 944,000
shares. As of December 17, 1996 (i) a total of ______ persons had been granted
options under the Stock Option Plan, (ii) ________ shares of Common Stock had
been issued and sold by the Company pursuant to the exercise of such options,
and (iii) options to purchase an aggregate of _________ shares were outstanding
at a weighted average exercise price of $_________ per share. As of December
___, 1996, the market value of the Common Stock was $_______ per share, based on
the closing price per share of the Common Stock on the Nasdaq National Market on
that date.
As a result of the option grants described above, only ______
shares of Common Stock remain available for grant under the Stock Option Plan as
of the date of this Proxy Statement. The Company expects to continue to grant
options in the ordinary course of business and in connection with acquisitions
to attract, retain and motivate directors, officers and key employees in a
competitive environment as the Company deems such issuances appropriate. The
Board of Directors believes that an increase in the number of shares authorized
for issuance under the Stock Option Plan to 1,300,000 is necessary to facilitate
the Company's growth and for the Company to continue to benefit from such plan.
The following table sets forth certain information with
respect to options granted under the Stock Option Plan since its inception to
each of the Company's executive officers, all current executive officers as a
group, all current directors who are not executive officers a group and all
employees who are not executive officers as a group. The option grants disclosed
in the following table include those reflected in the two tables included above
under the caption "Executive Compensation and Other Related Information - Stock
Option Plan."
NEW PLAN BENEFITS
Protection One, Inc. 1994 Stock Option Plan
<TABLE>
<CAPTION>
Number
Name and Position Dollar Value* of Shares
----------------- ------------- ---------
<S> <C> <C>
James M. Mackenzie, Jr 423,000 118,000
President and
Chief Executive Officer
John W. Hesse 495,000 130,000
Executive Vice President,
Chief Financial Officer
and Secretary
</TABLE>
17
<PAGE> 20
<TABLE>
<S> <C> <C>
John E. Mack, III 531,000 136,000
Executive Vice President -
Business Development and
Assistant Secretary
Thomas K. Rankin 531,000 136,000
Executive Vice President -
Branch Management and
Assistant Secretary
George A. Weinstock 72,000 12,000
Executive Vice President and
Assistant Secretary
Executive Officers 2,052,000 532,000
Non-Executive Director Group 63,000 18,000
Non-Executive Officer Employee Group 1,201,086 354,800
</TABLE>
- -------------------
1 Value is calculated by subtracting the exercise price from the assumed
fair market value of the securities underlying the option and
multiplying the result by the number of shares for which the option is
in the money. Fair market value was calculated based upon the average
of the high and low sales prices of the Common Stock as reported on the
Nasdaq National Market on September 30, 1996 ($12.50). There is no
guarantee that if and when any such option is exercised, the option
will have this value.
In addition to the options described in the immediately
preceding table, two options for an aggregate of 12,000 shares have been
granted to Ben Enis and an option for 6,000 shares has been granted to James Q.
Wilson. No option has been granted to any associate of any director or
executive officer of the Company, and no person has been granted options for
five percent or more of the total number of shares subject to options.
If the stockholders of the Company do not approve the proposed
increase in the number of shares for which options may be granted under the
Stock Option Plan to 1,300,000, the plan will continue in effect in its present
form. Except as described above, the amount of compensation that will accrue to
the Company's directors, executive officers and other employees pursuant to the
Stock Option Plan, if the proposed amendment is approved by the Company's
stockholders, can not be determined at this time.
Summary of 1994 Stock Option Plan
The principal provisions of the Stock Option Plan as currently
in effect are summarized below. The summary is in all respects qualified by the
provisions of the Stock Option Plan itself, a copy of which is available to any
stockholder upon written request to the Secretary of the Company at its
principal executive offices.
Securities Utilized; Eligible Participants. An aggregate of
944,000 shares of Common Stock have been reserved for issuance under the Stock
Option Plan, with such number subject to such adjustments as may be necessary to
reflect changes in the number or kind of shares of Common Stock or other
securities of the Company. The Stock Option Plan provides for the granting to
directors, officers and key employees of the Company (an aggregate of
approximately _______ persons at December 17, 1996) of options that qualify as
"incentive stock options" ("incentive stock options") under the Internal Revenue
Code, and options that do not so qualify ("non-qualified stock options").
Administration. The Stock Option Plan is administered by the
Board of Directors or, if the Board so elects, by Compensation Committee, which
has the discretion to determine, among other matters, the persons to whom
options will be granted and the terms of such options, including the number of
shares purchasable upon exercise of each option; whether options will be
incentive stock options or non-qualified stock options, the exercise price of
each option and the time or times at which
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each option may be exercised. Authority to grant options to employees of the
Company who are not executive officers has been delegated to the Company's Chief
Financial Officer.
Exercise Price. The exercise price of each incentive stock
option may not be less than 100% of the fair market value of the Common Stock,
as determined by the Compensation Committee, on the date the option is granted,
and the maximum term of each incentive stock option is 10 years. The purchase
price of the shares issued upon exercise of an option must be paid (i) in cash,
(ii) by surrender of shares of Common Stock held by the optionee or a
combination of cash and shares, or (iii) by a promissory note or a combination
of cash and a promissory note.
Limitations on Grants. The aggregate fair market value of the
shares of Common Stock for which incentive stock options may first be
exercisable by an optionee during any one calendar year may not exceed $100,000.
No incentive stock option may be granted after the 10th anniversary of adoption
of the Stock Option Plan, and no incentive stock option may be granted to any
employee who owns stock possessing more than 10% of the total combined voting
power of all classes of stock of the Company.
Termination of Employment. Upon termination of an optionee's
employment with the Company by reason of the optionee's death or "permanent and
total disability" (as defined in Section 22(e)(3) of the Code), each option then
held by that optionee will terminate (i) in the case of a non-qualified stock
option, on its scheduled expiration date, and (ii) in the case of an incentive
stock option, on the earlier of its scheduled expiration date or the date that
is 12 months after the date of termination of employment. Upon termination of an
optionee's employment with the Company by reason of disability that is not
permanent and total, each option then held by that optionee will terminate on
the scheduled expiration date of such option; provided, however, that in the
case of an incentive stock option, the option will terminate on the date that is
three months after the date of termination of employment if such date is earlier
than the option's scheduled expiration date.
Upon termination of an optionee's employment with the Company
by any reason other than death or disability, each option held by the optionee
on the date of termination shall terminate on the earlier of the date that is
three months after the date of termination of employment, or the fixed
expiration date of such option. If employment terminates by reason of death or
permanent and total disability, all options held by the optionee will become
immediately exercisable. If employment terminates for any other reason, all
options not already exercisable will be forfeited by the optionee unless the
Compensation Committee determines otherwise.
Change of Control. In the event that the Company enters into
an agreement to dispose of all or substantially all of its assets or the
Company's stockholders dispose or agree to dispose of 50% or more of the
outstanding shares of Common Stock (an "Acceleration Event"), then each
outstanding option will be exercisable in full during the 30 days immediately
preceding such Acceleration Event; provided, however, that no Acceleration Event
will be deemed to occur in the event that (i) the terms of the agreement
pursuant to which such transaction is occurring require as a condition to the
consummation of the transaction that each option will either be assumed by a
successor corporation or be replaced with a comparable option to purchase shares
of capital stock of a successor corporation, and (ii) the transaction is
approved by a majority of the directors of the Company who have been in office
for more than 12 months prior to the scheduled consummation of the transaction.
Upon consummation of the Acceleration Event, all outstanding options, whether or
not so accelerated, will terminate and cease to be exercisable, unless assumed
by the successor corporation.
Amendments and Termination. The Board of Directors at any time
may terminate, or from time to time amend, the Stock Option Plan in whole or in
part, but no such amendment may adversely affect any right or obligation with
respect to any option previously granted under the Stock Option Plan (except as
contemplated by the provisions described in "Change of Control" above) and no
amendment of the Stock Option Plan that would cause the plan to no longer comply
with Rule 16b-3 of the Rules and Regulations of the Commission or other
regulatory requirements will be effective unless such amendment is approved by
the holders of at least a majority of the issued and outstanding shares of
Common Stock.
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<PAGE> 22
Federal Income Tax Consequences. The holder of a non-qualified
stock option will not realize taxable income at the time his or her
non-qualified stock option was or is granted. At the time of exercise, the
optionee will recognize ordinary income equal to the excess of the fair market
value on the exercise date of the shares acquired over the total exercise price
paid. The optionee's basis in the shares so acquired will be equal to the total
exercise price plus the amount of such ordinary income. Upon the subsequent
disposition of the shares, an optionee will realize capital gain or loss equal
to the difference between such optionee's basis in the shares and the amount
realized from the disposition. The capital gain or loss will be treated as
long-term or short-term, depending upon the length of time that the optionee has
held the shares after exercise of the non-qualified stock option.
The holder of an incentive stock option also will not realize
taxable income at the time his or her incentive stock option is granted. The
exercise of the incentive stock option will not be taxable if the exercise
occurs while the optionee is an employee, within one year after the optionee's
employment is terminated for disability or within three months after the
optionee's employment is terminated for any other reason. However, the excess of
the fair market value of the shares acquired over the total exercise price paid
is included in determining the optionee's tax liability, if any, for alternative
minimum tax purposes and the optionee's basis in the shares acquired is
increased by the amount of such excess for alternative minimum tax purposes.
The holder of an incentive stock option will realize capital
gain or loss upon disposition of shares acquired on exercise of an incentive
stock option if such disposition occurs at least two years after the date of
grant, and one year after the date of exercise, of the incentive stock option.
The amount of capital gain or loss will be equal to the difference between the
total exercise price paid (or, for alternative minimum tax purposes, the
optionee's basis as determined above) and the amount realized upon disposition
of the shares. The capital gain or loss will be either long-term or short-term
depending upon the length of time that the optionee has held the shares after
exercise of the incentive stock option. If the optionee disposes of the shares
within two years from the date of grant or one year from the date of exercise (a
"Disqualifying Disposition"), any gain upon disposition will be treated as: (a)
ordinary income up to an amount equal to the lesser of the fair market value of
the shares on the date of exercise or the amount realized on their sale over the
total exercise price paid, and (b) capital gain on any amount in excess of the
ordinary income described in clause (a).
The foregoing summary of the federal income tax consequences
of the grant and exercise of options does not purport to be complete and is
based upon interpretations of existing laws, regulations and rulings that are
subject to change, which change may be retroactive. There also may be state and
local income tax consequences of an optionee's receipt and exercise of an
option, which are not discussed above and which may vary from jurisdiction to
jurisdiction; in addition, an optionee's use of shares of Common Stock already
held by the optionee to pay the exercise price of an option will have federal
income tax consequences that are not included in the foregoing description.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE PROPOSAL TO
AMEND THE STOCK OPTION PLAN TO INCREASE THE NUMBER OF SHARES
OF COMMON STOCK FOR WHICH OPTIONS MAY BE GRANTED FROM
944,000 SHARES TO 1,300,000 SHARES.
STOCKHOLDER PROPOSALS
Stockholder proposals intended to be presented at the 1998
annual meeting of the Company's stockholders must be received at the Company's
executive offices at 6011 Bristol Parkway, Culver City, California 90230,
addressed to the attention of the Secretary, by September 8, 1997 in order to be
considered for inclusion in the proxy statement and form of proxy relating to
such meeting.
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<PAGE> 23
OTHER MATTERS
The Board of Directors is not aware of any matter to be
presented at the Meeting other than the matters described above. If any other
matter properly comes before the Meeting, the persons named in the enclosed form
of proxy intend to vote said proxy in accordance with their best judgment on
such matter.
ANNUAL REPORT ON FORM 10-K
AN ADDITIONAL COPY OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED SEPTEMBER 30, 1996 (THE "1996 ANNUAL REPORT"), INCLUDING THE
CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES OF THE
COMPANY BUT EXCLUDING EXHIBITS TO SUCH REPORT, WILL BE PROVIDED TO EACH PERSON
TO WHOM A COPY OF THIS PROXY STATEMENT HAS BEEN SENT BY THE COMPANY AND TO EACH
OTHER BENEFICIAL OWNER OF SHARES OF COMMON STOCK AS OF THE RECORD DATE, WITHOUT
CHARGE, UPON WRITTEN REQUEST OF SUCH PERSON. ANY SUCH REQUEST SHOULD BE DIRECTED
TO MONTGOMERY W. CORNELL, DIRECTOR OF INVESTOR RELATIONS, 3900 S.W. MURRAY
BLVD., BEAVERTON, OREGON 97005, AND EACH SUCH BENEFICIAL OWNER MUST INCLUDE IN
SUCH REQUEST A GOOD FAITH REPRESENTATION THAT AS OF THE RECORD DATE THE PERSON
MAKING THE REQUEST BENEFICIALLY OWNED ONE OR MORE SHARES OF THE COMPANY'S
CAPITAL STOCK. A LIST OF THE EXHIBITS TO THE 1996 ANNUAL REPORT IS INCLUDED IN
SUCH REPORT; A COPY OF ANY SUCH EXHIBIT WILL BE FURNISHED UPON REQUEST AND
PAYMENT OF A MINIMAL FEE EQUAL TO THE COMPANY'S REASONABLE EXPENSES IN
FURNISHING SUCH COPY.
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APPENDIX A
PROTECTION ONE, INC.
1994 STOCK OPTION PLAN
(As amended through October 3, 1996)
1. PURPOSE.
The purposes of this 1994 Stock Option Plan (THIS "PLAN") are
to provide long-term incentives and rewards to directors, officers and key
employees of Protection One, Inc., a Delaware corporation (THE "COMPANY"), and
of the Company's subsidiaries, to assist the Company and its subsidiaries in
attracting and retaining such individuals on a basis competitive with industry
practices, to align their interests with those of the Company's stockholders,
and to provide additional compensation to them.
2. EFFECTIVE DATE.
This Plan shall be effective as of the date of its adoption by
the Board of Directors of the Company (THE "ADOPTION DATE"), subject to the
approval of this Plan by the holders of a majority of the issued and
outstanding shares of the Class A Common Stock of the Company (THE "COMMON
STOCK") and the voting preferred stock of the Company, voting together as a
single class and with each share of such preferred stock entitled to the number
of votes determined in accordance with Section 9(a) of Article IV of the
Company's Restated Certificate of Incorporation (THE DATE ON WHICH THE HOLDERS
SO APPROVE THE PLAN TO BE REFERRED TO HEREIN AS THE "APPROVAL DATE"). Grants
of "Options" (as hereinafter defined) may be made under this Plan on and after
the Adoption Date, but all rights of the participants shall be subject to such
stockholder approval of this Plan. In the event such stockholder approval is
not obtained, all Options under this Plan shall be null and void ab initio.
3. ADMINISTRATION OF THIS PLAN.
3.1 This Plan shall be administered by the Board of Directors or a
committee thereof designated by the Board of Directors, which committee (THE
"COMMITTEE") may be the Compensation Committee of the Board of Directors as
shall be designated by the Board of Directors; provided, however, that with
respect to grants of Options to persons who are then subject to Section 16 of
the Securities Exchange Act of 1934, as amended (THE "1934 ACT"), the Plan
shall at all times be administered so as to permit the Plan to comply with Rule
16b-3 under the 1934 Act or any successor thereto ("RULE 16B-3") and that any
Committee shall be so constituted so as to satisfy the legal requirements
relating to the administration of incentive stock option plans, if any, of
Delaware corporate and securities laws and of the Internal Revenue Code of
1986, as from time to time amended (THE "IRC"). Once appointed, the Committee
shall continue to serve in its designated capacity until otherwise directed by
the Board. If permitted by Rule 16b-3, the Plan may be administered by
different bodies with respect to directors, non-director officers and employees
who are neither directors nor officers of the Company. If and to the extent
the Plan is then being administered by the Board, the Board shall have all
authority and each and all of the powers granted to the Committee by this Plan
(including, without limitation, Sections 3.2, 3.3, 3.4 and 6).
3.2 The Committee shall have full power and authority in its
discretion, subject to and not inconsistent with the express provisions of this
Plan, to take any and all actions
<PAGE> 25
required or permitted to be taken under this Plan. Such full power and
authority shall include, without limitation, the actions set forth in Section
6, the making of all required or appropriate determinations under this Plan,
and the adoption, amendment and recision of such rules and regulations relating
to this Plan as the Committee shall determine in its discretion (THE "RULES");
in each case subject to the express provisions of this Plan.
3.3 The interpretation or construction by the Committee of this
Plan, any Option or "Agreement" (as hereinafter defined) or any Rule and all
determinations by the Committee shall in each case be final, binding and
conclusive with respect to all interested parties, unless otherwise determined
by the Board of Directors. No member of the Committee shall be personally
liable for any action, failure to act, determination, interpretation or
construction made in good faith.
3.4 The Committee shall determine the "fair market value" of the
Common Stock from time to time for purposes of this Plan in accordance with
such procedures for the determination thereof as the Committee shall determine.
4. PARTICIPANTS.
Participants in this Plan shall be directors, officers and key
employees of the Company or its subsidiaries selected by the Committee.
Nothing set forth in this Plan or in any Agreement shall confer upon any
director, officer or employee any right to continue in the employ of the
Company or its subsidiaries or as an officer of the Company, nor limit in any
manner the right of the Company to terminate such office or employment for any
reason whatsoever, with or without good cause. No employee or other person
shall have any right to be granted an Option.
5. SHARES OF STOCK SUBJECT TO THIS PLAN.
The shares of Common Stock available for issuance under this
Plan pursuant to the exercise of "ISOs" or "NQSOs" (as each such term is
hereinafter defined), shall consist of 944,000 shares of Common Stock in the
aggregate, subject to adjustment as provided in Section 13. Such number of
shares shall be set aside out of the authorized but unissued shares of Common
Stock not reserved for any other purpose or out of Common Stock held in or
acquired for the treasury of the Company. Should an Option be terminated for
any reason without being exercised, or be cancelled in whole or in part, the
shares of Common Stock subject to such Option shall again be available for
issuance under this Plan.
6. GRANT OF OPTIONS.
The Committee may from time to time, in its sole discretion,
award to such directors, officers and key employees as the Committee designates
options to purchase shares of the Common Stock (THE "OPTIONS"). In connection
therewith, the Committee shall have full and final authority in its discretion,
subject to the express provisions of this Plan, (i) in the case of each Option,
to determine whether the Option shall be an incentive stock option (AN "ISO")
pursuant to Section 422 of the IRC, as such section may from time to time be
amended or supplemented ("SECTION 422"), or an Option that does not qualify
under such Section 422 (AN "NQSO"), (ii) to determine the time or times at
which Options will be awarded, (iii) to determine
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<PAGE> 26
the number of shares that may be purchased upon the exercise of each Option,
(iv) to determine the amount payable by the participant upon the exercise of
such Option (THE "EXERCISE PRICE"), which price shall not be less than the
minimum specified in Section 7.1, (v) to determine the time or times when each
Option shall become exercisable, the objectives or conditions, if any, to such
exercise and the duration of the exercise period, and (vi) to prescribe the
form or forms of the agreement or instrument reflecting the terms and
conditions of each Option (THE "AGREEMENTS").
The Committee also shall have full power and authority to
delegate to one or more of the executive officers of the Company, as the
Committee deems appropriate, (i) the selection of participants to whom Options
shall be granted; (ii) the determination of the number of shares of Common
Stock purchasable upon the exercise of each such Option and the Exercise Price
thereof; (iii) the other terms and conditions of each such Option and the
applicable Agreement, including without limitation establishing the objectives
and conditions, if any, for the earning or vesting of such Option; and (iv) the
right to interpret and construe each provision of this Plan as applicable to
such Option; provided, however, that no Option may be granted or other
determination made pursuant to this paragraph to any person who (i) is a
"covered employee" within the meaning of Section 162(m) of the IRC or who, in
the Committee's judgment, is likely to be a covered employee at any time during
the period the Option granted to such employee would be outstanding or (ii) an
officer or other person subject to Section 16 of the 1934 Act.
7. EXERCISE PRICE AND CONSIDERATION.
7.1 The Exercise Price shall be determined by the Committee at the
time of each grant of Options; provided, however, that the Exercise Price for
an ISO shall not be less than 100% of the fair market value of the Common Stock
on the date on which the ISO is granted and that the Exercise Price of any ISO
granted to a person who, at the time of such grant, owns capital stock
possessing more than 10% of the total combined voting power of all classes of
capital stock of the Company or of subsidiary of the Company (A "TEN PERCENT
HOLDER") shall be the price (currently 110% of fair market value of a share of
Common Stock) required by the IRC in order to constitute an ISO.
7.2 The Exercise Price shall be paid in cash, by check payable to
the order of the Company, by the surrender of shares of the Common Stock having
a fair market value (determined in accordance with Section 3.4 above) equal to
the Exercise Price on the date on which the Option is exercised, or any
combination of the foregoing. Notwithstanding the foregoing, the Exercise
Price may also be paid by delivery to the Company or its designated agent of an
executed irrevocable option exercise form together with irrevocable
instructions to a financial institution or broker-dealer approved by the
Company to sell or margin a sufficient portion of the shares and deliver the
sale or margin loan proceeds directly to the Company to pay the Exercise Price,
such instructions to be in such form is acceptable to the Committee; provided,
however, that a participant may pay the Exercise Price pursuant to this
sentence if and only if either (x) the Option being exercised is an NQSO, or
(y) the Option being exercised is an ISO and the Company is satisfied that the
participant understands that the effect of such arrangement will be to cause a
"disqualifying disposition" of the participant's shares and a loss to the
participant of the favorable tax treatment of such ISO provided by the IRC.
The Committee may determine to cause the Company to lend directly to a
participant some or all of the funds required to pay the Exercise Price, on
such terms and subject to such conditions as the Committee may establish.
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<PAGE> 27
8. MANNER OF EXERCISE.
Unless and to the extent otherwise provided in the applicable
Agreement, and subject to the limitations set forth in this Plan, each Option
may be exercised from time to time in whole or in part by the participant
delivering to the Company at its main office (to the attention of the President
and the Chief Financial Officer) written notice of the number of shares with
respect to which the Option is being exercised accompanied by full payment to
the Company of the Exercise Price of the shares being purchased; provided,
however, that in the event the consideration is other than cash, such written
notice shall include the participant's election to pay some or all of the
Exercise Price as otherwise permitted by Section 7.2, in which case the
participant shall have a reasonable time (as determined by the Committee) to
arrange for the delivery to the Company of the balance of the Exercise Price or
the agreement that will reflect the terms of such payment; and provided,
further, that if payment of the Exercise Price is to be made in shares of
Common Stock, the participant shall deliver to the Company stock certificates
evidencing such shares properly endorsed for transfer in negotiable form. If
someone other than the participant is exercising an Option, the person or
persons so exercising the Option shall be required to furnish to the Company
appropriate documentation that such person or persons have the full legal right
and power to exercise the Option on behalf of and for the participant.
9. DURATION AND PERIOD FOR EXERCISE OF OPTIONS.
9.1 Each Option shall be exercisable on such date or dates and
during such period as shall be determined by the Committee at the time of
grant; provided, however, that (i) no ISO shall be exercisable after the
expiration of 10 years after the grant date, (ii) no ISO granted to a Ten
Percent Holder shall be exercisable after the expiration of five years after
the grant date, and (iii) no Option shall be exercisable unless and until
either a registration statement under the Securities Act of 1933, as amended,
is in effect registering the shares of Common Stock to be issued upon exercise
of the Options or, in the opinion of counsel for the Company, an exemption from
registration is available. Subject to the foregoing, the Committee shall
specify at the time each Option is granted, and shall set forth in the
corresponding Agreement, the time or times at which, and in what amounts, the
Option may be exercised.
9.2 Upon the termination of the employment by the Company or its
subsidiaries of a participant, such participant's rights to exercise an Option
then held shall be as follows, subject to the authority of the Committee to
shorten or extend the exercisability of an Option in its sole discretion (with
the consent of the participant or the participant's legal representative in the
case of an ISO):
(a) Death or Permanent and Permanent and Total
Disability. If the employment is terminated by reason of the death or
"permanent and total disability" as defined in Section 22(e)(3) of the
IRC of the participant, each Option held by the participant on the
date of termination shall terminate on the fixed expiration date of
such Option; provided, however, that in the case of ISOs the date of
termination shall be the date that is 12 months after the date of
termination of employment if such date is earlier than the fixed
expiration date of the Option.
(b) Other Disability. If the employment is
terminated by reason of a disability of the participant that is not a
"permanent and total disability" as defined in Section 22(e)(3) of the
IRC, each Option held by the participant on the date of
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<PAGE> 28
termination shall terminate on the fixed expiration date of such
Option; provided, however, that in the case of ISOs the date of
termination shall be the date that is three months after the date of
termination of employment if such date is earlier than the fixed
expiration date of the Option.
(c) Other Termination. If the employment is
terminated by any reason other than death or disability, each Option
held by the participant on the date of termination shall terminate on
the earlier of (i) the date that is three months after the date of
termination of employment, or (ii) the fixed expiration date of such
Option.
9.3 If the employment of a participant is terminated by reason of
the "death or permanent and total disability" (as defined in Section 22(e)(3)
of the IRC) of the participant, all Options held by such participant shall
become immediately vested, notwithstanding any conditions to the vesting of
such Options set forth herein or in the Agreement reflecting such Options. If
the employment of a participant is terminated by any reason other than the
death or permanent and total disability of the participant, all Options not
vested as of the time of termination shall be forfeited, subject to the
authority of the Committee to authorize, in the applicable Agreement, at the
time of termination or otherwise, the immediate vesting of all or such portion
of such Options as it may determine. The Committee shall have the authority to
accelerate the vesting of all or some portion of the Options notwithstanding
any conditions to vesting of such Options set forth herein or in the Agreement
reflecting such Options.
9.4 The Options of a participant who dies shall be exercisable by
a legatee or legatees of such Options under the participant's last will, or by
such participant's executor, personal representative or distributee. However,
in the event of a participant's death after the date of termination of
employment (which termination was for a reason other than the death of the
participant), such deceased's participant's Options shall expire in accordance
with their terms as if such participant were still living.
9.5 The Committee shall have the authority to determine the reason
for and date of termination of employment of each participant (including but
not limited to determining whether a termination is by reason of disability),
which determination shall be final, binding and conclusive on all interested
parties.
10. LIMITATION ON GRANT OF ISO'S.
10.1 The aggregate fair market value (determined as of the time the
Option is granted) of the shares of Common Stock for which ISO's may first be
exercisable by an participant during any calendar year shall not exceed
$100,000 or such other amount as may be established by the Code.
10.2 No ISO may be granted under this Plan after the 10th
anniversary of the Adoption Date.
10.3 No ISO may be granted to any employee who owns stock
possessing more than 10% of the total combined voting power of all classes of
stock of the Company.
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11. ACCELERATION OF OPTIONS.
11.1 In the event that the Company enters into one or more
agreements to dispose of all or substantially all of its assets or the
Company's stockholders dispose of or become obligated to dispose of 50% or more
of the outstanding shares of Common Stock, other than to the Company or a
subsidiary of the Company, in either case by means of a tender offer, sale,
merger, reorganization or liquidation, in one or a series of related
transactions (AN "ACCELERATION EVENT"), then each outstanding Option shall
become exercisable during the 30 days immediately prior to the scheduled
consummation of the Acceleration Event with respect to the full number of
shares for which such Option has been granted: provided, however, that no
Acceleration Event shall be deemed to occur for purposes of this section
(unless otherwise provided in the applicable Agreement) in the event that (i)
the term of the agreements pursuant to which such transaction is occurring
require as a condition to the consummation thereof that each Option shall
either be assumed by a successor corporation or parent thereof or be replaced
with a comparable option to purchase shares of capital stock of the successor
corporation or parent thereof, and (ii) the transaction is approved by a
majority of the directors who have been in office for more than 12 months prior
to the scheduled consummation of the transaction. Any exercise of Options
during such 30-day period shall be conditioned upon the consummation of the
Acceleration Event and shall be effective only concurrently with the
consummation of the Acceleration Event, and in the event the Acceleration Event
is not consummated all exercises of Options made pursuant to this section shall
be of no further force or effect; unless, with respect to any such Option, such
Option was otherwise exercisable in accordance with its terms without regard to
this section and the participant exercising such Option indicates in writing
that such exercise is not conditioned on the consummation of the Acceleration
Event. Upon consummation of the Acceleration Event, all outstanding Options,
whether or not accelerated pursuant to this section, shall terminate and cease
to be exercisable, unless assumed by the successor corporation or a parent
thereof.
11.2 In the event of the occurrence of an Acceleration Event in
which the Company will not be the surviving entity or in which all of the
shares of Common Stock of the Company are being acquired, any participant who
is then subject to the filing requirements imposed under Section 16(a) of the
1934 Act with respect to the Company shall receive a payment of cash equal to
the difference between the aggregate fair market value of the shares of Common
Stock subject to such accelerated Option and the aggregate Exercise Price of
such shares. Payment shall be made within 10 days after the consummation of
the Acceleration Event. The foregoing payments under this section shall be
made in lieu of and in full discharge of any and all obligations of the Company
with respect to all subject Options of the participant.
11.3 The grant of Options under this Plan shall in no way affect
the right of the Company to adjust, reclassify, reorganize or otherwise change
its capital or business structure or to merge, consolidate, dissolve, liquidate
or sell or transfer all or any part of its business or assets.
12. CANCELLATION AND REPRICING OF OPTIONS.
12.1 The Committee shall have the authority to effect, at any time
and from time to time, with the consent of the affected participant, the
cancellation of any or all outstanding Options and the grant in substitution
therefor of new Options under this Plan (subject to the limitations hereof)
providing for the purchase of the same or a different number of shares of
Common Stock and, in the case of ISO's, the grant is at an Exercise Price not
less than 100% of
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<PAGE> 30
the fair market value of the Common Stock on the new grant date. The Agreement
reflecting the terms of the new Options may, in the discretion of the
Committee, include the same terms and conditions as the Agreement reflecting
the terms of the old Options including, without limitation, the same vesting
schedule.
12.2 The Committee may, in its discretion, amend the terms of any
Agreement, with the consent of the affected participant, to provide that the
Exercise Price of the shares remaining subject to the original Option shall be
reestablished at a price not less than 100% of the fair market value of the
Common Stock on the effective date of such amendment.
13. ADJUSTMENTS AND CHANGES IN THE COMMON STOCK.
13.1 In the event that the shares of Common Stock as presently
constituted shall be changed into or exchanged for a different number or kind
of shares of stock or other securities of the Company, or if the number of such
shares of Common Stock shall be increased through the payment of a stock
dividend, then unless such change results in the termination of all outstanding
Options pursuant to the provisions of Section 11, there shall be substituted
for or added to each share of Common Stock theretofore appropriated or
thereafter subject or which may become subject to an Option, the number and
kind of shares of stock or other securities into which each outstanding share
of Common Stock shall be so changed, or for which each share shall be
exchanged, or to which each such share shall be entitled, as the case may be.
Each Agreement shall be deemed amended appropriately as to price and other
terms as may be necessary in the determination of the Committee to reflect the
foregoing events. In the event there shall be any other change in the number
or kind of the outstanding Common Stock, or of any stock or securities into
which such shares have been changed, or for which it shall have been exchanged,
then if the Committee shall, in its sole discretion, determine that such change
requires an adjustment in the terms of any Option granted or that may be
granted, such adjustment shall be made in accordance with such determination
and each Agreement reflecting such terms shall be deemed amended. Fractional
shares resulting from any adjustment in Options pursuant to this section shall
be rounded down to the nearest whole number of shares.
13.2 Notwithstanding the foregoing, any and all adjustments in the
terms of ISO's shall comply in all respects with applicable sections of the IRC
and the regulations thereunder.
13.3 Notice of any adjustment in the terms of Options shall be
given by the Company to each holder of an Option that has been so adjusted.
However, such adjustment shall be effective and binding for all purposes
whether or not such notice is given or received.
14. APPLICATION OF RULE 16B-3.
With respect to grants of Options to persons are then subject
to Section 16 of the 1934 Act, this Plan shall be governed by Rule 16b-3.
15. NO RIGHTS AS STOCKHOLDER.
No participant shall have rights as a holder of Common Stock
with respect to Options unless and until certificates for shares of such stock
are issued to the participant or the participant's legal representative.
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<PAGE> 31
16. WITHHOLDING TAXES.
The Company shall have the right to withhold from the
participant, at the time of the issuance by the Company of any shares, any
federal, state or other taxes required by law to be withheld with respect to
such issuance or to require, through withholding from the participant's salary
or otherwise, the payment by the participant of any such taxes. An Agreement
may provide that the participant may satisfy any such obligation by any of the
following means: (i) a cash payment to the Company by the participant, (ii)
delivery to the Company of previously owned shares of Common Stock that the
participant has held for at least six months prior to the delivery of such
shares or that the participant purchased on the open market and for which the
purchaser has good and marketable title, free and clear of any security
interest, lien or encumbrance, having an aggregate fair mated value, determined
as of the date the obligation to withhold or pay taxes arises in connection
with the Option (THE "TAX DATE"), equal to the amount necessary to satisfy any
such obligation, (iii) a cash payment to the Company by a broker-dealer
acceptable to the Company to whom the purchaser has submitted an irrevocable
notice of exercise, or (iv) the withholding by the Company from the shares of
Common Stock to be issued upon exercise of the Option that number of shares
having a fair market on the Tax Date equal to the amount required to be
withheld; provided, howvever, that the Committee shall have sole discretion to
disapprove of an election pursuant to clauses (ii) or (iii) and that if the
participant is a person subject to Section 16 of the 1934 Act, the Company may
require that the method of satisfying any such withholding obligation be in
compliance with said Section 16 and Rule 16b-3 thereunder.
17. TRANSFERABILITY.
No Incentive Stock Option may be in any way transferred,
assigned, pledged or hypothecated by the participant to which it was granted or
awarded, other than by will or the laws of descent or distribution, and an
Incentive Stock Option may be exercised during the participant's lifetime only
by the participant or the participant's legal representative.
No NQSO may be in any way transferred, assigned, pledged or
hypothecated by the participant to which that NQSO was granted or awarded other
than by will or the laws of descent or distribution or, if and to the extent
that the Agreement governing such NQSO so provides, to a family member of such
participant, to a trust established for the benefit of such participant or
family member or to a qualified charity (as defined in the Agreement). A NQSO
may be exercised during the participant's lifetime only by the participant or
the participant's legal representative or, if applicable Agreement so provides,
by a permitted transferee or his or her legal representative. Notwithstanding
the foregoing, the Committee may upon request consent to such additional
transfers of NQSO's as the Committee may determine in its sole discretion
subject to such conditions as the Committee may require and provided such
transfer will not cause the Plan to no longer comply with Rule 16b-3 or any
other regulatory requirements.
18. AMENDMENTS AND TERMINATION.
18.1 In addition to such amendments as are provided for in Section
12, with the consent of the affected participant the Committee may amend any
outstanding Agreement in a manner not inconsistent with this Plan.
8
<PAGE> 32
18.2 Unless the holders of at least a majority of the issued
outstanding shares of Common Stock shall have approved thereof, no amendment of
this Plan shall be effective which would cause the Plan to no longer comply
with Rule 16b-3 or other regulatory requirements. In the event that the
Committee or the Board of Directors determines at any time or from time to time
that Rule 16b-3 requires that the terms of any outstanding Option be modified,
the Committee or the Board of Directors shall have the right and power to amend
any outstanding Agreement, or otherwise modify the terms of any outstanding
Option, without the consent of the affected participant(s) and irrespective of
whether such modification is (i) consistent with the terms of this Plan, or
(ii) adverse to such participant(s). For the purposes of this section, any (I)
cancellation and reissuance, or (II) repricing of any Options granted at a new
Exercise Price as provided in Section 12 shall not constitute an amendment of
this Plan.
18.3 The Board of Directors may at any time terminate or from time
to time amend this Plan in whole or in part, but no such amendment shall
adversely affect any rights or obligations with respect to any Options
theretofore granted under this Plan (except as contemplated by Section 18.2).
19. GOVERNING LAW.
The validity and construction of this Plan and the Agreements
shall be governed by the laws of the State of Delaware.
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<PAGE> 33
PRELIMINARY COPY
PROTECTION ONE, INC.
1997 ANNUAL MEETING OF STOCKHOLDERS
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned stockholder of Protection One, Inc., a Delaware corporation
(the "Company"), hereby appoints JOHN W. HESSE and GEORGE A. WEINSTOCK and each
of them, with full power of substitution to each, proxies of the undersigned to
represent the undersigned and to vote all shares of Common Stock, par value $.01
per share, of the Company that the undersigned would be entitled to vote at the
1997 Annual Meeting of Stockholders of the Company to be held on January 29,
1997 (the "Meeting") and at all adjournments thereof, as directed below and in
their discretion on such other matters as may properly come before the Meeting,
as if the undersigned were present and voting at the Meeting.
The shares represented by this proxy, when duly executed and returned, will
be voted as directed. WHERE NO DIRECTION IS GIVEN, SUCH SHARES WILL BE VOTED FOR
THE ELECTION OF DIRECTORS (ITEM 1), FOR THE RATIFICATION OF AUDITORS (ITEM 2),
FOR THE AMENDMENT OF THE COMPANY'S FIFTH RESTATED CERTIFICATE OF INCORPORATION
TO INCREASE THE AUTHORIZED NUMBER OF SHARES OF COMMON STOCK (ITEM 3) AND FOR THE
AMENDMENT TO THE COMPANY'S 1994 STOCK OPTION PLAN TO INCREASE THE NUMBER OF
SHARES FOR WHICH OPTIONS MAY BE ISSUED (ITEM 4). In the event a named nominee
for director is unavailable for election, the shares represented by this proxy
may be voted for a substitute nominee selected by the Board of Directors.
<TABLE>
1. ELECTION OF DIRECTORS
Nominees: Robert M. Chefitz, Ben Enis, James M. Mackenzie, Jr. and James Q. Wilson
<S> <C> <C>
[ ] FOR all nominees listed above [ ] WITHHOLD AUTHORITY to vote for all [ ] WITHHOLD AUTHORITY to vote for the
nominees listed above following nominee(s) only. (Write
the name of the nominee(s) below.)
- --------------------------------------------------------------------------------------------------------------------------
2. RATIFICATION OF AUDITORS
[ ] FOR [ ] AGAINST [ ] ABSTAIN as to the proposal to ratify the
selection of Coopers and Lybrand L.L.P.
as independent public accountants for
fiscal 1997.
</TABLE>
<PAGE> 34
<TABLE>
<S> <C>
3. AMENDMENT OF THE COMPANY'S FIFTH RESTATED CERTIFICATE OF INCORPORATION
[ ] FOR [ ] AGAINST [ ] ABSTAIN as to the proposal to amend the
Fifth Restated Certificate of
Incorporation to increase the number of
shares of Common Stock that may be issued
to 40,000,000 shares.
4. AMENDMENT OF THE COMPANY'S 1994 STOCK OPTION PLAN
[ ] FOR [ ] AGAINST [ ] ABSTAIN as to the proposal to amend the
1994 Stock Option Plan to increase the
number of shares of Common stock for
which options may be issued to 1,300,000
shares.
</TABLE>
The proxies named herein are authorized to vote in their discretion upon such
other matter or matters as may properly come before the Meeting. The undersigned
hereby acknowledges receipt of the Notice of Annual Meeting of Stockholders and
Proxy Statement each dated December 30, 1996 and the Annual Report on Form 10-K
for the year ended September 30, 1996.
Date: , 1997
Signature:
-------------------------------
(Please sign exactly as
your name or names appear(s)
on the label affixed hereon.
When signing in fiduciary or
representative capacity or as a
corporate officer, please so
indicate and state such
capacity, title or office.)
