<PAGE> 1
SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only
(as permitted by Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to sec. 240.14a-11(c) or sec. 240.14a-12
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):
[ ] No fee required.
[X] Fee computed on table below per Exchange Act Rules 14a-6(i)(l) and
0-11.
(1) Title of each class of securities to which transaction applies: Common
Stock, par value $.01 per share, of Protection One, Inc. ("Common Stock")
(2) Aggregate number of securities to which transaction applies: 14,357,887
shares. Based upon the shares of Common Stock and options and warrants to
acquire shares of Common Stock outstanding on September 2, 1997.
(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):
$7.00 per share, which amount represents the cash consideration to be paid to
holders of the common stock of Protection One, Inc. in connection with the
transaction described herein.
(4) Proposed maximum aggregate value of transaction: $100,505,209.00
(5) Total fee paid: $20,101.05
[X] 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:
- --------------------------------------------------------------------------------
<PAGE> 2
PROTECTION ONE, INC.
6011 BRISTOL PARKWAY
CULVER CITY, CALIFORNIA 90230
November 7, 1997
Dear Stockholder:
You are cordially invited to attend a Special Meeting of Stockholders (the
"Special Meeting") of Protection One, Inc. ("Protection One") to be held at 8:00
A.M., Pacific Standard Time, on November 24, 1997 at Protection One's executive
offices at 6011 Bristol Parkway, Culver City, California 90230.
As most of you are aware, Protection One has entered into a Contribution
Agreement dated as of July 30, 1997, as amended (the "Contribution Agreement"),
with Western Resources, Inc. ("Western Resources"), which provides for the
combination of the security alarm monitoring businesses of Protection One and
Western Resources.
At the Special Meeting, holders of Common Stock will be asked to consider
and vote upon a proposal (the "Stock Acquisition Proposal") to amend Protection
One's Fifth Restated Certificate of Incorporation, as previously amended, to
increase the authorized shares of Common Stock from 40,000,000 shares to
150,000,000 shares (the "Charter Amendment") and to approve the issuance to
Western Resources, Inc., a Kansas corporation ("Western Resources"), of such
number of shares of Common Stock (the "Shares" and such issuance the "Share
Issuance") as will equal, immediately after the Shares are issued, 80.1% of the
sum of (i) the aggregate number of shares of Common Stock then outstanding
(including the Shares, but excluding any shares issued pursuant to the exercise
of the stock option granted to Western Resources (the "19.9% Option")) and (ii)
the aggregate number of shares of Common Stock issuable pursuant to outstanding
options and warrants of Protection One (other than the 19.9% Option) after
giving effect to adjustments required as a result of the payment of the Special
Dividend and the Option/Warrant Payments (each as defined below). Based on the
number of shares of Common Stock outstanding, or issuable upon exercise of
options and warrants outstanding, on October 24, 1997, the record date for the
Special Meeting (the "Record Date"), approximately 68,500,000 shares of Common
Stock will be issued to Western Resources in the Share Issuance. As a result,
Western Resources will have the ability to elect the entire Board of Directors
of Protection One and to approve any matter requiring the approval of Protection
One's stockholders.
In consideration of the Share Issuance, Western Resources will contribute
to Protection One all of the outstanding capital stock of WestSec, Inc., a
Kansas corporation, and Westar Security, Inc., a Kansas corporation (together
with their respective subsidiaries, "the Western Resources Security Business"),
and cash (or as to up to $10 million of such amount, certain marketable
securities) in an amount equal to the sum of (i) $250 million and (ii) $7.00
multiplied by the aggregate number of shares of Common Stock outstanding, or
issuable upon exercise of options and warrants of Protection One (other than the
19.9% Option) outstanding, immediately prior to the Share Issuance and after
giving effect to the adjustments to certain warrants required as a result of the
payment of the Special Dividend and the Option/Warrant Payments.
Following the Share Issuance, Protection One will pay (a) to the holders of
record of Common Stock on the date the Shares are issued (other than Western
Resources) a cash dividend of $7.00 per share (the "Special Dividend"); (b) to
the holders of outstanding options to purchase shares of Common Stock other than
Western Resources, $7.00 in cash with respect to each share of Common Stock
issuable upon the exercise of such options; and (c) to the holders of certain
warrants exercisable for shares of Common Stock, $7.00 in cash with respect to
each share of Common Stock issuable upon exercise of such warrants, in lieu of
certain anti-dilution adjustments that would otherwise be made to the terms of
such warrants. Such payments to holders of options and warrants are herein
referred to as the "Option/Warrant Payments."
<PAGE> 3
Based upon the number of shares of Common Stock outstanding, or issuable
upon exercise of options and warrants outstanding, as of the Record Date, the
aggregate amount of cash and marketable securities to be contributed by Western
Resources to Protection One (the "Western Resources Contribution") is expected
to be approximately $366.9 million, and the aggregate amount of the Special
Dividend and Option/Warrant Payments (which will be paid from the Western
Resources Contribution) is expected to be approximately $113.7 million.
The Charter Amendment, the Share Issuance and the Western Resources
Contribution are scheduled to occur immediately after the final adjournment of
the Special Meeting, and the Charter Amendment, the Share Issuance, the Western
Resources Contribution, the payment of the Special Dividend and the
Option/Warrant Payments are collectively referred to as the "Stock Acquisition
Transaction." As a part of the Stock Acquisition Transaction, the size of the
Board of Directors of Protection One will be increased immediately after the
Special Meeting from four to 12, with the eight new directors to be selected by
Western Resources.
Approval of the Stock Acquisition Proposal will require the affirmative
vote of the holders of a majority of the shares of Protection One common stock
outstanding on the Record Date.
The Board of Directors of Protection One has unanimously approved the
issuance of the Shares to Western Resources and the related amendment to
Protection One's charter, having determined that the Stock Acquisition
Transaction is fair to and in the best interests of Protection One's
stockholders. Protection One's financial advisor, Morgan Stanley & Co., Inc. has
rendered an opinion that, based upon certain assumptions, the Transaction
(defined in such opinion as the Western Resources Contribution, the Share
Issuance and the Special Dividend, taking into account the Option/Warrant
Payments and the Charter Amendment) is fair to the holders of Common Stock from
a financial point of view. The Stock Acquisition Transaction is described in the
accompanying Proxy Statement, which includes a summary of the terms of the
Contribution Agreement and certain other information relating to the proposed
transaction. I urge you to give this material your careful consideration.
At the Special Meeting, the Protection One stockholders also will be asked
to consider and vote upon approval of the 1997 Long-Term Incentive Plan, which
plan provides for the award to Directors, officers and employees of Protection
One of stock options, restricted shares and other equity-based awards and is
intended to replace Protection One's 1994 stock option plan.
Your Board of Directors believes that the Stock Acquisition Transaction is
in the best interests of Protection One and its stockholders and unanimously
recommends a vote "FOR" the Stock Acquisition Proposal. Your Board of Directors
also believes that approval of the 1997 Long-Term Incentive Plan is in the best
interests of Protection One and its stockholders and unanimously recommends a
vote "FOR" such approval.
All Protection One stockholders are cordially invited to attend the Special
Meeting in person. However, whether or not you are personally able to attend, it
is important that your shares be represented at the meeting. Accordingly, please
complete, sign and date the accompanying proxy card and return it promptly in
the enclosed postage pre-paid envelope. If you do attend the Special Meeting,
you may vote in person if you wish, even though you have previously returned the
proxy card. It is very important that your shares be represented and voted at
the Special Meeting; failure to vote is equivalent to a vote AGAINST the Stock
Acquisition Proposal. Your prompt cooperation will be greatly appreciated.
Sincerely,
/s/ James M. Mackenzie, Jr.
James M. Mackenzie, Jr.
Chief Executive Officer
and President
EVERY VOTE IS IMPORTANT. WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING,
PLEASE COMPLETE, SIGN AND DATE YOUR PROXY CARD AND RETURN IT AS PROMPTLY AS
POSSIBLE IN THE ENCLOSED POSTAGE PRE-PAID ENVELOPE.
<PAGE> 4
PROTECTION ONE, INC.
6011 BRISTOL PARKWAY
CULVER CITY, CALIFORNIA 90230
------------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON NOVEMBER 24, 1997
------------------------
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders (the "Special
Meeting") of Protection One, Inc., a Delaware corporation ("Protection One"),
will be held at 8:00 A.M., Pacific Standard Time, on November 24, 1997 at 6011
Bristol Parkway, Culver City, California 90230 for the following purposes:
1. To consider and vote upon a proposal (the "Stock Acquisition
Proposal") to amend Protection One's Fifth Restated Certificate of
Incorporation, as previously amended, to increase the authorized shares of
Common Stock from 40,000,000 shares to 150,000,000 shares (the "Charter
Amendment") and to approve the issuance to Western Resources, Inc., a
Kansas corporation ("Western Resources"), of such number of shares of
Common Stock (the "Shares" and such issuance the "Share Issuance") as will
equal, immediately after the Shares are issued, 80.1% of the sum of (i) the
aggregate number of shares of Common Stock then outstanding (including the
Shares, but excluding any shares issued pursuant to the exercise of the
option granted to Western Resources (the "19.9% Option")), and (ii) the
aggregate number of shares of Common Stock issuable pursuant to outstanding
options and warrants of Protection One (other than the 19.9% Option) after
giving effect to adjustments required as a result of the payment of the
Special Dividend and the Option/Warrant Payments (each as defined below).
Based on the number of shares of Common Stock outstanding, or issuable upon
exercise of options and warrants outstanding, on October 24, 1997, the
record date for the Special Meeting (the "Record Date"), approximately
68,500,000 shares of Common Stock will be issued to Western Resources in
the Share Issuance. As a result, Western Resources will have the ability to
elect the entire Board of Directors of Protection One and to approve any
matter requiring the approval of Protection One's stockholders.
In consideration of the Share Issuance, Western Resources will
contribute to Protection One all of the outstanding capital stock of
WestSec, Inc., a Kansas corporation, and Westar Security, Inc., a Kansas
corporation (together with their respective subsidiaries, the "Western
Resources Security Business"), and cash (or as to up to $10 million of such
amount, certain marketable securities) in an amount equal to the sum of (i)
$250 million and (ii) $7.00 multiplied by the aggregate number of shares of
Common Stock outstanding, or issuable upon exercise of options and warrants
of Protection One (other than the 19.9% Option) outstanding, immediately
prior to the Share Issuance and after giving effect to the adjustments to
certain warrants required as a result of the payment of the Special
Dividend and the Option/Warrant Payments.
Following the Share Issuance, Protection One will pay (a) to the
holders of record of Common Stock on the date the Shares are issued (other
than Western Resources) a cash dividend of $7.00 per share (the "Special
Dividend"); (b) to the holders of options to purchase shares of Common
Stock (other than Western Resources), $7.00 in cash with respect to each
share of Common Stock issuable upon the exercise of such options; and (c)
to the holders of certain warrants exercisable for shares of Common Stock,
$7.00 in cash with respect to each share of Common Stock issuable upon
exercise of such warrants in lieu of certain anti-dilution adjustments that
would otherwise be made to the terms of such warrants. Such payments by
Protection One to holders of options and warrants are collectively referred
to as the "Option/Warrant Payments."
<PAGE> 5
Based upon the number of shares of Common Stock outstanding, or
issuable upon exercise of options and warrants outstanding, as of the
Record Date, the aggregate amount of cash and marketable securities to be
contributed by Western Resources to Protection One (the "Western Resources
Contribution") is expected to be approximately $366.9 million, and the
aggregate amount of the Special Dividend and Option/Warrant Payments (which
will be paid from the Western Resources Contribution) is expected to be
approximately $113.7 million.
The Charter Amendment, the Share Issuance and the Western Resources
Contribution are scheduled to occur immediately after the final adjournment
of the Special Meeting, and the Charter Amendment, the Share Issuance, the
Western Resources Contribution and the payment of the Special Dividend and
the Option/Warrant Payments are collectively referred to as the "Stock
Acquisition Transaction." As a part of the Stock Acquisition Transaction,
the size of the Board of Directors of Protection One will be increased
immediately after the Special Meeting from four to 12, with the eight new
directors to be selected by Western Resources.
2. To consider and vote upon the approval of the 1997 Long-Term
Incentive Plan, which plan provides for the award to Directors, officers
and employees of Protection One of stock options, restricted shares and
other equity-based awards and is intended to replace Protection One's 1994
stock option plan.
3. To transact such other business as may properly come before the
Special Meeting or any adjournment or postponement thereof, including any
motion to adjourn to a later date to permit further solicitation of proxies
if necessary to establish a quorum or to obtain additional votes in favor
of the Stock Acquisition Proposal.
Only holders of record of shares of Common Stock at the close of business
on the Record Date are entitled to receive notice of, and to vote at, the
Special Meeting. A list of stockholders of record on that date will be
maintained at Protection One's offices in Culver City, California, and will be
open during ordinary business hours for examination by any stockholder for any
purpose related to the Special Meeting for a period of not less than 10 days
prior to the Special Meeting.
Approval of the Stock Acquisition Proposal will require the affirmative
vote of the holders of a majority of the shares of Common Stock outstanding on
the Record Date. Approval of the 1997 Long-Term Incentive Plan will require the
affirmative vote of the holders of a majority of the shares of Common Stock
present at the Special Meeting and entitled to vote on such matter.
The Stock Acquisition Transaction, the 1997 Long-Term Incentive Plan and
other related matters are more fully described in the accompanying Proxy
Statement, including the appendices thereto.
By order of the Board of Directors
SIGNATURE
John W. Hesse
Executive Vice President
and Secretary
Culver City, California
November 7, 1997
ALL STOCKHOLDERS ARE CORDIALLY INVITED TO ATTEND THE SPECIAL MEETING IN
PERSON. WHETHER OR NOT YOU EXPECT TO ATTEND, YOU ARE URGED TO READ THE ATTACHED
PROXY STATEMENT AND TO ASSURE YOUR REPRESENTATION AT THE SPECIAL MEETING BY
COMPLETING, SIGNING, DATING AND RETURNING THE ENCLOSED PROXY CARD AS PROMPTLY AS
POSSIBLE. AN ENVELOPE THAT REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES IS
INCLUDED FOR YOUR CONVENIENCE. YOUR PROXY MAY BE REVOKED IN THE MANNER DESCRIBED
IN THE PROXY STATEMENT AT ANY TIME BEFORE THE PROXY HAS BEEN VOTED AT THE
SPECIAL MEETING.
<PAGE> 6
PROTECTION ONE, INC.
6011 BRISTOL PARKWAY
CULVER CITY, CALIFORNIA 90230
PROXY STATEMENT
This Proxy Statement is being furnished to holders of the Common Stock, par
value $.01 per share ("Common Stock"), of Protection One, Inc., a Delaware
corporation ("Protection One"), in connection with the solicitation of proxies
by the Board of Directors of Protection One for use at a Special Meeting of
Stockholders of Protection One (including any adjournment or postponement
thereof, the "Special Meeting") to be held at 8:00 A.M., Pacific Standard Time,
on November 24, 1997 at 6011 Bristol Parkway, Culver City, California 90230.
At the Special Meeting, holders of Common Stock will be asked to consider
and vote upon a proposal (the "Stock Acquisition Proposal") to amend Protection
One's Fifth Restated Certificate of Incorporation, as previously amended, to
increase the authorized shares of Common Stock from 40,000,000 shares to
150,000,000 shares (the "Charter Amendment") and to approve the issuance to
Western Resources, Inc., a Kansas corporation ("Western Resources"), of such
number of shares of Common Stock (the "Shares" and such issuance the "Share
Issuance") as will equal, immediately after the Shares are issued, 80.1% of the
sum of (i) the aggregate number of shares of Common Stock then outstanding
(including the Shares, but excluding any shares issued pursuant to the exercise
of the option granted to Western Resources (the "19.9% Option")), and (ii) the
aggregate number of shares of Common Stock issuable pursuant to outstanding
options and warrants of Protection One (other than the 19.9% Option) after
giving effect to adjustments required as a result of the payment of the Special
Dividend and the Option/Warrant Payments (each as defined below). Based on the
number of shares of Common Stock outstanding on October 24, 1997, the record
date for the Special Meeting (the "Record Date"), approximately 68,500,000
shares of Common Stock will be issued to Western Resources in the Share
Issuance. As a result, Western Resources will have the ability to elect the
entire Board of Directors of Protection One and to approve any matter requiring
the approval of Protection One's stockholders.
In consideration of the Share Issuance, Western Resources will contribute
to Protection One all of the outstanding capital stock of WestSec, Inc., a
Kansas corporation ("WestSec"), and Westar Security, Inc., a Kansas corporation
("Westar Security," and together with WestSec and both companies' respective
subsidiaries, the "Western Resources Security Business"), and cash (or as to up
to $10 million of such amount, certain marketable securities) in an amount equal
to the sum of (i) $250 million and (ii) $7.00 multiplied by the aggregate number
of shares of Common Stock outstanding, or issuable upon exercise of options and
warrants of Protection One (other than the 19.9% Option) outstanding,
immediately prior to the Share Issuance and after giving effect to the
adjustments to certain warrants required as a result of the payment of the
Special Dividend and the Option/Warrant Payments.
Following the Share Issuance, Protection One will pay (a) to the holders of
record of Common Stock on the date the Shares are issued (other than Western
Resources), a cash dividend of $7.00 per share (the "Special Dividend"); (b) to
the holders of options to purchase shares of Common Stock (other than Western
Resources), $7.00 in cash with respect to each share of Common Stock issuable
upon the exercise of such options; and (c) to the holders of certain warrants
exercisable for shares of Common Stock, $7.00 in cash with respect to each share
of Common Stock issuable upon exercise of such warrants in lieu of certain
anti-dilution adjustments that would otherwise be made to the terms of such
warrants. Such payments to holders of options and warrants are collectively
referred to as the "Option/Warrant Payments."
Based upon the number of shares of Common Stock outstanding, or issuable
upon exercise of options and warrants outstanding, as of the Record Date, the
aggregate amount of cash and marketable securities to be contributed by Western
Resources to Protection One (the "Western Resources Contribution") is expected
to be approximately $366.9 million, and the aggregate amount of the Special
Dividend and Option/Warrant Payments (which will be paid from the Western
Resources Contribution) is expected to be approximately $113.7 million. As of
November 6, 1997, the closing price of a share of Common Stock on the Nasdaq
National Market was $17.875.
The Charter Amendment, the Share Issuance and the Western Resources
Contribution are scheduled to occur immediately after the final adjournment of
the Special Meeting, and the Charter Amendment, the Share Issuance, the Western
Resources Contribution and the payment of the Special Dividend and the
Option/Warrant Payments are collectively referred to as the "Stock Acquisition
Transaction." As a part of the Stock Acquisition Transaction, the size of the
Board of Directors of Protection One will be increased immediately after the
Special Meeting from four to 12, with the eight new directors to be selected by
Western Resources. The Contribution Agreement dated as of July 30, 1997, as
amended, between Western Resources and Protection One sets forth the terms and
conditions of the Stock Acquisition Transaction, and a copy of such agreement is
attached to this Proxy Statement as Appendix A. See "The Contribution
Agreement."
Stockholders also will be asked at the Special Meeting to consider and vote
upon a proposal to approve the 1997 Long-Term Incentive Plan, which plan
provides for the award to Directors, officers and employees of Protection One of
stock options, restricted shares and other equity-based awards and is intended
to replace Protection One's 1994 stock option plan. A copy of the 1997 Long-Term
Incentive Plan is attached to this Proxy Statement as Appendix F.
This Proxy Statement and the accompanying form of proxy are first being
mailed to stockholders of Protection One on or about November 7, 1997.
THE DATE OF THIS PROXY STATEMENT IS NOVEMBER 7, 1997.
<PAGE> 7
AVAILABLE INFORMATION
Protection One is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports, proxy statements and other information with
the Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information may be inspected without charge and copied at
the public reference facilities maintained by the Commission at Room 1024, 450
Fifth Street, N.W., Washington, D.C. 20549 and at the regional offices of the
Commission located at Seven World Trade Center, Suite 1300, New York, New York
10048, and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies of such materials may be obtained from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549, and the Commission's public reference facilities in New York, New York,
and Chicago, Illinois at prescribed rates. In addition, certain of the documents
filed by Protection One are available from the Commission's Electronic Data
Gathering and Retrieval System ("EDGAR") at http://www.sec.gov. The Common Stock
is traded on the Nasdaq National Market (symbol: ALRM). Reports, proxy
statements and other information concerning Protection One also may be inspected
at the office of the National Association of Securities Dealers, Inc. at 1735 K
Street, N.W., Washington, D.C. 20006.
Following the completion of the Stock Acquisition Transaction, Protection
One will continue to prepare annual and quarterly reports, which will be
distributed to Protection One's stockholders, and will continue to be subject to
the informational requirements of the Exchange Act. Protection One intends to
change its fiscal year for financial reporting purposes to January 1 to December
31 from October 1 to September 30. The first annual report for Protection One
that includes the results of operations and financial condition of the Western
Resources Security Business will be issued with regard to the fiscal period
ending December 31, 1997. Following completion of the Stock Acquisition
Transaction, the Common Stock will continue to be traded on the Nasdaq National
Market.
INFORMATION PROVIDED BY WESTERN RESOURCES AND THIRD PARTIES
The information set forth in this Proxy Statement concerning Western
Resources, WestSec and Westar Security has been furnished by Western Resources,
and the information set forth herein concerning Centennial Security Holdings,
Inc., Network Holdings, Inc. and Guardian International, Inc., has been
furnished by such companies; such information has not been independently
investigated or verified by Protection One. All other information set forth in
this Proxy Statement has been provided by Protection One.
FORWARD-LOOKING INFORMATION
This Proxy Statement and the materials incorporated by reference herein
include "forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933, as amended (the "Securities Act") and Section 21E of the
Exchange Act, which statements involve risks and uncertainties. When used in
this document, the words "believe," "intend," "expect" and "anticipate," or
their equivalents, are intended to identify such forward-looking statements.
Although Protection One believes that such forward-looking statements are based
on reasonable assumptions, no assurance can be given that actual results may not
differ materially from those described in the forward-looking statements.
Important factors that could cause actual results to differ materially from the
expectations of Protection One include, among others: Protection One's high
degree of leverage, need for additional capital and history of losses; the risks
and uncertainties related to acquisitions and the Protection One dealer program;
subscriber account attrition; the impact of accounting differences for account
purchases and new installations; the possible adverse effect of false alarm
ordinances and future government regulations; risks of liability from
operations; competition in the security alarm industry; and the ability of
Protection One to achieve the goals described in "The Stock Acquisition
Transaction -- Reasons -- Reasons of Protection One for the Stock Acquisition
Transaction." Stockholders should refer to discussions of certain of these
factors in Protection One's Annual Report on Form 10-K and other filings of
Protection One made with the Commission. See "Available Information." Protection
One disclaims any intent or obligation to update publicly any forward-looking
statement, whether as a result of new information, future events or otherwise.
2
<PAGE> 8
TABLE OF CONTENTS
<TABLE>
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<S> <C>
AVAILABLE INFORMATION................................................................. 2
INFORMATION PROVIDED BY WESTERN RESOURCES............................................. 2
FORWARD-LOOKING INFORMATION........................................................... 2
SUMMARY............................................................................... 6
THE SPECIAL MEETING................................................................... 21
Matters To be Considered at the Special Meeting.................................. 21
Board of Directors' Recommendations.............................................. 21
Record Date; Voting at the Special Meeting....................................... 21
Shares Owned by Western Resources; Option and Voting Agreement................... 22
Proxies.......................................................................... 22
Adjournment of the Special Meeting............................................... 22
No Appraisal Rights.............................................................. 22
Independent Accountants.......................................................... 23
Costs of Solicitation............................................................ 23
THE STOCK ACQUISITION TRANSACTION..................................................... 23
Parties.......................................................................... 23
Background....................................................................... 24
Certain Terms of the Combination................................................. 27
Reasons.......................................................................... 27
Opinion of Financial Advisor..................................................... 29
Control by Western Resources; Certain Restrictions............................... 32
Plans for Protection One Following the Stock Acquisition Transaction............. 33
Payments to Optionholders and Acceleration of Options............................ 34
Warrant Adjustments and Payments; Adjustments to Convertible Notes; Offer to
Repurchase of Discount Notes.................................................... 34
Accounting Treatment............................................................. 35
Certain Federal Income Tax Consequences.......................................... 35
Regulatory Requirements.......................................................... 37
Charter Amendment................................................................ 38
THE CONTRIBUTION AGREEMENT............................................................ 39
The Share Issuance and the Western Resources Contribution........................ 39
The Special Dividend............................................................. 40
Treatment of Protection One Stock Options and Warrants........................... 40
Stockholders Meeting; Recommendation............................................. 40
The Closing...................................................................... 40
Acquisition Proposals............................................................ 40
Entire Security Business......................................................... 41
Standstill....................................................................... 43
Protection One's Board of Directors and Headquarters............................. 43
Stock Option Plan................................................................ 44
Conditions to the Share Issuance................................................. 44
Representations and Warranties................................................... 45
Conduct of Businesses Prior to the Closing; Certain Covenants; Indemnification... 46
Termination; Expenses; Amendment................................................. 49
Director and Officer Liability................................................... 50
</TABLE>
3
<PAGE> 9
<TABLE>
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<S> <C>
THE STOCK OPTION AGREEMENT............................................................ 52
The 19.9% Option................................................................. 52
Certain Conditions and Limitations............................................... 53
Exercise for Cash................................................................ 53
Profit Limitation................................................................ 53
Termination...................................................................... 54
Additional Provisions............................................................ 54
Purpose of Option; Possible Dilutive Effect...................................... 54
Registration Rights.............................................................. 54
THE OPTION AND VOTING AGREEMENT....................................................... 55
The Options...................................................................... 55
Voting Agreement; Proxies........................................................ 55
Transfer......................................................................... 56
New Shares....................................................................... 56
Termination...................................................................... 56
Additional Provisions............................................................ 56
MARKET PRICE AND DIVIDEND INFORMATION................................................. 57
SELECTED UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION OF PROTECTION ONE......... 58
SELECTED CONSOLIDATED HISTORICAL FINANCIAL INFORMATION OF PROTECTION ONE.............. 60
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OF PROTECTION ONE................................................................... 62
Overview......................................................................... 62
Results of Operations............................................................ 66
Fiscal 1996 Compared to Fiscal 1995.............................................. 68
Fiscal 1995 Compared to Fiscal 1994.............................................. 69
Liquidity and Capital Resources.................................................. 71
Pro Forma........................................................................ 73
BUSINESS OF PROTECTION ONE............................................................ 74
Potential Acquisitions........................................................... 74
Market Overview and Trends....................................................... 75
Overview......................................................................... 77
The Dealer Program............................................................... 79
The Acquisition Program.......................................................... 80
Description of Operations........................................................ 81
Sales and Marketing.............................................................. 84
Competition...................................................................... 84
Regulatory Matters............................................................... 85
Legal Proceedings................................................................ 85
Risk Management.................................................................. 85
Employees........................................................................ 86
Facilities....................................................................... 86
SELECTED COMBINED HISTORICAL FINANCIAL INFORMATION OF THE WESTERN RESOURCES SECURITY
BUSINESS AND WSS.................................................................... 87
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OF THE WESTERN RESOURCES SECURITY BUSINESS.......................................... 90
Overview......................................................................... 90
</TABLE>
4
<PAGE> 10
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
1997 Year to Date WRSB Operating Results......................................... 91
Contingencies.................................................................... 92
1996 Compared to 1995 -- Westinghouse Security (Predecessor to WestSec).......... 92
Balance Sheet Data -- December 20, 1995 -- Westinghouse Security (Predecessor to
WestSec)........................................................................ 93
1995 Compared to 1994 -- Westinghouse Security (Predecessor to WestSec).......... 93
Capital Resources and Liquidity.................................................. 94
THE WESTERN RESOURCES SECURITY BUSINESS............................................... 96
General.......................................................................... 96
History of WSS as a Predecessor of WestSec....................................... 96
Business Description............................................................. 97
Competition...................................................................... 98
Regulatory Matters............................................................... 99
Risk Management.................................................................. 99
Principal Executive Offices...................................................... 99
Employees........................................................................ 99
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION.......................... 100
MANAGEMENT OF PROTECTION ONE AFTER THE STOCK ACQUISITION TRANSACTION.................. 106
Directors and Executive Officers................................................. 106
Director Compensation; Meetings and Committees................................... 107
Executive Officers............................................................... 108
Executive Compensation........................................................... 109
COMPENSATION COMMITTEE REPORT ON PROTECTION ONE EXECUTIVE COMPENSATION FOR FISCAL
1997................................................................................ 114
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT........................ 115
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT.......................... 117
APPROVAL OF THE 1997 LONG-TERM INCENTIVE PLAN......................................... 117
Description of the Plan.......................................................... 117
Tax Aspects...................................................................... 121
New Plan Benefits................................................................ 124
EXPERTS............................................................................... 124
INDEPENDENT AUDITORS.................................................................. 124
LEGAL MATTERS......................................................................... 124
SUBMISSION OF STOCKHOLDER PROPOSALS................................................... 125
INDEX TO FINANCIAL STATEMENTS......................................................... F-1
</TABLE>
APPENDIX A -- CONTRIBUTION AGREEMENT, AS AMENDED
APPENDIX B -- STOCK OPTION AGREEMENT
APPENDIX C -- OPTION AND VOTING AGREEMENT
APPENDIX D -- OPINION OF MORGAN STANLEY & CO. INCORPORATED
APPENDIX E -- FORM OF ARTICLE FOUR OF PROTECTION ONE'S CERTIFICATE OF
INCORPORATION AS PROPOSED TO BE AMENDED
APPENDIX F -- 1997 LONG-TERM INCENTIVE PLAN
5
<PAGE> 11
SUMMARY
The following is a summary of certain information contained elsewhere in
this Proxy Statement and is qualified in its entirety by the full text of this
Proxy Statement, including the Appendices hereto, and the documents referred to
herein. Stockholders are urged to read this Proxy Statement, including its
Appendices, in its entirety. As used in this Proxy Statement, unless the context
otherwise requires, (i) "Protection One" means Protection One, Inc., a Delaware
corporation, and its subsidiaries, including Protection One Alarm Monitoring,
Inc., a Delaware corporation ("Monitoring"); (ii) "Western Resources" means
Western Resources, Inc., a Kansas corporation, and its subsidiaries; (iii)
"WestSec" means WestSec, Inc., a Kansas corporation, and its subsidiaries; (iv)
"Westar Security" means Westar Security, Inc., a Kansas corporation, and its
subsidiaries; and (v) each of "the Western Resources Security Business" and
"WRSB" means WestSec and Westar Security.
PROTECTION ONE............. Protection One provides security alarm monitoring
services and sells, installs and services security
alarm systems for residential and small business
subscribers. See "Business of Protection One."
Protection One's executive offices are located at
6011 Bristol Parkway, Culver City, California
90230, and its telephone number is 310-342-6300.
For the twelve months ended June 30, 1997,
Protection One had total revenues of $93.6 million
and a net loss of $19.5 million; at June 30, 1997,
Protection One had total assets of $357.6 million
and total stockholders' equity of $24.4 million.
WESTERN RESOURCES.......... Western Resources is engaged principally in the
production, purchase, transmission, distribution
and sale of electricity, the delivery and sale of
natural gas, and the provision of electronically
monitored security services. The principal
executive offices of Western Resources are located
at 818 Kansas Avenue, Topeka, Kansas 66612, and the
telephone number of Western Resources is
785-575-6300. Western Resources had, for the twelve
months ended June 30, 1997, total revenues of $2.1
billion and net income of $160.8 million; at June
30, 1997, Western Resources had total assets of
$6.7 billion and total stockholders' equity of $1.6
billion.
WESTERN RESOURCES SECURITY
BUSINESS................. WestSec and Westar Security are wholly owned by
Western Resources, and collectively provide
security alarm monitoring services and sell,
install and service security alarm systems for
homes and businesses. The principal executive
offices of WestSec and Westar Security are located
at 4221 W. John Carpenter Freeway, Irving, Texas
75063, and their telephone number is 972-916-6100.
The Western Resources Security Business had, for
the twelve months ended June 25, 1997, total
revenues of $70.5 million and a net loss of $5.2
million; at June 25, 1997, the Western Resources
Security Business had total assets of $519 million
and total stockholders' equity of $413.6 million.
TIME, DATE AND PLACE OF THE
SPECIAL MEETING.......... The Special Meeting of Stockholders of Protection
One (together with any adjournment or postponement
thereof, the "Special Meeting") will be held at
8:00 A.M., Pacific Standard Time, on November 24,
1997 at 6011 Bristol Parkway, Culver City,
California 90230.
PURPOSES OF THE SPECIAL
MEETING.................. At the Special Meeting, the stockholders of
Protection One will be asked (i) to consider and
vote upon a proposal (the "Stock Acquisition
Proposal") to amend the charter of Protection One
to increase the authorized shares of Common Stock,
par value $.01 per share ("Com-
6
<PAGE> 12
mon Stock"), of Protection One from 40,000,000
shares to 150,000,000 shares (the "Charter
Amendment") and to approve the issuance to Western
Resources of such number of shares of Common Stock
(the "Shares") as will equal, immediately after the
Shares are issued, 80.1% of the sum of (x) the
aggregate number of shares of Common Stock then
outstanding (including the Shares, but excluding
any shares issued pursuant to the exercise of the
19.9% Option) and (y) the aggregate number of
shares of Common Stock issuable pursuant to
outstanding options and warrants of Protection One
(other than the 19.9% Option) after giving effect
to adjustments required as a result of the payment
of the Special Dividend and the Option/Warrant
Payments; (ii) to approve the 1997 Long-Term
Incentive Plan; and (iii) to transact such other
business as may properly come before the Special
Meeting. See "The Special Meeting -- Matters to be
Considered at the Special Meeting."
STOCKHOLDERS ENTITLED TO
VOTE....................... Only holders of record of shares of Common Stock at
the close of business on October 24, 1997 (the
"Record Date") will be entitled to vote at the
Special Meeting. On the Record Date, there were
14,493,722 shares of Common Stock outstanding. Each
holder of record of shares of Common Stock on the
Record Date is entitled to cast one vote per share
of Common Stock held on each matter to come before
the Special Meeting. See "The Special
Meeting -- Record Date; Voting at the Special
Meeting."
VOTE REQUIRED; OPTION AND
VOTING AGREEMENT......... A majority of the shares of Common Stock entitled
to vote, represented in person or by proxy, will
constitute a quorum at the Special Meeting.
Approval of the Stock Acquisition Proposal requires
the affirmative vote of the holders of a majority
of the shares of Common Stock outstanding on the
Record Date. Approval of the 1997 Long-Term
Incentive Plan requires the affirmative vote of the
holders of a majority of the shares of Common Stock
present at the Special Meeting and entitled to vote
on such matter. See "The Special Meeting -- Record
Date; Voting at the Special Meeting."
As of the Record Date, the directors and executive
officers of Protection One owned an aggregate of
751,342 shares of Common Stock, and three
partnerships affiliated with Robert M. Chefitz, a
director of Protection One (the "Patricof
Partnerships"), owned an aggregate of 2,515,444
additional shares of Common Stock, representing in
the aggregate 22.5% of the shares of Common Stock
outstanding on the Record Date. Pursuant to an
Option and Voting Agreement dated as of July 30,
1997, with Western Resources, all of such persons
other than George M. Weinstock have granted to
Western Resources irrevocable proxies to vote such
shares in favor of the Stock Acquisition Proposal.
See "The Option and Voting Agreement." Mr.
Weinstock has advised Protection One that he also
intends to vote all of his shares of Common Stock
in favor of the Stock Acquisition Proposal. As of
the Record Date, Western Resources owned 1,000
shares of Common Stock.
STOCK OPTION AGREEMENT..... Pursuant to a Stock Option Agreement dated as of
July 30, 1997, Protection One has granted to
Western Resources an option (the "19.9% Option") to
purchase (i) if the Stock Acquisition Transaction
takes place, up to 2,750,238 additional shares of
Common Stock at a price of $15.50 per share, and
(ii) if prior to the Stock Acquisition
7
<PAGE> 13
Transaction, certain other events related to a
proposed acquisition of the assets or a substantial
portion of the voting securities of Protection One
by a party other than Western Resources (each an
"Exercise Event") occur, up to the same number of
shares of Common Stock at a price of $13.50 per
share. As of the date of this Proxy Statement, no
Exercise Event has occurred. The 19.9% Option was
granted to induce Western Resources to enter into
the Contribution Agreement by providing a means for
Western Resources (i) to maintain ownership of not
less than 80.1% of the shares of Common Stock
outstanding notwithstanding the conversion into
Common Stock of some or all of Monitoring's
Convertible Senior Subordinated Notes due 2003 (the
"Convertible Notes") and (ii) to be compensated for
the costs and expenses incurred by Western
Resources in pursuing a business combination with
Protection One in the event that, prior to the
Stock Acquisition Transaction, an unsolicited offer
is made by a third party to acquire the assets or a
substantial part of the Common Stock. If the Stock
Acquisition Transaction occurs, Western Resources'
right to exercise the 19.9% Option will terminate
on the earlier of October 31, 1999 and the 45th day
after the last day on which any of the Convertible
Notes remains outstanding. See "The Stock Option
Agreement."
NO APPRAISAL RIGHTS........ Holders of shares of Common Stock do not have the
right to demand appraisal of, and obtain payment
for, the fair value of the shares of Common Stock
pursuant to Section 262 of the Delaware General
Corporation Law as a result of the Stock
Acquisition Transaction or any other matter
referred to in this Proxy Statement.
BACKGROUND OF THE STOCK
ACQUISITION
TRANSACTION.............. Following a January 1997 meeting at a security
industry conference arranged by an industry
consultant, representatives of the managements of
Protection One and Western Resources met at the
suggestion of the consultant on March 18, 1997 to
discuss the possibility of a business combination
transaction or other strategic alliance.
Negotiations ensued between Protection One and
Western Resources, leading to the approval of the
Stock Acquisition Transaction by the respective
boards of directors of Protection One and Western
Resources and the execution and delivery on July
30, 1997 of the Contribution Agreement, the Stock
Option Agreement and the Option and Voting
Agreement. For a description of the events leading
to the execution of such agreements, see "The Stock
Acquisition Transaction -- Background."
REASONS FOR THE STOCK
ACQUISITION
TRANSACTION.............. The Board of Directors of Protection One believes
that the Stock Acquisition Transaction is in the
best interests of Protection One and its
stockholders because Protection One's competitive
position will be enhanced by the increased market
presence and nationwide subscriber base, the
opportunities for growth and cost savings and the
greater financial resources that are expected to
result from the combination of Protection One and
the Western Resources Security Business. In
addition, the Stock Acquisition Transaction will
give stockholders (i) immediate cash consideration
of $7.00 per share pursuant to the Special Dividend
and (ii) a continuing equity interest in Protection
One. See "The Stock Acquisition
Transaction -- Reasons -- Reasons of Protection One
for the Stock Acquisition Transaction."
8
<PAGE> 14
Western Resources believes that the combination of
the Western Resources Security Business and
Protection One will create a security alarm
business that has a significant size and market
position in the security alarm industry. Western
Resources also believes that the Stock Acquisition
Transaction will provide a market valuation for the
Western Resources Security Business that will be
based upon the fundamentals of the security
industry rather than the utility fundamentals on
which Western Resources has historically been
valued, and will give Western Resources control of
a publicly traded company that is in a position to
participate in the further consolidation of the
fragmented security alarm industry. See "The Stock
Acquisition Transaction -- Reasons -- Reasons of
Western Resources for the Stock Acquisition
Transaction."
RECOMMENDATION OF THE BOARD
OF DIRECTORS............... The Board of Directors of Protection One, by
unanimous vote on July 30, 1997, (i) determined
that the Stock Acquisition Transaction is fair to,
and in the best interests of, the stockholders of
Protection One, (ii) approved the Contribution
Agreement and the Stock Option Agreement and (iii)
resolved to recommend that stockholders vote to
approve the Stock Acquisition Proposal.
ACCORDINGLY, THE BOARD OF DIRECTORS OF PROTECTION
ONE RECOMMENDS THAT STOCKHOLDERS VOTE THEIR SHARES
OF COMMON STOCK IN FAVOR OF THE STOCK ACQUISITION
PROPOSAL. For a discussion of the factors
considered by the Board of Directors in reaching
its determination and making its recommendation,
see "The Stock Acquisition
Transaction -- Reasons -- Reasons of Protection One
for the Stock Acquisition Transaction."
The Board of Directors also has unanimously
approved the 1997 Long-Term Incentive Plan and
recommends that stockholders vote their shares of
Common Stock for approval of such plan.
STRUCTURE OF THE STOCK
ACQUISITION
TRANSACTION.............. In the Stock Acquisition Transaction, Protection
One will issue the Shares to Western Resources, and
Western Resources will contribute to Protection One
all of the outstanding shares of the Western
Resources Security Business and cash (or as to up
to $10 million of such amount, certain marketable
securities) in an aggregate amount equal to (i)
$250 million and (ii) an amount equal to the sum of
$7.00 multiplied by the aggregate number of shares
of Common Stock outstanding, or issuable upon
exercise of options and warrants of Protection One
(other than the 19.9% Option) outstanding,
immediately prior to the Share Issuance and after
giving effect to the adjustments to certain
warrants required as a result of the payment of the
Special Dividend and the Option/Warrant Payments.
Based upon the number of shares of Common Stock
outstanding, or issuable upon exercise of options
and warrants outstanding, as of the Record Date,
the aggregate amount of cash and marketable
securities to be contributed by Western Resources
to Protection One (the "Western Resources
Contribution") will be approximately $366.9
million, and upon consummation of the Share
Issuance
(the "Closing"), Western Resources will own
approximately 68,500,000 shares, or approximately
82.5% of the then outstanding shares, of Common
Stock.
As a part of the Stock Acquisition Transaction,
Protection One will pay (i) to the holders of
record of Common Stock on the date the Shares are
9
<PAGE> 15
issued (other than Western Resources), a cash
dividend of $7.00 per share (the "Special
Dividend"); (ii) to those directors, officers,
employees and consultants of Protection One who
hold options to purchase shares of Common Stock,
$7.00 in cash with respect to each share of Common
Stock issuable upon the exercise of such options;
and (iii) to the holders of certain warrants
exercisable for shares of Common Stock, $7.00 in
cash with respect to each share of Common Stock
issuable upon exercise of such warrants in lieu of
certain anti-dilution adjustments that would
otherwise be made to the terms of such warrants.
The payments described in clauses (ii) and (iii)
above are collectively referred to as the
"Option/Warrant Payments." The Special Dividend
will be paid (i) after the date on which the
Closing occurs and on or before December 31, 1997
if the Closing occurs before December 31, 1997, or
(ii) on the date on which the Closing occurs if the
Closing occurs on or after December 31, 1997. The
Option/Warrant Payments will be made at or about
the same time the Special Dividend is paid. Based
upon the number of shares of Common Stock
outstanding, or issuable upon exercise of options
and warrants outstanding, as of the Record Date,
the aggregate amount of the Special Dividend is
expected to be approximately $101.5 million, and
the aggregate amount of the Option/Warrant Payments
is expected to be approximately $12.2 million. As a
result of the Stock Acquisition Transaction certain
anti-dilution adjustments will be made to the
exercise price of, and the number of shares of
Common Stock subject to, those warrants issued by
Protection One in respect of which Option/Warrants
Payments are not made, and to the conversion price
of the Convertible Notes. For additional
information with respect to the Option/Warrant
Payments and the adjustments to be made to other
Protection One securities, including the amounts to
be paid to and numbers of such securities held by
Protection One's management and certain other
beneficial owners of Protection One's securities,
see "The Stock Acquisition Transaction -- Payments
to Optionholders and Acceleration of Options," "The
Stock Acquisition Transaction--Warrant Adjustments
and Payments; Adjustments to Convertible Notes" and
"Security Ownership of Certain Beneficial Owners
and Management."
MARKET FOR COMMON STOCK.... The Common Stock currently trades, and after the
Stock Acquisition Transaction will continue to
trade, on the Nasdaq National Market under the
symbol "ALRM." Although it is a condition to the
parties' obligations to consummate the Stock
Acquisition Transaction that the Shares be approved
for quotation on the Nasdaq National Market, the
Shares will be "restricted securities" as defined
in Rule 144 under the Securities Act and
accordingly will not be freely tradeable in the
public market. In addition, Western Resources has
advised Protection One that Western Resources
currently intends to maintain ownership of not less
than 80.1% of the outstanding shares of Common
Stock. For a description of certain restrictions
imposed by the Contribution Agreement on Western
Resources' ability to purchase additional shares of
Common Stock in the public market, see "-Control of
Protection One" and "The Contribution
Agreement -- Standstill."
OPINION OF FINANCIAL
ADVISOR.................... Morgan Stanley & Co. Incorporated ("Morgan
Stanley") delivered its written opinion, dated July
30, 1997, to the Protection One Board of Directors
that the Transaction (defined in such opinion as
the Western Resources Contribution, the Share
Issuance and the Special Dividend,
10
<PAGE> 16
taking into account the Option/Warrant Payments and
the Charter Amendment) was fair to the holders of
Common Stock from a financial point of view. The
full text of the written opinion of Morgan Stanley,
dated July 30, 1997, which sets forth assumptions
made, matters considered and limitations on the
review undertaken in connection with the opinion,
is attached as Appendix D to this Proxy Statement
and is incorporated herein by reference. HOLDERS OF
PROTECTION ONE COMMON STOCK ARE URGED TO, AND
SHOULD, READ THIS OPINION IN ITS ENTIRETY. SEE "THE
STOCK ACQUISITION TRANSACTION -- OPINION OF
FINANCIAL ADVISOR."
FEDERAL INCOME
TAX CONSEQUENCES FOR
STOCKHOLDERS OF THE
SPECIAL DIVIDEND......... Set forth below is a brief summary of certain
federal income tax consequences arising from the
payment of the Special Dividend to holders of
Common Stock. The following summary is qualified in
its entirety by reference to the more detailed
discussion set forth under "The Stock Acquisition
Transaction -- Certain Federal Income Tax
Consequences."
Each stockholder who receives the Special Dividend
will be required to recognize dividend income (to
the extent of such stockholder's pro rata share of
the current or accumulated earnings and profits of
Protection One) of up to the amount received. To
the extent that the amount of the Special Dividend
received by any stockholder exceeds such pro rata
share, the excess will reduce the stockholder's tax
basis for his or her shares of Common Stock until
such basis has been reduced to zero. Any remaining
portion of the Special Dividend then will be taxed
as a capital gain.
It is not known at this time what portion, if any,
of the Special Dividend will be treated as dividend
income, and that portion cannot be determined until
after the close of the tax year of Protection One
in which the Special Dividend is paid. However, it
is presently anticipated that if the Closing occurs
on or prior to December 31, 1997, Protection One
will not have any significant current or
accumulated earnings and profits. Protection One
will be required to report to each stockholder and
the Internal Revenue Service the total amount of
the Special Dividend and the portion of the amount
so distributed to each stockholder to be treated as
a dividend.
THE CONTRIBUTION
AGREEMENT --
REPRESENTATIONS AND
WARRANTIES; COVENANTS.... Each of Protection One and Western Resources has
made in the Contribution Agreement a number of
representations and warranties regarding the
business, operations, financial condition and
capital structure of, and other certain matters
relating to, Protection One and the Western
Resources Security Business, respectively. The
Contribution Agreement also provides that
Protection One will, and that Western Resources
will cause the Western Resources Security Business
to, conduct their respective operations in the
ordinary course and use all reasonable efforts to
maintain their respective businesses and provide
each other with reasonable access to their
respective operating, financial and other
information; in addition, Protection One and
Western Resources have agreed to use all reasonable
efforts to consummate the
11
<PAGE> 17
Stock Acquisition Transaction. See "The
Contribution Agreement -- Representations and
Warranties" and "The Contribution Agreement --
Conduct of Businesses Prior to Closing; Certain
Covenants; Indemnification."
NO SOLICITATION............ Subject to the fiduciary duties of its Board of
Directors and certain other exceptions, Protection
One has agreed that it will not (i) directly or
indirectly initiate, solicit, encourage or
otherwise facilitate any inquiry or the making of
any proposal or offer with respect to a merger,
reorganization, share exchange, consolidation or
similar transaction involving, or any purchase of
all or any significant portion of the assets or any
equity securities of, Protection One or any of its
subsidiaries (any such proposal or offer an
"Acquisition Proposal"), or (ii) engage in any
negotiations concerning, or provide any
confidential information or data to, or have any
discussions with, any person relating to an
Acquisition Proposal, or otherwise facilitate any
effort to make or implement an Acquisition
Proposal. See "The Contribution
Agreement -- Acquisition Proposals."
CONDITIONS TO THE STOCK
ACQUISITION
TRANSACTION.............. The respective obligations of Protection One and
Western Resources to effect the Stock Acquisition
Transaction are subject to the satisfaction of
certain conditions, including, but not limited to,
obtaining the approval of the stockholders of
Protection One, obtaining other requisite
regulatory approvals, the approval of the Shares
for quotation on the Nasdaq National Market, the
absence of any injunction prohibiting consummation
of the Stock Acquisition Transaction, the accuracy
of the representations and warranties contained in
the Contribution Agreement and the receipt of a
legal opinion with respect to certain tax matters.
See "The Contribution Agreement -- Conditions to
the Share Issuance."
TERMINATION OF THE
CONTRIBUTION AGREEMENT..... The Contribution Agreement is subject to
termination by mutual written consent of Protection
One and Western Resources, by either Protection One
or Western Resources if the Share Issuance has not
been consummated by January 31, 1998, or prior to
such time upon the occurrence of certain events.
Under certain circumstances, either Protection One
or Western Resources may be required to reimburse
the other party for such party's Stock Acquisition
Transaction-related expenses of up to $5 million.
See "The Contribution Agreement -- Termination;
Expenses; Amendment."
CONTROL OF PROTECTION
ONE........................ Following the Stock Acquisition Transaction,
Western Resources will control Protection One
through Western Resources' ownership of
approximately 82.5% of the shares of Common Stock
outstanding immediately after the Closing (based on
the number of shares of Common Stock outstanding on
the Record Date). As a result, Western Resources
will have the ability to elect the entire Board of
Directors of Protection One and to approve any
matter requiring the approval of Protection One's
stockholders. See "The Stock Acquisition
Transaction -- Control of Protection One." Pursuant
to the Contribution Agreement, Western Resources
has agreed to certain arrangements relating to the
election of directors of Protection One after the
Closing. See "-- Election of Directors of
Protection One" below. In addition, during the
10-year period following the Closing, a merger or a
sale of all or substantially all of the assets of
Protection One involving Western Resources or any
12
<PAGE> 18
affiliate of Western Resources generally will,
under the terms of the Contribution Agreement,
require the prior approval of a majority of the
"Independent Directors" (see "-- Election of
Directors of Protection One"), and Western
Resources may not acquire more than 85% of the
outstanding shares of Common Stock or other voting
securities of Protection One except under specified
circumstances and subject to specified limitations.
See "The Contribution Agreement -- Standstill."
ELECTION OF DIRECTORS OF
PROTECTION ONE........... The Contribution Agreement provides that at the
Closing, Protection One will increase the size of
its Board of Directors from four to 12, and that
eight persons selected by Western Resources will be
added to such Board. The names of the persons who
have been selected by Western Resources to serve on
the Protection One Board of Directors pursuant to
this arrangement, and certain information with
respect to their respective backgrounds, is
included in the section of this Proxy Statement
captioned "Management of Protection One After the
Stock Acquisition Transaction -- Directors and
Executive Officers." The Contribution Agreement
further provides that (i) until the second
anniversary of the Closing, Western Resources will
vote all shares of Common Stock beneficially owned
by Western Resources to elect as directors of
Protection One the four current directors of
Protection One and eight individuals nominated by
Western Resources (some or all of whom may be, at
Western Resources' sole discretion, "independent
persons" as defined in the Contribution Agreement);
and (ii) thereafter, for so long as Western
Resources directly or indirectly owns more than 50%
of the outstanding shares of Common Stock, Western
Resources will vote all such shares to elect as
directors of Protection One one individual selected
by Western Resources from the executive officers of
Protection One, at least three "Independent
Directors," and eight individuals nominated by
Western Resources.
An "Independent Director" is defined in the
Contribution Agreement as a director of Protection
One who is an "independent person," and an
"independent person" is defined as a person who (i)
is in fact independent, (ii) does not have any
direct or material indirect financial interest in
Western Resources, Protection One or any entity or
individual that beneficially owns greater than two
percent of the outstanding Common Stock or any of
their respective affiliates, and (iii) is not
connected with Western Resources, Protection One or
any entity or individual that beneficially owns
greater than two percent of the outstanding Common
Stock or any of their respective affiliates as an
officer, employee, consultant, agent,
representative, trustee, partner, director (other
than of Protection One) or person performing
similar functions.
PLANS FOR PROTECTION ONE
FOLLOWING THE STOCK
ACQUISITION
TRANSACTION.............. Western Resources presently intends to cause
Protection One to retain, and to operate Protection
One's business (including the Western Resources
Security Business) under the direction of,
Protection One's current management. Steven A.
Millstein, currently President of each of WestSec
and Westar Security, will become an Executive Vice
President -- New Market Development of Protection
One; and Protection One's directors and executive
officers immediately after the Closing will become
the directors and executive officers of the Western
Resources
13
<PAGE> 19
Security Business. See "The Stock Acquisition
Transaction -- Plans for Protection One Following
the Stock Acquisition Transaction" and "Management
of Protection One After the Stock Acquisition
Transaction -- Directors and Executive Officers."
The Contribution Agreement provides that until the
third anniversary of the Closing, the corporate
headquarters of Protection One will be in Los
Angeles, California and Protection One's finance
headquarters will be in Dallas, Texas.
Pursuant to the Contribution Agreement, Western
Resources has agreed that from and after the
Closing, for so long as Western Resources owns more
than 50% of the outstanding Common Stock, Western
Resources will not engage in, or invest in, acquire
any equity securities of, or enter into any
material business relationship with, any person
engaged in the business of selling and servicing
residential (other than multi-family residential)
or commercial monitoring and response security
systems, access control systems, closed-circuit
television and video monitoring systems, vehicle
location and monitoring systems or security guard
services (the "Business") other than through
Protection One. Notwithstanding this restriction,
Western Resources may (i) engage in the business of
selling and servicing multi-family residential
monitoring and response security systems (the
"Multi-Family Monitoring Business"); (ii) invest
in, acquire equity securities of, or enter into any
material business relationship with, any person
engaged in the Business that derives at least 75%
of such person's revenues from the Multi-Family
Monitoring Business and/or any other business other
than the Business; and (iii) engage in the Business
to the extent of any business acquired pursuant to
clause (ii) immediately above. However, Western
Resources may not invest in, acquire any equity
security of, or enter any material business
relationship with any person engaged in the
Business if, following such investment, acquisition
or entrance into, Western Resources would derive
aggregate annual revenues from the Business in an
amount equal to 7.5% or greater of the aggregate
annual revenues at such time of Protection One.
Notwithstanding the foregoing, Western Resources
has advised Protection One that although Western
Resources reserves the right to engage in the
Multi-Family Monitoring Business other than through
Protection One, Western Resources has no current
plan to do so. See "-- Potential Acquisitions" and
"The Contribution Agreement -- Entire Security
Business.
POTENTIAL ACQUISITIONS..... In September 1997, Western Resources purchased all
of the equity securities of Network Holdings, Inc.
("Network"), the parent company of Network
Multi-Family Security Corporation ("Network
Multi-Family" and such acquisition the "Network
Acquisition"). In October 1997, Western Resources
agreed to acquire all of the equity securities of
Centennial Security Holdings, Inc. ("Centennial");
such acquisition (the "Centennial Acquisition") is
expected to be consummated in November 1997. The
Contribution Agreement provides that if the Closing
occurs, such securities of Centennial as are
acquired by Western Resources will be transferred
to Protection One and Protection One will have an
option, exercisable during the 180-day period
following the Closing by vote of a majority of the
Protection One Board of Directors as then
constituted, to acquire from Western Resources all
of the equity securities of Network, in each case
for a price equal to the purchase price paid by
Western Resources plus a finance charge and
reimbursement of
14
<PAGE> 20
certain expenses. As a result, Protection One will
pay to Western Resources, if the Stock Acquisition
Transaction is consummated, (i) approximately $92.0
million for the transfer of Centennial and (ii) if
Protection One's Board of Directors votes to
exercise Protection One's option to acquire the
equity securities of Network, approximately $171.0
million for the transfer of such securities,
together in each case with Western Resources'
expenses and the finance charge. In addition,
Protection One will acquire all of the equity
securities of Guardian International, Inc. owned by
Western Resources, and will pay to Western
Resources for the transfer of such securities
approximately $7.5 million. The aggregate purchase
price to be paid by Protection One for such
securities (approximately $270.5 million plus
Western Resources' expenses and any applicable
finance charge) would exceed the amount of cash
included in the Western Resources Contribution and
retained by Protection One after the Special
Dividend is paid and the Option/Warrants Payments
are made. For additional information with respect
to such proposed acquisitions, including Protection
One's financing thereof, see "The Contribution
Agreement - Entire Security Business," "Business of
Protection One - Potential Acquisitions" and
"Unaudited Pro Forma Combined Condensed Financial
Statements."
INTERESTS OF CERTAIN
PERSONS IN THE STOCK
ACQUISITION
TRANSACTION.............. If the Stock Acquisition Transaction is
consummated, James M. Mackenzie, Jr., John W.
Hesse, John E. Mack, III and Thomas K. Rankin,
executive officers of Protection One, will enter
into new employment agreements with Protection One
pursuant to which their annual salaries will be
increased by an aggregate of approximately $0.3
million for the twelve months ending September 30,
1998 and such executive officers will be paid
performance bonuses in an amount equal as to each
such officer to 150% of the sum of such officer's
annual salary for fiscal 1997 plus $110,000, or an
aggregate of $2.1 million. See "Management of
Protection One After the Stock Acquisition
Transaction -- Executive Compensation." In
addition, such officers may be granted options for
shares of Common Stock under the 1997 Long-Term
Incentive Plan, if such plan is approved by the
stockholders at the Special Meeting. See "Approval
of the 1997 Long-Term Incentive Plan."
In connection with the Stock Acquisition
Transaction, all outstanding options to acquire
Common Stock (other than the 19.9% Option) will
become exercisable in full, including options to
purchase an aggregate of 712,000 shares of Common
Stock held as of the Record Date by directors,
executive officers and other affiliates of
Protection One, some of which options otherwise
would have vested over periods of up to five years.
Such directors, executive officers and other
affiliates also will receive (i) as holders of
outstanding options, cash payments in the amount of
$7.00 for each share of Common Stock issuable upon
exercise of such options, or an aggregate of
approximately $5.0 million, and (ii) as holders of
outstanding shares of Common Stock, the Special
Dividend with respect to each share held as of the
Record Date, or an aggregate of approximately $22.9
million. Of such latter amount, an aggregate of
$5.3 million will be paid to the directors and
executive officers of Protection One and $17.6
million will be paid to the Patricof Partnerships.
If all of the options held by Protection One's
directors and
15
<PAGE> 21
officers as of the Record Date were exercised in
full immediately after the Closing, such directors
and officers would realize an aggregate value
(calculated by subtracting both the option's
exercise price and the $7.00 per share to be paid
in respect of such options from the closing price
of the Common Stock on the Nasdaq National Market
on October 31, 1997 and multiplying the result by
the number of shares acquired) of approximately
$1.6 million. See "The Stock Acquisition
Transaction -- Payments to Optionholders and
Acceleration of Options" and "The Contribution
Agreement -- The Special Dividend."
Pursuant to the Contribution Agreement, Protection
One will be required to indemnify each person who
is or was a director or officer of Protection One
at the time of the Closing against certain
liabilities to the maximum extent provided by law.
In addition, Western Resources has agreed to cause
Protection One to maintain, with certain
limitations, for six years after the Closing, a
policy of directors' and officers' liability
insurance comparable to that currently maintained
by Protection One. See "The Contribution
Agreement -- Director and Officer Liability."
16
<PAGE> 22
PROTECTION ONE, INC.
SUMMARY UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
(IN THOUSANDS)
The following pro forma financial information reflects the pro forma effects
of the Stock Acquisition Transaction, the Centennial Acquisition and the Network
Acquisition. The Stock Acquisition Transaction will be accounted for under the
purchase method of accounting. Although Protection One will be acquiring WRSB,
Western Resources will hold a controlling interest in Protection One as a result
of the Stock Acquisition Transaction. Accordingly, the Stock Acquisition
Transaction is considered, for accounting purposes, to be a "reverse
acquisition," in which WRSB is considered the "accounting acquirer." The
Centennial Acquisition and the Network Acquisition will each be accounted for
under the purchase method of accounting. Accordingly, the unaudited pro forma
combined balance sheet at June 30, 1997 includes the accounts of WRSB on a
historical cost basis and the assets and liabilities of Protection One,
Centennial and Network Multi-Family at acquisition cost, allocated by relative
estimated fair value as of the date of the Share Issuance. The estimated
purchase price allocations have been made on a preliminary basis and may change
as additional information becomes known. The unaudited pro forma combined
statements of operations have been presented as if the Stock Acquisition
Transaction, the Centennial Acquisition and the Network Acquisition took place
on January 1, 1996 and combine (i) Protection One's consolidated statements of
operations for the six months ended June 30, 1997 (unaudited) and for the fiscal
year ended September 30, 1996, (ii) WRSB's combined statements of operations for
the six months ended June 25, 1997 (unaudited) and for the year ended December
31, 1996, (iii) the statement of operations of Westinghouse Security Systems
("WSS") for the 53 weeks ended December 30, 1996, (iv) Centennial's consolidated
statements of operations for the six months ended June 30, 1997 (unaudited) and
for the fiscal year ended December 31, 1996, and (v) Network Multi-Family's
statements of operations for the six months ended June 30, 1997 (unaudited) and
for the fiscal year ended December 31, 1996. The operations of WSS were acquired
by WRSB on December 30, 1996.
The unaudited pro forma combined financial information is presented for
illustrative purposes only and is not necessarily indicative of the consolidated
financial position or results of operations for future periods or the results
that actually would have been realized had the Stock Acquisition Transaction,
the Centennial Acquisition and the Network Acquisition occurred on the dates
specified above. The unaudited pro forma combined financial information is
derived from the unaudited pro forma combined condensed financial statements
included elsewhere herein and should be read in conjunction with those
statements and the notes thereto and (i) the separate audited historical
consolidated financial statements of Protection One and the notes thereto, (ii)
the separate audited historical combined financial statements of WRSB and the
notes thereto, (iii) the separate audited historical financial statements of WSS
and the notes thereto, (iv) the separate audited historical financial statements
of Centennial and the notes thereto, and (v) the separate audited historical
financial statements of Network Multi-Family and the notes thereto, all of which
are included elsewhere in this Proxy Statement.
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
AT OR FOR THE FOR THE
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1997(4) DEC. 31, 1996(4)
---------------- ----------------
<S> <C> <C>
OPERATIONS DATA:
Revenues........................................................................... $ 140,308 $242,992
Operating income (loss)............................................................ 1,477 (2,593)
Net loss........................................................................... (18,700) (33,891)
Net loss per common share.......................................................... (.23) (.43)
EBITDA(1)(3)....................................................................... 41,880 67,699
Adjusted EBITDA(2)(3).............................................................. 51,508 81,375
BALANCE SHEET DATA:
Cash and cash equivalents.......................................................... $ 3,170
Total assets....................................................................... 1,362,084
Long-term debt..................................................................... 357,431
Total shareholders' equity......................................................... 875,622
</TABLE>
OTHER FINANCIAL DATA:
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
AT 6/30/97 PRE-DIVIDEND(5)(6) POST-DIVIDEND(6)
-------------- ------------------ ----------------
<S> <C> <C> <C>
Total assets.......................................... $357,567 $1,475,746 $1,362,084
Book value............................................ 24,360 989,284 875,622
Shares of Common Stock outstanding at October 24,
1997................................................ 14,494 82,944 82,944
Total assets per share................................ $ 24.67 $ 17.79 $ 16.42
Book value per share.................................. $ 1.68 11.93 10.56
</TABLE>
17
<PAGE> 23
- ---------------
(1) EBITDA does not represent cash flow from operations as defined by generally
accepted accounting principles, should not be construed as an alternative to
net income and is indicative neither of Protection One's operating
performance nor of cash flows available to fund Protection One's cash needs.
Items excluded from EBITDA are significant components in understanding and
assessing Protection One's financial performance. Management believes
presentation of EBITDA enhances an understanding of Protection One's
financial position, results of operations and cash flows because EBITDA is
used by Protection One to satisfy its debt service obligations and its
capital expenditure and other operational needs as well as to provide funds
for growth. EBITDA has been used by senior lenders and subordinated
creditors and the investment community to determine the current borrowing
capacity and to estimate the long-term value of companies with recurring
cash flows from operations and net losses. EBITDA is derived by adding to
the loss before income taxes, the sum of (i) loss on sales of assets, (ii)
interest expense, and (iii) amortization of intangibles and depreciation
expense.
(2) Adjusted EBITDA is derived by adding to EBITDA selling and marketing
expenses, net of revenues, arising from installation activities during the
period. Adjusted EBITDA does not represent cash flow from operations as
defined by generally accepted accounting principles, should not be construed
as an alternative to net income and is indicative neither of Protection
One's operating performance nor of cash flows available to fund Protection
One's cash needs.
(3) The following table provides a calculation of pro forma EBITDA and pro forma
Adjusted EBITDA for each of the periods presented above:
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
FOR THE SIX FOR THE
MONTHS ENDED YEAR ENDED
JUNE 30, 1997 DEC. 31, 1996
-------------- --------------
<S> <C> <C>
Loss before income taxes.................................................. $(17,774) $ (36,971)
Plus:
Loss on sales of assets................................................. 107 105
Interest expense........................................................ 19,144 34,273
Amortization of intangibles and depreciation expense.................... 40,403 70,292
-------------- --------------
EBITDA............................................................ 41,880 67,699
-------------- --------------
Plus:
Selling and marketing expenses related to installations................. 17,277 30,970
Less:
Installation revenues................................................... (7,649) (17,294)
-------------- --------------
Adjusted EBITDA................................................... $ 51,508 $ 81,375
============= =============
</TABLE>
(4) The pro forma financial information reflects the financial position and
results of operations of Network Multi-Family, the wholly-owned subsidiary
and principal operations of Network. The assets, results of operations and
stockholders' equity of Network Multi-Family comprises substantially all of
the assets, results of operations and stockholders' equity of Network. For
the periods presented there are no material differences between the
financial position and results of operations of Network and Network
Multi-Family.
(5) Before payment of the Special Dividend in an assumed aggregate amount of
$101.5 million and the Option/Warrant Payments in an assumed aggregate
amount of approximately $12.2 million.
(6) Reflects each of the adjustments set forth in notes (a) through (i) to the
notes to unaudited pro forma combined condensed financial information of
Protection One included in this Proxy Statement.
18
<PAGE> 24
SUMMARY CONSOLIDATED HISTORICAL FINANCIAL INFORMATION
OF PROTECTION ONE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
AT OR FOR THE NINE
MONTHS ENDED JUNE
30, AT OR FOR THE YEAR ENDED SEPTEMBER 30,
------------------- ----------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
-------- -------- -------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATIONS DATA:
Total revenues................................. $ 71,954 $ 51,795 $ 73,457 $ 55,882 $ 34,480 $ 21,890 $ 17,598
Operating income (loss)........................ 5,095 5,221 7,061 5,496 (1,526) (777) (1,963)
Loss attributable to common stock before
extraordinary items and cumulative effect of
change in accounting method(1)............... (15,109) (11,347) (15,745) (7,592) (7,987) (4,354) (5,033)
Net loss per common share before extraordinary
items and cumulative effect of change in
accounting method(1)......................... (1.11) (1.06) (1.40) (0.87) (27.11) (41.86) (48.40)
EBITDA(2)(3)................................... 32,723 22,579 32,182 22,247 12,294 3,609 1,043
BALANCE SHEET DATA:
Cash and cash equivalents...................... $ 1,105 $ 1,782 $ 1,256 $ 1,057 $ 1,345 $ 3,427
Total assets................................... 357,567 297,636 178,669 126,085 44,472 39,071
Long-term debt................................. 279,750 225,650 146,023 86,508 23,585 18,036
Total stockholders' equity (deficit)........... 24,360 28,827 6,347 (6,084) (8,796) (4,195)
</TABLE>
- ---------------
(1) Excludes losses on early extinguishment of debt of $8.9 million, $1.2
million and $0.3 million in each of fiscal 1995, 1994 and 1993,
respectively, and loss from cumulative effect of change in accounting method
of $2.0 million in fiscal 1995.
(2) EBITDA does not represent cash flow from operations as defined by generally
accepted accounting principles, should not be construed as an alternative to
net income and is indicative neither of Protection One's operating
performance nor of cash flows available to fund Protection One's cash needs.
Items excluded from EBITDA are significant components in understanding and
assessing Protection One's financial performance. Management believes
presentation of EBITDA enhances an understanding of Protection One's
financial condition, results of operations and cash flows because EBITDA is
used by Protection One to satisfy its debt service obligations and its
capital expenditure and other operational needs as well as to provide funds
for growth. In addition, EBITDA has been used by senior lenders and
subordinated creditors and the investment community to determine the current
borrowing capacity and to estimate the long-term value of companies with
recurring cash flows from operations and net losses. EBITDA is derived by
adding to the loss before income taxes, extraordinary items and cumulative
effect of change in accounting method-net of taxes, the sum of (i) loss on
sales of assets, (ii) loss on assets held for sale, (iii) amortization of
debt issuance costs and OID, (iv) interest expense, net, (v) amortization of
intangibles and depreciation expense, (vi) performance warrants compensation
expense and (vii) loss on acquisition terminations.
The following table provides a calculation of EBITDA for each of the periods
presented above:
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED JUNE 30, FOR THE YEAR ENDED SEPTEMBER 30,
------------------- ------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
-------- -------- -------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Loss before income taxes, extraordinary items and
cumulative items and cumulative effect of change
in accounting method-net of taxes(a).............. $(16,853) $(11,009) $(15,744) $(9,432) $(9,349) $(2,526) $(3,953)
Plus:
Loss on sales of assets........................... -- 19 19 505 -- -- --
Loss on assets held for sale...................... 231 -- 89 -- -- -- --
Amortization of debt issuance costs and OID....... 15,267 13,159 17,812 6,797 891 185 49
Interest expense, net............................. 6,450 3,052 4,885 7,626 6,932 1,564 1,941
Amortization of intangibles and depreciation
expense......................................... 27,628 17,358 25,121 16,543 9,290 4,386 3,006
Performance warrants compensation expense......... -- -- -- -- 4,504 -- --
Loss on acquisition terminations.................. -- -- -- 208 26 -- --
-------- -------- -------- ------- ------- ------- -------
EBITDA...................................... $ 32,723 $ 22,579 $ 32,182 $22,247 $12,294 $ 3,609 $ 1,043
======== ======== ======== ======= ======= ======= =======
</TABLE>
- ---------------
(a) Fiscal 1993 loss reflects a reduction of $0.7 million for adjustment of
purchase accounting accruals, net.
(3) Protection One's installation activities were immaterial for each of the
periods presented. As a result, EBITDA and Adjusted EBITDA are approximately
the same.
19
<PAGE> 25
SUMMARY COMBINED HISTORICAL FINANCIAL INFORMATION OF
WESTERN RESOURCES SECURITY BUSINESS AND WSS
(IN THOUSANDS)
<TABLE>
<CAPTION>
WSS
WESTERN RESOURCES SECURITY BUSINESS ----------------------
--------------------------------------
PRO FORMA(4) FOR THE 52 WEEKS ENDED
AT OR FOR THE FOR THE YEAR DECEMBER 20,
SIX MONTHS ENDED ENDED ----------------------
JUNE 25, 1997 DECEMBER 31, 1996 1995 1994
---------------- ----------------- ------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
OPERATIONS DATA:
Total revenues.................... $ 63,506 $ 118,978 $88,710 $ 67,253
Operating income (loss)........... (2,403) (7,116) 2,606 10,622
Net loss.......................... (4,746) (11,166) (5,923) (1,764)
EBITDA(1)(3)...................... 14,655 24,313 19,435 22,128
Adjusted EBITDA(2)(3)............. 22,977 36,986
BALANCE SHEET DATA:
Cash and cash equivalents......... $ 1,049
Total assets...................... 519,005
Long-term debt.................... 42,967
Total stockholder's equity........ 413,622
</TABLE>
- ---------------
(1) EBITDA does not represent cash flow from operations as defined by generally
accepted accounting principles, should not be construed as an alternative to
net income and is indicative neither of WRSB's operating performance nor of
cash flows available to fund WRSB's cash needs. Items excluded from EBITDA
are significant components in understanding and assessing WRSB's financial
performance. Management believes presentation of EBITDA enhances an
understanding of WRSB's financial position, results of operations and cash
flows because EBITDA is used by WRSB to satisfy its debt service obligations
and its capital expenditure and other operational needs as well as to
provide funds for growth. EBITDA has been used by senior lenders and
subordinated creditors and the investment community to determine the current
borrowing capacity and to estimate the long-term value of companies with
recurring cash flows from operations and net losses. EBITDA is derived by
adding to the loss before income taxes, the sum of (i) interest expense,
net, and (ii) amortization of intangibles and depreciation expense.
(2) Adjusted EBITDA is derived by adding to EBITDA selling and marketing
expenses, net of revenues, arising from installation activities during the
period. Adjusted EBITDA does not represent cash flow from operations as
defined by generally accepted accounting principles, should not be construed
as an alternative to net income and is indicative neither of WRSB's
operating performance nor of cash flows available to fund WRSB's cash needs.
WRSB presents Adjusted EBITDA as a measure which WRSB believes provides a
more appropriate comparison to EBITDA as presented by companies such as
Protection One that grow through a dealer program or acquisitions.
(3):
<TABLE>
<CAPTION>
WSS
------------------
THE WESTERN RESOURCES
SECURITY BUSINESS FOR THE 52 WEEKS
----------------------------------
FOR THE SIX PRO FORMA FOR ENDED DECEMBER 20,
MONTHS ENDED THE YEAR ENDED ------------------
JUNE 25, 1997 DECEMBER 31, 1996 1995 1994
------------- ----------------- ------- -------
<S> <C> <C> <C> <C>
Loss before income taxes.............................. $(7,499) $ (18,009) $(9,553) $(2,845)
Plus:
Interest expense.................................... 5,096 10,893 12,159 13,467
Amortization of intangibles and depreciation
expense........................................... 17,058 31,429 16,829 11,506
------------- -------- ------- -------
EBITDA............................................ 14,655 24,313 $19,435 $22,128
======= =======
------------- --------
Plus:
Selling and marketing expenses related to
installations..................................... 15,257 29,074
Less:
Installation revenues............................... (6,935) (16,401)
------------- --------
Adjusted EBITDA..................................... $22,977 $ 36,986
============ =================
</TABLE>
(4) WSRB purchased the operations of WSS on December 30, 1996. WSRB pro forma
operations data is derived from, and should be read in conjunction with, the
unaudited condensed pro forma financial statements and the notes thereto
included elsewhere in this Proxy Statement. The WRSB pro forma operations
data reflects the operations of WRSB for the year ended December 31, 1996,
as if the acquisition of the operations of WSS had occurred on January 1,
1996.
20
<PAGE> 26
THE SPECIAL MEETING
This Proxy Statement is being furnished to holders of Common Stock in
connection with the solicitation of proxies by the Board of Directors of
Protection One for use at the Special Meeting of Stockholders to be held at 8:00
A.M., Pacific Standard Time, on November 24, 1997 at 6011 Bristol Parkway,
Culver City, California 90230, including any adjournment or postponement
thereof.
MATTERS TO BE CONSIDERED AT THE SPECIAL MEETING
At the Special Meeting, the stockholders of Protection One will be asked to
consider and vote upon (i) the Stock Acquisition Proposal, including the Charter
Amendment and the Share Issuance; (ii) approval of the 1997 Long-Term Incentive
Plan; and (iii) such other business as may properly come before the Special
Meeting, including any motion to adjourn to a later date to permit further
solicitation of proxies if necessary to establish a quorum or to obtain
additional votes in favor of the Stock Acquisition Proposal. The Board of
Directors does not know of any matter to be presented at the Special Meeting
other than those described in this Proxy Statement.
BOARD OF DIRECTORS' RECOMMENDATIONS
The Board of Directors of Protection One has unanimously determined that
the Stock Acquisition Transaction is fair to, and in the best interests of,
Protection One's stockholders and has unanimously approved the Stock Acquisition
Transaction. The Board of Directors recommends that the stockholders of
Protection One vote FOR approval of the Stock Acquisition Proposal. The Board of
Directors also has unanimously adopted the 1997 Long-Term Incentive Plan and
recommends that stockholders of Protection One vote FOR approval of such plan.
RECORD DATE; VOTING AT THE SPECIAL MEETING
The Board of Directors has fixed October 24, 1997 as the date (the "Record
Date") for the determination of stockholders entitled to receive notice of, and
to vote at, the Special Meeting. At the close of business on the Record Date,
14,493,722 shares of Common Stock were outstanding and entitled to vote.
A majority of the outstanding shares of Common Stock must be represented in
person or by proxy at the Special 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 Special 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 Special Meeting.
Because the Stock Acquisition Proposal includes an amendment to Protection
One's charter, approval of the Stock Acquisition Proposal will require the
affirmative vote of the holders of a majority of the shares of Common Stock
issued and outstanding. 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 Stock Acquisition
Proposal.
Approval of the 1997 Long-Term Incentive Plan and (except as may be
otherwise required by applicable law) action with respect to any other matter
that may properly come before the Special Meeting will require the affirmative
vote of the holders of a majority of the shares of Common Stock represented at
the Special 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 any such proposal, and will have no effect on the outcome.
21
<PAGE> 27
SHARES OWNED BY WESTERN RESOURCES; OPTION AND VOTING AGREEMENT
At the Record Date, Western Resources held of record 1,000 shares of Common
Stock. In addition, each of the directors and certain executive officers and
stockholders of Protection One have executed and delivered an Option and Voting
Agreement dated as of July 30, 1997, with Western Resources pursuant to which
such persons have granted to two representatives of Western Resources
irrevocable proxies to vote such persons' respective shares of Common Stock in
favor of approval of the Share Issuance and against any action or agreement that
could reasonably be expected to impede, interfere with or otherwise materially
adversely affect, or inhibit the timely consummation of, the Share Issuance.
Pursuant to the Option and Voting Agreement, all of the 3,221,609 shares of
Common Stock owned as of the Record Date by the directors and such executive
officers of Protection One and by the Patricof Partnerships, together with the
1,000 shares of Common Stock currently owned by Western Resources (representing
in the aggregate approximately 22.2% of the total number of shares of Common
Stock outstanding at such date), will be voted for approval of the Stock
Acquisition Proposal. See "The Option and Voting Agreement."
For a description of the option held by Western Resources to acquire from
Protection One up to 2,750,238 newly issued shares of Common Stock (which option
is not currently exercisable), see "The Stock Option Agreement."
PROXIES
In connection with the solicitation by the Board of Directors of Protection
One of proxies for use at the Special Meeting, the Board of Directors has
designated James M. Mackenzie, Jr. and John W. Hesse as proxies. Shares of
Common Stock represented by proxies in the accompanying form, properly executed,
received and not revoked prior to the Special Meeting will be voted at the
Special Meeting in accordance with the instructions specified on such proxies.
If no instructions are specified, such proxies will be voted FOR the Stock
Acquisition Proposal and FOR approval of the 1997 Long-Term Incentive Plan. If
any other matter is properly presented at the Special Meeting (other than
consideration of a motion to adjourn the Special Meeting to another time and/or
place), the persons named in the enclosed form of proxy will have discretion to
vote on such matters in accordance with their best judgement.
A stockholder may revoke a proxy given pursuant to this solicitation at any
time prior to the time such proxy is exercised by filing with the Secretary of
Protection One at its principal executive office at 6011 Bristol Parkway, Culver
City, California 90230 a notice of revocation bearing a later date than the
proxy or a duly executed, later dated proxy relating to the same shares, or by
attending the Special Meeting and voting in person. Attendance at the Special
Meeting will not, in itself, constitute revocation of a previously granted
proxy.
ADJOURNMENT OF THE SPECIAL MEETING
In the event that a quorum is not present at the time the Special Meeting
is convened or if for any reason (including for the purpose of allowing
additional time for the solicitation of proxies) Protection One determines that
an adjournment is necessary or appropriate, Protection One may adjourn the
Special Meeting with or without a vote of the stockholders. If Protection One
proposes to adjourn the Special Meeting by a vote of the stockholders, the
persons named in the enclosed form of proxy will vote all shares of Common Stock
for which such persons have voting authority in favor of such adjournment;
provided, however, that if the purpose of such adjournment is to permit
Protection One to continue soliciting votes in favor of the Stock Acquisition
Proposal, proxies voted against the Stock Acquisition Proposal will not be voted
by such persons in favor of adjournment.
NO APPRAISAL RIGHTS
Holders of Common Stock do not have the right to demand appraisal of, and
obtain payment for, the fair value of their shares of Common Stock pursuant to
Section 262 of the Delaware General Corporation Law as a result of the Stock
Acquisition Transaction or any other matter referred to in this Proxy Statement.
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INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P. has audited Protection One's financial statements
and has served as Protection One's independent accountants since Protection
One's formation in 1991. A representative of Coopers & Lybrand L.L.P. is
expected to be present at the Special Meeting and will have an opportunity to
make a statement and to answer appropriate questions that may arise.
COSTS OF SOLICITATION
The costs of this solicitation, including expenses in connection with
preparing and mailing this Proxy Statement and the enclosed proxy, will be paid
by Protection One. Protection One has retained Innisfree M&A Incorporated
("Innisfree"), a proxy soliciting firm, to assist in the solicitation of
proxies. Innisfree's fee for these services will be approximately $7,500, plus
reimbursement of out-of-pocket expenses estimated at $2,500. Original
solicitations of proxies by mail also may be supplemented by telephone,
telegram, facsimile and personal solicitation by directors, officers and other
employees of Protection One and its subsidiaries. Such persons will receive no
additional compensation, but may be reimbursed for reasonable out-of-pocket
expenses, in connection with such solicitation. Protection One 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 custodians, nominees and fiduciaries) for their expenses in forwarding
soliciting materials to such beneficial owners.
THE STOCK ACQUISITION TRANSACTION
In the Stock Acquisition Transaction, Protection One will issue the Shares
to Western Resources, Western Resources will make the Western Resources
Contribution to Protection One, and Protection One will pay the Special Dividend
to Protection One's stockholders (other than Western Resources) and make the
Option/Warrant Payments to holders of options and warrants (other than the 19.9%
Option) issued by Protection One. The Special Dividend will be paid (i) after
the date on which the Closing occurs and on or before December 31, 1997 if the
Closing occurs before December 31, 1997, or (ii) on the date on which the
Closing occurs if the Closing occurs on or after December 31, 1997. The
Option/Warrant Payments will be made at or about the same time as the Special
Dividend is paid.
Based upon the number of shares of Common Stock outstanding, or issuable
pursuant to options and warrants outstanding, on the Record Date, cash and
marketable securities in an aggregate amount of $366.9 million will be
contributed by Western Resources to Protection One, approximately 68,500,000
shares of Common Stock will be issued to Western Resources in the Share
Issuance, an aggregate of $101.5 million will be paid to stockholders in the
form of the Special Dividend, and an aggregate of $12.2 million will be paid to
holders of options and warrants issued by Protection One as Option/Warrant
Payments. In connection with the Stock Acquisition Transaction, the size of the
Board of Directors of Protection One will be increased immediately following the
Special Meeting from four to 12, with the eight additional directors to be
selected by Western Resources. As a result of the Stock Acquisition Transaction,
Western Resources will have the ability to elect the entire Board of Directors
of Protection One and to approve any matter requiring the approval of Protection
One's stockholders.
PARTIES
Protection One. Protection One, through Monitoring, provides security alarm
monitoring services for residential and small business subscribers. Protection
One monitors digital signals arising from burglaries, fires and other events
through security systems installed at subscribers' premises. Most of these
signals are received and processed at Protection One's central monitoring
station located in the Portland, Oregon metropolitan area. Protection One also
sells enhanced security services, patrol and alarm response services and alarm
systems and provides local field repair services through 13 branch offices.
Enhanced security services provided by Protection One include two-way voice
communications, supervised monitoring services, pager services, wireless backup
services and extended service protection. Based on Protection One's
approximately 236,000 subscribers as of June 30, 1997 (approximately 80% of
which are residential), Protection One believes
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it is the fourth largest residential security alarm monitoring company in the
United States and the largest in the seven western states of Arizona,
California, Nevada, New Mexico, Oregon, Utah and Washington.
Protection One was incorporated under the laws of the State of Delaware in
1991. Protection One's executive offices are located at 6011 Bristol Parkway,
Culver City, California 90230 and its telephone number is 310-342-6300.
Western Resources. Western Resources is engaged principally in the
production, purchase, transmission, distribution and sale of electricity, the
delivery and sale of natural gas, and the provision of electronic monitored
security services. Western Resources serves approximately 600,000 electric
customers in eastern and central Kansas, approximately 650,000 natural gas
customers in Kansas and northeastern Oklahoma, and approximately 440,000
monitored security subscribers in 48 states.
Western Resources divisions and wholly owned subsidiaries other than
WestSec and Westar Security include KPL, a rate-regulated electric and gas
division of Western Resources, Kansas Gas and Electric Company, a rate-regulated
electric utility and wholly owned subsidiary of Western Resources, and Westar
Capital, Inc., Westar Energy, Inc., Mid-Continent Market Center, Inc. and The
Wing Group, Ltd., non-utility subsidiaries that market natural gas primarily to
large commercial and industrial customers, engage in international power project
development and provide other energy-related products and services.
Western Resources was incorporated under the laws of the State of Kansas in
1924. Western Resources' corporate headquarters is located at 818 S. Kansas
Avenue, Topeka, Kansas 66612, and its telephone number is 785-575-6300.
Western Resources Security Business. Western Resources' security business
is comprised of WestSec and Westar Security, including their respective
subsidiaries. The Western Resources Security Business, which has been owned by
Western Resources since November 1995, is a rapidly growing security alarm
services business with over 440,000 subscriber accounts. On December 30, 1996,
Western Resources acquired all of the assets and assumed certain liabilities of
Westinghouse Security Systems ("WSS"), a national security system monitoring
company, from Westinghouse Electric Corporation. The WSS acquisition represented
approximately 94% of the total security business investment of Western Resources
at December 31, 1996, with assets acquired of approximately $478.0 million,
annual revenues approximating $111.0 million, approximately 309,000 subscriber
accounts and 1,648 employees. In addition to the purchase of WSS, other smaller
security company acquisitions and internal growth have made the Western
Resources Security Business one of the largest security alarm companies in the
United States, with offices in many major U.S. markets, central monitoring
stations in Irving, Texas, Orlando, Florida and Lenexa, Kansas and customers in
48 states.
Each of WestSec and Westar Security was incorporated under the laws of the
State of Kansas. The principal executive offices of WestSec and Westar Security
are located at 4221 W. John Carpenter Freeway, Irving, Texas 75063, and their
shared telephone number is 972-916-6100.
BACKGROUND
Since its formation in 1991, Protection One has sought to increase its
number of subscribers and EBITDA through acquisitions of portfolios of
subscriber accounts, purchases of subscriber accounts from independent security
alarm system dealers with whom Protection One has exclusive purchase agreements
(the "Dealer Program") and co-marketing arrangements, joint ventures and other
strategic alliances with companies in industries facing deregulation (such as
the telecommunications and electric utility industries) that have expressed to
Protection One an interest in offering security alarm services to develop more
comprehensive relationships with their customers.
In January 1997, members of the managements of Protection One and Western
Resources participated in a security industry conference co-hosted by Barnes &
Associates, a consulting firm that specializes in the security industry and that
has been retained by Western Resources in connection with certain of its
acquisitions in the security alarm industry. Following the conference, Michael
S. Barnes of Barnes & Associates (which will receive an advisory fee from
Western Resources in connection with the Stock Acquisition Transaction)
contacted both managements and arranged a meeting for March 1997.
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On March 18, 1997, James M. Mackenzie, Jr., President and Chief Executive
Officer of Protection One, and other members of Protection One's management met
with David C. Wittig, President of Western Resources, and Mr. Barnes, to discuss
the possibility of a business combination transaction or other strategic
alliance between Protection One and Western Resources. Following this meeting,
the parties and their legal counsel negotiated the terms and conditions of a
confidentiality agreement pursuant to which they would exchange confidential,
proprietary information concerning their respective security alarm businesses
for the purposes of evaluating a possible transaction.
Management of Protection One, representatives of Morgan Stanley, which had
been retained by Protection One to act as its financial advisor, Mr. Wittig and
Mr. Barnes met on May 1, 1997 to discuss the security alarm businesses of the
two companies and the timing and potential alternative structures of a possible
transaction.
On May 5, 1997, a confidentiality agreement was executed and delivered, and
initial financial information concerning Protection One and its business was
provided to Western Resources. From May 6 though 14, 1997, Messrs. Mackenzie and
Wittig discussed in a series of telephone calls the financial information
provided by Protection One and potential growth strategies. On May 15, 1997,
Protection One received from Western Resources initial financial information
concerning the Western Resources Security Business.
On June 2, 1997, Western Resources purchased 1,000 shares of Common Stock
in the open market.
Between June 6 and 11, 1997, Messrs. Mackenzie and Wittig held a series of
telephone calls to discuss possible structures for a business combination and
related issues, including Protection One's desire for a transaction involving
the entirety of Protection One's business, as well as Western Resources' desire
to conduct its security alarm operations through a publicly traded subsidiary of
which Western Resources would own at least 80.1% of the shares outstanding, the
role of Protection One's current management in the post-transaction company and
financial issues related to Protection One's outstanding debt.
At a meeting held on June 12, 1997, at Protection One's executive offices,
the Board of Directors of Protection One discussed generally the potential
transaction and alternative business strategies. At this meeting, Protection
One's management and Morgan Stanley each made presentations to the Board.
On June 18, 1997, representatives of Morgan Stanley and Bear, Stearns &
Co., Inc. ("Bear, Stearns"), Western Resources' financial advisor, discussed by
telephone various structures for the possible transaction.
Following a June 23, 1997 telephone call between John E. Mack, III,
Executive Vice President -- Business Development of Protection One, and Mr.
Wittig to discuss various growth strategies, potential acquisitions and related
issues, Protection One's management met on June 26, 1997 with representatives of
Morgan Stanley to discuss Protection One's strategic objectives with respect to,
and potential structures for, a possible business combination.
On June 27 and 28, 1997, the parties and their respective financial
advisors met to discuss possible terms of, structures for and valuation issues
related to the potential combination, including the value to be delivered to
Protection One's stockholders, the possible issuance to Protection One's
stockholders of contingent value securities and the method pursuant to which the
number of shares to be issued to Western Resources would be determined.
On July 1, 1997, John W. Hesse, Executive Vice President and Chief
Financial Officer of Protection One, and Lori Finney, Executive Director of
Corporate Strategy for Western Resources, met by telephone with Protection One's
independent accountants, Coopers & Lybrand L.L.P., and Western Resources'
independent accountants, Arthur Andersen LLP, to discuss accounting implications
of a possible business combination.
On July 2, 1997, an initial draft of the Contribution Agreement was
distributed by counsel to Western Resources to the parties and their respective
financial and legal advisors; an initial draft of the Stock Option Agreement was
distributed shortly thereafter.
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From June 30 through July 3, 1997 and again on July 7 through 10, 1997,
representatives of the parties and their respective financial and legal advisors
conducted business, financial and legal due diligence reviews.
On July 8, 1997, Protection One's management met with Mr. Wittig to discuss
the proposed terms and conditions of the draft Contribution Agreement and the
other agreements pursuant to which the proposed business combination would take
place. Such discussion focused on the values to be delivered to Protection One
and its stockholders (including the replacement of the contingent value
securities with a special cash dividend and the amount of such dividend), the
stock option to be granted to Western Resources and Western Resources' control
of Protection One after the transaction, including the persons who would serve
as directors of Protection One after the transaction, and limitations on Western
Resources' ability to engage in the security alarm business after the proposed
transaction other than through Protection One.
On July 10, 1997, Messrs. Mackenzie and Wittig met to discuss potential
employment agreements between Protection One and its management.
Between July 10 and July 25, 1997, the parties' respective management
teams, financial advisors and legal counsel negotiated the terms of the draft
Contribution Agreement and draft Stock Option Agreement.
On July 14, 1997, the Board of Directors of Protection One met to discuss
the proposed transaction. At the meeting, Protection One's management presented
an analysis of the potential strategic benefits of combining the security alarm
business of Protection One and the Western Resources Security Business, legal
counsel discussed with the directors the principal terms and conditions of the
draft Contribution Agreement and draft Stock Option Agreement, and
representatives of Morgan Stanley presented a preliminary analysis of certain
financial aspects of the proposed combination. After reviewing the terms of the
proposed transaction in detail, the Board of Directors instructed management of
Protection One to continue negotiations of the draft Contribution Agreement and
related transaction documents. That same day, attorneys for Protection One
conducted an additional legal due diligence review at Western Resources'
offices.
Between July 15 and 19, 1997, various members of Protection One's
management discussed by telephone with members of Western Resources' management
the timing of the possible transaction and various terms and conditions of the
proposed business combination, including the interim financial results of the
Western Resources Security Business and potential transition issues. Additional
issues were discussed and resolved by the parties at a meeting held on July 22,
1997 and by Messrs. Mackenzie and Wittig by telephone on July 25, 1997,
including valuations of the parties' respective security alarm businesses, an
increase in the amount of the special cash dividend and Western Resources'
activities in the security alarm industry following any acquisition of control
of Protection One following the transaction.
On July 28 and July 29, 1997, managements of Protection One and Western
Resources and their respective financial advisors and legal counsel met and such
managements negotiated the final terms and conditions of the Contribution
Agreement and the Stock Option Agreement.
On July 29, 1997, the Board of Directors of Protection One held a
telephonic meeting with members of management, representatives of Morgan Stanley
and legal counsel to review the terms and conditions of the proposed
transaction. At this meeting, Protection One's financial and legal advisers made
detailed presentations on the key elements of the proposed business combination
and the related transaction documents and Morgan Stanley delivered its oral
opinion (subsequently confirmed in writing) that the Transaction (defined in
such opinion as the Western Resources Contribution, the Share Issuance and the
Special Dividend, taking into account the Option/Warrant Payments and the
Charter Amendment) was fair to the holders of Common Stock from a financial
point of view. See "The Stock Acquisition Transaction -- Opinion of Financial
Advisor." That same day, the board of directors of Western Resources met and
approved the Stock Acquisition Transaction and the terms of the Contribution
Agreement, the Stock Option Agreement and the Option and Voting Agreement.
On the morning of July 30, 1997, Protection One's Board of Directors met
again and unanimously (i) determined that the Stock Acquisition Transaction was
fair to and in the best interests of the stockholders of Protection One, (ii)
approved the terms of the Contribution Agreement and the Stock Option Agreement,
as well as the Charter Amendment and (iii) resolved to recommend that
stockholders of Protection One
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approve the Charter Amendment and the Share Issuance and vote for the Stock
Acquisition Proposal. The Contribution Agreement, the Stock Option Agreement and
the Option and Voting Agreement were executed and delivered later that day.
The closing price per share of the Common Stock on the Nasdaq National
Market was $15.25 on July 29, 1997, the last full trading day prior to the
execution and delivery of the Contribution Agreement and the public announcement
thereof.
On October 2, 1997, the parties executed and delivered Amendment No. 1 to
the Contribution Agreement, to increase the number of shares of Common Stock to
be authorized pursuant to the Charter Amendment to 150,000,000 and to permit
Western Resources to acquire equity securities of each of Centennial and Network
and additional equity securities of Guardian, subject to an agreement by Western
Resources (if Western Resources acquires such securities and the Closing occurs)
to transfer such securities to Protection One on the terms and conditions
specified in such amendment. See "The Contribution Agreement -- Entire Security
Business" and "Business of Protection One -- Potential Acquisitions."
CERTAIN TERMS OF THE COMBINATION
Managements of Protection One and Western Resources negotiated the terms
and conditions of a potential combination of the companies' respective security
alarm monitoring businesses using two important parameters: Western Resources'
desire to own not less than 80.1% of the outstanding shares of a publicly traded
security alarm monitoring company (see "-- Reasons -- Reasons of Western
Resources for the Stock Acquisition Transaction") and Protection One's desire to
achieve the best transaction reasonably available for Protection One's
stockholders. Because the Common Stock is publicly traded, the parties
determined that an issuance to Western Resources of additional shares of Common
Stock was the most efficient method to accomplish Western Resources' goals. In
exchange, Western Resources agreed to contribute to Protection One enough
consideration, in the form of the Western Resources Security Business and cash,
and to allow enough of the contributed cash to be distributed to those persons
who are holders of Common Stock immediately prior to the issuance of the shares
to Western Resources, to cause Protection One's stockholders other than Western
Resources to receive what Protection One's Board of Directors believed to be the
highest value reasonably available. Protection One's management estimated the
value of the combined security businesses of Protection One and WRSB based on
such factors as the respective businesses' historical and projected financial
performance, management's plans of Protection One's management for the
integration of those businesses and historical valuation multiples of the Common
Stock.
REASONS
Reasons of Protection One for the Stock Acquisition Transaction. The Board
of Directors of Protection One, by unanimous vote at a meeting held on July 30,
1997, (i) determined that the Stock Acquisition Transaction is fair to, and in
the best interests of, the stockholders of Protection One, (ii) approved the
Contribution Agreement and the Stock Option Agreement and (iii) resolved to
recommend that the stockholders of Protection One approve the Charter Amendment
and the Share Issuance and vote for Stock Acquisition Proposal. Accordingly, the
Board of Directors recommends that the stockholders of Protection One vote their
shares of Common Stock in favor of the Stock Acquisition Proposal. Each of
Protection One's directors and all of Protection One's executive officers other
than Mr. Weinstock have granted to Western Resources irrevocable proxies to vote
all shares owned by such directors and executive officers in favor of the Stock
Acquisition Proposal (see "The Option and Voting Agreement"), and Mr. Weinstock
has advised the Board of Directors that he intends to vote in favor of the Stock
Acquisition Proposal.
The Board of Directors of Protection One believes that by combining the
business of Protection One and the Western Resources Security Business,
Protection One will have the nationwide subscriber base and increased market
presence that is likely to be critical to continued growth and success in the
consolidating security alarm industry. The Board of Directors also believes that
the combination will provide opportunities for Protection One's management team
to use its experience in integrating acquired businesses to generate
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higher growth rates, enhanced market share and savings in operating expenses and
corporate overhead, and that the cash to be contributed to Protection One by
Western Resources, together with the greater cash flows and lower debt-to-equity
ratios that Protection One will have after the Closing, will provide Protection
One with a greater ability to capitalize on acquisition opportunities and invest
in the development of new subscriber accounts through the Dealer Program. In
addition, the Board of Directors believes that the Stock Acquisition Transaction
is in the best interests of Protection One's stockholders because the
transaction gives Protection One's stockholders immediate cash consideration in
the amount of $7.00 per share pursuant to the Special Dividend, and an ability
to continue to participate, through continued ownership of the Common Stock, in
the enhanced prospects of Protection One.
In reaching its conclusions and recommendations described above, the Board
of Directors of Protection One considered a number of factors, including,
without limitation, the following:
(i) the Board of Directors' familiarity with the business, financial
condition, results of operations, prospects and strategic objectives of
Protection One, as well as its assessment of trends in the nationwide alarm
monitoring industry;
(ii) the oral and written presentations of Morgan Stanley and the
written opinion of Morgan Stanley dated July 30, 1997, a copy of which is
attached to this Proxy Statement as Appendix D, to the effect that the
Stock Acquisition Transaction was fair to the holders of Common Stock from
a financial point of view.
(iii) possible alternatives to the Stock Acquisition Transaction,
including without limitation, additional issuances of equity or debt
securities and/or a joint venture or other strategic alliance with another
company;
(iv) information concerning the history, business, financial
condition, results of operations and prospects of the Western Resources
Security Business;
(v) the fact that the Stock Acquisition Transaction will give
stockholders of Protection One (i) immediate cash consideration of $7.00
per share pursuant to the Special Dividend and (ii) a continuing equity
interest in Protection One;
(vi) the corporate governance aspects of the Stock Acquisition
Transaction, including that Western Resources has agreed to certain
arrangements relating to the election of directors of Protection One, that
the current management of Protection One will continue and the fact that
during the 10-year period following the Share Issuance, a merger or a sale
of all or substantially all of the assets of Protection One involving
Western Resources or any affiliate of Western Resources generally will,
under the terms of the Contribution Agreement, require the prior approval
of a majority of the Independent Directors of Protection One;
(vii) the number of shares of Common Stock to be issued to Western
Resources in the Share Issuance, and the percentage ownership of Protection
One retained by its current stockholders;
(viii) the other terms and conditions of the Contribution Agreement
and the Stock Option Agreement; and
(ix) the historical market prices of and trading information with
respect to the Common Stock, and the potential future trading values of the
Common Stock after the Stock Acquisition Transaction.
In view of the variety of information considered by the Board of Directors
of Protection One in connection with its evaluation of the Stock Acquisition
Transaction, the Board of Directors did not find it practicable to, and did not,
quantify or otherwise assign a particular weight to any of the items listed
above in reaching the Board of Directors' determination.
Reasons of Western Resources for the Stock Acquisition Transaction. Western
Resources believes the combination of the Western Resources Security Business
with Protection One will create an opportunity to capitalize on the strengths of
both companies. Western Resources believes that combining the national presence
and large customer base of the Western Resources Security Business with
Protection One's
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management team, Dealer Program and historically strong growth, will create the
nation's second largest security alarm business. Western Resources also believes
that the Stock Acquisition Transaction will provide a market valuation for the
Western Resources Security Business that will be based on the fundamentals of
the security industry rather than the utility fundamentals on which Western
Resources has historically been valued. The Stock Acquisition Transaction will
give Western Resources control of a publicly traded company that, Western
Resources believes, is in a position to participate in further consolidation of
the fragmented security alarm industry.
OPINION OF FINANCIAL ADVISOR
Pursuant to a letter agreement dated as of April 10, 1997 (the "Engagement
Letter"), Morgan Stanley was engaged to act as financial advisor to Protection
One in connection with the Stock Acquisition Transaction. Morgan Stanley was
selected by Protection One to act as Protection One's financial advisor based on
Morgan Stanley's qualifications, expertise and reputation and its knowledge of
the business and affairs of Protection One. At the meeting of the Protection One
Board of Directors on July 29, 1997, Morgan Stanley rendered its oral opinion,
subsequently confirmed in writing, that as of July 30, 1997, based upon and
subject to the various considerations set forth in the opinion, the Transaction
(defined in such opinion as the Western Resources Contribution, the Share
Issuance and the Special Dividend, taking into account the Option/Warrant
Payments and the Charter Amendment) was fair from a financial point of view to
the holders of shares of Common Stock.
The full text of the written opinion of Morgan Stanley dated July 30, 1997,
which sets forth, among other things, assumptions made, procedures followed,
matters considered and limitations on the scope of the review undertaken by
Morgan Stanley in rendering its opinion, is attached as Appendix D to this Proxy
Statement. Protection One stockholders are urged to, and should, read the
opinion carefully and in its entirety. Morgan Stanley's opinion is directed to
the Protection One Board of Directors and addresses only the fairness of the
Transaction from a financial point of view to the holders of shares of Common
Stock as of the date of the opinion, and does not constitute a recommendation to
any holder of Common Stock as to how to vote at the Special Meeting. The summary
of the opinion of Morgan Stanley set forth in this Proxy Statement is qualified
in its entirety by reference to the full text of such opinion.
In connection with rendering its opinion, Morgan Stanley, among other
things: (i) reviewed certain publicly available financial statements and other
information of Western Resources and Protection One, respectively; (ii) reviewed
certain internal financial statements and other financial and operating data
concerning the Western Resources Security Business and Protection One prepared
by the managements of Western Resources and Protection One, respectively; (iii)
analyzed certain financial projections relating to the Western Resources
Security Business prepared by the managements of Western Resources and
Protection One; (iv) analyzed certain financial projections relating to
Protection One prepared by the management of Protection One; (v) discussed the
past and current operations and financial condition and the prospects of
Protection One and the Western Resources Security Business, including
information relating to certain strategic, financial and operational benefits
anticipated from the Stock Acquisition Transaction, with senior executives of
Protection One and Western Resources; (vi) reviewed the reported prices and
trading activity for the Common Stock; (vii) compared the financial performance
of Protection One and the prices and trading activity of the Common Stock with
that of certain other comparable publicly-traded companies and their securities;
(viii) reviewed the financial terms, to the extent publicly available, of
certain comparable merger and acquisition transactions; (ix) reviewed and
discussed with the senior managements of Protection One and Western Resources
the strategic rationale for the Stock Acquisition Transaction and certain
alternatives to the Stock Acquisition Transaction; (x) participated in
discussions and negotiations among representatives of Western Resources and
Protection One and their financial and legal advisors; (xi) reviewed the
Contribution Agreement and certain related agreements; and (xii) considered such
other factors and performed such other analyses as Morgan Stanley has deemed
appropriate.
Morgan Stanley assumed and relied upon, without independent verification,
the accuracy and completeness of the information reviewed by it for the purposes
of its opinion. With respect to the internal financial statements for the
Western Resources Security Business reviewed by Morgan Stanley in connection
with the
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preparation of its opinion, Morgan Stanley assumed that such statements were
reasonably prepared and would not differ materially from the audited financial
statements conforming to U.S. Generally Accepted Accounting Principles
ultimately prepared for purposes of the consummation of the Stock Acquisition
Transaction. With respect to the financial projections, Morgan Stanley assumed
that such projections were reasonably prepared on bases reflecting the best
currently available estimates and judgments of the future financial performance
of Protection One and the Western Resources Security Business. Morgan Stanley
also relied upon, without independent verification, the assessment by the
managements of Protection One and Western Resources of the strategic, financial
and other operational benefits expected to result from the Stock Acquisition
Transaction and the timing and risks associated with the integration of the
Western Resources Security Business and Protection One, including the conversion
of the Western Resources Security Business to a business model consistent with
that of Protection One. Morgan Stanley also assumed that the Stock Acquisition
Transaction would be consummated on the terms set forth in the Contribution
Agreement and relied upon, without independent verification, the assessment by
the management of Protection One and its advisors of the tax treatment of the
Special Dividend to be paid to Protection One stockholders in connection with
the Stock Acquisition Transaction. Morgan Stanley did not make any independent
valuation or appraisal of the assets or liabilities of Protection One or the
Western Resources Security Business, nor was it furnished with any such
appraisals. Morgan Stanley's opinion is necessarily based on economic, market
and other conditions as in effect on, and the information made available to it
as of, the date of its opinion. In arriving at its opinion, Morgan Stanley had
certain limited discussions with certain third parties but was not authorized to
solicit interest generally from other parties with respect to an acquisition or
other transaction involving Protection One, other than Western Resources.
The following is a brief summary of the analysis performed by Morgan
Stanley in preparation of its opinion letter dated July 30, 1997.
Stock Price Performance
As part of its analysis, Morgan Stanley reviewed the recent stock price
performance of Protection One and compared such performance with that of an
index of a group of six security companies (the "Security Companies") and
Western Resources. Morgan Stanley observed that over the period from January 1,
1997 to July 25, 1997, the market price of the Common Stock appreciated
approximately 52%, compared with an approximate appreciation of 20% for an index
of the Security Companies and 10% for Western Resources.
Peer Group Comparison
Morgan Stanley compared certain financial information of Protection One
with that of the Security Companies and Western Resources. Such financial
information included, among other things, market value, aggregate value and the
ratio of aggregate value to latest twelve months earnings before depreciation,
amortization, interest and taxes ("EBITDA"), latest quarter annualized ("LQA")
EBITDA and calendar year 1997 estimated EBITDA, respectively. Such analysis
showed that as of July 25, 1997, the Common Stock traded at a multiple of 12.1
times latest twelve months EBITDA, 10.6 times LQA EBITDA (reflecting the quarter
ending September 30, 1997 based on Protection One's management estimates) and
10.7 times calendar year 1997 estimated EBITDA based on Protection One's
management estimates, compared to average multiples of 9.4 times, 9.3 times and
7.8 times, respectively, for the Security Companies based on research analyst
estimates and 7.2 times, 7.6 times and 7.1 times, respectively, for Western
Resources based on research analyst estimates. Morgan Stanley also examined
latest quarter annualized multiples of EBITDA for a group of nine cellular
companies (the "Cellular Companies") and six cable companies (the "Cable
Companies"). Such analysis showed that the Cellular Companies and the Cable
Companies traded at average multiples of 13.2 times and 10.0 times EBITDA,
respectively. Based on multiples ranging from 10.0 times to 12.0 times latest
twelve months EBITDA, 9.0 times to 11.0 times LQA EBITDA and 9.0 times to 11.0
times calendar year 1997 estimated EBITDA, the implied value per share of the
Common Stock ranged from $9.62 to $16.05.
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Analysis of Selected Precedent Transactions
As part of its analysis, Morgan Stanley reviewed eight security
transactions (collectively, the "Security Transactions"), a group of five
cellular transactions (the "Cellular Transactions") and a group of seven cable
transactions (the "Cable Transactions"). Morgan Stanley compared certain
statistics for the Security Transactions to the relevant financial statistics
for Protection One. The analysis showed that based on multiples of latest twelve
months EBITDA ranging from 10 times to 13 times and multiples of calendar year
1997 estimated EBITDA based on Protection One's management estimates ranging
from 10 times to 12 times, the implied value per share of the Common Stock
ranged from $9.62 per share to $18.64 per share. The analysis also showed that
based on premiums ranging from 15% to 30% over the closing price of Common Stock
as of June 30, 1997 (the "Normalized Stock Price") and premiums ranging from 20%
to 35% over the closing price of Common Stock as of 30 trading days prior to
June 30, 1997, the implied value per share of the Common Stock ranged from
$12.30 per share to $17.55 per share.
Discounted Equity Value
Morgan Stanley performed an analysis of the present value per share of the
Common Stock's future trading price based on a range of EBITDA assumptions for
Protection One for the calendar years 2001 and 2002, illustrative multiples of
EBITDA ranging from 7.0 times to 10.2 times (Protection One's then current
multiple of calendar year 1997 estimated EBITDA) and illustrative discount rates
ranging from 15% to 25%. Based on this analysis, Morgan Stanley estimated a
present value of the potential future trading price per share ranging from $5.95
to $8.72 based on slower growth financial projections provided by Protection One
management, EBITDA multiples ranging from 7.0 times to 8.0 times and discount
rates ranging from 20% to 25%. Morgan Stanley also estimated a present value of
the potential future trading price per share ranging from $12.13 to $18.49 based
on base case financial projections provided by Protection One's management,
EBITDA multiples ranging from 9.0 times to 10.2 times and discount rates ranging
from 20% to 25%.
Pro Forma Analysis
Morgan Stanley analyzed the pro forma impact of the Stock Acquisition
Transaction on Protection One's EBITDA in projected calendar years 2001 and
2002. Based on this analysis and including the value of the Special Dividend and
the 19.9% Option granted to Western Resources, Morgan Stanley estimated a pro
forma present value of the potential future trading price per share ranging from
$14.54 to $20.98 based on pro forma financial projections provided by Protection
One's management, EBITDA multiples ranging from 9.0 times to 10.2 times and
discount rates ranging from 15% to 25%.
Morgan Stanley also analyzed the pro forma trading price per share based on
Protection One's then current multiple of latest quarter annualized EBITDA, a
range of LQA EBITDA values for the Western Resources Security Business of
approximately $30 million to $50 million and a range of LQA EBITDA multiples for
the Western Resources Security Business of 7.0 times to 11.0 times. Based on
this analysis, Morgan Stanley estimated a pro forma trading value per share
ranging from $7.60 per share to $11.89 per share.
Morgan Stanley also analyzed the implied precedent price paid for the
Western Resources Security Business based on a valuation of $394.4 million as of
December 31, 1996 (based on the purchase price paid for the Western Resources
Security Business by Western Resources) and a range of present values of such
purchase price paid ranging from 80% to 120% of the value as of December 31,
1996. Such analysis showed a range of implied equity values of $315.5 to $473.3
million for the Western Resources Security Business and an implied pro forma
value per share for Protection One of $9.38 per share to $11.25 per share based
on the aggregate value of Protection One based on the Normalized Stock Price.
No company or transaction used in the peer group analysis and selected
precedent transactions analysis is identical to Protection One or the Stock
Acquisition Transaction. Accordingly, an analysis of the results of the
foregoing necessarily involved complex considerations and judgments concerning
financial and operating characteristics of Protection One and other factors that
could affect the public trading value of the companies to which Protection One
is being compared.
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In connection with the review of the Stock Acquisition Transaction by the
Protection One Board of Directors, Morgan Stanley performed a variety of
financial and comparative analyses for purposes of its opinion given in
connection therewith. The preparation of a fairness opinion is a complex process
and is not necessarily susceptible to partial analysis or summary description.
In arriving at its opinion, Morgan Stanley considered the results of all of its
analyses as a whole and did not attribute any particular weight to any analysis
or factor considered by it. Furthermore, selecting any portion of its analyses,
without considering all analyses, would create an incomplete view of the process
underlying its opinion. In addition, Morgan Stanley may have given various
analyses and factors more or less weight than other analyses and factors, and
may have deemed various assumptions more or less probable than other
assumptions, so that the ranges of valuations resulting from any particular
analysis described above should not be taken to be Morgan Stanley's view of the
actual value of Protection One or the Western Resources Security Business. In
performing its analyses, Morgan Stanley made numerous assumptions with respect
to industry performance, general business and economic condition and other
matters, many of which are beyond the control of Protection One. Any estimates
contained in the fairness opinion are not necessarily indicative of future
results or actual values, which may be significantly more or less favorable than
those suggested by such estimates. The analyses performed were prepared solely
as part of Morgan Stanley's analysis of the fairness from a financial point of
view of the Transaction to the holders of shares of Common Stock and were
conducted in connection with the delivery of Morgan Stanley's opinion. The
analyses do not purport to be appraisals or to reflect the prices at which the
Common Stock might actually trade. The terms of the Stock Acquisition
Transaction were determined through arm's-length negotiations between Protection
One and Western Resources and were approved by the Protection One Board.
The Protection One Board of Directors retained Morgan Stanley based upon
Morgan Stanley's qualifications, experience and expertise. Morgan Stanley is an
internationally recognized investment banking and advisory firm. Morgan Stanley,
as part of its investment banking business, is continuously engaged in the
valuation of businesses and securities in connection with mergers and
acquisitions, negotiated underwritings, competitive biddings, secondary
distributions of listed and unlisted securities, private placements and
valuations for corporate and other purposes. Morgan Stanley makes a market in
the Common Stock. In the ordinary course of Morgan Stanley's trading and
brokerage activities, Morgan Stanley or its affiliates may at any time hold long
or short positions, may trade or otherwise effect transactions, for its own
account or for the accounts of customers, in the equity securities of Protection
One or Western Resources.
Pursuant to the Engagement Letter, Morgan Stanley provided advisory
services and a financial opinion in connection with the Stock Acquisition
Transaction and Protection One agreed to pay to Morgan Stanley, if the Stock
Acquisition Transaction is consummated, a fee based on the aggregate value of
the Stock Acquisition Transaction and estimated by Protection One at
approximately $3.7 million. In addition, Protection One has also agreed to
indemnify Morgan Stanley and its affiliates, their respective directors,
officers, agents and employees and each person, if any, controlling Morgan
Stanley or any of its affiliates against certain liabilities and expenses,
including certain liabilities under the federal securities laws, related to
Morgan Stanley's engagement. In the past, Morgan Stanley and its affiliates have
provided financial advisory and financing services for Protection One and have
received fees for the rendering of these services.
CONTROL BY WESTERN RESOURCES; CERTAIN RESTRICTIONS
Immediately following the Share Issuance, Western Resources will own shares
of Common Stock constituting in the aggregate approximately 82.5% of the
outstanding shares of Common Stock, based on the number of shares of Common
Stock outstanding as of the Record Date. As a result, Western Resources will
have the ability to elect the entire Board of Directors of Protection One and to
approve any matter requiring the approval of Protection One's stockholders,
including the merger of Protection One, the sale of all or substantially all of
Protection One's assets and the adoption of amendments to Protection One's
certificate of incorporation.
The Contribution Agreement provides that at the Closing, Protection One
will increase the size of its Board of Directors from four to 12, and that eight
persons selected by Western Resources will be added to such Boards. The names of
the persons who have been nominated by Western Resources to serve on the
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Protection One Board of Directors pursuant to this arrangement, and certain
information with respect to their respective backgrounds, is included in the
section of this Proxy Statement captioned "Management of Protection One After
the Stock Acquisition Transaction -- Directors and Executive Officers." The
Contribution Agreement further provides that (i) until the second anniversary of
the Closing, Western Resources will vote all shares of Common Stock beneficially
owned by Western Resources to elect as directors of Protection One the four
current directors of Protection One and eight individuals nominated by Western
Resources (some or all of whom may be, at Western Resources' sole discretion,
"independent persons" as defined in the Contribution Agreement); and (ii)
thereafter, for so long as Western Resources directly or indirectly owns more
than 50% of the outstanding shares of Common Stock, Western Resources will vote
all such shares to elect as directors of Protection One one individual selected
by Western Resources from the executive officers of Protection One, at least
three "Independent Directors" and eight additional individuals nominated by
Western Resources. See "The Contribution Agreement -- Protection One's Board of
Directors and Headquarters."
As used in the Contribution Agreement, an "independent person" is a person
who (i) is in fact independent, (ii) does not have any direct financial interest
or any material indirect financial interest in Western Resources, Protection One
or any entity or individual that beneficially owns greater than two percent of
the outstanding Common Stock or any affiliate of any such entity or individual,
and (iii) is not connected with Western Resources, Protection One or any entity
or individual that beneficially owns greater than two percent of the outstanding
Common Stock or any affiliate of such entity or individual as an officer,
employee, consultant, agent, representative, trustee, partner, director (other
than of Protection One) or a person performing similar functions.
Protection One is a Delaware corporation and is subject to Section 203 of
the Delaware General Corporation Law. Pursuant to Section 203, certain "business
combinations" (as defined) between a Delaware corporation and an "interested
stockholder" (defined generally as a stockholder who becomes the beneficial
owner of 15% or more of a Delaware corporation's outstanding voting stock) are
prohibited for three years following the date such stockholder became an
"interested stockholder," unless the business combination is approved by the
board of directors of the corporation and by the holders of two-thirds of the
outstanding voting stock of the corporation not owned by the "interested
stockholder." The term "business combination" is defined generally to include
mergers or consolidations between a Delaware corporation and an interested
stockholder, transactions with an interested stockholder involving the assets or
stock of the corporation or its majority-owned subsidiaries and transactions
that increase an interested stockholder's percentage ownership of stock. Because
the Share Issuance has been approved by Protection One's Board of Directors, the
provisions of Section 203 requiring a "supermajority" vote to approve certain
corporate transactions will not apply to transactions between Western Resources
and Protection One. However, the Contribution Agreement provides that during the
10-year period following the Closing, a merger or a sale of all or substantially
all of the assets of Protection One involving Western Resources or any affiliate
of Western Resources generally will, under the terms of the Contribution
Agreement, require the prior approval of a majority of the Independent
Directors, and Western Resources may acquire more than 85% of the outstanding
shares of Common Stock or other voting securities of Protection One only under
specified circumstances and subject to specified limitations. See "The
Contribution Agreement -- Standstill." In addition, certain fiduciary
obligations will be imposed by law on Western Resources in its capacity as
majority stockholder of Protection One.
PLANS FOR PROTECTION ONE FOLLOWING THE STOCK ACQUISITION TRANSACTION
Western Resources presently intends to cause Protection One to retain, and
to operate Protection One's business (including the Western Resources Security
Business) under the direction of, Protection One's current management. (See
"Management of Protection One After the Stock Acquisition Transaction" for a
description of the new employment agreements to be entered into between
Protection One and four of Protection One's current executive officers upon
consummation of the Stock Acquisition Transaction and certain performance
bonuses to be paid to such officers.) Steven A. Millstein, currently President
of each of WestSec and Westar Security, will become an Executive Vice
President -- New Market Development of Protection One; and Protection One's
directors and executive officers immediately after the Closing will become the
directors and executive officers of the Western Resources Security Business.
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Pursuant to the Contribution Agreement, Western Resources has agreed that,
subject to certain exceptions, Western Resources will not engage in selling and
servicing residential or commercial monitoring and response security systems,
access control systems, closed-circuit television and video monitoring systems,
vehicle location and monitoring systems or security guard services other than
through Protection One. See "The Contribution Agreement -- Entire Security
Business."
Protection One and Western Resources also have provided in the Contribution
Agreement that for three years following the Stock Acquisition Transaction, the
principal executive offices of Protection One will continue to be located in Los
Angeles, California and Protection One's financial headquarters will be located
in Dallas, Texas.
If the Stock Acquisition Transaction occurs, management of Protection One
currently intends to retain all of the monitoring centers of Protection One and
the Western Resources Security Business, including facilities in Arizona,
Florida, Kansas, Oregon and Texas, and substantially all of the infrastructure
and employees of the Western Resources Security Business in support of
Protection One's growth objectives. Immediately following the Closing,
management will conduct a review of branch operations and locations with the
goal of combining duplicative branches in markets that were common to Protection
One and the Western Resources Security Business while enhancing field service
capabilities. In addition, certain corporate staff areas will be streamlined. In
addition, Protection One's finance, accounting and management information
services staffs will be combined with those of WRSB as a part of the relocation
to Dallas, Texas. Staffs in other areas also may be combined where management
determines doing so would contribute to enhanced efficiencies and lower costs.
Protection One's management expects that following the Stock Acquisition
Transaction, a majority of Protection One's new subscriber growth will continue
to be generated through a dealer program (which is expected to be substantially
expanded from Protection One's current program) and acquisitions of subscriber
account portfolios. Management will prioritize and target geographic areas for
additional growth.
PAYMENTS TO OPTIONHOLDERS AND ACCELERATION OF OPTIONS
In connection with the Stock Acquisition Transaction, Protection One will
pay to those directors, officers, employees and consultants of Protection One
who hold options to purchase shares of Common Stock, $7.00 in cash with respect
to each share issuable upon the exercise of such options, or an aggregate of up
to $8.2 million, of which an aggregate of up to $5.0 million will be paid to
directors, executive officers and other affiliates of Protection One, based upon
the number of shares of Common Stock issuable upon exercise of options
outstanding as of the Record Date. In addition, all outstanding options to
acquire Common Stock will become exercisable in full, including options to
purchase an aggregate of 712,000 shares of Common Stock held by directors,
executive officers and other affiliates of Protection One as of the Record Date,
some of which options otherwise would have vested over periods of up to five
years. Such payments to holders of outstanding options will be made at or about
the same time the Special Dividend is paid. For information with respect to the
options beneficially owned by each of Protection One's directors and executive
officers, see "Management of Protection One after the Stock Acquisition
Transaction -- Option Grants in Last Fiscal Year" and "Management of Protection
One after the Stock Acquisition Transaction -- Option Values."
WARRANT ADJUSTMENTS AND PAYMENTS; ADJUSTMENTS TO CONVERTIBLE NOTES; OFFER TO
REPURCHASE DISCOUNT NOTES
As of the Record Date, Protection One had outstanding (i) an Amended and
Restated Stock Purchase Warrant dated as of September 16, 1991 (the "Bank
Warrant"), issued to a bank as a former lender to Protection One and exercisable
for up to 103,697 shares of Common Stock at an exercise price of $3.633 per
share, (ii) 770,000 warrants (the "1993 Warrants") issued pursuant to a Warrant
Agreement dated as of November 3, 1993, between Protection One and United States
Trust Company of New York as Warrant Agent, each of which warrants entitles the
holder thereof to purchase from the Company six-tenths of a share of Common
Stock at a price of $.167 per share, (iii) 469,600 warrants (the "1995
Warrants") issued pursuant to a Warrant Agreement dated as of May 17, 1995 (the
"1995 Warrant Agreement"), between Protection
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One and State Street Bank and Trust Company as Warrant Agent, each of which
warrants entitles the holder thereof to purchase one share of Common Stock at a
price of $6.60 per share, and (iv) $103.5 million aggregate principal amount of
Convertible Notes. The 1993 Warrants and the 1995 Warrants were issued by
Protection One in private offerings to purchasers of two series of senior
subordinated notes; for additional information with respect to the terms of such
warrants, see note 10 of the notes to the consolidated financial statements of
Protection One for the fiscal years ended September 30, 1996 and 1995 included
in this Proxy Statement. The Convertible Notes were issued in 1996 in a
registered public offering.
Pursuant to the terms of the Bank Warrant, the 1993 Warrants, the 1995
Warrants and the Convertible Notes, as a result of the transactions provided for
in the Contribution Agreement, certain adjustments will be made to the exercise
or conversion prices of these securities and/or certain payments will be made in
lieu of such adjustments, including, but not limited to, the following:
(a) As a result of the Special Dividend, the holder of the Bank
Warrant will be entitled to receive, at such holder's election, either a
cash payment of $725,879 or an increase in the number of shares of Common
Stock subject to such warrant and a decrease in the warrant's exercise
price, in accordance with the terms and conditions of the Bank Warrant;
(b) Protection One will pay to the holders of the 1993 Warrants cash
in an aggregate amount equal to $7.00 multiplied by the number of shares of
Common Stock issuable upon exercise of the 1993 Warrants, or an aggregate
of $3,234,000, in lieu of adjustments to the exercise price and numbers of
shares of Common Stock subject to such warrants;
(c) The exercise price of the 1995 Warrants will be decreased, and the
number of shares of Common Stock issuable upon exercise of the 1995
Warrants will be increased; and
(d) The conversion price of the Convertible Notes will be decreased.
The $7.00 per share payments to holders of the 1993 Warrants and, if such
holder so elects, the holder of the Bank Warrant will be made at or about the
same time as the Special Dividend is paid. The amounts of the anti-dilution
adjustments made to the 1995 Warrants and the Convertible Notes will be
determined in accordance with formulas set forth in the instruments governing
those securities, will depend upon the trading prices of the Common Stock during
specified periods prior to the record date for the Special Dividend, and will be
effective as of such date.
As a result of the Stock Acquisition Transaction, holders of the 13 5/8%
Senior Subordinated Discount Notes due 2003 issued by Monitoring (the "Discount
Notes") will have the right to require Monitoring to repurchase, as of a date
selected by Monitoring that is not less than 60 days nor more than 90 days after
notice of the repurchase offer is mailed, to purchase some or all of such
holders' Discount Notes at a price equal to 101% of the Discount Notes'
"Accreted Value" (as defined in the indenture governing the Discount Notes), or
approximately $950.47 per $1,000 principal amount at maturity of the Discount
Notes.
ACCOUNTING TREATMENT
The Stock Acquisition Transaction will be accounted for under the purchase
method of accounting. Although Protection One will be the acquirer of the
Western Resource Security Business, after such transaction Western Resources
will hold a controlling interest in Protection One. Accordingly, for accounting
purposes, the Stock Acquisition Transaction will be a "reverse acquisition" and
WRSB will be the "accounting acquirer". As WRSB will be the accounting acquirer,
its accounts will be recorded at historical cost, and the assets and liabilities
of Protection One will be recorded at their estimated fair value as of the date
of the Share Issuance.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion addresses certain federal income tax
considerations of the Stock Acquisition Transaction that are applicable to
Protection One and to holders of the Common Stock generally. The discussion is
based on provisions of the United States Internal Revenue Code of 1986, as
amended (the
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"Code"), the final, temporary and proposed Treasury Regulations promulgated
thereunder and judicial and administrative interpretations thereof, all as in
effect on the date of this Proxy Statement. There can be no assurance that the
Internal Revenue Service (the "IRS") will not take a contrary view as to any of
the matters discussed below. In addition, there can be no assurance that future
legislative, judicial or administrative changes or interpretations will not
adversely affect the accuracy of the statements and conclusions set forth
herein. Any such change or interpretation could be applied retroactively and
could affect the tax consequences of the Stock Acquisition Transaction to
Protection One and its stockholders.
Stockholders should be aware that the following discussion does not deal
with all federal income tax consequences that may result from the Stock
Acquisition Transaction or the tax consequences of transactions effected prior
to or after the Stock Acquisition Transaction (whether or not such transactions
are in connection with the Stock Acquisition Transaction), including, without
limitation, the exercise of the 19.9% Option. In addition, no foreign, state or
local tax considerations are addressed herein. Furthermore, this discussion
applies only to a stockholder in whose hands the shares of Common Stock are a
capital asset, and does not address the considerations that may apply to
stockholders who are subject to special treatment for federal income tax
purposes (such as financial institutions, tax-exempt entities and foreign
persons) or who acquired their shares of Common Stock through the exercise of
employee stock options or otherwise as compensation. The consequences to any
particular stockholder may differ from those described below by reason of the
particular circumstances and income tax situation of that stockholder.
Subject to the limitations and qualifications referred to herein,
Protection One believes that the material federal income tax consequences of the
Stock Acquisition Transaction to Protection One and its stockholders generally
will be as follows:
No Recognition of Gain or Loss. Protection One will not recognize gain or
loss on the issuance of the Shares to Western Resources in exchange for the
Western Resources Contribution.
Special Dividend. Each stockholder who receives the Special Dividend will
be required to recognize dividend income (to the extent of such stockholder's
pro rata share of the current or accumulated earnings and profits of Protection
One) of up to the amount received. To the extent that the amount of the Special
Dividend received by any stockholder exceeds his or her pro rata share of such
current or accumulated earnings and profits, the excess will reduce the
stockholder's tax basis for his or her shares of Common Stock until such basis
has been reduced to zero. Any remaining portion of the Special Dividend will be
taxed as a capital gain. In the event that the stockholder's holding period for
his or her shares of Common Stock is more than 18 months, the maximum federal
capital gains rate is 20%. In the event the stockholder's holding period for his
or her shares of Common Stock is more than one year and not more than 18 months,
the maximum federal capital gains rate is 28%.
It is not known at this time what portion, if any, of the Special Dividend
will be treated as dividend income, and that portion cannot be determined until
after the close of the tax year of Protection One in which the Special Dividend
is paid. However, it is presently anticipated that if the Closing occurs prior
to December 31, 1997, and the Special Dividend is paid on or before December 31,
1997, Protection One will not have any significant current or accumulated
earnings and profits. Protection One will be required to report to each
stockholder and the IRS the total amount of the Special Dividend and the portion
of the amount so distributed to each stockholder to be treated as a dividend.
Although unlikely, it is possible that for federal income tax purposes, the
transfer of cash by Western Resources to Protection One in connection with the
Stock Acquisition Transaction followed by the distribution of cash by Protection
One to its stockholders would be treated as a direct transfer of cash by Western
Resources to the Protection One stockholders in exchange for a portion of the
shares of Common Stock held by each Protection One stockholder, followed by a
non-taxable stock split. In such event, each Protection One stockholder would be
treated as required to recognize taxable gain or loss from the deemed sale of a
portion of his or her shares of Common Stock, and no portion of the Special
Dividend would be treated as generating dividend income or as reducing the tax
basis of such stockholder's stock.
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Payments to Holders of Options. Amounts paid in connection with the Stock
Acquisition Transaction to those directors, officers and employees of Protection
One who hold options issued pursuant to Protection One's 1994 Stock Option Plan,
as amended (the "1994 Stock Option Plan") or Protection One's 1996 Non-Qualified
Stock Option Plan that are calculated with respect to the shares of Common Stock
subject to such options will be taxable income to the recipients. Generally,
such payments are deductible by the payor under Section 162 of the Code.
However, Section 162(m) of the Code disallows any deduction for otherwise
deductible compensation payable to certain executive officers to the extent that
compensation paid to such officers for such year exceeds $1 million. There is an
exception to this disallowance for certain "performance-based compensation."
Protection One believes that the entire amount paid to option holders would be
deductible under this exception. However, the IRS may take a contrary view and
seek to treat a portion of the amount paid as non-deductible.
It is possible that the IRS will take the position that a portion of the
compensation paid to holders of options may constitute an "excess parachute
payment" under the Code. Very generally, excess parachute payments arise from
certain payments made to disqualified individuals that are in the nature of
compensation, that are not reasonable in amount and that are contingent on
certain changes in ownership or control of the Company. Disqualified individuals
for this purpose include certain employees and independent contractors who are
officers, shareholders or highly-compensated individuals. To the extent that any
payment constitutes an excess parachute payment, Protection One would not obtain
a deduction for the amount of such payment, and the recipient of the payment
would be subject to a 20% excise tax in addition to regular income taxes.
Protection One believes that the payments to be made to holders of options in
connection with the Stock Acquisition Transaction represent reasonable
compensation for services previously rendered, and that accordingly no portion
of such payments constitutes "excess parachute payments."
Acceleration of Vesting Period of Certain Options. As described in "The
Stock Acquisition Transaction -- Payments to Optionholders and Acceleration of
Options," upon consummation of the Stock Acquisition Transaction all outstanding
options to acquire shares of Common Stock will become exercisable in full. The
acceleration of the exercisability of any such option will not result in any
taxable income being required to be recognized by the optionholder or in any
deduction to Protection One. However, in some instances the acceleration of
exercisability of an option that qualified as an "incentive stock option" under
Section 422 of the Code could cause such option be converted into a nonqualified
option. For a description of the different tax consequences to Protection One of
the exercise of incentive and nonqualified stock options, see "Approval of the
1997 Long-Term Incentive Plan -- Tax Aspects -- Stock Options." In addition, the
acceleration of exercisability of options must be taken into account making any
required "excess parachute payments" computation at the time of the option in
question is exercised.
Payments to Holders of Warrants. Amounts paid in connection with the Stock
Acquisition Transaction to holders of warrants issued by Protection One will not
be deductible by Protection One.
REGULATORY REQUIREMENTS
Antitrust. Pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended, and the rules issued thereunder by the Federal Trade
Commission (the "FTC", and such statute and rules together the "HSR Act"), the
Stock Acquisition Transaction may not be consummated until certain information
has been provided to the FTC and the Antitrust Division of the Department of
Justice (the "Antitrust Division") and specified waiting period requirements
have been satisfied. Protection One and Western Resources filed Notification and
Report Forms under the HSR Act relating to the Stock Acquisition Transaction on
August 13, 1997. The waiting period under the HSR Act with respect to the Stock
Acquisition Transaction expired on September 14, 1997. At any time before or
after the Stock Acquisition Transaction is consummated, the FTC or the Antitrust
Division could take such action under the antitrust laws as such agency deems
necessary or desirable in the public interest, including seeking to enjoin
consummation of the Share Issuance or seeking divestiture of assets of
Protection One or Western Resources. At any time before or after the Share
Issuance, any state could take such action under the antitrust laws as that
state deems necessary or desirable in the public interest. Such action could
include seeking to enjoin the consummation of
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the Stock Acquisition Transaction or seeking divestiture of assets of Protection
One or Western Resources. Private parties also may seek to take legal action
under the antitrust laws under certain circumstances.
Protection One and Western Resources believe that the Stock Acquisition
Transaction is in compliance with federal and state antitrust laws. However,
there can be no assurance that a challenge to the consummation of the Stock
Acquisition Transaction will not be made or that if such a challenge were made,
Protection One and Western Resources would prevail or would not be required to
accept certain conditions, possibly including certain divestitures, in order to
consummate the Stock Acquisition Transaction.
Licensing. The Western Resources Security Business has subscribers in a
number of states as to which regulatory filings or approvals may be required in
connection with the contribution to Protection One of the shares of WestSec and
Westar Security.
CHARTER AMENDMENT
In order for Protection One to have sufficient authorized capital to issue
the Shares to Western Resources, the Fifth Restated Certificate of
Incorporation, as previously amended, of Protection One (the "Certificate of
Incorporation") must be further amended to increase the number of shares of
Common Stock that Protection One is authorized to issue. The Board of Directors
of Protection One has approved an amendment to Article Four of the Certificate
of Incorporation increasing the number of authorized shares of Common Stock from
40,000,000 shares to 150,000,000 shares. A copy of Article Four of the
Certificate of Incorporation as proposed to be amended is attached to this Proxy
Statement as Appendix E. By voting in favor of the Stock Acquisition Proposal,
stockholders will be voting in favor of the Charter Amendment.
As of the Record Date, of the currently authorized shares of Common Stock,
14,493,722 shares were outstanding, 2,224,444 unissued shares were reserved for
issuance under Protection One's stock option and other employee benefit plans,
1,035,297 shares were reserved for issuance pursuant to the exercise of other
outstanding options and warrants, 5,766,017 shares were reserved for issuance
upon conversion of the Convertible Notes and 2,750,238 shares were reserved for
issuance upon exercise of the 19.9% Option. It is anticipated that approximately
68,500,000 shares of Common Stock will be issued in the Share Issuance, that up
to 4,000,000 additional shares may need to be reserved for issuance pursuant to
the exercise of outstanding warrants and the Convertible Notes as a result of
adjustments that may be required in connection with the Stock Acquisition
Transaction (see "-- Warrant Adjustments and Payments; Adjustments to
Convertible Notes; Offer to Repurchase Discount Notes") and that 4,200,000
shares will need to be reserved following the Stock Acquisition Transaction for
issuance upon exercise of options and other awards to be granted under the 1997
Long-Term Incentive Plan. See "Approval of 1997 Long-Term Incentive Plan."
Although only approximately additional 88,476,000 shares of Common Stock
would need to be authorized in order to meet all currently known needs, the
Board of Directors of Protection One believes that it is in the best interests
of Protection One 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, other
investment opportunities, or other corporate purposes is desirable in order to
avoid repeated separate amendments to the Certificate of Incorporation.
Except as described above, Protection One has no present understanding or
commitment, nor has Protection One taken any formal action, to issue currently
authorized but unissued shares or the additional shares to be authorized
pursuant to the Charter Amendment.
No further authorization by vote of Protection One'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 Protection One'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 Protection One'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.
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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.
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
Protection One. 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 Charter Amendment.
THE CONTRIBUTION AGREEMENT
The following description of certain terms of the Contribution Agreement is
only a summary and does not purport to be complete. This discussion is qualified
in its entirety by reference to the complete text of the Contribution Agreement,
a copy of which is attached to this Proxy Statement as Appendix A.
THE SHARE ISSUANCE AND THE WESTERN RESOURCES CONTRIBUTION
The Contribution Agreement provides that Western Resources will contribute
to Protection One:
(i) all of the issued and outstanding common stock of WestSec;
(ii) all of the issued and outstanding common stock of Westar
Security;
(iii) $250 million in cash (except that up to $10 million of such
amount may be contributed in the form of securities issued by one or more
entities engaged in the business of selling and servicing residential or
commercial monitoring and response security systems which securities are
listed for trading on a national securities exchange or quoted on an
interdealer quotation system, with such securities (the "Investment
Shares") valued at the higher of (a) the closing sale price thereof on a
national securities exchange or an interdealer quotation system two
business days prior to the date on which the Closing occurs and (b) the
historical price at which Western Resources purchased such securities); and
(iv) approximately $116.9 million in additional cash, such amount
constituting $7.00 multiplied by the aggregate number of shares of Common
Stock outstanding, or issuable upon exercise of options and warrants of
Protection One (other than the 19.9% Option) outstanding, immediately prior
to the Share Issuance, after giving effect to any and all adjustments in
the terms of such options and warrants resulting from the transactions
provided for in the Contribution Agreement.
In consideration of the Western Resources Contribution, Protection One will
issue to Western Resources approximately 68,500,000 shares of Common Stock, such
number being equal to the product of (i) .801 and (ii) the sum of (x) the
aggregate number of shares of Common Stock outstanding as of the Closing
(including the shares to be issued pursuant to the Contribution Agreement, but
excluding any shares issued pursuant to the Stock Option Agreement at or prior
to the Closing) and (y) the aggregate number of shares of Common Stock issuable
as of the Closing pursuant to outstanding options and warrants of Protection One
(other than the 19.9% Option) after giving effect to the adjustments required as
a result of the Special Dividend and the Option/Warrant Payments). Not later
than two business days prior to the date of the Closing (the "Closing Date"),
Protection One is required to deliver to Western Resources a schedule setting
forth (i) the cash payments to be paid with respect to, the reduction in the
exercise price of, and/or the increase in the number of shares of Common Stock
issuable upon exercise of, each option, warrant and Convertible Note as a result
of the payment to the record holders of Common Stock of the Special Dividend and
(ii) the number of the Shares, after giving effect to all payments, reductions
and increases referred to in clause(i) immediately above. If, following the
Closing, Western Resources notifies Protection One that any calculation on such
schedule was incorrect and that as a result thereof either Western Resources was
not issued as of the Closing the correct number of Shares or Protection One has
been required to make distributions or adjustments not contemplated by such
schedule, then as promptly as practicable after Western Resources and the
Independent Directors have agreed thereto, such agreement not to be unreasonably
withheld, Protection One will issue additional shares of Common Stock to Western
Resources at no cost to Western Resources to correct such incorrect calculation.
With respect to distributions or adjustments to exercise prices that Protection
One is required to make that were not contemplated by such schedule, Western
Resources will be entitled to receive for each $1 million of such payments or
adjustments that number of shares of Common Stock equal to .1% of the number of
Shares.
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THE SPECIAL DIVIDEND
The Contribution Agreement provides that prior to the Closing Protection
One will declare a dividend of $7.00 in cash on each share of Common Stock
issued and outstanding on the date the Closing occurs, except that the Special
Dividend will not be payable on any shares of Common Stock held by Western
Resources. The Special Dividend will be payable to holders of record of Common
Stock as of the date of, and immediately prior to, the Closing occurs, and will
be paid only if the Closing in fact takes place. The Special Dividend will be
paid (i) after the date on which the Closing occurs and on or before December
31, 1997 if the Closing occurs before December 31, 1997, and (ii) on the date on
which the Closing occurs if the Closing occurs on or after December 31, 1997.
TREATMENT OF PROTECTION ONE STOCK OPTIONS AND WARRANTS
Pursuant to the Contribution Agreement, Protection One will pay a cash
bonus to each of its directors, officers, employees and consultants who is a
holder of record on the Closing Date of an option or to purchase Common Stock.
Such cash bonus will be in the amount of $7.00 per share of Common Stock
issuable on exercise of such option. Holders of record of warrants to purchase
Common Stock (other than the 19.9% Option) will receive a reduction in the
exercise price of, and/or an increase in the number of shares of Common Stock
issuable on exercise of, such warrants or a $7.00 per share cash payment, in
each case pursuant to the terms of such holders' warrants. See "The Stock
Acquisition Transaction -- Warrant Adjustments and Payments; Adjustments to
Convertible Notes; Offer to Repurchase Discount Notes."
STOCKHOLDERS MEETING; RECOMMENDATION
The Contribution Agreement requires Protection One to take all action
necessary to convene a meeting of the holders of the Common Stock as promptly as
practicable to consider and vote on the approval of the Stock Acquisition
Proposal and the 1997 Long-Term Incentive Plan. Protection One has agreed that,
subject to fiduciary obligations under applicable law, Protection One's Board of
Directors will recommend, and take all reasonable action to solicit, such
approval.
THE CLOSING
The Contribution Agreement provides that the Closing will take place as
promptly as practicable after the satisfaction or waiver of the conditions set
forth in the Contribution Agreement, assuming that the Contribution Agreement
has not theretofore been terminated in accordance with its terms.
ACQUISITION PROPOSALS
In the Contribution Agreement, Protection One agrees that neither it nor
any of its officers and directors will, and that Protection One will direct and
use its best efforts to cause its employees, agents and representatives
(including any investment banker, attorney or accountant) not to, directly or
indirectly, (i) initiate, solicit, encourage or otherwise facilitate any inquiry
or the making of any proposal or offer with respect to a merger, reorganization,
share exchange, consolidation or similar transaction involving, or any purchase
of all or any significant portion of the assets or any equity securities of,
Protection One (any such proposal or offer an "Acquisition Proposal"), or (ii)
engage in any negotiations concerning, or provide any confidential information
or data to, or have any discussions with, any person relating to an Acquisition
Proposal, or otherwise facilitate any effort to make or implement an Acquisition
Proposal; provided, however that nothing in the Contribution Agreement will
prevent Protection One or its Board of Directors from (i) complying with Rule
14e-2 under the Exchange Act with regard to an Acquisition Proposal; (ii)
providing information in response to a request therefor by a party who has made
an unsolicited Acquisition Proposal, if the Board of Directors of Protection One
receives from the party requesting the information an executed confidentiality
agreement on terms substantially similar to the confidentiality agreement
entered into between Protection One and Western Resources (the "Confidentiality
Agreement") in connection with the transactions contemplated by the Contribution
Agreement (except that such confidentiality agreement need not prohibit the
making or amendment of an Acquisition Proposal), (iii) engaging in any
negotiations or discussions with a party who has made an unsolicited bona fide
written Acquisition Proposal, or
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(iv) recommending such an Acquisition Proposal to the stockholders of Protection
One, if and only to the extent that, in each case referred to in clauses (ii),
(iii) or (iv), immediately above, the Board of Directors of Protection One
determines in good faith after consultation with outside legal counsel that such
action is necessary for the directors to comply with their fiduciary duties
under applicable law.
Protection One also has agreed (i) immediately to cease and cause to be
terminated any existing activities, discussions or negotiations with any party
conducted prior to entering into the Contribution Agreement with respect to any
of the foregoing, (ii) to promptly inform the individuals or entities referred
to in the first sentence of the immediately preceding paragraph of the
obligations undertaken in connection with the Contribution Agreement and the
Confidentiality Agreement with regard to Acquisition Proposals, (iii) to notify
Western Resources immediately if any such inquiry, proposal or offer is received
by, any such information is requested from, or any such discussions or
negotiations are sought to be initiated or continued with, any of Protection
One's representatives, indicating the name of such person, (iv) to notify
Western Resources of the material terms and conditions of any Acquisition
Proposal at least 72 hours prior to Protection One's execution of any letter of
intent or agreement with respect thereto, and (v) to promptly request each
person who has executed a confidentiality agreement in connection with its
consideration of acquiring Protection One to return all confidential information
furnished to such person.
ENTIRE SECURITY BUSINESS
The Contribution Agreement provides that, from and after the Closing, for
so long as Western Resources owns, directly or indirectly, more than 50% of the
outstanding Common Stock, neither Western Resources, Inc. nor any of its
subsidiaries other than Protection One will engage in, or invest in, acquire any
equity securities of, or enter into any material business relationship with any
person engaged in the business of selling and servicing residential (other than
multi-family residential) or commercial monitoring and response security
systems, access control systems, closed-circuit television and video monitoring
systems, vehicle location and monitoring systems or security guard services (the
"Business"). Notwithstanding this prohibition, Western Resources may (i) engage
in the business of selling and servicing multi-family residential monitoring and
response security systems (the "Multi-Family Monitoring Business"), (ii) invest
in, acquire equity securities of or enter into any material business
relationship with any person engaged in the Business provided such person
derives at least 75% of its revenues from the Multi-Family Monitoring Business
and/or any other business other than the Business, and (iii) engage in the
Business to the extent such business is acquired pursuant to the foregoing
clause (ii). However, Western Resources may not invest in, acquire equity
securities of, or enter into any material business relationship with any person
engaged in the Business if, following such investment, acquisition or entrance
into, Western Resources would derive aggregate annual revenues from the Business
in an amount equal to 7.5% or greater of the aggregate annual revenues at such
time of Protection One.
Notwithstanding the foregoing provisions of the Contribution Agreement,
Western Resources had the right, prior to the Closing and with the prior written
consent of Protection One, to enter into one or more agreements to acquire some
or all of the equity securities of each of Centennial Security Holdings, Inc.,
Network Holdings, Inc. and Guardian International, Inc.
Prior to entering into any acquisition agreement with Centennial, Network
or Guardian, Western Resources was required to (i) ensure that Protection One
was entitled to enter into a confidentiality agreement entered into between
Western Resources and such party, and to Protection One and its representatives
a period of no less than five days to review all of the same financial and other
information made available to or generated by Western Resources or any of its
representatives or advisors in connection with Western Resources's review of
such party; (ii) provide Protection One with a substantially final draft of the
acquisition agreement with respect to the acquired securities at least five days
prior to execution thereof; and (iii) not enter into such acquisition agreement
unless Protection One consented in writing to Western Resources entering into
such agreement.
Immediately or as soon as practicable following the Closing, Western
Resources is required to transfer to Protection One, without recourse to Western
Resources or any of its subsidiaries or affiliates, all of Western Resources's
right, title and interest, if any, in all of the equity securities of Centennial
and all of the equity
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securities of Guardian acquired by Western Resources after the Closing, as well
as all rights and obligations of Western Resources under the acquisition
agreements entered into with respect to Centennial and/or Guardian, as the case
may be. (Western Resources has advised Protection One that Western Resources
intends to contribute to Protection One, as a part of the Investment Shares, the
common stock of Guardian owned by Western Resources as of the signing of the
Contribution Agreement.) For a period of 180 days following the Closing Date,
Protection One will have the right, exercisable by the vote of a majority of the
Protection One Board of Directors, to require Western Resources to transfer to
Protection One, without recourse to Western Resources or any of its subsidiaries
or affiliates, all of Western Resources's right, title and interest in the
equity securities of Network, as well as all rights and obligations of Western
Resources under the acquisition agreement entered into with respect to Network.
In consideration of the transfer of all of Western Resources's right, title
and interest, if any, in each of Centennial and Network and the equity
securities of Guardian acquired by Western Resources after the Closing, and the
respective acquisition agreements with respect thereto, Protection One will pay
in cash to Western Resources an amount equal to the sum of (x) the purchase
price paid by Western Resources to acquire Centennial, Network or Guardian, as
the case may be (the "Purchase Price"), (y) any and all fees and expenses
incurred by Western Resources to third parties (including, without limitation,
investment bankers, attorneys and accountants) in connection with Western
Resources's acquisition of Centennial, Network or Guardian, as the case may be,
and (z) a carrying charge equal to the product of (A) the Purchase Price, (B)
0.1 and (C) the number of days from and including the date of the consummation
of the acquisition of Centennial, Network or Guardian, as the case may be, by
Western Resources up to but not including the date of transfer, divided by 365;
and (ii) Protection One will pay to Western Resources the higher of (x) the
amount determined by the foregoing formula and (y) the closing sales price of
the securities of Guardian purchased by Western Resources on a national
securities exchange or interdealer quotation system two business days prior to
the consummation of the transfer of such securities to Protection One.
Notwithstanding anything to the contrary contained in the Contribution
Agreement, in the event that the aggregate amount paid by Protection One to
Western Resources for such securities of Centennial, Network and Guardian as are
transferred to Protection One in accordance with the terms of the Contribution
Agreement (the "Aggregate Amount") exceeds the Base Amount (as defined below),
then Protection One will pay to Western Resources cash in an aggregate amount
equal to the Base Amount and Protection One will issue to Western Resources (or
any subsidiary of Western Resources designated by Western Resources) an
unsecured note or notes in any aggregate principal amount equal to the
difference between the Aggregate Amount and the Base Amount. Such note or notes
will bear interest at an annual rate of 10%, and the principal amount of the
note or notes and all accrued interest thereon will be payable in full on the
first anniversary of the date of issuance of each such note or notes. Protection
One's obligations under such note or notes shall be subordinated to any other
outstanding debt obligations of Protection One to the extent that such
subordination is required by the instruments governing such debt obligations.
For purposes of the Contribution Agreement, "Base Amount" means an amount equal
to the aggregate amount of cash and marketable securities contributed to
Protection One by Western Resources at the Closing minus the sum of (i) the
aggregate principal amount and accrued interest outstanding under Protection
One's Amended and Restated Credit Agreement as of the Closing Date and (ii) the
aggregate amount of the cash dividends and the distributions payable to holders
of Common Stock and Protection One options and warrants following the Closing
Date as contemplated by the Contribution Agreement.
For additional information with respect to the businesses of Centennial,
Network and Guardian and the acquisition or proposed acquisition by Western
Resources of equity securities of such companies, see "Business of Protection
One -- Potential Acquisitions." At the time the Contribution Agreement was
entered into, the Multi-Family Monitoring Business was excluded from the
business in which Western Resources agree to engage only through Protection One
due to the status at that time of the negotiations between Western Resources and
Network for the Network Acquisition, which negotiations had commenced prior to
the negotiation and structuring of the Stock Acquisition Transaction. However,
as described above, as of the date of this Proxy Statement Western Resources has
granted Protection One an option to acquire the equity securities of Network,
and has advised Protection One that although Western Resources reserves the
right to
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engage in the Multi-Family Monitoring Business other than through Protection
One, Western Resources has no present plans to do so.
STANDSTILL
Until the 10th anniversary of the Closing Date (unless earlier terminated
pursuant to the provisions of the Contribution Agreement), the Contribution
Agreement prohibits Western Resources, its affiliates and any person acting on
their behalf from directly or indirectly (i) acquiring, agreeing to acquire or
proposing, or announcing or disclosing any intention to propose, to acquire any
shares of Common Stock or any other securities of Protection One generally
entitled to vote for the election of directors of Protection One and on other
matters for which the holders of Common Stock are entitled to vote ("Voting
Securities"), and (ii) proposing, or announcing or disclosing any intention to
propose, any merger or business combination involving Protection One or the
purchase of all or substantially all of the assets of Protection One.
Notwithstanding this prohibition:
(a) Western Resources and its affiliates, and any person acting on
their behalf, may acquire Voting Securities pursuant to the Share Issuance,
the Stock Option Agreement and the Option and Voting Agreement;
(b) Between the Closing Date and the six-month anniversary of the
Closing Date, Western Resources may in any manner acquire Voting Securities
representing in the aggregate up to but not exceeding 85% of the Voting
Securities issued and outstanding at such time;
(c) After the six-month anniversary of the Closing Date, at any time
when Convertible Notes representing more than $51,750,000 in aggregate
principal amount remain outstanding, Western Resources may in any manner
acquire Voting Securities representing in the aggregate up to but not
exceeding 88.5% of the Voting Securities issued and outstanding at such
time;
(d) After the six-month anniversary of the Closing Date, at any time
when Convertible Notes representing less than $51,750,000 in aggregate
principal amount remain outstanding, Western Resources may in any manner
acquire Voting Securities representing in the aggregate up to but not
exceeding 85% of the Voting Securities issued and outstanding at such time;
and
(e) Following the Closing Date Western Resources may make a tender
offer or exchange offer for all outstanding shares of Common Stock or
Voting Securities, and may propose a merger or business combination
involving Protection One or the purchase of all or substantially all of the
assets of Protection One, but only if (x) any tender offer constitutes a
"tender offer" for purposes of, and is made in compliance with, Rules 14d-1
and 13e-3 under the Exchange Act, and (y) any such action is approved by a
majority of the Independent Directors, and is at a price and on terms that
are fair to the stockholders of Protection One as determined by a majority
of such Independent Directors after receipt of a fairness opinion from a
nationally recognized investment banking firm selected by a majority of
such Independent Directors and reasonably acceptable to Western Resources.
PROTECTION ONE'S BOARD OF DIRECTORS AND HEADQUARTERS
The Contribution Agreement provides that at the Closing Protection One will
increase the size of its Board of Directors from four to 12 to permit eight
persons named by Western Resources to be added to such Board. Until the second
anniversary of the Closing, Western Resources will vote all shares of Common
Stock beneficially owned by Western Resources to elect the four current
directors of Protection One and eight individuals selected by Western Resources
(some or all of whom, at Western Resources's sole discretion, may be
"independent persons" as defined in the Contribution Agreement). Thereafter, for
so long as Western Resources directly or indirectly owns more than 50% of the
outstanding shares of Common Stock, Western Resources will vote all such shares
to elect as directors of Protection One (i) one individual selected from the
executive officers of Protection One, (ii) at least three Independent Directors,
and (iii) eight individuals selected by Western Resources. The Contribution
Agreement also provides that, until the third anniversary of the Closing, the
corporate headquarters of Protection One will be in Los Angeles, California and
Protection One's finance headquarters will be in the Dallas, Texas metropolitan
area.
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STOCK OPTION PLAN
The Contribution Agreement requires that, subject to obtaining stockholder
approval, upon or promptly following the Closing Date Protection One will
establish a new stock option plan (the "New Option Plan") for the benefit of
officers and key employees of Protection One (including the Western Resources
Security Business). The New Option Plan is to include such terms and conditions
as are determined by the Board of Directors of Protection One and approved by
Western Resources; provided, however, that the New Option Plan will provide for
issuance of a total of up to 4,200,000 shares of Common Stock. Options with
respect to 1,600,000 shares of Common Stock will be granted to officers and key
employees of Protection One (including WRSB) on or immediately after the Closing
Date. The 1997 Long-Term Incentive Plan will constitute the New Option Plan. See
"Approval of 1997 Long-Term Incentive Plan" and the form of the 1997 Long-Term
Incentive Plan attached hereto as Appendix F.
CONDITIONS TO THE SHARE ISSUANCE
The Contribution Agreement provides that the respective obligations of
Protection One and Western Resources to effect the Share Issuance are subject to
the satisfaction or waiver at or prior to the Closing of each of the following
conditions: (i) the Stock Acquisition Proposal and the New Option Plan shall
have been approved by the requisite votes of the holders of the Common Stock;
(ii) the shares of Common Stock issuable pursuant to the Share Issuance shall
have been authorized for quotation on the Nasdaq National Market; (iii) the
applicable waiting period under the HSR Act shall have expired or been
terminated, and all consents, registrations, approvals, permits and
authorizations from any Governmental Entity required prior to the Closing shall
have been made or obtained (except for those that the failure to make or obtain
are not, individually or in the aggregate, reasonably likely to have a
"Transferred Subsidiary Material Adverse Effect" or a "Protection One Material
Adverse Effect" (each as defined in the Contribution Agreement) or to provide a
reasonable basis to conclude that the parties or their affiliates or respective
directors, officers or other representatives would be subject to the risk of
criminal liability); and (iv) no court or governmental entity of competent
jurisdiction shall have enacted, entered or enforced any law, rule, regulation,
judgment or other order that is in effect and restrains, enjoins or otherwise
prohibits consummation of the Share Issuance.
The obligation of Protection One to effect the Share Issuance is also
subject to the satisfaction or waiver by Protection One at or prior to the
Closing of the following conditions: (i) the representations and warranties of
Western Resources in the Contribution Agreement shall be true and correct as of
the date of the Contribution Agreement and as of the Closing as though made on
and as of the Closing (except to the extent any representation or warranty
expressly speaks as of an earlier date), and Protection One shall have received
certificates of Western Resources to such effect, provided that this condition
shall be deemed satisfied unless the failure of such representations and
warranties to be so true and correct, individually or in the aggregate, has had,
or is reasonably likely to have, a Transferred Subsidiary Material Adverse
Effect or is reasonably likely to prevent or materially burden or impair the
ability of Western Resources to consummate the Share Issuance and the other
transactions contemplated by the Contribution Agreement; (ii) Western Resources
shall have performed in all material respects all of Western Resources'
obligations under the Contribution Agreement at or prior to the Closing Date,
and Protection One shall have received certificates of Western Resources to such
effect; (iii) Western Resources and WRSB shall have obtained the consent or
approval of each person whose consent or approval is required under any
agreement or instrument to which Western Resources is a party, except those for
which the failure to obtain such consent or approval, individually or in the
aggregate, is not reasonably likely to have a Transferred Subsidiary Material
Adverse Effect or to prevent or materially burden or impair the ability of
Western Resources to consummate the Share Issuance and the other transactions
contemplated by the Contribution Agreement; (iv) Protection One shall have
received the cash and stock certificates evidencing the Investment Shares
required to be delivered to Protection One at the Closing; (v) Protection One
shall have received stock certificates evidencing the shares of the Western
Resources Security Business, in form satisfactory to Protection One; and (vi) no
event or events shall have occurred, or be reasonably likely to occur, which,
individually or in the aggregate, have had, or could reasonably be expected to
have, a Transferred Subsidiary Material Adverse Effect.
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The obligation of Western Resources to effect the Share Issuance is also
subject to the satisfaction or waiver by Western Resources at or prior to the
Closing of the following conditions: (i) the representations and warranties of
Protection One in the Contribution Agreement shall be true and correct as of the
date of the Contribution Agreement and as of the Closing as though made on and
as of the Closing Date (except to the extent any representation or warranty
expressly speaks as of an earlier date), and Western Resources shall have
received a certificate of Protection One to such effect, provided that this
condition shall be deemed satisfied unless the failure of such representations
and warranties to be so true and correct, individually or in the aggregate, has
had, or is reasonably likely to have, a Protection One Material Adverse Effect
or is reasonably likely to prevent or materially burden or impair the ability of
Protection One to consummate the transactions contemplated by the Contribution
Agreement; (ii) Protection One shall have performed in all material respects all
of Protection One's obligations under the Contribution Agreement at or prior to
the Closing Date, and Western Resources shall have received a certificate of
Protection One to such effect; (iii) Protection One shall have obtained the
consent or approval of each person whose consent or approval is required under
any contract to which Protection One is a party, except for those for which the
failure to obtain such consent or approval, individually or in the aggregate, is
not reasonably likely to have a Protection One Material Adverse Effect or to
prevent or materially burden or impair the ability of Protection One to
consummate the Share Issuance and the other transactions contemplated by the
Contribution Agreement; (iv) Western Resources shall have received the opinion
of Sullivan & Cromwell, dated the Closing Date, to the effect that the
contribution of the shares of WestSec and Westar Security and the Investment
Shares will be treated for Federal income tax purposes as a "contribution to a
controlled corporation" within the meaning of Section 351 of the Code; (v)
Protection One shall have entered into employment and non-competition agreements
with each of Messrs. Mackenzie, Hesse, Mack and Rankin; (vi) Western Resources
shall have received stock certificates representing the duly authorized, validly
issued, fully paid and nonassessable Shares; and (vii) no event or events shall
have occurred, or be reasonably likely to occur, which, individually or in the
aggregate, have had, or could reasonably be expected to have, a Protection One
Material Adverse Effect.
As used in the Contribution Agreement,
(a) "Transferred Subsidiary Material Adverse Effect" means any change
or effect that is materially adverse to the financial condition,
properties, business or results of operations of the Western Resources
Security Business taken as a whole; provided, however, that any such effect
resulting from any change (i) in any law, rule, or regulation that applies
to both Protection One and the Western Resources Security Business or (ii)
in economic or business conditions generally or in the security monitoring
industry specifically shall not be considered when determining if a
Transferred Subsidiary Material Adverse Effect has occurred; and
(b) "Protection One Material Adverse Effect" means any change or
effect that is materially adverse to the financial condition, properties,
business or results of operations of Protection One taken as a whole;
provided, however, that any such effect resulting from any change (i) in
any law, rule or regulation that applies to both Protection One and WRSB or
(ii) in economic or business conditions generally or in the security
monitoring specifically shall not be considered when determining if a
Protection One Material Adverse Effect has occurred,
The conditions to each party's obligations to consummate the Share Issuance
are for the sole benefit of such party, and may be waived by that party to the
extent permitted by applicable law.
REPRESENTATIONS AND WARRANTIES
The Contribution Agreement contains various representations and warranties
of Protection One and Western Resources relating to, among other things: (i) the
organization of each of Protection One, Inc. and Western Resources, Inc. and
similar corporate matters; (ii) the identities and capitalization of WRSB and
Protection One, and related matters; (iii) corporate authority and approval;
(iv) governmental filings and the absence of certain conflicts; (v) financial
statements and Protection One's filings with the Commission; (vi) the absence of
certain changes; (vii) litigation and liabilities; (viii) employee benefits;
(ix) permits and
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compliance with laws; (x) environmental matters; (xi) absence of actions that
would prevent qualification under Section 351 of the Code; (xii) taxes; (xiii)
labor matters; (xiv) insurance; (xv) intellectual property; (xvi) brokers and
finders; (xvii) real property; (xviii) WestSec's and Westar Security's ownership
of all properties and assets material to Western Resources's entire security
monitoring business; (xix) the agreement with Westinghouse Electric Corporation
("Westinghouse") pursuant to which WestSec acquired WSS; and (xx) the fairness
opinion of Protection One's financial advisor.
CONDUCT OF BUSINESSES PRIOR TO CLOSING; CERTAIN COVENANTS; INDEMNIFICATION
Western Resources has agreed that, except as otherwise expressly
contemplated by the Contribution Agreement, the Stock Option Agreement or the
Option and Voting Agreement or approved by Protection One in writing, prior to
the Closing:
(i) The businesses of WRSB will be conducted in the ordinary and usual
course, and Western Resources will cause WestSec and Westar Security to use
all reasonable efforts consistent therewith to preserve their business
organizations and maintain their relations and goodwill with customers,
employees and certain other persons;
(ii) Western Resources will not: (a) issue, sell, pledge, dispose of,
encumber or accelerate, modify, or amend any shares of, or securities
convertible into or exchangeable or exercisable for, or options, warrants,
calls, commitments or rights of any kind to acquire, any shares of capital
stock of WestSec or Westar Security (b) amend the certificate of
incorporation or by-laws of WestSec or Westar Security, (c) split, combine
or reclassify the outstanding shares of capital stock of WestSec or Westar
Security, (d) declare, set aside or pay any dividend in respect of any
shares of WestSec or Westar Security, (e) repurchase, redeem or otherwise
acquire any shares of capital stock of WestSec or Westar Security or any
securities convertible into or exchangeable or exercisable for any shares
of WestSec or Westar Security, (f) other than in the ordinary and usual
course of business, transfer, lease, license, guarantee, sell, mortgage,
pledge, encumber or dispose of any other property or assets of WestSec or
Westar Security or permit WestSec or Westar Security to incur or modify any
material indebtedness or other liability, or (g) permit WestSec or Westar
Security to make or authorize or commit for any capital expenditures or, by
any means, permit WestSec or Westar Security to make any acquisition of, or
investment in, assets or stock of any other person or entity, except for
(A) acquisitions of security monitoring accounts in the ordinary course of
business consistent with past practice, (B) other acquisitions of security
monitoring accounts not to exceed $5,000,000 in the aggregate, and (C)
other capital expenditures not to exceed $500,000 in the aggregate;
(iii) Western Resources will not terminate, establish, adopt, enter
into, make any new grants or awards under, amend or otherwise modify any
employee compensation agreement or arrangement or any employee benefit plan
or increase the salary, wage, bonus or other compensation of any employees
of WestSec or Westar Security except grants, awards and increases occurring
in the ordinary and usual course of business;
(iv) Western Resources will not settle or compromise any material
claims or litigation involving WestSec or Westar Security or, except in the
ordinary and usual course of business, modify, amend or terminate any
material agreement to which WestSec or Westar Security is a party or waive,
release or assign any material rights or claims of WestSec or Westar
Security;
(v) Western Resources will not make any tax election with respect to
taxes payable by WestSec or Westar Security or permit any insurance policy
naming WestSec or Westar Security as a beneficiary or loss-payable payee to
be canceled or terminated except in the ordinary and usual course of
business;
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(vi) Western Resources will not take or omit to take any action that
would cause any of its representations and warranties in the Contribution
Agreement to become untrue in any material respect; and
(vii) Western Resources will not authorize or enter into an agreement
to do any of the foregoing.
Protection One has agreed that, except as otherwise expressly contemplated
by the Contribution Agreement, the Stock Option Agreement or the Option and
Voting Agreement or approved by Western Resources in writing, prior to the
Closing:
(i) the business of Protection One will be conducted in the ordinary
and usual course and, to the extent consistent therewith, Protection One
will use all reasonable efforts to preserve its business organization and
maintain its relations and goodwill with customers, employees and certain
other persons;
(ii) Protection One will not (a) issue, sell, pledge, dispose of,
encumber or accelerate, modify, or amend any shares of, or securities
convertible into or exchangeable or exercisable for, or options, warrants,
calls, commitments or rights of any kind to acquire, any shares of any
capital stock of Protection One, (b) amend the certificate of incorporation
or by-laws of Protection One, (c) split, combine or reclassify the
outstanding shares of capital stock of Protection One, (d) declare, set
aside or pay any dividend, in respect of any capital stock other than
dividends from Protection One's direct or indirect wholly-owned
subsidiaries and the dividend and other distributions referred to in the
recitals to the Contribution Agreement, (e) repurchase, redeem or otherwise
acquire any shares of capital stock or any securities convertible into or
exchangeable or exercisable for any shares of capital stock of Protection
One, (f) other than in the ordinary and usual course of business, transfer,
lease, license, guarantee, sell, mortgage, pledge, encumber or dispose of
any other property or assets of Protection One or incur or modify any
material indebtedness or other liability, or (g) make or authorize or
commit for any capital expenditures or, by any means, make any acquisition
of, or investment in, assets or stock of any other party, except for (A)
acquisitions of security monitoring accounts in the ordinary course of
business consistent with past practice, (B) other acquisitions of security
monitoring accounts not to exceed $5,000,000 in the aggregate and (C) other
capital expenditures not to exceed $500,000 in the aggregate;
(iii) Protection One will not terminate, establish, adopt, enter into,
make any new grants or awards under, amend or otherwise modify any employee
compensation agreement or arrangement or any employee benefit plan or
increase the salary, wage, bonus or other compensation of any employees
except grants, awards and increases occurring in the ordinary and usual
course of business;
(iv) Protection One will not settle or compromise any material claims
or litigation or, except in the ordinary and usual course of business,
modify, amend or terminate any material agreement or waive, release or
assign any material rights or claims;
(v) Protection One will not make any tax election or permit any
insurance policy naming Protection One as a beneficiary or loss-payable
payee to be cancelled or terminated except in the ordinary and usual course
of business;
(vi) Protection One will not take any action or omit to take any
action that would cause any of its representations and warranties in the
Contribution Agreement to become untrue in any material respect; and
(vii) Protection One will not authorize or enter into an agreement to
do any of the foregoing.
The Contribution Agreement also includes agreements of Protection One and
Western Resources with respect to various other matters, including, but not
limited to, the following: (i) preparation and accuracy of the information to be
supplied by each of them for inclusion or incorporation by reference in this
Proxy Statement; (ii) prompt preparation and mailing of this Proxy Statement;
(iii) mutual cooperation and use of reasonable efforts to do everything
necessary, proper or advisable under the Contribution Agreement and applicable
law to consummate and make effective the Share Issuance and the other
transactions contemplated by the Contribution Agreement, the Stock Option
Agreement and the Option and Voting Agreement; (iv) mutual consultation on, and
a right to review in advance, all information relating to Protection One or
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Western Resources, as the case may be, that appears in certain filings or
written materials submitted to any third party or governmental entity; (v)
furnishing the other with all information concerning such party, its directors,
officers and stockholders and such other matters as may be reasonably necessary
or advisable in connection with this Proxy Statement or any other statement,
filing, notice or application made to any third party and/or governmental entity
in connection with the Share Issuance and the other transactions contemplated by
the Contribution Agreement, the Stock Option Agreement and the Option and Voting
Agreement; (vi) keeping the other apprized of the status of matters relating to
completion of the transactions contemplated by the Contribution Agreement,
including promptly furnishing copies of notices and other communications
received with respect to the Share Issuance and the other transactions
contemplated by the Contribution Agreement, the Stock Option Agreement and the
Option and Voting Agreement; (vii) giving prompt notice to the other of any
change that is reasonably likely to result in a Transferred Subsidiary Material
Adverse Effect or Protection One Material Adverse Effect, as the case may be;
(viii) providing promptly to each government antitrust entity information and
documents it may request or that may be necessary, proper or advisable to permit
consummation of the Share Issuance and the other transactions contemplated by
the Contribution Agreement, the Stock Option Agreement and the Option and Voting
Agreement; (ix) in the event any injunction or other order is entered or becomes
reasonably foreseeable that would make consummation of the Share Issuance
unlawful or would prevent or delay such consummation or the other transactions
contemplated by the Contribution Agreement, the Stock Option Agreement and the
Option and Voting Agreement, taking promptly any and all steps necessary to
vacate, modify or suspend such injunction or order so as to permit such
consummation on a schedule as close as possible to that contemplated by the
Contribution Agreement, the Stock Option Agreement and the Option and Voting
Agreement; (x) using their respective reasonable best efforts until the Closing
to cooperate in developing plans and timetables for, and completing commercially
reasonable preparatory work in connection with, the integration and coordination
of the operations, systems, information technology and personnel of Protection
One and the Western Resource Security Business, in order that such integration
and coordination can be effected as soon after the Closing as reasonably
practicable; (xi) Protection One's becoming a party, at or prior to the Closing,
to Western Resources' existing tax sharing arrangements; (xii) provision of
access and the furnishing of certain additional information pending the Closing;
(xiii) causing the Shares to be accepted for quotation on the Nasdaq National
Market; and (xiv) issuing a joint press release to announce the transactions
contemplated by the Contribution Agreement and the Stock Option Agreement, and
mutual consultation prior to certain other press releases, public announcements
and filings with third parties and/or governmental entities.
The Contribution Agreement requires Western Resources to indemnify
Protection One and its affiliates, and their respective officers, directors,
employees, agents, successors and assigns, with respect to, and hold each of
them harmless from and against, any and all costs, expenses, damages and other
losses ("Losses") resulting from, arising out of or relating to (i) United
States federal, state and local and foreign income taxes of WRSB attributable to
taxable periods (or portions thereof) ending on or prior to the Closing Date,
and all United States federal, state and local taxes of Western Resources and
any entity, other than WRSB, which has been affiliated with Western Resources as
a result of Treasury Regulation Section 1.1502-6(a) or similar state or local
tax provisions; (ii) any increase in the purchase price payable by Western
Resources under the Westinghouse Acquisition Agreement (it being agreed that any
increase, reduction or other adjustment in such purchase price is solely for the
account of Western Resources); and (iii) certain litigation questioning the
right of WRSB to use the trademark "Westar." The Contribution Agreement further
provides that Protection One will pay and/or indemnify Western Resources for the
first $1,000,000 of Losses, if any, suffered by Western Resources, the Western
Resources Security Business or Protection One relating to the IBS Litigation (as
defined below), and that Western Resources will pay and/or indemnify the Western
Resources Security Business and Protection One for all such Losses in excess of
$1,000,000. The Contribution Agreement also includes certain provisions relating
to procedures to be followed in connection with matters indemnified against, and
provides that Western Resources' obligation to indemnify Protection One with
respect to such tax liabilities terminates on expiration of the applicable
statutes of limitations with respect to the tax liabilities in question (giving
effect to any waiver, mitigation or extension thereof). In consideration of such
indemnification for federal income taxes, the Contribution Agreement provides
that the Western Resources Security Business will pay to Western Resources, as
soon as practicable, an amount in respect to the Western
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Resources Security Business' federal income tax liability of the Western
Resources Security Business for the period from January 1, 1997 to the Closing
Date computed on a stand-alone basis (to the extent not paid under previous
tax-sharing arrangements).
On January 8, 1997, Innovative Business Systems, Ltd. ("IBS") filed suit
against Westinghouse, Western Resources, Inc., WestSec and Westar in Dallas
County, Texas district court alleging, among other things, breach of contract by
Westinghouse and interference with contract by Western Resources, WestSec and
Westar in connection with the sale by Westinghouse of the assets of WSS to
WestSec. IBS alleges in the suit that Westinghouse improperly transferred to
WestSec certain computer software owned by IBS and used to support certain
monitoring and operational functions and that WestSec is not entitled to use
such software. Westinghouse and Western Resources have denied IBS's allegations
and are vigorously defending against them, and Western Resources has demanded
that Westinghouse indemnify and defend Western Resources in connection with the
claim. As set forth above, if the Stock Acquisition Transaction occurs, the
first $1,000,000 of costs, expenses, damages and other losses incurred by
WestSec in connection with the IBS Litigation will be borne by Protection One,
and Western Resources will indemnify Protection One against all Losses in excess
of such amount. Accordingly, management of Protection One does not believe that
the IBS Litigation will have a material adverse effect on Protection One's
results of operations or financial condition.
TERMINATION; EXPENSES; AMENDMENT
The Contribution Agreement provides that it may be terminated and the Share
Issuance may be abandoned at any time before the Closing, as follows:
(i) by mutual written consent of Western Resources and Protection One
by action of their respective Boards of Directors, whether before or after
the approval by stockholders of Protection One;
(ii) by action of the Board of Directors of either Western Resources
or Protection One if (a) the Share Issuance has not been consummated by
January 31, 1998 (provided that neither party can terminate under this
clause (a) if that party has breached in any material respect its
obligations under the Contribution Agreement in any manner that has
proximately contributed to the failure of the Share Issuance to be
consummated), (b) approval by Protection One's stockholders of the Stock
Acquisition Proposal and the New Option Plan is not obtained at the Special
Meeting, or (c) any order permanently restraining, enjoining or otherwise
prohibiting consummation of the Share Issuance becomes final and
non-appealable, whether before or after the approval by stockholders of
Protection One;
(iii) by action of the Board of Directors of Western Resources,
whether before or after the approval by stockholders of Protection One, if
(a) the Board of Directors of Protection One withdraws or adversely
modifies its approval or recommendation of the Contribution Agreement, or
(b) there has been a material breach by Protection One of any
representation, warranty, covenant or agreement in the Contribution
Agreement that is not curable or, if curable, is not cured within 30 days
after written notice is given by Western Resources to Protection One
(provided that Western Resources may not terminate under this provision if
such breach, individually or in the aggregate with any other such breaches,
has not had, or is not reasonably likely to have, a Protection One Material
Adverse Effect, and is not reasonably likely to prevent or materially
burden or impair the ability of Protection One and Western Resources to
consummate the transactions contemplated by the Contribution Agreement and
the Stock Option Agreement); or
(iv) by action of the Board of Directors of Protection One, whether
before or after the approval by stockholders of Protection One, if (a)
there has been a material breach by Western Resources of any
representation, warranty, covenant or agreement in the Contribution
Agreement that is not curable or, if curable, is not cured within 30 days
after written notice is given by Protection One to Western Resources
(provided that Protection One may not terminate under this provision if
such breach, individually or in the aggregate with any other such breaches,
has not had, or is not reasonably likely to have, a Transferred Subsidiary
Material Adverse Effect, and is not reasonably likely to prevent or
materially burden or impair
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the ability of Protection One and Western Resources to consummate the
transactions contemplated by the Contribution Agreement and the Stock
Option Agreement), or (b) the Board of Directors of Protection One
withdraws or adversely modifies its approval or recommendation of the
Contribution Agreement.
If the Contribution Agreement is terminated and the Share Issuance is
abandoned, the Contribution Agreement (except for certain sections) will become
void without liability on the part of either party or any of the parties'
respective directors, officers, employees, agents, legal and financial advisors
or other representatives; provided, however, that no such termination will
relieve any party of any liability resulting solely from any wilful breach of
the Contribution Agreement.
If the Contribution Agreement is terminated as provided above by either
party because of the material breach by the other party of any representation,
warranty, covenant or agreement in the Contribution Agreement, the
non-terminating party is obligated to pay all of the charges and expenses
incurred by the terminating party in connection with the Contribution Agreement,
the Stock Option Agreement, the Option and Voting Agreement and the transactions
contemplated thereby, up to a maximum of $5,000,000. Except in the event of such
termination, each party will pay all costs and expenses incurred by it in
connection with the Contribution Agreement, the Share Issuance and the other
transactions contemplated by the Contribution Agreement.
The Contribution Agreement provides that certain of the agreements of
Western Resources and Protection One contained therein will survive the
consummation of the Share Issuance, that certain of such agreements will survive
the termination of the Contribution Agreement, and that all other
representations, warranties, covenants and agreements will not survive the
consummation of the Share Issuance or the termination of the Contribution
Agreement.
Subject to the provisions of applicable law, the parties may modify or
amend the Contribution Agreement at any time prior to the Closing by a written
agreement executed and delivered by their duly authorized officers. From and
after the Closing, neither the Contribution Agreement nor any other agreement
entered into by Protection One in connection with the Contribution Agreement may
be supplemented or modified, and Protection One may not waive any provision of
the Contribution Agreement, unless such supplement, modification or waiver is
approved by a majority of the directors of Protection One immediately prior to
the Closing other than Mr. Chefitz or such directors' successors (the
"Continuing Directors").
DIRECTOR AND OFFICER LIABILITY
The Contribution Agreement requires Protection One, from and after the
Closing, to indemnify, to the fullest extent permitted under Delaware law, each
present and former director and officer of Protection One (determined as of the
Closing) when acting in such capacity against certain costs and expenses
incurred or paid by them in connection with any claim, action, suit proceeding
or investigation, whether civil, criminal, administrative or investigative,
arising out of matters existing or occurring at or prior to the Closing, whether
asserted or claimed prior to, at or after the Closing, to the fullest extent
that Protection One is permitted under Delaware law; and to advance expenses as
incurred to the fullest extent permitted under applicable law provided the
person to whom expenses are advanced provides an undertaking to repay such
advances if it is ultimately determined that such person is not entitled to
indemnification. Any determination required to be made with respect to whether
an officer's or director's conduct complies with the standards set forth under
Delaware law will be made by independent counsel selected by Protection One. Any
such director or officer wishing to claim indemnification under the Contribution
Agreement, upon learning of any such claim, action, suit, proceeding or
investigation, will promptly notify Protection One thereof, but the failure to
so notify will not relieve Protection One of any liability it may have to such
officer or director if such failure does not materially prejudice Protection
One. In the event of any such claim, action, suit, proceeding or investigation
(whether arising before or after the Closing), Protection One will have the
right to assume the defense thereof and will not be liable to such officer or
director for any legal expenses of other counsel or any other expenses
subsequently incurred by such person, subject to certain exceptions. Under the
Contribution Agreement, such directors and officers must cooperate in the
defense of any such matter and Protection One will not be liable
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for any settlement effected without Protection One's prior written consent or
have any obligation under the indemnity provision of the Contribution Agreement
to any such officer or director if and when a court of competent jurisdiction
ultimately determines, and such determination becomes final, that the
indemnification of such officer or director in the manner contemplated is
prohibited by applicable law. The Contribution Agreement prohibits for six years
any amendment of the existing provisions dealing with indemnification in
Protection One's certificate of incorporation and by-laws in any manner adverse
to the rights of the individuals who are directors and officers of Protection
One at the Closing. The Contribution Agreement also requires Protection One to
maintain its existing officers' and directors' insurance policy for six years
after the Closing, as long as the annual premium is not more than 150% of the
last annual premium paid prior to the date of the Contribution Agreement (the
"current premium"), and further provides that if the existing insurance expires,
is terminated or canceled during such six-year period, Protection One will use
reasonable efforts to obtain officers' and directors' insurance providing
coverage in as large an amount as Protection One can obtain upon payment of a
premium that is not more than 150% of the current premium.
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THE STOCK OPTION AGREEMENT
The following description of certain terms of the Stock Option Agreement is
only a summary and does not purport to be complete. This discussion is qualified
in its entirety by reference to the complete text of the Stock Option Agreement,
a copy of which is attached to this Proxy Statement as Appendix B.
THE 19.9% OPTION
In order to induce Western Resources to enter into the Contribution
Agreement and as a condition to Western Resources' willingness to do so,
Protection One and Western Resources entered into the Stock Option Agreement.
The Stock Option Agreement grants to Western Resources the 19.9% Option, which
gives Western Resources' the irrevocable right to purchase (i) if the Closing
occurs, up to 2,750,238 additional shares of Common Stock at a price of $15.50
per share, or (ii) upon the occurrence of an Exercise Event (as defined in the
Stock Option Agreement), up to the same number of shares at a price of $13.50
per share. However, any purchase of shares on exercise of the 19.9% Option is
subject (i) to compliance with applicable law, (ii) in the case of shares
purchased prior to the Closing, to certain limitations on Western Resources'
profits on such purchase, and (iii) in the case of shares purchased after the
Closing, to certain limitations on Western Resources' profits from such
purchase. See "-- Certain Conditions and Limitations" and "-- Profit
Limitations."
An "Exercise Event" will have occurred if:
(i) Any person other than Western Resources has commenced (as defined
in Rule 14d-2 under the Exchange Act), or has filed a registration
statement under the Securities Act, with respect to, a tender offer or
exchange offer to purchase any shares of Common Stock such that, upon
consummation of such offer, such person or a "group" (as defined under the
Exchange Act) of which such person is a member shall have acquired
"beneficial ownership" (as defined in Rule 13d-3 under the Exchange Act),
or the right to acquire beneficial ownership, of 20% or more of the then
outstanding Common Stock;
(ii) Protection One has authorized, recommended, proposed or publicly
announced an intention to authorize, recommend or propose, or entered into,
an agreement with any person other than Western Resources to (a) effect a
merger, consolidation or other business combination involving Protection
One, (b) sell, lease or otherwise dispose of assets of Protection One
aggregating 20% or more of the consolidated assets of Protection One, or
(c) issue, sell or otherwise dispose of (including by merger, share
exchange or any similar transaction) securities representing 20% or more of
the voting power of Protection One;
(iii) Any person other than Western Resources has acquired beneficial
ownership or the right to acquire beneficial ownership of, or any group has
been formed which beneficially owns or has the right to acquire beneficial
ownership of Common Stock (other than trust account shares) aggregating 20%
or more of the then outstanding Common Stock; or
(iv) The Charter Amendment and the Share Issuance are not approved at
the Special Meeting, the Special Meeting is not held or is canceled prior
to termination of the Contribution Agreement or the Board of Directors of
Protection One has withdrawn or modified in a manner adverse to Western
Resources (or to Western Resources' ability to consummate the transactions
contemplated by the Contribution Agreement) the recommendation of the Board
of Directors with respect to the Stock Acquisition Proposal, in each case
after any person other than Western Resources has publicly announced or
delivered to Protection One a proposal, or disclosed publicly or to
Protection One an intention to make a proposal, to engage in an Acquisition
Transaction.
As of the date of this Proxy Statement, no Exercise Event has occurred, and the
19.9% Option is not currently exercisable.
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CERTAIN CONDITIONS AND LIMITATIONS
Protection One's obligation to issue shares of Common Stock on exercise of
the 19.9% Option is subject only to the conditions that (i) no preliminary or
permanent injunction or other order issued by any court of competent
jurisdiction in the United States prohibiting delivery of such Common Stock
shall be in effect, and (ii) any applicable waiting period under the HSR Act
shall have expired or been terminated. However, Western Resources may not
purchase any shares under the 19.9% Option after the Closing if, upon the
issuance of the shares, Western Resources would be in violation of the
provisions of the Contribution Agreement described in "The Contribution
Agreement -- Standstill."
EXERCISE FOR CASH
At any time prior to the Closing when the 19.9% Option may be exercised,
Western Resources may elect, in lieu of exercising such option, to send a
written notice (a "Cash Exercise Notice") to Protection One specifying a date on
which Protection One must pay Western Resources cash in an amount equal to the
"Spread" multiplied by the number of the shares subject to the 19.9% Option
specified by Western Resources. "Spread" means the excess, if any over $13.50 of
the higher of (i) if applicable, the highest price per share of Common Stock
(including any brokerage commissions, transfer taxes and soliciting dealers'
fees) paid by any person pursuant to an Acquisition Proposal (the "Alternative
Purchase Price"), or (ii) the closing price of the Common Stock on the Nasdaq
National Market on the last trading day immediately prior to the date of the
Cash Exercise Notice (the "Closing Price"). The Stock Option Agreement also
includes provisions for determining the amount in cash to be paid pursuant to
the Cash Exercise Notice if the Alternative Purchase Price includes property
other than cash. Upon exercise by Western Resources of its right to be paid the
Spread with respect to some or all of the shares subject to the 19.9% Option,
the obligations of Protection One to deliver shares pursuant to the 19.9% Option
is terminated with respect to such shares.
PROFIT LIMITATION
Notwithstanding any other provision of the Stock Option Agreement, in no
event may Western Resources' "Total Profit" exceed $25 million and, if it
otherwise would do so, Western Resources, at its sole election, must either (i)
deliver to Protection One for cancellation shares previously purchased by
Western Resources, (ii) pay cash or other consideration to Protection One, or
(iii) a combination thereof, so that Western Resources' Total Profit does not
exceed $25 million after taking such actions into account. In addition, the
19.9% Option may not be exercised for a number of shares of Common Stock that
would, as of the date of the notice of exercise, result in a "Notional Total
Profit" of more than $25 million and, if exercise of the Option would otherwise
exceed such amount, Western Resources, at its discretion, may increase the
purchase price for the number of shares it elects to purchase so that the
Notional Total Profit shall not exceed $25 million. However, this limitation
does not restrict any later exercise of the 19.9% Option at the purchase price
originally specified in the Stock Option Agreement.
As used in the Stock Option Agreement, "Total Profit" means the aggregate
amount (before taxes) of (i) the amount of cash received by Western Resources
pursuant to Cash Exercise Notices, plus (ii) (a) the net cash amounts received
by Western Resources pursuant to the sale of shares of Common Stock (or other
securities into which such shares are converted or exchanged) to any
unaffiliated third party, less (b) Western Resources' purchase price for such
shares. "Notional Total Profit" with respect to any number of shares as to which
Western Resources may propose to exercise the 19.9% Option shall be the Total
Profit determined as of the date of the notice of such exercise assuming the
19.9% Option were exercised on such date for such number of shares and assuming
that such shares, together with all other shares purchased on exercise of the
19.9% Option held by Western Resources and its affiliates as of such date, were
sold for cash at the closing market price for the Common Stock as of the close
of business on the preceding trading day, less customary brokerage commissions.
The limitations on Western Resources' Total Profit and Notional Total
Profit do not apply with respect to Common Stock purchased pursuant to the 19.9%
Option following the Closing.
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TERMINATION
The right to exercise the 19.9% Option terminates upon the earliest of (i)
if the Contribution Agreement is terminated before any Exercise Event occurs,
the termination date of the Contribution Agreement; (ii) if the Closing under
the Contribution Agreement has not occurred and an Exercise Event has occurred,
12 months after the first occurrence of the Exercise Event; and (iii) if such
Closing has occurred, the earlier of (a) 45 days following the last date on
which any Convertible Notes remain outstanding, and (b) October 31, 1999.
However, if the 19.9% Option cannot be exercised or the shares purchased on such
exercise cannot be delivered to Western Resources by reason of any applicable
judgment, decree or order or because any applicable waiting period under the HSR
Act has not expired or been terminated, the expiration date of the 19.9% Option
is extended until 30 days after such impediment to exercise has been removed.
Notwithstanding termination of the 19.9% Option, Western Resources can purchase
the shares with respect to which Western Resources duly exercised the option
prior to its termination. The waiting period under the HSR Act with respect to
Western Resources' exercise of the 19.9% Option expired on September 14, 1997.
ADDITIONAL PROVISIONS
The Stock Option Agreement also contains provisions relating to, among
other things, procedures for exercise of the 19.9% Option and the issuance of
shares of Common Stock, adjustment in the number of shares subject to the 19.9%
Option and the purchase price per share in the event of stock splits and certain
other changes, representations and warranties by Protection One and Western
Resources, making any filings and obtaining any approvals necessary to
consummate the transactions contemplated by the Stock Option Agreement,
registration under the Securities Act of the shares of Common Stock purchased
under the 19.9% Option if Western Resources desires to sell any of such shares
within three years after purchase, payment by each party of its own expenses in
connection with the Stock Option Agreement, and specific performance of the
Stock Option Agreement.
PURPOSE OF OPTION; POSSIBLE DILUTIVE EFFECT
The 19.9% Option was granted to induce Western Resources to enter into the
Contribution Agreement by providing a means for Western Resources (i) to
maintain ownership of not less than 80.1% of the shares of Common Stock
outstanding notwithstanding the conversion into Common Stock of some or all of
the Convertible Notes and (ii) to be compensated for the costs and expenses
incurred by Western Resources in pursuing a business combination with Protection
One in the event that, prior to the Stock Acquisition Transaction, an
unsolicited offer is made by a third party to acquire the assets or a
substantial part of the Common Stock. If the 19.9% Option is exercised by
Western Resources at a time when the market price of the Common Stock is less
than $15.50, issuance of shares of Common Stock to Western Resources pursuant to
such exercise could have a dilutive effect on the other stockholders of
Protection One. The exercise prices of the 19.9% Option were determined in arm's
length negotiations between the managements of Protection One and Western
Resources and reflect Protection One's desire to limit such stockholder dilution
and Western Resources' desire to limit the dilution to its investment in the
Shares that would result from the conversion of the Convertible Notes.
REGISTRATION RIGHTS
The Stock Option Agreement provides that if Western Resources desires to
sell any shares of Common Stock purchased by exercising the 19.9% Option within
three years after the date of purchase and such sale requires, in the opinion of
counsel to Western Resources, registration of such shares under the Securities
Act, Protection One will, at its cost, cooperate with Western Resources and any
underwriter in registering such shares for resale, including without limitation
by filing up to two registration statements and entering into an underwriting
agreement.
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THE OPTION AND VOTING AGREEMENT
The following description of certain terms of the Option and Voting
Agreement is only a summary and does not purport to be complete. This discussion
is qualified in its entirety by reference to the complete text of the Option and
Voting Agreement, a copy of which is attached to this Proxy Statement as
Appendix C.
THE OPTIONS
In order to induce Western Resources to enter into the Contribution
Agreement, each of the directors of Protection One, Messrs. Hesse, Mack and
Rankin and the Patricof Partnerships (collectively, the "Stockholders") entered
into the Option and Voting Agreement with Western Resources. Pursuant thereto,
each of the Stockholders granted Western Resources or its designee (the
"Holder") an unconditional, irrevocable option (collectively, the "Stockholder
Options") to purchase all (but no fewer than all) of the shares of Common Stock
owned by such Stockholder (collectively, the "Stockholder Shares") and all
shares of Common Stock, if any, subsequently acquired by such Stockholder (the
"New Shares"), if a Takeover Proposal has been made. "Takeover Proposal" means
any proposal or offer, other than by Western Resources or any affiliate thereof,
for (i) any tender or exchange offer for 20% or more of the equity of Protection
One, (ii) any merger, consolidation or other business combination involving
Protection One, (iii) any acquisition in any manner of 20% or more of the equity
of, or 20% or more of the assets of Protection One or Monitoring, or (iv) any
solicitation of proxies or consents from Protection One's stockholders relating
to directors or an acquisition of control of Protection One. Following the
occurrence of a Takeover Proposal contemplated by clauses (i) or (ii) above, the
Holder may purchase the Stockholder Shares and New Shares for a price per share
equal to the price proposed or offered pursuant to the Takeover Proposal.
Following the occurrence of a Takeover Proposal contemplated by clauses (iii) or
(iv) above, the Holder may purchase the Stockholder Shares and New Shares for a
price per share equal to the closing price of a share of Common Stock on the
Nasdaq National Market on the last trading day immediately preceding the date on
which the Holder gives notice of its exercise of the particular Stockholder
Option.
Notwithstanding the foregoing, however, if within 12 months after the
closing of any purchase of Common Stock pursuant to the Stockholder Options,
Protection One enters into a definitive agreement with any person, including
Western Resources, for implementation of a Takeover Proposal (a "Takeover
Transaction") and such Takeover Transaction is thereafter consummated, the
Holder has agreed to pay each of the Stockholders an amount equal to the product
of (i) the number of shares of Common Stock the Holder acquired from such
Stockholder upon exercise of the Stockholder Options, multiplied by (ii) the
excess, if any, of the Takeover Transaction Price over the price paid by the
Holder on such exercise of the Stockholder Option.
VOTING AGREEMENT; PROXIES
During the term of the Option and Voting Agreement, each of the
Stockholders has agreed to vote all of such Stockholder's Stockholder Shares and
New Shares, and to cause any holder of record of such Stockholder Shares and New
Shares to vote, (i) in favor of adoption and approval of the Contribution
Agreement and the Share Issuance at every meeting of the stockholders of
Protection One at which such matters are considered and at every adjournment or
postponement thereof, (ii) against any action or agreement that could reasonably
be expected to impede, interfere with or otherwise materially adversely affect
the Share Issuance or inhibit the timely consummation of the Share Issuance,
(iii) against any action or agreement that could reasonably be expected to
result in a breach of any covenant, representation or warranty or any other
obligation of Protection One under the Contribution Agreement, and (iv) except
for the Share Issuance and the Contribution Agreement, against any merger,
consolidation, business combination, reorganization, recapitalization,
liquidation or sale or transfer of any material assets of Protection One or its
subsidiaries. Pursuant to the Option and Voting Agreement, the Stockholders also
appointed Messrs. John K. Rosenberg and Richard D. Terrill, representatives of
Western Resources, the Stockholders' proxies to vote all such Stockholder Shares
and New Shares in accordance with the foregoing agreement. The proxy is agreed
to be coupled with an interest, and to revoke all prior proxies and to be
irrevocable during the term of the Option and Voting Agreement to the extent
permitted under Delaware law.
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<PAGE> 61
Each of the Stockholders also agrees that it will not, and will not permit
any entity under such Stockholder's control to, (i) solicit proxies or become a
"participant" in a "solicitation" (as defined in Regulation 14A under the
Exchange Act) in opposition to or competition with the consummation of the Share
Issuance or otherwise encourage or assist any party in taking or planning any
action which could reasonably be expected to impede, interfere with or otherwise
materially adversely affect the Share Issuance or inhibit its timely
consummation in accordance with the Contribution Agreement, (ii) directly or
indirectly initiate or cooperate in a stockholders' vote or action by consent of
Protection One's stockholders in opposition to or in competition with the
consummation of the Share Issuance, or (iii) become a member of a "group" (as
used in Section 13(d) of the Exchange Act) with respect to any voting securities
of Protection One for the purpose of opposing or competing with the consummation
of the Share Issuance. However, this agreement does not restrict any director or
officer of Protection One from taking any action such director or officer
reasonably believes after consultation with outside counsel is necessary to
satisfy such director's or officer's fiduciary duty as a director or officer to
Protection One or its stockholders.
TRANSFER
During the term of the Option and Voting Agreement, each of the
Stockholders has agreed not to sell, offer, assign, exchange, pledge or
otherwise transfer or dispose of or encumber any of such Stockholder's
Stockholder Shares and New Shares, or to enter into any contract, option or
other arrangement with respect thereto. However, a Stockholder may transfer such
Stockholder Shares and New Shares to any partner of such Stockholder, so long as
the transferee agrees to be bound by the Option and Voting Agreement.
NEW SHARES
The Option and Voting Agreement prohibits the Stockholders from purchasing
or otherwise acquiring beneficial ownership of any Common Stock after the
execution of the Option and Voting Agreement, and from voluntarily acquiring the
right to vote or share in the voting of any Common Stock other than those shares
of Common Stock which such Stockholder owned at the time the Option and Voting
Agreement was executed, unless such Stockholder agrees to deliver to Western
Resources immediately after such purchase or acquisition an irrevocable proxy
with respect to such New Shares in the form attached to the Option and Voting
Agreement. All New Shares, if any, are subject to the Option and Voting
Agreement to the same extent as if they had been owned by the Stockholder
acquiring or purchasing them at the time the Option and Voting Agreement was
executed.
TERMINATION
The Option and Voting Agreement terminates on the earliest to occur of (i)
the date the Closing occurs, (ii) if the Contribution Agreement is terminated
prior to any Takeover Proposal having been made, the date the Contribution
Agreement is terminated, (iii) if the Closing has not occurred and a Takeover
Proposal has been made, 15 days after the first notice to Western Resources or
publication of a Takeover Proposal, and (iv) the date specified in a written
agreement duly executed and delivered by Western Resources and each of the
Stockholders.
ADDITIONAL PROVISIONS
The Option and Voting Agreement also contains provisions relating to, among
other things, representations and warranties by the Stockholders, procedures for
exercise of the Stockholder Options, adjustment in the securities and other
property subject to the Stockholder Options in the event of dividends, stock
splits and certain other changes in the Common Stock, the avoidance of voting
trusts, specific performance of the Option and Voting Agreement, absence or
publicity or filings without Western Resources' consent (except as may be
required by law), and payment by each party of its own expenses in connection
with the Option and Voting Agreement.
56
<PAGE> 62
MARKET PRICE AND DIVIDEND INFORMATION
The following table sets forth the range of high and low sales prices
reported on the Nasdaq National Market for the Common Stock for the fiscal
periods indicated:
<TABLE>
<CAPTION>
HIGH LOW
------- ------
<S> <C> <C>
Fiscal Year Ended September 30, 1996
First Quarter.............................................................. $10 1/2 $ 7 9/32
Second Quarter............................................................. 14 9/16 9
Third Quarter.............................................................. 17 5/16 13 3/8
Fourth Quarter............................................................. 16 7/8 11 3/4
Fiscal Year Ended September 30, 1997
First Quarter.............................................................. $15 $ 8 3/4
Second Quarter............................................................. 11 1/8 7 3/8
Third Quarter.............................................................. 14 1/8 9 1/4
Fourth Quarter............................................................. 21 3/4 13 3/8
Fiscal Year Ending September 30, 1998
First Quarter (through November 6, 1997)................................... $20 1/8 $16 7/8
</TABLE>
On November 6, 1997, the last sale price for the Common Stock was $17.875,
as reported on the Nasdaq National Market.
Protection One has not ever paid a cash dividend on the Common Stock.
Whether or not the Stock Acquisition Transaction is consummated, Protection
One's Board of Directors presently intends to continue the policy of not paying
dividends in order to retain future earnings, if any, for reinvestment in the
business of Protection One. In addition, the agreement governing Protection
One's revolving credit facility (the "Credit Agreement") and the indenture (the
"Discount Notes Indenture") governing the Discount Notes restrict the payment of
cash dividends on the Common Stock.
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<PAGE> 63
PROTECTION ONE, INC.
SELECTED UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following pro forma financial information reflects the pro forma
effects of the Stock Acquisition Transaction, the Centennial Acquisition and the
Network Acquisition. The Stock Acquisition Transaction will be accounted for
under the purchase method of accounting. Although Protection One will be
acquiring WRSB, Western Resources will hold a controlling interest in Protection
One as a result of the Stock Acquisition Transaction. Accordingly, the Stock
Acquisition Transaction is considered, for accounting purposes, to be a "reverse
acquisition," in which WRSB is considered the "accounting acquirer." The
Centennial Acquisition and the Network Acquisition will each be accounted for
under the purchase method of accounting. Accordingly, the unaudited pro forma
combined balance sheet at June 30, 1997 includes the accounts of WRSB on a
historical cost basis and the assets and liabilities of Protection One,
Centennial and Network Multi-Family at acquisition cost, allocated by relative
estimated fair value as of the date of the Share Issuance. The estimated
purchase price allocations have been made on a preliminary basis and may change
as additional information becomes known. The unaudited pro forma combined
statements of operations have been presented as if the Stock Acquisition
Transaction, the Centennial Acquisition and the Network Acquisition took place
on January 1, 1996 and combine (i) Protection One's consolidated statements of
operations for the six months ended June 30, 1997 (unaudited) and for the fiscal
year ended September 30, 1996, (ii) WRSB's combined statements of operations for
the six months ended June 25, 1997 (unaudited) and for the year ended December
31, 1996, (iii) the statement of operations of Westinghouse Security Systems
("WSS") for the 53 weeks ended December 30, 1996, (iv) Centennial's consolidated
statements of operations for the six months ended June 30, 1997 (unaudited) and
for the fiscal year ended December 31, 1996, and (v) Network Multi-Family's
statements of operations for the six months ended June 30, 1997 (unaudited) and
for the fiscal year ended December 31, 1996. The operations of WSS were acquired
by WRSB on December 30, 1996.
The unaudited pro forma combined financial information is presented for
illustrative purposes only and is not necessarily indicative of the consolidated
financial position or results of operations for future periods or the results
that actually would have been realized had the Stock Acquisition Transaction,
the Centennial Acquisition and the Network Acquisition occurred on the dates
specified above. The unaudited pro forma combined financial information is
derived from the unaudited pro forma combined condensed financial statements
included elsewhere herein and should be read in conjunction with those
statements and the notes thereto and (i) the separate audited historical
consolidated financial statements of Protection One and the notes thereto, (ii)
the separate audited historical combined financial statements of WRSB and the
notes thereto, (iii) the separate audited historical financial statements of WSS
and the notes thereto, (iv) the separate audited historical financial statements
of Centennial and the notes thereto, and (v) the separate audited historical
financial statements of Network Multi-Family and the notes thereto, all of which
are included elsewhere in this Proxy Statement.
<TABLE>
<CAPTION>
NETWORK MULTI-
PROTECTION ONE WRSB AT OR FOR CENTENNIAL AT OR FAMILY AT OR FOR
AT OR FOR THE THE SIX MONTHS FOR THE SIX THE SIX MONTHS PRO FORMA
SIX MONTHS ENDED ENDED MONTHS ENDED ENDED JUNE 30, PRO FORMA AS
JUNE 30, 1997 JUNE 25, 1997 JUNE 30, 1997 1997(5) ADJUSTMENTS ADJUSTED
---------------- ---------------- ---------------- ---------------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS DATA:
Revenues............... $ 49,293 $ 63,506 $ 9,727 $ 18,482 $ (700) $ 140,308
Operating income
(loss).............. 3,198 (2,403) (2,295) 4,283 (1,306) 1,477
Net income (loss)...... (11,932) (4,746) (3,387) 1,506 (141) (18,700)
Net loss per common
share............... (0.87) (0.23)
EBITDA(1)(3)........... 22,508 14,655 349 5,204 (836) 41,880
Adjusted EBITDA(2)(3).. 22,508 22,977 1,655 5,204 (836) 51,508
BALANCE SHEET DATA:
Cash and cash
equivalents......... $ 1,105 $ 1,049 $ 910 $ 106 $ 3,170
Total assets........... 357,567 519,005 59,220 72,468 $ 353,824 1,362,084
Long-term debt......... 279,750 42,967 21,127 38,200 (24,613) 357,431
Total shareholders'
equity (deficit).... 24,360 413,622 (9,169) 19,999 426,810 875,622
Book value per common
share(4)............ 1.68 10.56
</TABLE>
58
<PAGE> 64
<TABLE>
<CAPTION>
PROTECTION PRO FORMA NETWORK
ONE FOR WRSB(6) CENTENNIAL MULTI-FAMILY
THE YEAR FOR THE FOR THE YEAR FOR THE YEAR
ENDED YEAR ENDED ENDED ENDED
SEPTEMBER 30, DECEMBER 31, DECEMBER 31, DECEMBER 31, PRO FORMA PRO FORMA
1996 1996 1996 1996(5) ADJUSTMENTS AS ADJUSTED
------------- ------------ ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS DATA:
Revenues......................... $ 73,457 $118,978 $ 17,276 $ 35,281 $ (2,000) $ 242,992
Operating income (loss).......... 7,061 (8,261) (2,202) 9,570 (8,761) (2,593)
Net income (loss)................ (15,497) (11,876) (5,050) 4,043 (5,511) (33,891)
Net loss per common share........ (1.40) (0.43)
EBITDA(1)(3)..................... 32,182 24,313 2,289 11,188 (2,273) 67,699
Adjusted EBITDA(2)(3)............ 32,182 36,986 3,292 11,188 (2,273) 81,375
</TABLE>
- ---------------
(1) EBITDA does not represent cash flow from operations as defined by generally
accepted accounting principles, should not be construed as an alternative to
net income and is indicative neither of a company's operating performance
nor of cash flows available to fund the company's cash needs. Items excluded
from EBITDA are significant components in understanding and assessing a
company's financial performance. Management believes presentation of EBITDA
enhances an understanding of Protection One's financial position, results of
operations and cash flows because EBITDA is used by Protection One to
satisfy its debt service obligations and its capital expenditure and other
operational needs as well as to provide funds for growth. EBITDA has been
used by senior lenders and subordinated creditors and the investment
community to determine the current borrowing capacity and to estimate the
long-term value of companies with recurring cash flows from operations and
net losses. EBITDA is derived by adding to the loss before income taxes, the
sum of (i) loss on sales of assets, (ii) interest expense, and (iii)
amortization of intangibles and depreciation expense.
(2) Adjusted EBITDA is derived by adding to EBITDA selling and marketing
expenses, net of revenues, arising from installation activities during the
period. Adjusted EBITDA does not represent cash flow from operations as
defined by generally accepted accounting principles, should not be construed
as an alternative to net income and is indicative neither of a company's
operating performance nor of cash flows available to fund a company's cash
needs. Protection One presents adjusted EBITDA as a measure which Protection
One believes provides as to WRSB a more appropriate comparison to EBITDA as
presented by companies such as Protection One that grow through a dealer
program or acquisitions.
(3) The following table provides a calculation of pro forma EBITDA and pro forma
Adjusted EBITDA for each of the periods presented above:
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
FOR THE SIX FOR THE
MONTHS ENDED YEAR ENDED
JUNE 30, 1997 DEC. 31, 1996
------------- -------------
<S> <C> <C>
Loss before income taxes............................................. $ (17,774) $ (36,971)
Plus:
Loss on sales of assets............................................ 107 105
Interest expense................................................... 19,144 34,273
Amortization of intangibles and depreciation expense............... 40,403 70,292
------------- -------------
EBITDA....................................................... 41,880 67,699
------------- -------------
Plus:
Selling and marketing expenses related to installations............ 17,277 30,970
Less:
Installation revenues.............................................. (7,649) (17,294)
------------- -------------
Adjusted EBITDA.............................................. $ 51,508 $ 81,375
============ ============
</TABLE>
(4) Based on 14,494 shares and 82,944 shares of Common Stock outstanding at
October 24, 1997 pre- and post-Stock Acquisition Transaction, respectively.
(5) The pro forma financial information reflects the financial position and
results of operations of Network Multi-Family, the wholly-owned subsidiary
and principal operations of Network. The assets, results of operations and
stockholders' equity of Network Multi-Family comprises substantially all of
the assets, results of operations and stockholders' equity of Network. For
the periods presented there are no material differences between the
financial position and results of operations of Network and Network
Multi-Family.
(6) WRSB purchased the operations of WSS on December 30, 1996. The WRSB pro
forma operations data reflects the operations of WRSB for the year ended
December 31, 1996, as if the acquisition of the operations of WSS had
occurred on January 1, 1996.
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<PAGE> 65
SELECTED CONSOLIDATED HISTORICAL FINANCIAL INFORMATION
OF PROTECTION ONE
The selected consolidated historical financial information of Protection
One as of and for the fiscal years ended September 30, 1992 through 1996 have
been derived from Protection One's audited historical consolidated financial
statements and the notes thereto, which are incorporated by reference herein,
and should be read in conjunction with such financial statements and notes
thereto. The selected historical consolidated information of Protection One as
of June 30, 1997 and for the nine months ended June 30, 1996 and 1997 have been
derived from Protection One's unaudited historical consolidated financial
statements and notes thereto, which are incorporated by reference in this Proxy
Statement, and should be read in conjunction with such financial statements and
notes thereto. In the opinion of the management of Protection One, such
unaudited financial information reflects all adjustments, consisting only of
normal recurring adjustments, necessary for the fair presentation of the results
of operation for such period. These interim operating results are not
necessarily indicative of the results that may be expected for the entire fiscal
year ending September 30, 1997.
<TABLE>
<CAPTION>
AT OR FOR THE NINE
MONTHS ENDED
JUNE 30, AT OR FOR THE YEAR ENDED SEPTEMBER 30,
------------------- --------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
-------- -------- -------- -------- -------- ------- -------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATIONS DATA:
Total revenues.................................. $ 71,954 $ 51,795 $ 73,457 $ 55,882 $ 34,480 $21,890 $17,598
Operating income (loss)......................... 5,095 5,221 7,061 5,496 (1,526) (777) (1,963)
Loss attributable to common stock before
extraordinary items and cumulative effect of
change in accounting method(1)................ (15,109) (11,347) (15,745) (7,592) (7,987) (4,354) (5,033)
Net loss per common share before extraordinary
items and cumulative effect of change in
accounting method(1).......................... (1.11) (1.06) (1.40) (0.87) (27.11) (41.86) (48.40)
EBITDA(2)(3).................................... 32,723 22,579 32,182 22,247 12,294 3,609 1,043
BALANCE SHEET DATA:
Cash and cash equivalents....................... $ 1,105 $ 1,782 $ 1,256 $ 1,057 $ 1,345 $ 3,427
Total assets.................................... 357,567 297,636 178,669 126,085 44,472 39,071
Long-term debt.................................. 279,750 225,650 146,023 86,508 23,585 18,036
Total stockholders' equity (accumulated
deficit)...................................... 24,360 28,827 6,347 (6,084) (8,796) (4,195)
</TABLE>
- ---------------
(1) Excludes losses on early extinguishment of debt of $8.9 million, $1.2
million and $0.3 million in each of fiscal 1995, 1994 and 1993,
respectively, and loss from cumulative effect of change in accounting method
of $2.0 million in fiscal 1995.
(2) EBITDA does not represent cash flow from operations as defined by generally
accepted accounting principles, should not be construed as an alternative to
net income and is indicative neither of Protection One's operating
performance nor of cash flows available to fund Protection One's cash needs.
Items excluded from EBITDA are significant components in understanding and
assessing Protection One's financial performance. Management believes
presentation of EBITDA enhances an understanding of Protection One's
financial condition, results of operations and cash flows because EBITDA is
used by Protection One to satisfy its debt service obligations and its
capital expenditure and other operational needs as well as to provide funds
for growth. In addition, EBITDA has been used by senior lenders and
subordinated creditors and the investment community to determine the current
borrowing capacity and to estimate the long-term value of companies with
recurring cash flows from operations and net losses. EBITDA is derived by
adding to the loss before income taxes, extraordinary items and cumulative
effect of change in accounting method-net of taxes, the sum of (i) loss on
sales of assets, (ii) loss on assets held for sale, (iii) amortization of
debt issuance costs and OID, (iv) interest expense, net, (v) amortization of
intangibles and depreciation expense, (vi) performance warrants compensation
expense and (vii) loss on acquisition terminations.
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<PAGE> 66
The following table provides a calculation of EBITDA for each of the periods
presented above:
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED JUNE 30, FOR THE YEAR ENDED SEPTEMBER 30,
------------------- ------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
-------- -------- -------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Loss before income taxes, extraordinary items and
cumulative items and cumulative effect of change in
accounting method-net of taxes(a)....................... $(16,853) $(11,009) $(15,744) $(9,432) $(9,349) $(2,526) $(3,953)
Plus:
Loss on sales of assets................................. -- 19 19 505 -- -- --
Loss on assets held for sale............................ 231 -- 89 -- -- -- --
Amortization of debt issuance costs and OID............. 15,267 13,159 17,812 6,797 891 185 49
Interest expense, net................................... 6,450 3,052 4,885 7,626 6,932 1,564 1,941
Amortization of intangibles and depreciation expense.... 27,628 17,358 25,121 16,543 9,290 4,386 3,006
Performance warrants compensation expense............... -- -- -- -- 4,504 -- --
Loss on acquisition terminations........................ -- -- -- 208 26 -- --
-------- -------- -------- ------- ------- ------- -------
EBITDA............................................ $ 32,723 $ 22,579 $ 32,182 $22,247 $12,294 $ 3,609 $ 1,043
========= ========= ========= ======== ======== ======== ========
</TABLE>
- ---------------
(a) Fiscal 1993 loss reflects a reduction of $0.7 million for adjustment of
purchase accounting accruals, net.
(3) Protection One's installation activities were immaterial for each of the
periods presented. As a result, EBITDA and Adjusted EBITDA are approximately
the same.
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<PAGE> 67
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF PROTECTION ONE
This Management's Discussion and Analysis of Financial Condition and
Results of Operations of Protection One is based on Protection One's own
historical financial results of operations and financial condition, and includes
certain forward-looking statements based on that information. Consummation of
the Stock Acquisition Transaction is subject to the approval of Protection One's
stockholders at the Special Meeting and various other conditions. Stockholders
should be aware that the discussion below does not, in general, reflect the
impact that the Stock Acquisition Transaction will have on the future revenues,
expenses and net income or loss, or the future liquidity and capital resources,
of the post-acquisition Protection One, and that the results of operations and
financial condition of the post-acquisition Protection One may not follow the
same historical trends or be subject to or reflect the same dependence on the
economic and competitive factors described below.
OVERVIEW
A majority of Protection One's revenues are derived from recurring payments
for the monitoring and servicing of security systems and additional security
services, pursuant to contracts with initial terms ranging from one to five
years. Service revenues are derived from payments under extended service
contracts and for service calls performed on a time and materials basis. The
remainder of Protection One's revenues are derived from revenues from the sale
and installation of security systems, add-ons and upgrades. Payment for
monitoring services is typically required in advance. Monitoring and service
revenues are recognized as the service is provided. Installation, add-on and
upgrade revenue is recognized when the required work is completed. All direct
installation costs, which include materials, labor and installation overhead,
and selling and marketing costs are expensed in the period incurred.
Alarm monitoring services generate a significantly higher gross margin than
do the other services provided by Protection One. In fact, the cost of providing
patrol and alarm response services exceeds the revenues generated by patrol
services, and although sales and installation services contribute to Protection
One's gross profits, the total expenses associated with alarm system
installations (including not only the direct costs of providing such services
but also the expenses associated with the sales and marketing of alarm systems)
also exceed the revenues generated by such services. Protection One's strategy,
however, is to provide patrol and alarm response services and to invest in
system sales and installation because Protection One believes that such services
and products contribute to the generation and retention of alarm monitoring
subscribers.
Accounting Differences for Account Purchases and New Installations. A
difference between the accounting treatment of the purchase of subscriber
accounts and the accounting treatment of the generation of subscriber accounts
through direct sales by Protection One's sales force has a significant impact on
Protection One's results of operations. All direct external costs associated
with purchases of subscriber accounts (either through the Dealer Program or
through acquisitions of subscriber account portfolios) are capitalized and
amortized over 10 years on a straight-line basis. Protection One personnel and
related support and duplicate costs incurred solely in connection with
subscriber account acquisitions and transitions are expensed as incurred. Other
acquisition transition costs that reflect Protection One's estimate of costs
associated with incorporating the purchased subscriber accounts into Protection
One's operations, including costs incurred by Protection One in fulfilling the
seller's pre-acquisition warranty repair service and other obligations to the
acquired subscribers, are capitalized and amortized as described above. In
contrast, all of Protection One's costs related to the sales, marketing and
installation of new alarm monitoring systems generated by Protection One's sales
force are expensed in the period in which incurred.
Protection One's purchase activity increased significantly in fiscal 1995
and 1996. In addition, beginning in fiscal 1994, Protection One adopted a
strategy of reducing its sales of new systems and related marketing
expenditures. As a result of the difference in the methods by which such
activities are accounted for, the combined effect of these two factors was to
improve operating results during fiscal 1995 and 1996. Protection
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<PAGE> 68
One does not expect to further reduce sales of new systems by Protection One
personnel and related marketing expenditures.
Change in Accounting Method. In the third quarter of fiscal 1995,
Protection One changed its method of accounting for certain subscriber account
acquisition and transition costs, effective as of October 1, 1994. The
acquisition and transition costs previously capitalized, which under the new
method are expensed as incurred, are Protection One personnel and related
support and duplicate costs incurred solely in connection with acquisitions and
transitions.
The new method is consistent with the guidelines published on July 21, 1995
by the Emerging Issues Task Force of the Financial Accounting Standards Board.
See "-- Accounting for Account Purchases and New Installations" and Note 2 of
the notes to the consolidated financial statements of Protection One included in
this Proxy Statement.
As a result of the change in accounting method: (i) in the quarter ended
December 31, 1994, Protection One recorded a non-cash, nonrecurring charge of
approximately $2.0 million, which amount represents the cumulative effect (net
of income tax benefit of approximately $1.2 million) of the accounting change on
prior years' results of operations; and (ii) Protection One's statements of
operations include an expense item captioned "acquisition and transition
expenses." The expense was approximately $3.1 million for fiscal 1995 and $4.2
million for fiscal 1996 (in each case before associated tax benefit). The
foregoing non-recurring charge and expenses are reflected in the Protection One
financial information presented in this Proxy Statement. Such expenses will
fluctuate from quarter to quarter based primarily on the amount of Protection
One's acquisition activity and its ability to require sellers to bear certain of
such acquisition-related expenses.
Acquisition and Dealer Program Activity. A significant portion of
Protection One's growth has been generated by the purchase of subscriber
accounts through Protection One's Dealer Program and through the acquisition of
portfolios of subscriber accounts from other alarm companies. Protection One's
Dealer Program consists of exclusive purchase agreement with independent alarm
companies specializing in the sale and installation of new alarm systems. Dealer
Program participants install alarm systems (which have a Protection One logo on
the keypad), arrange for subscribers to enter into Protection One alarm
monitoring agreements, and install Protection One yard signs and window decals.
Substantially all of these subscribers are contacted individually by Protection
One personnel, at the time of purchase of the accounts from the dealer, to
facilitate customer satisfaction and quality control. In addition, Protection
One requires dealers to evaluate the credit history of prospective new
subscribers.
Protection One also purchases portfolios of subscriber accounts. Because
Protection One typically acquires only the subscriber accounts (and not the
accounts receivable or similar assets) of the sellers, Protection One focuses
its pre-acquisition review and analysis on the quality and stability of the
subscriber accounts to verify the monthly recurring revenue ("MRR") represented
by such accounts. If the subscriber accounts to be purchased pass such due
diligence scrutiny, Protection One then applies its monitoring and other
servicing costs to such MRR as a basis for determining the purchase price to be
paid by Protection One. To protect Protection One against the loss of acquired
accounts, Protection One typically seeks to obtain from the seller a guarantee
against the subscriber account cancellation for a period following the
acquisition and the right to retain a portion of the acquisition price (a
"purchase price holdback") against the MRR lost due to subscriber account
cancellations during the specified period. Protection One obtains a similar
purchase price holdback in its purchases through the Dealer Program.
During the nine months ended June 30, 1997, Protection One added (through
its Dealer Program and acquisitions of nine portfolios of subscriber accounts)
an aggregate of approximately 66,700 subscriber accounts for a total purchase
price of approximately $79.1 million. The MRR of the acquired accounts ranged
from approximately $15.00 to $60.00, with an average MRR of $28.87. Of the nine
acquisitions completed during the first nine months of fiscal 1997 by Protection
One, purchase price holdbacks ranged from 0% to 20% of the initial purchase
price (and averaged 12.4% of the initial purchase price) and attrition guarantee
periods ranged from 0 months to 12 months (and averaged 11.9 months).
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<PAGE> 69
Subscriber Attrition. Subscriber attrition has a direct impact on
Protection One's results of operations, because it affects both Protection One's
revenues and its amortization expense. Attrition can be measured in terms of
canceled subscriber accounts and in terms of decreased MRR resulting from
canceled subscriber accounts. Gross subscriber attrition is defined by
Protection One for a particular period as a quotient, the numerator of which is
equal to the number of subscribers who disconnect service during such period and
the denominator of which is the average of the number of subscribers at each
month end during such period. Net MRR attrition is defined by Protection One for
a particular period as a quotient, the numerator of which is an amount equal to
gross MRR lost as the result of canceled subscriber accounts or services during
such period, net of (i) MRR generated during such period by the sale of
additional services and increases in rates to existing subscribers, (ii) MRR
generated during such period from the connection of subscribers who move into
premises previously occupied by subscribers and in which existing systems are
installed and from conversion of accounts that were previously monitored by
other companies to Protection One's monitoring service (i.e., "reconnects" and
"conversions"); and (iii) MRR attributable to canceled accounts that, by virtue
of a purchase holdback are "put" back to the seller of such accounts during such
period (i.e., "guaranteed accounts"); and the denominator of which is the
average month-end MRR in effect during such period. While Protection One reduces
the gross MRR lost during a period by the amount of guaranteed accounts provided
for in purchase agreements with sellers, in some cases Protection One may not
collect all or any of the reimbursement due from the sellers.
The following table sets forth Protection One's gross subscriber attrition
and net MRR attrition for the periods indicated:
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED
-------------------------------------------
9/30/94 9/30/95 9/30/96 6/30/97
------- ------- ------- -------
<S> <C> <C> <C> <C>
Gross subscriber attrition............. 19.6% 19.3% 18.3% 16.5%
Net MRR attrition...................... 5.3 6.6 7.0 6.7
</TABLE>
Management has established target ranges for gross subscriber attrition and
net MRR attrition of 16%-18% and 6%-8%, respectively. Fluctuations in gross
subscriber attrition reflect changes in levels of acquisition activity, the rate
at which subscribers move, the number of subscribers that Protection One
disconnects for non-payment and customer satisfaction with Protection One's
customer service and field repair functions. Changes in net MRR attrition are
caused by the factors impacting gross subscriber attrition, as well as changes
in Protection One's ability to generate reconnects and conversions, to create
MRR through the sale of additional services and price increases and to obtain
purchase holdbacks covering the loss of acquired subscribers. In each of fiscal
years 1995 and 1996, gross subscriber attrition declined and net MRR attrition
increased. For each such period, while the gross number of subscriber
disconnects as a percentage of the average subscriber balance decreased, such
disconnects covered by purchase holdbacks declined, thereby causing net MRR
attrition to increase. Gross subscriber and net MRR attrition declined during
the 12 months ended June 30, 1997 from the 12 months ended March 31, 1997 due to
fewer cancellations arising from acquired customer assimilation and better
customer service performance. Protection One anticipates a slight increase in
net MRR attrition for the 12-month period ending September 30, 1997 due to a
decrease in the level of acquired customers covered by purchase holdbacks.
Although Protection One's management believes net MRR attrition for the period
will fall within the 6%-8% target range discussed above, there can be no
assurance that such target range will be met.
MRR represents the monthly recurring revenue Protection One is entitled to
receive under subscriber contracts in effect at the end of the period. Included
in MRR and the number of subscribers are amounts associated with subscribers
with past due balances. It is the policy and practice of Protection One that
every effort be made to preserve the revenue stream associated with these
contractual obligations. To this end, Protection One actively works to both
collect amounts owed and to retain the subscriber. In certain instances, this
collection and evaluation period may exceed six months in length. When, in the
judgment of Protection One's collection personnel, all reasonable efforts have
been made to collect balances due, subscribers are disconnected from Protection
One's monitoring center and are included in the calculation of gross subscriber
and net MRR attrition.
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<PAGE> 70
Because Protection One determines payments to sellers under purchase price
holdbacks subsequent to the periods to which such holdbacks apply, and because
holdbacks are not allocated to specific guaranteed accounts or specific fiscal
periods, Protection One reduces gross MRR lost during a period by the amount of
guaranteed accounts provided for in purchase agreements with sellers. However,
in some cases, Protection One has not retained the full amount of such holdback
to which Protection One is contractually entitled. If guaranteed accounts for
which Protection One was not compensated by the seller were taken into account
in calculating net MRR attrition, net MRR attrition would have been higher in
each period presented in the table above.
Generally, net MRR attrition is less than actual "net account attrition,"
which Protection One defines as canceled subscriber accounts net of reconnects,
conversions and guaranteed accounts. Estimated net account attrition is the
basis upon which Protection One determines the period over which it amortizes
its investment in subscriber accounts. Protection One amortizes such investment
over 10 years based on current estimates. If actual subscriber account attrition
were to exceed such estimated attrition, Protection One could be required to
amortize its investment in subscriber accounts over a shorter period, thus
increasing amortization expense in the period in which such adjustment is made
and in future periods. There can be no assurance that the actual attrition rates
for such accounts will not be greater than the rate assumed by Protection One.
See "-- Results of Operations -- Fiscal 1996 Compared to Fiscal
1995 -- Amortization of subscriber accounts and goodwill" and Note 7 of the
notes to the consolidated financial statements of Protection One included in
this Proxy Statement.
The table below sets forth the change in Protection One's subscriber base
over the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30, TWELVE MONTHS
----------------------------- ENDED JUNE 30,
1994 1995 1996 1997
------- ------- ------- --------------
<S> <C> <C> <C> <C>
Number of subscribers:
Beginning of period.............. 39,527 85,269 129,420 184,352
Additions through portfolio
acquisitions and Dealer
Program, net of sales of
subscriber accounts........... 54,211 60,909 91,325 81,886
Installations by Company
personnel..................... 1,646 1,502 881 391
Reconnects and conversions....... 3,060 3,585 4,633 4,938
Gross subscriber attrition....... (13,175) (21,845) (29,728) (35,326)
------- ------- ------- --------------
End of period................. 85,269 129,420 196,531 236,241
======= ======= ======= ===========
</TABLE>
Changes in Presentation Format. Beginning with its Quarterly Report on Form
10-Q for the first quarter of fiscal 1997, Protection One made changes to its
presentation of income statement information. First, Protection One has
reclassified revenues and cost of revenues associated with its alarm response
and patrol operations from the "other" category to "monitoring and related
services." The "other" category now reflects solely results from Protection
One's installation, lock and other operations. Protection One made this change
to better reflect its efforts to sell a bundle of monitoring, field service and
alarm response services to both existing and new subscribers. Second, Protection
One has reclassified depreciation expense from monitoring and service cost of
revenues, other cost of revenues and the selling, general and administrative
expenses category, and included depreciation expense in a line item entitled
"amortization of intangibles and depreciation expense." Protection One made this
change to allow readers to more easily calculate the aggregate amount of
non-cash charges in the income statement. Finally, Protection One has
reclassified customer service expense from monitoring and service cost of
revenues to selling, general and administrative expenses. This change reflects
Protection One's move to centralize all customer service functions into a single
facility in Chatsworth, California. Customer service personnel formerly
dedicated to the support of monitoring and related services are responsible for
Protection One's entire customer service efforts. Results reported in this Proxy
Statement for nine months ended June 30, 1996 have been modified to reflect
these changes and make the information for such periods comparable to
information for the nine months ended June 30, 1997. Amounts in the audited
financial statements as of September 30, 1995 and 1996 and for the three years
ended September 30, 1996 included in this Proxy Statement have also been
reclassified to reflect these changes.
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<PAGE> 71
Impact of SFAS 121. In March 1995, the Financial Accounting Standards Board
issued SFAS 121 "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of," effective for financial statements for
fiscal years beginning after December 15, 1995. This statement requires that
long-lived assets and certain identifiable intangibles to be held and used by an
entity be reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. Protection
One determines the value of its "Subscriber Accounts and Intangibles, net" based
on the undiscounted cash flows from the MRR stream using the most recent
historical attrition rate and aggregate MRR. At September 30, 1996, the
undiscounted cash flows from the MRR stream were significantly in excess of the
carrying value of "Subscriber Accounts and Intangibles, net." Protection One
does not anticipate a material impact on its financial statements resulting from
the adoption of this standard.
Restrictions on Dividends. Protection One has never paid any cash dividends
on the Common Stock and does not intend to pay any cash dividends in the
foreseeable future. The Credit Agreement and the Discount Notes Indenture
restrict Protection One's ability to declare or pay any dividend on, or make any
other distribution in respect of, Protection One's capital stock.
RESULTS OF OPERATIONS
The following table sets forth certain operating data as a percentage of
total revenues for the periods indicated.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED SEPTEMBER 30, JUNE 30,
-------------------------- ----------------
1994 1995 1996 1996 1997
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Revenues:
Monitoring and related services................. 85.0% 87.5% 93.6% 93.7% 96.4%
Other........................................... 15.0 12.5 6.4 6.3 3.6
------ ------ ------ ------ ------
Total revenues............................... 100.0% 100.0% 100.0% 100.0% 100.0%
------ ------ ------ ------ ------
Cost of revenues:
Monitoring and related services................. 24.2% 24.4% 26.0% 26.2% 26.5%
Other........................................... 9.4 7.0 3.4 3.9 2.4
------ ------ ------ ------ ------
Total cost of revenues....................... 33.6 31.3 29.4 30.1 28.9
------ ------ ------ ------ ------
Gross profit................................. 66.4% 68.7% 70.6% 69.9% 71.1%
Selling, general and administrative expense....... 30.8 23.3 21.1 20.5 19.8
Acquisition and transition expenses............... -- 5.5 5.7 5.8 5.8
Amortization of intangibles and depreciation
expense......................................... 26.9 29.6 34.2 33.5 38.4
------ ------ ------ ------ ------
Operating income............................. (4.4)% 9.8% 9.6% 10.1% 7.1%
====== ====== ====== ====== ======
</TABLE>
NINE MONTHS ENDED JUNE 30, 1997 COMPARED TO NINE MONTHS ENDED JUNE 30, 1996
Revenues for the nine months ended June 30, 1997 increased by approximately
$20.2 million, or 38.9%, to $72.0 million from $51.8 million for the comparable
period in 1996. Monitoring and related services revenues increased by
approximately $20.8 million, or 42.9%, a substantial majority of which increase
resulted from the addition of subscribers through the Dealer Program and the
acquisition of portfolios of subscriber accounts. Protection One's subscriber
base increased by 28.1% to 236,241 subscribers at June 30, 1997 as compared to
184,352 subscribers at June 30, 1996. The sale of enhanced services and new
subscribers generated by Protection One personnel comprised the remainder of
revenue growth. Other revenues, consisting primarily of revenues generated by
Protection One's installation and lock businesses, decreased by $0.7 million, or
21.0% to $2.6 million. Such decrease was caused primarily by a decline in
installation revenues of 30.3%, or approximately $0.6 million. The decline in
installation revenues resulted from Protection One's continued emphasis on
growth through the Dealer Program and acquisitions, rather than through the sale
of new alarm systems by Protection One personnel.
Cost of revenues for the nine months ended June 30, 1997 increased by
approximately $5.2 million, or 33.4%, to $20.8 million. Cost of revenues as a
percentage of total revenues declined to 28.9% for the nine
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<PAGE> 72
months ended June 30, 1997 from 30.1% for the comparable period in fiscal 1996.
This decline reflects improved performance in Protection One's monitoring and
related services, as well as an increase in monitoring and related services
revenues as a percentage of total revenues. Monitoring and related services
expenses increased by approximately $5.5 million, or 40.3%, reflecting increased
activity at Protection One's central monitoring station and field service
branches due to a substantially larger subscriber base. Monitoring and related
services expenses as a percentage of monitoring and related services revenues
decreased to 27.5% for the nine months ended June 30, 1997 from 28.0% during the
comparable period in fiscal 1996. Such decrease was generated by efficiencies
realized in the monitoring center and by greater service technician
productivity. Other expenses decreased by approximately $0.3 million, or 13.8%,
to $1.7 million for the nine months ended June 30, 1997 from $2.0 million for
the nine months ended June 30, 1996. The decrease primarily was caused by a
17.4% decrease ($0.2 million) in installation expense associated with reduced
installation activities.
Gross profit for the nine months ended June 30, 1997 was approximately
$51.2 million, representing an increase of approximately $15.0 million, or
41.3%, over the $36.2 million of gross profit recognized in the comparable
period in fiscal 1996. Such increase was caused primarily by an increase in
monitoring and related services activities, which paralleled the increase in
Protection One's subscriber base noted above. Gross profit as a percentage of
total revenues was 71.1% for the nine months ended June 30, 1997 compared to
69.9% for the comparable period in fiscal 1996. This increase was caused by both
an improvement in the gross profit margin for monitoring and related services
and an increase in monitoring and related services revenues as a percentage of
total revenues (96.4% for the nine months ended June 30, 1997 compared to 93.7%
for the nine months ended June 30, 1996). Gross profit from other revenues
declined to approximately $0.8 million for the nine months ended June 30, 1997
from $1.3 million for the comparable period in fiscal 1996. Such decline was
caused primarily by a decrease in the gross profit from reduced installation
activities.
Selling, general and administrative expenses rose to approximately $14.3
million in the nine months ended June 30, 1997, which represents an increase of
approximately $3.7 million, or 34.6%, over selling, general and administrative
expenses in the comparable period in fiscal 1996. The majority of the increase
reflects higher general and administrative expenses arising from Protection
One's growth, including the addition of two branch offices and the
implementation of a 24-hour, 7-day-a-week customer service call center. Such
figure as a percentage of total revenues decreased from 20.5% in the nine months
ended June 30, 1996 to 19.8% in the nine months ended June 30, 1997. Advertising
and marketing expenses, net of reimbursements, comprised less than 1% of
revenues in each of the nine-month periods ended June 30, 1996 and 1997. The
provision for doubtful accounts increased to approximately $2.4 million for the
nine months ended June 30, 1997 from $1.5 million for the comparable period in
fiscal 1996, reflecting a corresponding increase of $4 million in accounts
receivable.
Acquisition and transition expenses for the nine months ended June 30, 1997
totaled $4.2 million compared to $3.0 million for the comparable period in
fiscal 1996. Such expenses will fluctuate from quarter to quarter based
primarily on the amount of Protection One's acquisition and Dealer Program
activity and its ability to require sellers to bear certain of such
acquisition-related expenses.
Amortization of intangibles and depreciation expense for the nine months
ended June 30, 1997 increased by approximately $10.3 million, or 59.2%, to $27.6
million. This increase is primarily the result of the addition of subscriber
accounts through the acquisition of portfolios of subscriber accounts and
through the Dealer Program, as well as increases in depreciation expense
associated with Protection One's new software implementation.
Operating income for the nine months ended June 30, 1997 was $5.1 million,
compared to $5.2 million in the comparable period in fiscal 1996. Operating
income as a percentage of total revenues was 7.1% in the nine months ended June
30, 1997, compared to 10.1% in the comparable period in fiscal 1996. The
decrease in such figure over the comparable period in fiscal 1996 reflects
substantial increases in operating expenses and amortization and depreciation
expense, offset by improvement in Protection One's gross profit and higher
revenues.
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<PAGE> 73
Interest expense, net and amortization of debt issuance costs and
OID increased by $5.5 million, or 34.0%, to $21.7 million in the nine months
ended June 30, 1997, reflecting Protection One's use of debt to finance a
substantial portion of its subscriber account growth.
Balance Sheet Data. At June 30, 1997, Protection One's working capital
deficit was $10.5 million as compared to a working capital deficit of $5.6
million at September 30, 1996. This increase of $4.9 million in the working
capital deficit was caused primarily by an increase in purchase holdbacks of
$3.7 million, deferred revenues of $2.6 million, acquisition transition costs of
$1.8 million, other accruals of $1.3 million and capital leases payable of $0.5
million, offset by increases in accounts receivable of $2.4 million and deferred
tax assets of $1.9 million. Subscriber accounts and intangibles, net increased
to $308.9 million at June 30, 1997 from $257.4 million at September 30, 1996.
This increase of $51.5 million, or 20.0%, was caused by the addition of new
subscribers, net of amortization expense. Total stockholders' equity decreased
by $4.4 million to approximately $24.4 million at June 30, 1997 from $28.8
million at September 30, 1996. The decrease in such figure reflects Protection
One's net loss of $15.1 million for the nine months ended June 30, 1997 offset
by the issuance of shares of Common Stock as a portion of the purchase price of
Security Holdings, Inc. (approximately $7.3 million), Phillips Electronics, Inc.
(approximately $2.0 million), Able Alarms of Arizona, Inc. (approximately $0.8
million) and pursuant to the exercise of options (approximately $0.3 million).
FISCAL 1996 COMPARED TO FISCAL 1995
Revenues for fiscal 1996 increased by $17.6 million, or 31.5%, to $73.5
million from $55.9 million for fiscal 1995. Monitoring and related services
revenues increased by $19.9 million, or 40.6%, substantially all of which
resulted from the addition of approximately 55,000 subscribers from the
acquisition of portfolios of subscriber accounts and approximately 36,000
subscribers from the Dealer Program. Other revenues declined by 32.9% to $4.7
million in fiscal 1996 from $7.0 million in fiscal 1995. The decline in other
revenues reflects a decrease in installation revenues of $1.4 million and a
decrease in lock revenues of $0.4 million. The decline in installation revenues
resulted from Protection One's continued emphasis on growth through acquisitions
and the Dealer Program, rather than through sales of new alarm systems by
Protection One personnel. In addition, during fiscal 1995, Protection One
recognized $1.6 million of other revenue arising from the sales of security
alarm equipment received from a vendor.
Cost of revenues for fiscal 1996 increased by $4.1 million, or 23.2%, to
$21.6 million. Cost of revenues as a percentage of total revenues declined to
29.4% during fiscal 1996 from 31.3% during fiscal 1995. Monitoring and related
services expenses increased by $5.4 million, or 39.9%, primarily due to
increased activity at Protection One's central monitoring station and field
service branches due to a substantially larger subscriber base. Monitoring and
related services expenses as a percentage of monitoring and related services
revenues decreased slightly to 27.7% from 27.9% during fiscal 1995. Such
decrease reflects efficiencies achieved in patrol and alarm response operations,
offset by increased expenses in the monitoring and field service areas noted
above. See "-- Overview -- Acquisition and Dealer Program Activity." Other
expenses declined by $1.4 million to $2.5 million in fiscal 1996 from $3.9
million in fiscal 1995, reflecting the decline in installation activities.
Gross profit for fiscal 1996 was $51.9 million, which represents an
increase of $13.5 million, or 35.2%, over the $38.4 million of gross profit
recognized in fiscal 1995. Such increase was caused primarily by an increase in
monitoring and service activities, which reflected the increase in Protection
One's subscriber base from 129,420 at September 30, 1995 to 196,531 at September
30, 1996. Gross profit as a percentage of total revenues was 70.6% for fiscal
1996 compared to 68.7% for fiscal 1995. This increase was caused primarily by an
increase in monitoring and related services revenues as a percentage of total
revenues.
Selling, general and administrative expenses rose to $15.5 million in
fiscal 1996, an increase of $2.4 million, or 18.8%, over such expenses in fiscal
1995, but declined as a percentage of total revenues from 23.3% in fiscal 1995
to 21.1% in fiscal 1996. Sales and marketing expenses declined due to Protection
One's continued emphasis on growth through acquisitions and the Dealer Program,
rather than through sales of new alarm systems by Protection One personnel. An
increase in general and administrative expenses was caused by
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<PAGE> 74
increases in corporate and branch overhead expenses incurred to supervise a
larger employee base associated with a larger subscriber base. Advertising and
marketing expenses comprised 1% of revenues in each of fiscal 1995 and 1996. The
provision for doubtful accounts increased to $2.6 million in fiscal 1996 from
$1.8 million in fiscal 1995, reflecting the 51.8% increase in Protection One's
average subscriber base from fiscal 1995 to fiscal 1996.
Acquisition and transition expenses for fiscal 1996 totaled $4.2 million
compared to $3.1 million for fiscal 1995. Such expenses will fluctuate from
quarter to quarter based primarily on Protection One's acquisition activity and
the extent sellers bear certain of the related expenses.
Amortization of intangibles and depreciation expense for fiscal 1996
increased by $8.6 million, or 51.9%, to $25.1 million. This increase is the
result of Protection One's purchase of approximately 91,000 subscriber accounts
through the acquisition of portfolios of subscriber accounts and the Dealer
Program in fiscal 1996.
Operating income for fiscal 1996 was $7.1 million, compared to operating
income of $5.5 million in fiscal 1995. Operating income as a percentage of
revenue was 9.6% in fiscal 1996, compared to 9.8% in fiscal 1995.
Interest expense, net and amortization of debt issuance costs and OID
increased by $8.3 million, or 57.4%, to $22.7 million in fiscal 1996. This
increase reflects Protection One's continued use of debt to finance a
substantial portion of its subscriber account growth, including the issuance of
the Discount Notes in May 1995. See "-- Liquidity and Capital Resources."
Balance sheet data. At September 30, 1996, Protection One's working capital
deficit was $13.2 million, as compared to a working capital deficit of $9.2
million at September 30, 1995. Significant changes in working capital items
include a $6.9 million increase in accounts receivable offset by increases in
purchase holdbacks ($5.0 million), acquisition and transition costs ($3.4
million) and deferred revenue ($4.7 million). Subscriber accounts and
intangibles, net increased to $257.4 million at September 30, 1996 from $162.2
million at September 30, 1995. This increase of $95.2 million, or 58.6%, was
caused by the acquisition of new subscribers, net of amortization expense. Total
stockholders' equity increased to $28.8 million at September 30, 1996 from $6.3
million at September 30, 1995 reflecting the conversion of redeemable preferred
stock to common stock, the issuance of Common Stock in the Protection One's
February 1996 public offering, the issuance of $6.0 million of Common Stock in
the acquisition of Metrol Security Services and a loss of $15.7 million for
fiscal 1996.
FISCAL 1995 COMPARED TO FISCAL 1994
Revenues for fiscal 1995 increased by $21.4 million, or 62.1%, to $55.9
million from $34.5 million for fiscal 1994. Monitoring and related services
revenues increased by $19.6 million, or 66.9%, a substantial majority of which
resulted from the addition of approximately 53,000 subscribers from the
acquisition of portfolios of subscriber accounts and approximately 10,000
subscribers from the Dealer Program. The sale of enhanced services and new
subscribers generated by Protection One personnel comprised the remainder of
revenue growth. Other revenue increased by 34.5% to approximately $7.0 million
in fiscal 1995 from $5.2 million in fiscal 1994. The increase in other revenue
was generated by an increase in lock revenue of $1.4 million, as fiscal 1995
included twelve months of lock revenues and fiscal 1994 included two months of
such revenues, offset by a decline in installation revenues of $1.1 million. The
decline in installation revenues resulted from Protection One's increased
emphasis on growth through acquisitions and the Dealer Program, rather than
through sales of new alarm systems by Protection One personnel. In addition,
Protection One recognized $1.6 million of other revenue arising from the sales
of security alarm equipment received from a vendor.
Cost of revenues for fiscal 1995 increased by $5.9 million, or 51.3%, to
$17.5 million. Cost of revenues as a percentage of total revenues declined to
31.3% during fiscal 1995 from 33.6% during fiscal 1994. Monitoring and related
services expenses increased by $5.3 million, or 63.1%, primarily due to
increased activity at Protection One's central monitoring station and field
service branches due to a substantially larger subscriber base. Monitoring and
related services expenses as a percentage of monitoring and related services
revenues decreased slightly to 27.9% from 28.5% during fiscal 1994. Such
decrease reflects efficiencies in Protection
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<PAGE> 75
One's monitoring and field service functions, offset by an increased loss in
Protection One patrol and alarm response business. MRR per subscriber was lower
in fiscal 1995, due primarily to the acquisition of portfolios of subscriber
accounts that had a lower average MRR per subscriber than Protection One's
average. See "-- Overview -- Acquisition and Dealer Program Activity." Other
expenses increased by $0.7 million, or 20.6%, to $3.9 million in fiscal 1995
from $3.2 million in fiscal 1994. The increase primarily was caused by an
increase in lock expenses of approximately $0.8 million.
Gross profit for fiscal 1995 was $38.4 million, an increase of $15.5
million, or 67.5%, over the $22.9 million of gross profit in fiscal 1994. Such
increase was caused primarily by an increase in monitoring and service
activities, which paralleled the increase in Protection One's subscriber base
from 85,269 at September 30, 1994 to 129,420 at September 30, 1995. Gross profit
as a percentage of total revenues was 68.7% for fiscal 1995 compared to 66.4%
for fiscal 1994. This increase was caused primarily by an increase in monitoring
and related services revenues as a percentage of total revenues.
Selling, general and administrative expenses rose to $13.0 million in
fiscal 1995, which represents an increase of $2.4 million, or 22.9%, over
selling, general and administrative expenses in fiscal 1994. Such figure as a
percentage of total revenues declined from 30.8% in fiscal 1994 to 23.3% in
fiscal 1995, due primarily to a decline in sales and marketing expense of 34.0%
(or $1.3 million) offset by an increase in general and administrative expenses.
Sales and marketing expenses declined due to Protection One's increased emphasis
on growth through acquisitions and the Dealer Program, rather than through sales
of new alarm systems by Protection One personnel. The increase in general and
administrative expenses was caused by increases in corporate and branch overhead
expenses incurred to supervise a larger employee base associated with a larger
subscriber base. The percentage increase in general and administrative expenses
from fiscal 1994 to fiscal 1995 was lower than the 62.1% increase in total
revenues between the comparable periods, reflecting economies of scale and
efficiencies realized in Protection One's branch and corporate offices.
Advertising and marketing expenses are expensed as incurred and comprised 1% of
revenues in each of fiscal 1994 and 1995. The provision for doubtful accounts
increased to approximately $1.8 million in fiscal 1995 from $0.8 million in
fiscal 1994, reflecting an increase in Protection One's average subscriber base
of approximately 72.1% and Protection One's willingness to work with subscribers
experiencing credit difficulties in order to maintain long-term subscriber
relationships.
Acquisition and transition expenses for fiscal 1995 totaled $3.1 million,
reflecting Protection One's change in its method of accounting for certain
expenses, effective as of October 1, 1994. See "-- Overview -- Recent Change in
Accounting Method." Had Protection One enacted the change in accounting method
on October 1, 1993, acquisition and transition expenses would have been $2.4
million for fiscal 1994. Such expenses will fluctuate from quarter to quarter
based primarily on the amount of Protection One's acquisition activity and its
ability to require sellers to bear certain of such acquisition-related expenses.
Amortization of intangibles and depreciation expense for fiscal 1995
increased by $7.3 million, or 78.1%, to $16.5 million. This increase is the
result of Protection One's purchase of approximately 63,000 subscriber accounts
through the acquisition of portfolios of subscriber accounts and through the
Dealer Program in fiscal 1995.
Operating income for fiscal 1995 was $5.5 million, compared to an operating
loss of $1.5 million in fiscal 1994. The operating loss in fiscal 1994 included
a non-recurring charge for performance warrants compensation expense of $4.5
million. Operating income as a percentage of revenue was 9.8% in fiscal 1995,
compared to 8.6% in fiscal 1994 (excluding the non-recurring charge).
Comparisons of this figure for fiscal 1995 and 1994 are impacted by the change
in accounting method adopted by Protection One effective as of the beginning of
fiscal 1995. The increase in such figure over fiscal 1994 reflects the increase
in gross profit and efficiencies realized in branch office and corporate general
and administrative expenses noted above.
Interest expense, net and amortization of debt issuance costs and OID
increased by $6.6 million, or 84.4%, to $14.4 million in fiscal 1995, reflecting
Protection One's use of debt to finance a substantial portion of its subscriber
account growth.
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Extraordinary item. During fiscal 1995, Protection One recorded an
extraordinary charge of $8.9 million (net of a tax benefit of $0.9 million) due
to the loss on early extinguishment of debt. The loss, which arose from the
purchase of Protection One's $50.0 million principal amount of 12% senior
subordinated notes issued in November 1993, included the write-off of the
remaining unamortized portions of the OID ($4.1 million) and the capitalized
fees and expenses associated with the November 1993 note offering ($3.0
million), a 5% premium paid in the tender offer for the notes ($2.5 million) and
certain fees incurred in the tender offer.
Balance sheet data. At September 30, 1995, Protection One's working capital
deficit was $9.2 million, as compared to a working capital deficit of $11.5
million at September 30, 1994. The decline in the working capital deficit was
caused primarily by an increase in accounts receivable and inventory and a
decline in accrued interest. Subscriber accounts and intangibles, net increased
to $162.2 million at September 30, 1995 from $114.6 million at September 30,
1994. This increase of $47.6 million, or 41.6%, was caused by the addition of
new subscribers, net of amortization expense. Total stockholders' equity
(deficit) increased to $6.3 million at September 30, 1995 from a deficit of $6.1
million at September 30, 1994. The increase in such figure reflects the
conversion of redeemable preferred stock to common stock and the issuance of
common stock in Protection One's initial public offering completed in October
1994, offset by a loss of $18.5 million for fiscal 1995.
LIQUIDITY AND CAPITAL RESOURCES
General. Since Protection One's formation in September 1991, Protection One
has financed its operations and growth from a combination of capital raised
through debt and equity offerings and, to a lesser extent, cash flow from
operations. During the fiscal 1994-1996 period, Protection One completed three
long-term debt offerings, including the issuances of $50.0 million principal
amount of senior subordinated notes issued in November 1993 (which notes were
retired in fiscal 1995), $166.0 million principal amount ($105.2 million net
proceeds) of Discount Notes issued in May 1995 and $103.5 million principal
amount of Convertible Notes issued in September and October 1996. Protection One
also has utilized borrowings under its revolving credit facility to fund
acquisitions and the Dealer Program. For additional information with respect to
this indebtedness, see Note 8 of the notes to the consolidated financial
statements of Protection One included in this Proxy Statement. In September
1994, Protection One raised $18.3 million in net proceeds from its initial
public offering of Common Stock and in February 1996, Protection One raised
$23.1 million in net proceeds from another public offering of Common Stock.
Protection One intends to use cash flows from operations, together with
borrowings under the revolving credit facility, to finance the addition of
subscriber accounts and capital expenditures. Although Protection One
anticipates that it will continue to acquire portfolios of subscriber accounts,
Protection One cannot estimate the number, size or timing of such acquisitions.
Depending on such factors, additional funds beyond those currently available to
Protection One may be required to continue the acquisition program and to
finance the Dealer Program, and there can be no assurance that Protection One
will be able to obtain such financing on acceptable terms or at all.
On a long-term basis, Protection One has several material commitments.
Borrowings under the revolving credit facility were approximately $31.9 million
at June 30, 1997 and could be as high as $100.0 million through the period ended
January 3, 2000, the current maturity date of the revolving credit facility.
While Protection One believes it will be able to obtain further extensions of
the maturity date of the revolving credit facility from time to time, or will be
able to refinance the revolving credit facility prior to its maturity date,
there can be no assurance that Protection One will be able to do so. The
Convertible Notes require Protection One to make semi-annual cash interest
payments of $3.5 million, the first of which was made on March 15, 1997. The
Discount Notes require Protection One to begin to make interest payments on such
obligations on December 31, 1998. Based on an interest rate of 13 5/8%, such
payment will be approximately $11.3 million semiannually, or approximately $22.6
million on an annual basis. As a result, a substantial portion of Protection
One's operating cash flows will be required to make interest payments on the
Convertible Notes and the Discount Notes, and there can be no assurance that
Protection One's cash flow from operations will be sufficient to meet such
obligations, or that there will be sufficient funds available to Protection One
after such interest payments to meet other debt, capital expenditure and
operational obligations. The $103.5 million principal amount of the Convertible
Notes matures on September 15, 2003, although these notes may be
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converted into shares of Common Stock at any time prior to such date. The $166.0
million principal amount of the Discount Notes matures on September 30, 2005.
There can be no assurance that Protection One will have the cash necessary to
repay either the Convertible Notes or the Discount Notes at maturity or will be
able to refinance such obligations. Protection One maintains a $2.0 million
letter of credit sub-facility under its revolving credit facility, and has
extended an approximately $0.8 million letter of credit to a seller, scheduled
payments under which are approximately $0.4 million during each of fiscal 1998
and fiscal 1999.
Protection One has had, and expects to continue to have, a working capital
deficit. For fiscal 1994, 1995 and 1996, Protection One had a working capital
deficit of $11.5 million, $9.2 million and $13.2 million, respectively; at June
30, 1997, Protection One's working capital deficit was $10.5 million. There are
two principal categories of current liabilities that cause Protection One to
have a working capital deficit: (i) "purchase holdbacks," which represent the
portion of the aggregate acquisition cost of subscriber accounts retained by
Protection One to offset lost MRR arising from the cancellation of acquired
accounts; and (ii) "deferred revenue," which represents billings and cash
collections received by Protection One from its subscriber base in advance of
performance of services. Both purchase holdbacks and deferred revenues are
recorded as a current liability on Protection One's balance sheet.
Protection One generated $26.1 million of net cash provided by operating
activities in the nine months ended June 30, 1997, compared to $16.6 million net
cash provided by operating activities for the comparable period in fiscal 1996.
The increase in net cash provided by operating activities reflects Protection
One's substantial growth in MRR and number of subscribers. For fiscal 1996,
Protection One's net cash provided by operating activities was $24.1 million,
compared to $8.5 million net cash provided by operating activities for fiscal
1995. During fiscal 1994, Protection One's net cash provided by operating
activities was $7.4 million.
In the nine months ended June 30, 1997, Protection One's net cash used in
investing activities was $66.3 million, compared to $80.8 million during the
nine months ended June 30, 1996. Investing activities during the nine months
ended June 30, 1997 included purchases through the Dealer Program, as well as
the acquisition of portfolios of subscriber accounts, including the purchase of
Security Holdings, Inc., Phillips Electronics, Inc. and Able Alarms of Arizona,
Inc. For fiscal 1996, Protection One's net cash used in investing activities was
$107.1 million, compared to $63.5 million during fiscal 1995, primarily as a
result of the acquisition of subscriber accounts, including the purchases of
subscriber accounts from InterCap Funds Joint Venture and Metrol Security
Services, as well as the Dealer Program. During fiscal 1994, Protection One's
net cash used in investing activities was $66.8 million, primarily as a result
of acquisitions.
During the nine months ended June 30, 1997, Protection One's net cash
provided by financing activities was $39.5 million, compared to $71.4 million
for the nine months ended June 30, 1996. Protection One's primary financing
activities during the nine months ended June 30, 1997 were the issuance of $13.5
million of Convertible Notes pursuant to the underwriters' exercise of an
over-allotment option and $9.3 million of Common Stock in connection with the
acquisitions of Security Holdings, Inc. ($7.3 million), Phillips Electronics,
Inc. ($2.0 million) and Able Alarms of Arizona, Inc. ($0.8 million). During
fiscal 1996, the Company's net cash provided by financing activities was $83.6
million, compared to $55.2 million in fiscal 1995. During fiscal 1994,
Protection One's net cash provided by financing activities was $59.1 million.
Financing activities are comprised of those debt and equity issuances discussed
above.
The Discount Notes Indenture, the Convertible Notes Indenture and the
Credit Agreement contain certain restrictions on transfers of funds, such as
dividends, loans and advances, by Protection One. Protection One believes that
such restrictions have not had and will not have a significant impact on
Protection One's ability to meet its cash obligations. Protection One does not
anticipate payment of dividends on Common Stock, except as disclosed in Note 10
in the notes to the consolidated financial statements of Protection One included
in this Proxy Statement, and such dividends are currently prohibited by the
Credit Agreement and the Discount Notes Indenture.
Capital Expenditures. Protection One anticipates making capital
expenditures during the remainder of fiscal 1997 of approximately $1.0 million
for routine replacement and upgrading of vehicles, computers and other capital
items. In addition, Protection One anticipates making capital expenditures of
approximately $0.5 million to complete a project to upgrade Protection One's
monitoring and administrative software.
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Protection One believes that complete implementation of the new software will
not occur until fiscal 1998. Protection One believes cash flows from operations,
together with borrowing under the Revolving Credit Facility, will be sufficient
to fund Protection One's capital expenditures in the remainder of fiscal 1997
and in fiscal 1998.
PRO FORMA
If the Stock Acquisition Transaction occurs, as a result of the combination
of the Western Resources Security Business with Protection One and the cash to
be contributed by Western Resources, Protection One, on an ongoing basis, will
have substantially more financial resources than was previously the case. This
will enable Protection One to pursue, among other things, opportunities afforded
by its increased geographic presence, expansion of the Dealer Program, and more
and larger acquisitions of subscriber alarm portfolios. See "Business of
Protection One -- Potential Acquisitions" and "The Stock Acquisition
Transaction -- Plans for Protection One Following the Stock Acquisition
Transaction." Protection One believes that its enhanced financial position,
together with anticipated increases in available credit, will be sufficient to
finance its operations, growth and capital expenditures and to make required
interest and principal payments on outstanding indebtedness and any required
repurchase of the Discount Notes.
Based on an initial evaluation of costs Protection One expects to incur to
integrate the operations and customers of WRSB, Centennial and (if the option is
exercised) Network with those of Protection One, management anticipates that
Protection One will incur a non-recurring charge of approximately $15-$25
million during the three months ended December 31, 1997. Management intends for
this charge to cover extraordinary and non-recurring costs arising from
converting customers to the Protection One brand, retaining employees by paying
bonuses, integrating branch, business development and information systems
operations and covering other costs typical to the combination of businesses.
There can be no assurance that the amount or timing of such charge will not
change.
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BUSINESS OF PROTECTION ONE
Protection One provides security alarm monitoring services for residential
and small business subscribers. Based on its approximately 236,000 subscribers
as of June 30, 1997 (approximately 80% of which are residential), Protection One
believes it is the fourth largest residential security alarm monitoring company
in the United States and the largest in the seven western states of Arizona,
California, Nevada, New Mexico, Oregon, Utah and Washington.
Protection One's revenues consist primarily of recurring payments under
written contracts for the monitoring and servicing of security systems and the
provision of additional enhanced security services. For the nine months ended
June 30, 1997, monitoring and related services revenues represented 96.4% of
total revenues. Protection One monitors digital signals arising from burglaries,
fires and other events through security systems installed at subscribers'
premises. Most of these signals are received and processed at Protection One's
state-of-the-art central monitoring station located in Portland, Oregon, which,
as currently configured, has the capacity to support up to 500,000 subscribers.
Protection One also sells enhanced security services, patrol and alarm response
services and alarm systems and provides local field repair services through 13
branch offices. Enhanced security services provided by Protection One include,
among others, two-way voice communication, supervised monitoring services, pager
service, wireless backup service and extended service protection.
From Protection One's inception, Protection One's growth has come primarily
through the acquisition of portfolios of subscriber accounts. Between September
30, 1991 and June 30, 1997, Protection One acquired 128 subscriber portfolios,
representing an aggregate of approximately 197,000 subscribers. Management
believes that numerous acquisition opportunities are available, and Protection
One is pursuing, and intends to continue to pursue, acquisitions of portfolios
of subscriber accounts, some of which may be significant. (See "The Contribution
Agreement -- Entire Security Business.") Since the beginning of fiscal 1995,
Protection One has increased its emphasis on the Dealer Program, which became a
more significant source of growth than in prior years. For the nine months ended
June 30, 1997, subscribers generated by the Dealer Program accounted for 56.7%
of Protection One's total subscriber additions during that period, as compared
with 35.6% of the subscribers added during the nine months ended June 30, 1996.
Protection One plans to continue its emphasis on the Dealer Program because of
the greater predictability and relatively lower cost of adding subscribers
through Protection One's dealers as compared with acquisitions of larger
portfolios of subscriber accounts. In addition, the Dealer Program generates a
comparatively steady flow of new subscribers spread more evenly over Protection
One's 13 branch offices, making it easier for Protection One's branch operations
to successfully assimilate these accounts. See "-- The Dealer Program."
POTENTIAL ACQUISITIONS
In September 1997, Western Resources purchased all of the equity securities
of Network Holdings, Inc. for approximately $171.0 million in cash and assumed
debt; in October 1997, Western Resources entered into agreements to acquire all
of the equity securities of Centennial Security Holdings, Inc. for a cash
purchase price of approximately $92.0 million and to acquire, for approximately
$7.5 million in cash, certain cumulative convertible preferred stock and
additional shares of common stock of Guardian International, Inc. representing
in the aggregate 37.5% of the equity of Guardian. As of the signing of the
Contribution Agreement, Western Resources already owned an additional 290,300
shares (representing approximately 4.5% of the outstanding shares) of Guardian
common stock, which securities Western Resources has advised Protection One will
be contributed to Protection One at the Closing as a part of the Western
Resources Contribution. See "The Contribution Agreement -- The Share Issuance
and the Western Resources Contribution."
The Contribution Agreement provides that if the Closing occurs, such
securities of Centennial as are acquired by Western Resources and such
securities of Guardian as are acquired by Western Resources after the signing of
the Contribution Agreement also will be transferred to Protection One and
Protection One will have an option, exercisable by vote of a majority of the
Protection One Board of Directors as constituted after the Closing, to acquire
from Western Resources all of the equity securities of Network. For a
description of the terms and conditions of such transfers, including the price
to be paid by Protection One, see "The Contribution Agreement -- Entire Security
Business."
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Network is the parent company of Network Multi-Family Corporation.
Headquartered in Dallas, Texas, Network Multi-Family provides security alarm
monitoring services from its central monitoring station in such city to
subscribers who live in apartment complexes in 38 states and as of September 30,
1997 had MRR of approximately $1.9 million. Based on its approximately 200,000
subscribers at September 30, 1997, Network Multi-Family is the largest provider
of monitored security systems to apartment complexes in the United States. For
the year ended December 31, 1996, Network had total revenues of $35.3 million
and annual earnings of $4.0 million; as of December 31, 1996, Network had total
assets of $69.6 million.
Centennial, based in Madison, New Jersey provides security alarm monitoring
services to residential and commercial subscribers located principally in Ohio,
Michigan, New Jersey, New York and Pennsylvania. As of September 30, 1997,
Centennial had approximately 47,000 subscribers (approximately 50% of which were
residential) and MRR of approximately $1.4 million. As of December 31, 1996,
Centennial had total assets of $47.8 million; for the year ended December 31,
1996, Centennial had total revenues of $17.3 million and a net loss of $5.0
million. Consummation of Western Resources' purchase of Centennial is expected
to occur in November 1997 and is subject to customary closing conditions.
For additional information with respect to the business, results of
operations and financial condition of Network and Centennial, see the
consolidated financial statements of Network and the consolidated financial
statements of Centennial included in this Proxy Statement.
Guardian provides security alarm monitoring services to approximately
12,000 subscribers in Florida (approximately 70% of which are residential) from
Guardian's central monitoring station in Hollywood, Florida. Guardian also
monitors approximately 16,000 additional subscribers on a "wholesale" basis for
certain third-party security alarm companies, sells high-grade and standard
alarm systems and provides field repair services principally to commercial
accounts and, to a more limited extent, provides installation services to
third-party security alarm companies. For the year ended December 31, 1996,
Guardian had total revenues of $3.6 million and a net loss of $590,000; as of
that date, Guardian had total assets of $9.0 million. Guardian's common stock
trades on the OTC Bulletin Board under the symbol "GIIS." As of the date of this
Proxy Statement, Western Resources has acquired the Guardian common stock
described above; Western Resources' purchase of the Guardian preferred stock
(which is convertible into shares of Guardian common stock on a share-for-share
basis) is expected to occur in November 1997, and is subject to customary
closing conditions.
As a result of Western Resources' acquisitions of Centennial and Network
and certain equity securities of Guardian, Protection One will pay to Western
Resources, if the Stock Acquisition Transaction is consummated, (i)
approximately $92.0 million for the transfer of such securities of Centennial,
(ii) approximately $7.5 million for the transfer of such securities of Guardian
as were acquired by Western Resources after the signing of the Contribution
Agreement, and (iii) if Protection One's Board of Directors votes to exercise
Protection One's option to acquire the equity securities of Network,
approximately $171.0 million, together in each case with Western Resources'
expenses incurred in connection with such acquisition and agreed upon finance
charge. Such aggregate purchase price (approximately $270.5 million plus
reimbursement of expenses and any applicable finance charge) will exceed the
amount of the cash included in the Western Resources Contribution and retained
by Protection One after the Special Dividend is paid and the Option/Warrants
Payments are made, and will be financed by Protection One by issuing to Western
Resources the promissory note described in "The Contribution Agreement -- Entire
Security Business."
MARKET OVERVIEW AND TRENDS
Protection One's target market consists of owners of single family
residences and small businesses. According to the most recent U.S. Census Bureau
data, there are over 10 million single-family residences and over 800,000
businesses with 100 or fewer employees in the seven states in which Protection
One principally operates.
The security alarm industry is characterized by the following attributes:
- HIGH DEGREE OF FRAGMENTATION; INCREASING NEED FOR CAPITAL. The security
alarm industry is currently comprised mostly of a large number of small
providers of alarm systems and services.
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According to data prepared in December 1995 by the J.P. Freeman Co. (the
"Freeman Data"), there are approximately 12,700 security alarm companies
nationally, and Protection One estimates that approximately 3,000
operate in the seven states Protection One principally currently serves.
A survey published by SDM magazine (formerly Security Distributing and
Marketing) in May 1996 reported that in 1995, based upon information
provided by the respondents, the 100 largest companies in the industry
accounted for approximately 23% of alarm industry revenues. Based on its
acquisition experience, Protection One believes that many smaller alarm
service companies, because of their size, have higher overhead expenses
as a percentage of revenues than Protection One and lack access to
capital on terms as attractive as those available to Protection One. Due
to a decline in security system installation prices since 1995, security
alarm monitoring companies participating in market growth are required
today to make a substantial investment in each new subscriber. As a
result, access to capital has become an increasingly important factor in
a security alarm company's success.
- RAPID GROWTH AND LOW PENETRATION. The residential security alarm market
is growing rapidly but is still characterized by a low level of market
penetration. The Freeman Data indicate that residential security alarm
monitoring revenues grew at a compounded annual rate of 9.9% between
1989 and 1995. Protection One believes that several factors, including
increased concern about crime and favorable demographic trends, have
contributed to the increased demand for residential security alarm
monitoring services. In addition, based on the Freeman Data, Protection
One estimates that at November 1995, the percentage of total households
in the United States with monitored security alarm systems was
approximately 10.9%.
- ADVANCES IN DIGITAL COMMUNICATIONS TECHNOLOGY. Prior to the development
of digital communications technology, alarm monitoring required a
dedicated telephone line, which made long-distance monitoring
uneconomic. Consequently, in order to achieve a national or regional
presence, alarm monitoring companies were required to maintain a large
number of geographically dispersed monitoring stations. The development
of digital communications technology eliminated the need for dedicated
telephone lines, reducing the cost of monitoring services to the
subscriber and permitting the monitoring of subscriber accounts over a
wide geographic area from a central monitoring station. The elimination
of local monitoring stations has decreased the cost of providing alarm
monitoring services and has substantially increased the economies of
scale for larger alarm service companies. In addition, the concurrent
development of microprocessor-based control panels has substantially
reduced the cost of the equipment available to subscribers in the
residential and small business markets. Digital technology also has
enabled equipment manufacturers to build more features into security
alarm systems (e.g., remote user interfaces, lighting and heating
controls and user programming features).
- INCREASING FALSE ALARMS. According to American City & County magazine,
police officers respond to more than 13.7 million alarm activations
annually, 94% to 98% of which are false. The magazine reports that
although alarm ownership is increasing by 11% annually, police
department budgets are rising by 3% annually. Municipalities have
responded to increasing false alarms by implementing alarm permit and
fine systems and by limiting police response to private alarms until
further verified by another response entity. Protection One believes
this trend will continue in the future.
- ENTRANCE OF TELECOMMUNICATIONS COMPANIES AND UTILITIES. Large,
consumer-oriented companies and industries facing deregulation,
including long distance and local telephone companies and electric and
gas utilities, have demonstrated an increased interest in the security
alarm industry over the last several years. Protection One believes
telecommunications and utility companies are interested in offering
their customers additional services, including security services, as a
means of enhancing customer loyalty and reducing future risk of losing
customers in a fully competitive environment.
Protection One believes that several factors contribute to a favorable
market for security alarm monitoring services both generally in the United
States and specifically in the western portion of the country:
- INCREASE IN CRIME RATES. According to the Uniform Crime Report published
by the Federal Bureau of Investigation in 1996 (the "UCR"), between 1986
and 1995 the number of violent crimes reported
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in the United States increased by 20.8% and the total number of reported
criminal offenses increased by 5.0%. The UCR also reported that although
the number of reported criminal offenses decreased on a nationwide basis
from 1994 to 1995 by .9%, a property crime was committed in the United
States in 1995 once every three seconds. In the states in which
Protection One operates, the property crime rate in 1995 was 28.1%
higher than the nation as a whole, averaging approximately 5,885
property crimes per 100,000 residents. In California, Protection One's
largest market, the 1995 property crime and overall crimes rates were
5.9% and 10.5%, respectively, above the national averages.
- HIGH LEVEL OF CONCERN ABOUT CRIME. As violent crime and the reporting of
crime by the news media has increased, the perception by Americans that
crime is a significant problem has also grown. In a December 1996 poll
conducted by The Wall Street Journal, survey participants ranked
reducing crime as one of the two highest priorities for Congress.
- PER CAPITA POLICE PROTECTION. The UCR reported that urban areas in the
western region of the United States had the lowest ratio of law
enforcement employees per capita of the four reporting regions in 1995,
the most recent period for which a UCR has been published. According to
population and law enforcement employee data presented in the UCR, in
1995 Los Angeles had 3.2 law enforcement employees per 1,000 citizens,
while New York had 6.4 and Chicago had 5.7. The number of law
enforcement employees per 1,000 citizens was 3.0 for Las Vegas, 2.8 for
Phoenix, 2.8 for Portland, 3.0 for Salt Lake City, 2.3 for San Diego,
3.3 for San Francisco, 3.3 for Seattle and 2.4 for Tucson.
- DEMOGRAPHIC TRENDS. According to the United States Census Bureau, from
1989 to 1994 the rate of population growth in the states in which
Protection One operates was approximately twice the national average.
According to the United States Department of Commerce, median income in
California has been above the national average since 1989. Other recent
trends that are favorable to the residential security alarm monitoring
business include: the increase in women in the workforce resulting in
more children being left at home alone and creating increased demand for
security alarm monitoring services; the aging of the population in
general, as older people tend to be more concerned about security; and
the increase in people working at home, resulting in increasing demand
for security services to protect home office equipment.
- INSURANCE DISCOUNTS. The increase in demand for security systems may
also be attributable in part to the granting by insurance companies of
discounts to homeowners who purchase alarm systems, and such discounts
are typically greater when systems are monitored by a central station.
In addition, insurance companies may require that businesses install an
alarm system as a condition of insurance coverage.
OVERVIEW
Protection One's strategy has been to enhance its position as the largest
residential security alarm monitoring company in the seven western states in
which Protection One principally operates by pursuing a balanced growth plan
incorporating the Dealer Program, acquisitions of portfolios of subscribers, the
sale of enhanced services and new alarm systems and possible joint ventures and
other strategic alliances. After the consummation of the Stock Acquisition
Transaction, Protection One's strategy will be re-evaluated in light of the
combined strengths of Protection One and WRSB.
Protection One's historical growth has enabled Protection One to realize
economies of scale in its central monitoring station, branch operations and
corporate offices. As the number of subscribers monitored by Protection One has
increased, the fixed costs of the central monitoring station have been spread
over a larger base, improving monitoring gross margins. Additionally,
subscribers have been added in areas surrounding Protection One's branch
offices, increasing the density of Protection One's subscriber base, allowing
Protection One to spread the branch office fixed costs over a larger base and
increasing the productivity of field service technicians through more efficient
scheduling and dispatching. Based on Protection One's subscriber base at June
30, 1997, Protection One services an average of over 18,000 subscribers per
branch, which Protection One believes to be among the highest averages in the
security alarm industry. Finally, Protection One's
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revenue growth has exceeded the growth of its selling, general and
administrative expenses, as Protection One has realized management efficiencies
and has spread additional revenue over its fixed corporate expenses. Such
economies of scale have allowed Protection One to add subscriber accounts at
attractive purchase prices.
The principal components of Protection One's business as conducted to date
are as follows:
- THE DEALER PROGRAM. Protection One participates in the growth of the
residential security alarm market by providing monitoring and field
repair services to subscriber accounts generated on a monthly basis
through exclusive purchase agreements with independent alarm companies
specializing in the sale and installation of security alarm systems.
Protection One added approximately 38,000 subscriber accounts through
its Dealer Program in the nine months ended June 30, 1997, an increase
of 48.2% over the approximately 25,500 subscribers added through the
Dealer Program in the nine months ended June 30, 1996. As of June 30,
1997, Protection One had 68 active participants in the Dealer Program.
Protection One believes that participation in the Dealer Program will
expand due to: (i) Protection One's concentrated presence in areas
surrounding its branch offices, which enhances Protection One's name
recognition and therefore the marketability of the Company's services;
(ii) Protection One's ability to obtain volume purchase discounts on
security system equipment on behalf of its dealers; (iii) Protection
One's support services provided to dealers in the areas of
administration, marketing and employee training; and (iv) Protection
One's ability to generate new customer leads through affinity programs
and strategic alliances.
- ACQUISITIONS OF PORTFOLIOS OF SUBSCRIBER ACCOUNTS. Protection One also
has grown by acquiring portfolios of subscriber accounts, primarily from
smaller alarm companies. These acquisitions represented approximately
51,000 subscribers in fiscal 1994, approximately 53,000 additional
subscribers in fiscal 1995, 55,000 additional subscribers in fiscal 1996
and approximately 66,700 additional subscribers in the nine months ended
June 30, 1997. Protection One typically has acquired only the subscriber
accounts, and not the facilities or liabilities, of such companies. As a
result, Protection One is able to obtain gross margins on the monitoring
of acquired subscriber accounts that are similar to those Protection One
currently generates on the monitoring of its existing subscriber base.
In addition, Protection One has instituted price increases over time for
acquired subscriber accounts where Protection One has determined that
the charges previously paid by those subscribers do not appropriately
reflect the higher quality of services provided by Protection One.
- JOINT VENTURES AND OTHER STRATEGIC ALLIANCES. To evaluate other
potential sources of subscriber growth, Protection One has analyzed
companies in other industries that may have an interest in entering the
residential security alarm market. In addition, certain companies in
industries facing deregulation (such as the telecommunications and
electric utility industries) have expressed to Protection One an
interest in offering security alarm services to develop more
comprehensive relationships with their customers. Protection One has
entered into a co-branding and marketing agreements with PacifiCorp, a
Portland, Oregon-based utility holding company, and Salt River Project,
a multipurpose reclamation project that provides electricity and water
in the Phoenix area, and an affinity marketing relationship with Kaufman
& Broad Home Corporation, the largest home builder in Protection One's
current market. In addition, Protection One has an agreement with
Southwestern Bell Telephone Company pursuant to which that company
markets, sells, installs and maintains alarm systems monitored by
Protection One, and acts as Protection One's sales and billing agent for
purposes of alarm monitoring services provided by Protection One in
Arkansas, Kansas, Missouri, Oklahoma and Texas. As of the date of this
Proxy Statement, Protection One intends to continue to explore
additional joint ventures, co-marketing arrangements and other strategic
alliances as a method of enhancing Protection One's subscriber growth
and reducing its costs of generating new subscribers. However,
Protection One does not currently believe that any such additional joint
venture or other strategic alliance is probable.
- SALE OF ENHANCED SERVICES; PATROL AND ALARM RESPONSE
SERVICES. Protection One currently seeks to increase revenues from
current and newly added subscribers by actively marketing enhanced
services to such subscribers. Such services include extended service
protection, two-way voice communication,
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supervised monitoring services, pager service, remote video verification
and wireless back-up. Protection One also offers patrol and alarm
response services, principally in southern California and Las Vegas.
- CONVERSIONS, NEW OWNERS AND NEW ALARM SYSTEMS. Protection One currently
seeks to convert subscribers from competitors' services to Protection
One's services, particularly in areas in which Protection One's patrol
and alarm response services enhance Protection One's presence and name
recognition. Protection One also generates new subscriber accounts by
signing monitoring contracts with new owners of residences previously
occupied by Protection One subscribers and through sales of alarm
systems by Protection One personnel.
Protection One believes the successful execution of its growth strategy has
led to increases in subscribers and high margin monitoring revenues in excess of
the growth in selling, general and administrative expenses. By way of example,
in fiscal 1996, monitoring and service revenues increased by 42.2% while
selling, general and administrative expenses increased by 19.3%, over comparable
revenues and expenses for fiscal 1995. In addition, Protection One intends to
continue to grow primarily in the areas surrounding its branch offices. As the
density of its subscriber account base in such areas increases, Protection One
expects to achieve further economies of scale in the scheduling and dispatching
of field service technicians and alarm response officers.
THE DEALER PROGRAM
The dealers that Protection One has selected for the Dealer Program are
typically small alarm companies that specialize in selling and installing alarm
systems for residential or small business subscribers in a specified geographic
area. Such companies often cannot profitably provide monitoring and repair
services because they lack a sufficient number of subscribers to support the
fixed operating expenses. Also, many dealers do not have access to capital on
attractive terms, a key factor that Protection One believes is necessary to
finance the investment required to grow rapidly. Protection One has entered into
exclusive contracts with such dealers that provide for the purchase by
Protection One of the dealers' subscriber accounts on an ongoing basis. Under
these agreements, the dealers install alarm systems (which have a Protection One
logo on the keypad), arrange for subscribers to enter into Protection One alarm
monitoring agreements, and install Protection One yard signs and window decals.
All of these subscribers are contacted individually by Protection One personnel,
at the time of the purchase of the accounts from the dealers, to facilitate
subscriber satisfaction and quality control. In addition, Protection One
requires dealers to evaluate the credit history of prospective new subscribers.
Protection One strives to provide quality, responsive field service to accounts
purchased from dealers; many of Protection One's principal competitors typically
subcontract the field service of subscriber accounts they purchase, which
Protection One believes increases attrition rates and may dissuade dealers from
selling their subscriber accounts to such competitors.
Protection One believes that its increased market share in the areas
surrounding its branch offices has enhanced both Protection One's ability to
attract dealers and the ability of such dealers to attract new subscribers. To
further attract high quality dealers, Protection One has enabled them to obtain
volume purchase discounts on security systems, coordinates cooperative dealer
advertising, and has provided administrative, marketing and employee training
support services.
Protection One's dealers employ a variety of marketing methods to identify
and create sales leads, including telemarketing, direct mail and door-to-door
solicitation. The majority of Protection One's dealers sell and install a
hard-wired, low-cost security system manufactured by Ademco, a subsidiary of
Pittway Corporation. The typical system includes protection of the front and
back doors of a home, one interior motion detection device, a central processing
unit with the ability to communicate signals to Protection One's central
monitoring station, a siren, window decals and a lawn sign. This basic system
often will be offered for little or no up-front price, but will be sold to a
subscriber with additional equipment customized to a subscriber's specific
needs. Such equipment add-ons encompass additional perimeter protection, fire
protection devices (heat and smoke detectors), environmental protection devices
(freeze sensors and water detectors), panic buttons and home automation devices
(lighting or appliance controls). Typically, dealers sign subscribers to alarm
monitoring contracts that include a bundled monthly charge for monitoring and
extended service
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protection. Extended service protection covers the normal costs of repair of the
security system by Protection One's service technicians at the subscriber's
premises during normal business hours after the expiration of the security
system's initial warranty period. Protection One believes the bundling of
monitoring and extended service protection has provided additional value to
subscribers and has allowed Protection One to more efficiently provide field
repair services. Dealers also sell Protection One's enhanced security services.
THE ACQUISITION PROGRAM
Overview
Protection One also has grown by acquiring portfolios of subscriber
accounts from other alarm companies. Protection One has focused on acquisitions
that allow it to "infill" areas surrounding branch operations, which in turn
leads to greater field maintenance, repair and patrol efficiencies. Protection
One estimates there are approximately 3,000 alarm companies in its markets,
substantially all of which are independently owned and could, from time to time,
become acquisition targets. Protection One believes that it has been an
effective competitor in the acquisition market because of the substantial
experience of its management in acquiring alarm companies and subscriber
accounts, both as a result of the 128 acquisitions made by Protection One
between September 30, 1991 and June 30, 1997 and acquisitions made by members of
management when they were employed by other alarm service companies. Protection
One also believes that, through its acquisition activities, it has developed a
reputation in the alarm service industry as an active purchaser of subscriber
accounts. Protection One historically has offered sellers cash, Common Stock or
a combination thereof as determined by the requirements of both the sellers and
Protection One.
Because Protection One's primary consideration in making an acquisition is
the amount of cash flow that can be derived from the monthly recurring revenue
associated with the purchased accounts, the price paid by Protection One
customarily has been based upon such MRR. To protect Protection One against the
loss of acquired accounts and to encourage the seller of such accounts to
facilitate the transfer of subscribers, Protection One typically has required
the seller to provide guarantees against account cancellations for a period
following the acquisition. Protection One usually has held back from the seller
a portion of the acquisition price, and has had the contractual right to utilize
such holdback to recapture a portion of the purchase price based on the lost MRR
arising from the cancellation of acquired accounts.
In evaluating the quality of the accounts acquired, Protection One has
relied primarily on management's knowledge of the industry, its due diligence
procedures, its experience integrating accounts into Protection One's
operations, its assumptions as to attrition rates for the acquired accounts, and
the representations and warranties of the sellers.
The Acquisition Management System
Protection One has employed a comprehensive acquisition management system
to identify, evaluate and assimilate acquisitions of new subscriber accounts
that includes three components: the identification and negotiation stage, the
due diligence stage and the assimilation stage.
Protection One has actively sought to identify prospective companies and
dealers with targeted direct mail, trade magazine advertising, trade show
participation, membership in key alarm industry trade organizations, and
contacts through various prominent vendors and other industry participants.
Management's extensive experience in identifying and negotiating previous
acquisitions, and Protection One's use of standard form agreements, has helped
to facilitate the successful negotiation and execution of acquisitions in a
timely manner.
In a typical acquisition, Protection One conducts an extensive pre-closing
review and analysis of all facets of the seller's operations. The process
includes a combination of selective field equipment inspections, individual
review of substantially all of the subscriber contracts, an analysis of the
rights and obligations under such contracts and other types of verification of
the seller's operations.
Protection One has developed a specific assimilation program, in
conjunction with the seller, for each acquisition. Assimilation efforts
typically include a letter, approved by Protection One, from the seller to its
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subscribers, explaining the sale and transition, followed by one or more letters
and packages that include Protection One's subscriber service brochures, field
service and monitoring phone number stickers, yard signs and window decals.
Thereafter, each new subscriber is contacted individually by telephone by a
member of Protection One's customer service group for the purpose of soliciting
certain information and addressing the subscriber's questions or concerns.
Finally, the subscriber receives a follow-up telephone call after six months and
periodically thereafter. The acquisition management system's goal has been to
enhance new subscriber identification with Protection One as the service
provider and to maintain subscriber satisfaction, and thus realize a higher
portion of the potential value of the MRR generated by purchased subscriber
accounts.
DESCRIPTION OF OPERATIONS
Protection One's operations consist principally of alarm monitoring
services, enhanced security services, field repair services and patrol and alarm
response services.
Alarm Monitoring Services
Subscriber Security Alarm Systems. Security alarm systems include devices
installed at the subscribers' premises designed to detect or react to various
occurrences or conditions, such as intrusion or the presence of fire or smoke.
These devices are connected to a computerized control panel that communicates
through telephone lines to a central monitoring station. Subscribers may also
initiate an emergency signal from a device such as a "panic button." In most
systems, control panels can identify the nature of the alarm and the areas
within a building where the sensor was activated, and can transmit that
information to the central monitoring station.
The Central Monitoring Station. Protection One monitors substantially all
of its subscriber accounts at its central monitoring station in Portland,
Oregon. In addition, in connection with certain acquisitions, the monitoring of
certain subscriber accounts is subcontracted to the seller or to independent
monitoring companies to provide for the orderly transition of the subscriber
accounts or to comply with certain state regulations. However, it is Protection
One's policy to transfer all monitoring services for its acquired subscriber
accounts to its central monitoring station as soon as practicable.
The central monitoring station incorporates the use of advanced
communications and computer systems that route incoming alarm signals and
telephone calls to operators. Each operator sits before a computer monitor that
provides immediate information concerning the nature of the alarm signal, the
subscriber whose alarm has been activated, and the premises on which such alarm
is located. All telephone conversations are automatically recorded.
The central monitoring station has the capacity to monitor up to 500,000
subscribers. The equipment at the central monitoring station includes:
sophisticated phone switching equipment; digital receivers that process the
incoming signals; two computers with built-in redundancy; a network of "smart"
computer terminals; a multichannel, voice-activated recording system;
uninterruptible power supply; and dual backup generators supplied by different
fuel sources.
Protection One's central monitoring station is listed by Underwriters
Laboratories Inc. ("UL") as a protective signaling services station. UL
specifications for central monitoring stations include building integrity,
back-up systems, staffing and standard operating procedures. In many
jurisdictions, applicable law requires that security alarms for certain
buildings be monitored by UL-listed facilities. In addition, such listing is
required by certain commercial subscribers' insurance companies as a condition
to insurance coverage.
Operation of the Central Monitoring Station. Depending upon the type of
service for which the subscriber has contracted, central monitoring station
personnel respond to alarms by relaying information to the local fire or police
departments, notifying the subscriber, or taking other appropriate action, such
as dispatching alarm response personnel to the subscriber's premises where this
service is available. Protection One also provides a substantial number of
subscribers with remote audio verification capability that enables the central
monitoring station to listen and speak directly into the subscriber's premises
in the event of an alarm activation. This feature allows Protection One's
personnel to verify that an emergency exists, to reassure
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the subscriber, and to expedite emergency response, even if the subscriber is
unable to reach a telephone. Remote audio verification capability also assists
Protection One in quickly determining if the alarm was activated inadvertently,
and thus whether a response is required.
Protection One's central monitoring station operates 24 hours per day,
seven days a week, including all holidays. Each operator receives training that
includes familiarization with substantially every type of alarm system in
Protection One's subscriber base. This enables the operator to tell subscribers
how to turn off their systems in the event of a false alarm, thus reducing the
instances in which a field service person must be dispatched. Other
non-emergency administrative signals are generated by low battery status,
deactivation and reactivation of the alarm monitoring system, and test signals,
and are processed automatically by computer.
Subscriber Contracts. Protection One's alarm monitoring subscriber
contracts generally have initial terms ranging from one to five years in
duration, and provide for automatic renewal for a fixed period (typically one
year) unless Protection One or the subscriber elects to cancel the contract at
the end of its term. Protection One maintains an individual file with a signed
copy of the contract for each of its subscribers and a computerized customer
data base.
Substantially all of Protection One's alarm monitoring agreements for
Protection One's residential subscribers (which constitute approximately 80% of
Protection One's total accounts) provide for subscriber payments of between $20
and $40 per month. Protection One's commercial subscribers typically pay from
$25 to $45 per month.
In the normal course of its business, Protection One experiences customer
cancellations of monitoring and related services as a result of subscribers
relocating, the cancellation of purchased accounts in the process of
assimilation into Protection One's operations, unfavorable economic conditions,
dissatisfaction with field maintenance services and other reasons. This
attrition is offset to a certain extent by revenues from the sale of additional
services to existing subscribers, price increases, the reconnection of premises
previously occupied by subscribers, conversions of accounts previously monitored
by other alarm companies and guarantees provided by the sellers of such
accounts. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Overview -- Subscriber Attrition."
Enhanced Security Services
Additional MRR is generated by the provision of enhanced security services
that Protection One offers to both its existing subscribers and in conjunction
with the sales of new systems. These enhanced security services include:
- Extended Service Protection, which covers the normal costs of repair of
the system during normal business hours, after the expiration of the
initial warranty period.
- Two-Way Voice Communication (Remote Audio Verification), which consists
of the ability, in the event of an alarm activation, to listen and talk
to persons at the monitored premises from the central monitoring station
through speakers and microphones located within the premises. Among
other things, such remote audio verification helps Protection One to
determine whether an alarm activation is a false alarm.
- Supervised Monitoring Service, which allows the alarm system to send
various types of signals containing information on the use of the
system, such as what users armed or disarmed the system and at what time
of the day. This information is supplied to subscribers for use in
connection with the management of their households or businesses.
Supervised monitoring service can also include a daily automatic test
feature.
- Pager Service, which provides the subscriber, at discounted rates, with
standard pager services that also enable Protection One to reach the
subscriber in the event of an alarm activation.
- Medical Identification Card, which enables medical personnel in the
event of a medical emergency to access a subscriber's medical
information (e.g., allergies, medications and family history), emergency
contacts and doctors by calling Protection One's central station.
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- Wireless Back-Up, which permits the alarm system to send signals over a
cellular telephone or dedicated radio system, in the event that regular
telephone service is interrupted.
Field Repair Services
Protection One believes one of the most effective ways of improving
customer retention is the provision of quality, responsive field repair service
by Protection One employees. Field service personnel are trained by Protection
One to provide repair services for the various types of security systems owned
by Protection One's subscribers. Field service personnel also inspect
installations performed by Protection One's installation subcontractors.
Repair services generate revenues primarily through billable field service
calls and contractual payments under Protection One's extended service program.
The increasing density of Protection One's subscriber base, as a result of
Protection One's effort to infill areas surrounding its branch operations with
new subscribers, permits more efficient scheduling and routing of field service
technicians, and results in economies of scale at the branch level. The
increased efficiency in scheduling and routing also allows Protection One to
provide faster field service response and support, which leads to a higher level
of subscriber satisfaction.
Alarm Response and Patrol Services
Protection One offers its subscribers in southern California and Las Vegas
a patrol and alarm response enhanced service in addition to Protection One's
other services, and employs over 100 patrol officers operating in 25 regular
patrol "beats," or designated neighborhoods, to provide such services. These
armed officers supplement Protection One's alarm monitoring service by providing
"alarm response service" to alarm system activations, "patrol service"
consisting of routine patrol of subscribers' premises and neighborhoods and, in
a few cases, "special watch" services, such as picking up mail and newspapers
and increased surveillance when the subscriber is travelling. Alarm response
service requires Protection One's patrol officers to observe and report to
police or other emergency agencies any potential criminal activity at a
subscriber's home.
Protection One has begun to offer a new bundle of services in Las Vegas.
The bundle of services consists of alarm monitoring, field repair and alarm
response services billed to the subscriber as a flat monthly charge regardless
of the number of service calls or responses to alarm activations. Protection One
believes this service package is attractive to current and prospective
subscribers because the package (i) enables Protection One to offer a reliable
and timely alarm response service, and (ii) eliminate subscriber uncertainty
arising from "per response" charges. Protection One intends to expand the
offering of this service's package to other areas within its markets over the
next several years.
Patrol officers are dispatched by a 24-hour central radio dispatch office
located in the local dispatch office. An alarm activation signal from a
subscriber to alarm response service is automatically processed by computer at
the central monitoring station and sent electronically to the local dispatch
office. If the patrol officer dispatched observes potential criminal activity,
the officer will report the activity to the dispatch office, which will in turn
notify local law enforcement. The patrol officer will then maintain surveillance
until law enforcement officers arrive. If a patrol officer does not detect
criminal activity, the officer will report that conclusion to the dispatch
office, which will cancel police response and thereby reduce the potential for a
false alarm fine.
Protection One also offers "dedicated" patrol service to homeowners'
associations in selected markets, for which Protection One provides a Protection
One-marked car for patrol exclusively in such association's neighborhood. A
significant percentage of the homeowners in such associations purchase
Protection One's alarm monitoring services.
Protection One's patrol officers are subject to extensive pre-employment
screening. Officers are subject to background checks and drug screening before
being hired, and are required to have gun and baton permits and state and city
guard licenses. Officers also must be licensed by the state to carry firearms
and to provide patrol services. Protection One's training program includes
arrest procedures, criminal law, weaponless defense, firearms and baton usage,
patrol tactics, and first-aid and CPR. This training program exceeds
state-mandated
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training requirements. However, the provision of patrol and alarm response
services subjects Protection One to greater risks, relating to accidents or
employee behavior, than other types of businesses.
The cost of providing patrol and alarm response services presently exceeds
the revenues generated by such services. However, Protection One believes that
its ability to provide these services gives Protection One a competitive
advantage in marketing its monitoring services over alarm service companies that
do not have these capabilities. Additionally, Protection One believes such
services are an effective impediment to subscriber attrition.
Protection One believes that demand for alarm response and patrol services
may increase as a result of a trend on the part of local police departments to
limit their response to alarm activations and other factors that may lead to a
decrease of police presence. Although Protection One currently incurs a loss in
its patrol and alarm response operations, Protection One believes further demand
for such services would allow Protection One to increase subscriber density in
its patrol routes, thereby reducing losses. In addition, Protection One's
provision of alarm response and patrol services is a sales method used to
convert subscribers of other alarm monitoring companies that do not provide such
services. To the extent that further demand developed for patrol and alarm
response services, Protection One believes its current presence would enable it
to increase its conversions of competitors' subscribers to Protection One's
services.
SALES AND MARKETING
Each of Protection One's 13 branch offices includes sales representatives
who sell new systems, equipment add-ons and upgrades and enhanced services to
subscribers. Although Protection One does not actively use outbound marketing
methods to sell new security alarm systems, Protection One receives in-bound
telephone requests for such systems, primarily as a result of subscriber
referrals, local crime activity and responses to yellow pages advertising. Such
leads are pursued by one of Protection One's sales representatives. Alarm sales
are made at the subscriber's home, typically in a single visit by a sales
representative. Protection One markets additional services through both its
account sales representatives and through a centralized telephone sales force in
Protection One's corporate offices.
Protection One believes that the increasing density of Protection One's
subscriber base (i.e., the increasing concentration of subscribers in certain
areas) has increased the overall presence and visibility of Protection One. Both
in the Dealer Program and in Protection One sales, new subscribers are provided
with highly visible reflective yard signs placed prominently in front of their
homes or businesses. The presence of these signs develops greater awareness in a
neighborhood and leads to more inbound and referral business. Protection One has
encouraged referrals from existing subscribers through an incentive program
promoted through newsletters, billing inserts and employee contacts. Alarm
response service, which uses marked patrol cars, also increases Protection One's
visibility.
COMPETITION
The security alarm industry is highly competitive and, despite ongoing
consolidation, highly fragmented. Protection One competes with major firms with
substantial financial resources, including ADT Operations Inc., a subsidiary of
Tyco International, Inc.; the Protection Securities Division of Honeywell, Inc.;
The National Guardian Corporation, a subsidiary of Ameritech Corporation; and
Brinks Home Security, a subsidiary of The Pittston Company. Other alarm service
companies have adopted a strategy similar to Protection One's that entails the
aggressive purchase of alarm monitoring accounts both through acquisitions of
account portfolios and through dealer programs. Some of such competitors have
greater financial resources than Protection One, or may be willing to offer
higher prices than Protection One is prepared to offer to purchase subscriber
accounts.
Competition in the security alarm industry is based primarily on
reliability of equipment, market visibility, services offered, reputation for
quality of service and price. Protection One believes it competes effectively
with other national, regional and local security alarm companies in the western
United States because of Protection One's reputation for reliable equipment and
services, its concentrated presence in the
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areas surrounding its branch offices, its ability to bundle monitoring,
maintenance and repair and enhanced services and its low cost structure.
REGULATORY MATTERS
A number of local governmental authorities have adopted or are considering
various measures aimed at reducing the number of false alarms. Such measures
include: (i) subjecting alarm monitoring companies to fines or penalties for
transmitting false alarms, (ii) licensing individual alarm systems and the
revocation of such licenses following a specified number of false alarms, (iii)
imposing fines on alarm subscribers for false alarms, (iv) imposing limitations
on the number of times the police will respond to alarms at a particular
location after a specified number of false alarms, and (v) requiring further
verification of an alarm signal before the police will respond.
Protection One's operations are subject to a variety of other laws,
regulations and licensing requirements of federal, state, and local authorities.
In certain jurisdictions, Protection One is required to obtain licenses or
permits, to comply with standards governing employee selection and training, and
to meet certain standards in the conduct of its business. Many jurisdictions
also require certain of Protection One's employees to obtain licenses or
permits. Those employees who serve as patrol officers are often subject to
additional licensing requirements, including firearm licensing and training
requirements in jurisdictions in which they carry firearms.
The alarm industry is also subject to requirements imposed by various
insurance, approval, listing, and standards organizations. Depending upon the
type of subscriber served, the type of security service provided, and the
requirements of the applicable local governmental jurisdiction, adherence to the
requirements and standards of such organizations is mandatory in some instances
and voluntary in others.
Protection One's advertising and sales practices are regulated by both the
FCC and state consumer protection laws. Such laws and regulations include
restrictions on-the manner in which Protection One promotes the sale of its
security alarm systems and the obligation of Protection One to provide
purchasers of its alarm systems with certain recision rights. From time to time
subscribers have submitted complaints to state and local authorities regarding
Protection One's sales and billing practices. Such complaints can result in
regulatory action against Protection One, including civil complaints seeking
monetary and injunctive remedies.
Protection One's alarm monitoring business utilizes telephone lines and
radio frequencies to transmit alarm signals. The cost of telephone lines, and
the type of equipment which may be used in telephone line transmission, are
currently regulated by both federal and state governments. The operation and
utilization of radio and cellular frequencies are regulated by the Federal
Communications Commission and state public utilities commissions.
LEGAL PROCEEDINGS
Protection One experiences routine litigation in the normal course of its
business. Protection One does not believe that any of such pending litigation
will have a material adverse effect on the financial condition or results of
operations of Protection One.
RISK MANAGEMENT
The nature of the services provided by Protection One potentially exposes
it to greater risks of liability for employee acts or omissions, or system
failure, than may be inherent in other businesses. Substantially all of
Protection One's alarm monitoring agreements, and other agreements pursuant to
which Protection One sells its products and services contain provisions limiting
liability to subscribers in an attempt to reduce this risk.
Protection One's alarm response and patrol services require Protection One
personnel to respond to emergencies that may entail risk of harm to such
employees and to others. In most cities in which Protection One provides such
services, Protection One's patrol officers carry firearms, which may increase
such risk. Although Protection One conducts extensive screening and training of
its employees, the provision of alarm
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response and patrol service subjects Protection One to greater risks related to
accidents or employee behavior than other types of businesses.
Protection One carries insurance of various types, including general
liability and errors and omissions insurance. The loss experience of Protection
One, and other security service companies, may affect the availability and cost
of such insurance. Certain of Protection One's insurance policies, and the laws
of some states, may limit or prohibit insurance coverage for punitive or certain
other types of damages, or liability arising from gross negligence.
EMPLOYEES
At September 30, 1997, Protection One employed 852 individuals on a
full-time basis. Currently, none of Protection One's employees is represented by
a labor union or covered by a collective bargaining agreement. Protection One
believes that its relations with its employees are good.
FACILITIES
Protection One's executive offices are located at 6011 Bristol Parkway,
Culver City, California, and its central monitoring station and administrative
office are located in the Portland, Oregon metropolitan area at 3900 S.W. Murray
Boulevard, Beaverton, Oregon. The offices at both locations are leased by
Protection One. The Culver City lease expires in 1998, but can be renewed by
Protection One for an additional term of five years. The Beaverton lease expires
in 2005, but can be renewed by Protection One for two additional terms of five
years each. Protection One also leases office space in Bullhead City, Arizona;
Tempe, Arizona; Las Vegas, Nevada; Albuquerque, New Mexico; Salt Lake City,
Utah; Kent, Washington; Riverside, California; Irvine, California; Bakersfield,
California; San Leandro, California; San Diego, California; Santa Clara,
California; and Van Nuys, California. The leases for these properties expire on
various dates through 2005, and in some cases are renewable at the option of
Protection One.
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SELECTED COMBINED HISTORICAL FINANCIAL INFORMATION
OF THE WESTERN RESOURCES SECURITY BUSINESS AND WSS
(IN THOUSANDS)
The selected combined historical financial information of WRSB as of and
for the year ended December 31, 1996 have been derived from their audited
historical combined financial statements and the notes thereto, which are
included elsewhere herein, and should be read in conjunction with such financial
statements and notes thereto. The selected historical financial information of
the Western Resources Security Business as of December 20, 1992 through 1995 and
for the 52 weeks ended December 20, 1992 through 1995 and as of December 30,
1996 and the 53 weeks ended December 30, 1996 have been derived from the
unaudited and audited historical financial statements and the notes thereto of
Westinghouse Security, as a predecessor of WestSec, which are included elsewhere
herein, and should be read in conjunction with such financial statements and
notes thereto. The selected historical combined data of WRSB as of June 25, 1997
and for the six months ended June 25, 1996 and 1997 have been derived from their
unaudited historical combined financial statements and notes thereto, which are
included elsewhere in this Proxy Statement and should be read in conjunction
with such financial statements and notes thereto. In the opinion of the
management of WRSB, such unaudited financial data reflects all adjustments,
consisting only of normal recurring accrual, adjustments necessary for the fair
presentation of the results of operation for such period. These interim
operating results are not necessarily indicative of the results that may be
expected for the entire year ending December 31, 1997.
<TABLE>
<CAPTION>
AT OR
FOR THE
YEAR
AT OR FOR THE SIX ENDED
MONTHS ENDED DECEMBER
JUNE 25, 31,
----------------- --------
1997 1996 1996
-------- ------ --------
(UNAUDITED)
<S> <C> <C> <C>
THE WESTERN RESOURCES SECURITY BUSINESS:
OPERATIONS DATA:
Total revenues................................................. $ 63,506 $1,120 $ 8,097
Operating loss................................................. (2,403) (270) (952)
Net loss....................................................... (4,746) (163) (656)
EBITDA(1)(3)..................................................... 14,655 (114) (342)
Adjusted EBITDA(2)(3)............................................ 22,977 (244) (342)
BALANCE SHEET DATA:
Cash and cash equivalents...................................... $ 1,049 $ 70 $ 169
Total assets................................................... 519,005 5,475 506,647
Long-term debt................................................. 42,967 20 60,505
Total stockholder's equity..................................... 413,622 4,860 410,430
</TABLE>
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<TABLE>
<CAPTION>
AT OR FOR THE AT OR FOR THE 52 WEEKS ENDED
53 WEEKS DECEMBER 20,
ENDED ----------------------------------------
DECEMBER 30, 1996 1995 1994 1993(5) 1992(5)
----------------- -------- -------- -------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
WESTINGHOUSE SECURITY:
OPERATIONS DATA:
Total revenues........................ $ 110,881 $ 88,710 $ 67,253 $ 47,985 $28,666
Operating income (loss)............... 3,042 2,606 10,622 (7,313) 4,881
Net income (loss)..................... (4,859) (5,923) (1,764) (9,191) 3,026
EBITDA(1)(4).......................... 24,655 20,410 24,581 5,696 8,810
BALANCE SHEET DATA:
Cash and cash equivalents............. $ 137 $ 134 $ 26 $ 1,942 $ 48
Total assets.......................... 187,456 170,907 145,062 109,593 67,536
Long-term debt........................ 47,931 52,511 58,475 35,883 29,014
Total stockholder's equity............ 106,140 89,120 60,108 55,803 19,683
</TABLE>
- ---------------
(1) EBITDA does not represent cash flow from operations as defined by generally
accepted accounting principles, should not be construed as an alternative to
net income and is indicative neither of WRSB's operating performance nor of
cash flows available to fund WRSB's cash needs. Items excluded from EBITDA
are significant components in understanding and assessing WRSB's financial
performance. Management of WRSB believes presentation of EBITDA enhances an
understanding of WRSB's financial condition, results of operations and cash
flows because EBITDA is used by WRSB to satisfy its debt service obligations
and its capital expenditure and other operational needs as well as to
provide funds for growth. In addition, EBITDA has been used by senior
lenders and subordinated creditors and the investment community to determine
the current borrowing capacity and to estimate the long-term value of
companies with recurring cash flows from operations and net losses. EBITDA
is derived by adding to the loss before income taxes the sum of (i) other,
(ii) interest expense and (iii) depreciation and amortization. See tables
below.
(2) Adjusted EBITDA is derived by adding to EBITDA selling and marketing
expenses, net of revenues, arising from installation activities during the
period. Adjusted EBITDA does not represent cash flow from operations as
defined by generally accepted accounting principles, should not be construed
as an alternative to net income and is indicative neither of WRSB's
operating performance nor of cash flows available to fund WRSB's cash needs.
WRSB presents Adjusted EBITDA as a measure which WRSB believes provides a
more appropriate comparison to EBITDA as presented by companies such as
Protection One that grow through a dealer program or acquisitions. See table
below.
(3) The following table provides a calculation of EBITDA and adjusted EBITDA for
each of the periods presented above as it relates to WRSB:
<TABLE>
<CAPTION>
FOR THE
FOR THE SIX MONTHS YEAR ENDED
ENDED JUNE 25, DECEMBER 31,
------------------- -------------
1997 1996 1996
------- ------- -------------
(UNAUDITED)
<S> <C> <C> <C>
THE WESTERN RESOURCES SECURITY BUSINESS:
Loss before income taxes......................................................... $(7,499) $ (270) $(966)
Plus:
Interest expense............................................................. 5,096 -- 14
Amortization of intangibles and depreciation expense......................... 17,058 156 610
------- ------- -------
EBITDA................................................................... $14,655 $ (114) $(342)
======= ======= =======
Plus:
Selling and marketing expenses related to installations...................... 15,257 111 --
Less:
Installation revenues........................................................ (6,935) (241) --
------- ------- -------
Adjusted EBITDA.......................................................... $22,977 $ (244) $(342)
======= ======= =======
</TABLE>
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(4) The following table provides a calculation of EBITDA for each of the periods
presented above as it relates to WSS.
<TABLE>
<CAPTION>
FOR THE
53 WEEKS
ENDED FOR THE 52 WEEKS ENDED DECEMBER 20,
DECEMBER 30, ----------------------------------------
1996 1995 1994 1993 1992
------------ ------- ------- -------- ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
WESTINGHOUSE SECURITY:
Income (loss) before income taxes.............................. $ (7,837) $(9,553) $(2,845) $(14,824) $4,881
Plus:
Interest expense........................................... 10,879 12,159 13,467 7,511 --
Amortization of intangibles and depreciation expense....... 21,613 17,804 13,959 13,009 3,929
------------ ------- ------- -------- ------
EBITDA................................................... $ 24,655 $20,410 $24,581 $ 5,696 $8,810
============ ======= ======= ======== ======
</TABLE>
(5) Unaudited operations data and balance sheet data for the 52 weeks ended
December 20, 1993 and 1992 as it relates to WSS are prepared on a consistent
basis with the subsequent audited periods presented above.
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<PAGE> 95
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF THE WESTERN RESOURCES SECURITY BUSINESS
Certain matters discussed in this section are "forward-looking statements"
intended to qualify for the safe harbor from liability established by the
Private Securities Litigation Reform Act of 1995. Such statements address future
plans, objectives, expectations and events or conditions concerning various
matters such as capital expenditures, earnings, litigation, pending
transactions, liquidity and capital resources, and accounting matters. Actual
results in each case could differ materially from those currently anticipated in
such statements, by reasons of factors including ongoing state and federal
activities; future economic conditions; legislation; competition; and other
circumstances affecting anticipated revenues and costs.
OVERVIEW
The Western Resources Security Business is composed of WestSec, Westar
Security and their respective subsidiaries. WestSec and Westar are indirect and
direct wholly owned subsidiaries of Western Resources. On December 30, 1996,
WestSec purchased the assets comprising the security business, and assumed
certain liabilities, of Westinghouse Security from Westinghouse Electric Company
("WEC") for $358 million in cash, subject to adjustments, and the assumption of
certain obligations. Approximately 310,000 subscribers were added as a result of
the Westinghouse Security Acquisition. WRSB recorded approximately $196 million
of goodwill as a result of this transaction. Westar, formed in 1995, built its
security business from six small acquisitions from November 1995 through
September 1996, representing approximately 100,000 subscribers, for an aggregate
of $25.1 million in cash and Western Resources stock. Goodwill recorded by WRSB
related to these acquisitions totaled approximately $23 million.
For the six months ended June 30, 1997, approximately 86% of WRSB's
revenues were derived from monitoring and servicing of security alarm systems.
Recurring monitoring revenues, generally derived from contracts for an initial
non-cancelable term, are recognized monthly as services are provided. Amounts
billed in advance are deferred and recognized in the month service occurs.
Service revenues are derived from recurring payments under extended service
contracts and for service calls performed on a time and materials basis. Service
revenue is recognized in the period that the services are provided.
Other revenues are derived primarily from the sale and installation of
security alarm systems, equipment add-ons and upgrades. Installation revenues
are recognized in the period of installation of the alarm system.
Security alarm monitoring services generate a significantly higher gross
margin than other services provided by WRSB. In fact, even though direct
installation expenses are capitalized, the installation revenue realized is
generally less than the non-capitalized expenses associated with sales and
marketing of alarm systems. Also, the service business generally does not
contribute positively to the operating profit of WRSB. WRSB's strategy, however,
is to invest in alarm system sales and installation and to provide quality
service because WRSB believes such products and services contribute to the
generation and retention of alarm monitoring subscribers.
Accounting For New Installations and Subscriber Acquisitions
Subscriber accounts generated through direct sales by WRSB's internal sales
force are stated at cost. WRSB's policy is to capitalize direct costs of
installed accounts. These direct costs include materials and equipment on
subscriber premises, installation labor, and other direct installation costs.
Account portfolio acquisitions are capitalized at amounts paid. Such capitalized
costs are amortized on a straight-line basis over the average estimated
subscriber life of ten years.
The mix of recent account growth by WRSB's predecessor companies through
internally generated installations has been increasing over the past three
years. In 1994, WSS, a predecessor to WestSec, implemented a strategy which
increased internally generated sales through the acquisition of a dealer who had
historically sold a significant number of accounts to WSS. This acquisition
substantially increased the internal sales force. In 1994, 1995 and 1996, the
percentage of accounts placed through the internal sales and
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installation efforts compared to total subscriber accounts added were 48%, 86%
and 92% respectively. As the cost associated with maintaining an internal sales
force are expensed, this increased activity from 1994 to 1996 has contributed to
operating losses before interest and taxes. However, WRSB does not currently
expect the internal mix of account additions to grow and it may consider
expansion of its dealer program activity in the future.
Subscriber Attrition
Subscriber attrition has a direct impact on WRSB's results of operations,
since it affects both WRSB's revenues and its amortization expense. WRSB
measures attrition in terms of canceled subscriber accounts. Gross subscriber
attrition is defined by WRSB for a particular period as a quotient; the
numerator of which is equal to the number of subscribers who disconnect service
during such period and the denominator of which is the average of the number of
subscribers at each month end during such period. When a customer moves from one
location to another and has a new system installed, both the new account and the
old account are excluded from the attrition calculation. Gross subscriber
attrition was 10.1%, 11.6% and 12.1% for each of the years ended December 31,
1994, 1995 and 1996, respectively. Gradual increases in gross subscriber
attrition are primarily attributable to the following factors: (a) actual
retention of customers beyond their initial contract terms (generally three
years), which did not meet management's expectations; (b) actual growth rates
incurred, which impact the denominator of the gross subscriber attrition
calculation generally and which did not meet management's expectations; (c) the
absence of credit evaluations of all new account applications for internal
installations coupled with marketing programs that required little, if any,
investment by new subscribers; and (d) the increase in internally generated
account acquisitions as a percentage of total account installations, whereas
prior to the 1994-1996 period, dealer acquisitions that allowed WSS to charge
the sellers for non-performing or attrited accounts were more significant.
Included in the number of subscribers are amounts associated with
subscribers who have past due balances. It is the policy and practice of WRSB to
make every effort to preserve the revenue stream associated with these
contractual obligations. To this end, WRSB actively works to both collect
amounts owed and to retain the subscriber. In certain instances, this collection
and evaluation period may exceed six months in length. When, in the judgment of
WRSB's collection personnel, all reasonable efforts have been made to collect
balances due, subscribers are disconnected from WRSB's monitoring center and are
included in the calculation of gross subscriber attrition.
The table below sets forth the change in subscriber base from 1994 through
1996, for WSS as predecessor of WestSec;
<TABLE>
<CAPTION>
FOR YEARS ENDED DECEMBER 31,
-------------------------------
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
Number of Accounts:
Beginning of Period................................. 166,089 211,211 263,087
Internal Installations.............................. 28,917 69,866 75,232
Dealer Account Acquisitions......................... 31,594 11,086 6,955
Account Attrition................................... (15,389) (29,076) (36,416)
------- ------- -------
End of Period....................................... 211,211 263,087 308,858
======= ======= =======
</TABLE>
1997 YEAR TO DATE WRSB OPERATING RESULTS
Western Resources purchased the assets comprising WSS on December 30, 1996;
such acquisition represents approximately 94% of WRSB's total investment in its
security services business and is included in the six month period ended June
25, 1997 subsequent to the acquisition, but not in prior periods. As a result, a
year to year comparison of operating results for the six-month period is not
meaningful.
Revenues totaled $63.5 million for the six months ended June 25, 1997 (the
"first half of fiscal 1997"), of which $54.5 million, or 85.9%, were monitoring
and service revenues arising primarily from contractually
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<PAGE> 97
recurring subscriber payments. The remaining $9.0 million of revenues arose
primarily from the sale and installation of new security alarm systems by WRSB's
sales force.
Costs and expenses equaled $18.1 million, or 28.5% of revenues during the
first half of fiscal 1997. Monitoring and service costs and expenses were $14.9
million, or 27.3% of monitoring and service revenues. Other costs and expenses
were $3.2 million or 35.5% of installation and other revenues.
Gross profit totaled $45.4 million for the first half of fiscal 1997. Taken
as a percentage of revenues, gross profit equaled 71.5%; monitoring and service
gross profit as a percentage of monitoring and service revenues was 72.7%, while
installation and other gross profit as a percentage of installation and other
revenues was 64.5%.
Selling, general and administrative expenses totaled $30.8 million during
the first half of fiscal 1997. Approximately $15.3 million of such amount are
selling and marketing expenses associated with WRSB's installation activities.
The remaining $15.5 million are general and administrative expenses reflecting
corporate and branch management and overhead. Selling, general and
administrative expenses as a percentage of revenues was 48.5% during the first
half of fiscal 1997.
Amortization of intangibles and depreciation expense was $17.1 million
during the first half of fiscal 1997. Amortization of intangible assets arising
from the WSS acquisition represented the majority of such expenses. Amortization
of intangibles and depreciation expense was 26.0% of total revenues.
Gross Subscriber Attrition. WRSB's actual experience incurred to date for
gross subscriber attrition is consistent with increasing attrition percentages
historically experienced in the prior three years. Factors contributing to this
trend are believed by WRSB to be those listed above under the caption
"Subscriber Attrition" and the transition of management in 1997.
Operating loss was $2.4 million during the first half of fiscal 1997, and
includes a loss from the internal creation of new subscribers of approximately
$8.3 million.
Interest expense, net totaled $5.1 million for the first half of fiscal
1997 and was predominantly related to the long-term obligation discussed in the
notes to the financial statements of WRSB for 1996.
Balance Sheet Data. WRSB's most significant assets are net subscriber
accounts and goodwill. The majority of the net subscriber accounts and all of
the goodwill arose from recent security company acquisitions. The recorded value
of the subscriber accounts was adjusted to fair market value at the time of the
individual security company acquisitions. Internally placed subscriber accounts
represent direct installation costs and acquired account portfolios are valued
at amounts paid for the subscriber contracts. WRSB amortizes subscriber accounts
over their estimated life of ten years.
Accounts receivable are net of a bad debt allowance of approximately $5.0
million. WRSB does not have a significant concentration of credit risk. Most
subscribers are residential and small commercial customers. The states with the
highest concentration of customers are Texas, Florida, California and Georgia.
The combined balance sheet at December 31, 1996 reflects the allocated
purchase price for each acquisition based upon the estimated fair values of the
net assets acquired. Certain allocations have been made on a preliminary basis
and may change.
CONTINGENCIES
See Note 8 of the notes to the audited combined financial statements of
WRSB included in this Proxy Statement for information concerning certain
significant contingencies.
1996 COMPARED TO 1995 -- WESTINGHOUSE SECURITY (PREDECESSOR TO WESTSEC)
WSS revenues for 1996 increased by $22.2 million, or 25.0%, to $110.9
million from $88.7 million for 1995. Monitoring and service revenues increased
by $18.9 million, or 25.2%, substantially all of which resulted from the
addition of approximately 75,000 subscribers from internal sales and
installations of subscriber accounts and approximately 7,000 subscribers
purchased from dealers. Other revenues increased by 24.0% to
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$17.1 million in 1996 from $13.8 million in 1995. The increase in other revenues
reflects an increase in installation revenues as a result of additional
installed accounts and the sale of equipment upgrades.
Costs and expenses for 1996 increased by $8.7 million, or 33.4%, to $26.0
million. Costs and expenses as a percentage of total revenues increased to 23.4%
during 1996 from 19.5% during 1995. Monitoring and service expenses increased by
$8.1 million, or 48.4% from 1995 to 1996, primarily due to increased activity at
WRSB's central monitoring station and an expansion in service activities in the
field branches. Monitoring and service expenses as a percentage of monitoring
and service revenues increased to 26.6% in 1996 from 22.5% during 1995. Such
increase reflects a higher level of staffing at WRSB's central monitoring
station.
Gross profit for 1996 was $84.9 million, which represents an increase of
$13.5 million, or 18.9%, over the $71.4 million of gross profit recognized in
1995. Such increase was due primarily to an increase in monitoring activities,
which reflected the increase in WSS's subscriber base from approximately 263,000
at December 20, 1995 to 310,000 at December 30, 1996.
Selling, general and administrative expenses ("SG&A") rose to $60.3 million
in 1996, an increase of $9.2 million, or 18.1%, over such expenses in 1995, but
declined as a percentage of total revenues from 57.5% in 1995 to 54.4% in 1996.
The increase in general and administrative expenses was caused by increases in
corporate and branch overhead expenses. Advertising and marketing expenses
comprised approximately 2% of revenues in both 1995 and 1996.
Amortization of intangibles and depreciation expense for 1996 increased by
$3.8 million, or 21.4%, to $21.6 million. This increase was partially due to the
75,000 new internally placed accounts and 7,000 dealer program accounts
purchased during 1996. Additionally, it is WRSB's policy to evaluate subscriber
account attrition on a quarterly basis utilizing actual historical attrition
rates for subscriber accounts and, when necessary, adjust the estimated
remaining lives accordingly. Currently, subscriber accounts are being amortized
over ten years.
Increases in both SG&A and amortization expenses contributed to the
operating income recognized for 1996 of $3.0 million, compared to operating
income of $2.6 million in fiscal 1995. Operating income as a percentage of
revenue was 2.7% in 1996, compared to 2.9% in 1995.
The effective income tax benefit for 1996, 1995, and 1994 has been
estimated at 38%. The historical net operating income or losses prior to the
WestSec purchase were included in WEC's consolidated federal income tax return.
BALANCE SHEET DATA -- DECEMBER 20, 1995 -- WESTINGHOUSE SECURITY (PREDECESSOR TO
WESTSEC)
Net subscriber accounts of $139 million include the addition of
approximately 70,000 subscribers from internal sales and installations and
approximately 11,000 additional subscribers from the addition of account
portfolios in 1995.
1995 COMPARED TO 1994 -- WESTINGHOUSE SECURITY (PREDECESSOR TO WESTSEC)
WSS's revenues for 1995 increased by $21.5 million, or 31.9%, to $88.7
million from $67.2 million for 1994. Monitoring and service revenues increased
by $14.8 million, or 24.7%, substantially all of which resulted from the
addition of approximately 70,000 subscribers from internal sales and
installations of subscriber accounts and approximately 11,000 subscribers
purchased. Other revenues increased by 92.8% to $13.8 million in 1995 from $7.2
million in 1994. The increase in other revenues reflects a substantial increase
in installation revenues as a result of additional internally installed
accounts.
Costs and expenses for 1995 increased by $2.1 million over 1994, or 11.9%,
to $17.3 million. Costs and expenses as a percentage of total revenues decreased
to 19.5% during 1995 from 22.6% during 1994. Monitoring and service expenses
increased by $2.7 million, or 18.7% from 1994 to 1995, primarily due to
increased activity at WSS's central monitoring station due to a substantially
larger subscriber base and the expansion of the number of field branches. This
activity reflects a higher level of staffing at the central monitoring station
as well as at its branch locations. WSS's acquisition of one of its primary
dealers in 1994
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significantly increased its employee base at its field branches and in its
internal sales force. Monitoring & service expenses as a percent of revenue
decreased from 21.1% to 19.0% from 1994 to 1995.
Gross profit for 1995 was $71.4 million, which represents an increase of
$19.4 million, or 37.3%, over the $52 million of gross profit recognized in
1994. Such increase was due primarily to an increase in monitoring and service
activities, which reflected the increase in WSS's ending subscriber base from
211,211 at December 20, 1994 to 263,087 at December 20, 1995.
SG&A expenses rose to $51.0 million in 1995, an increase of $23.6 million,
or 85.9%, over such expenses in 1994, and increased as a percentage of total
revenues from 40.8% in 1994 to 57.5% in 1995. The increase in general and
administrative expenses was caused by increases in corporate and branch overhead
expenses incurred to supervise a larger employee base associated with a larger
subscriber base. Also, the July 1994 acquisition of one of WSS's primary dealers
increased the number of field branches and shifted new account growth from
external to internal. For internal placements, sales commissions and marketing
costs to generate those sales leads were expensed for only five months of 1994
as compared to a full year in 1995, contributing to the SG&A expense growth as a
percentage of revenues.
Amortization of intangible and depreciation expense for 1995 increased by
$3.8 million, or 27.5%, to $17.8 million. This increase was partially due to the
70,000 new internally placed accounts and 11,000 dealer program accounts
purchased during 1995. With the acquisition of the primary dealer in July of
1994, WSS recorded goodwill and accordingly recognized a full year's provision
of amortization related to the goodwill in 1995.
Increases in both SG&A and amortization expenses contributed to the $8.0
million decrease in operating income recognized for 1995, from $10.6 million in
1994 to $2.6 million in 1995. Operating income as a percentage of revenue was
2.9% in 1995, compared to 15.8% in 1994.
CAPITAL RESOURCES AND LIQUIDITY
In general, WRSB has financed its operations and growth primarily from
operating cash flows and supplemented by advances from its parent, Western
Resources.
WSS entered into a series of agreements ("Agreements") to transfer certain
rights in certain security alarm monitoring contracts ("Contracts") to an
investor for approximately $76.9 million in cash during 1992 through 1994. WSS
continues to monitor and service these accounts and accounted for this
transaction as a financing arrangement and accordingly reflected the proceeds as
long-term debt.
The investor financed the purchase through the issuance of three series of
secured promissory notes having a five-year term (the "Investor Notes"). Under
the Agreements, WSS had the right but not the obligation, exercisable not more
than 15 months or less than 12 months prior to the stated maturity of any series
of Investor Notes, to repurchase the Contracts or cause the disposition of
Contracts securing a particular series of Investor Notes, for an amount equal to
the then fair market value of such Contracts, provided such fair market value
will not be less than the amount necessary to satisfy all obligations of the
investor related to such series of Investor Notes plus certain taxes, if any
(the "Minimum Purchase Price"). In the event of an unsolicited third party offer
in excess of the then Minimum Purchase Price to purchase such Contracts prior to
12 months before the stated maturity of any series of Investor Notes, the
Agreements provided WSS a right of first refusal to buy such Contracts. In
addition, the Agreements provided that WSS would receive 60% of the excess of
the fair market value over the Minimum Purchase Price, if any, if WSS
repurchases or arranges the sale of such Contracts.
On December 30, 1996, Westinghouse assigned to WestSec all of
Westinghouse's rights, title and interest, and WestSec agreed to assume all of
Westinghouse's liabilities and obligations under the Agreements in connection
with the purchase. This assumption of liabilities requires WestSec to purchase
the Contracts on the respective stated maturity date of the Investor Notes. The
purchase price payable by WestSec shall be equal to the greater of (i) Minimum
Purchase Price plus 40% of the excess of the fair market value over the Minimum
Purchase Price or (ii) 30 times total monthly recurring revenue related to the
Contracts. As a condition of assuming the obligations, WestSec issued a letter
of credit for $85 million to ensure the debt
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<PAGE> 100
holder the obligation would be repaid. In the event the fair market value
changes at the stated maturity date, a gain or loss would be recorded for the
difference between the actual amount paid and the recorded obligation.
Approximately $26.2 million is expected to be repaid in 1998 and approximately
$34.3 million is expected to be repaid in 1999.
WRSB and its predecessors had, and expect to have, working capital
deficits. At June 25, 1997, WRSB had a working capital deficit of $43.6 million.
For the 52- and 53-week periods ended December 20, 1995 and December 30, 1996,
WSS, a predecessor of WestSec, experienced working capital deficits of $11.7
million and $19.5 million, respectively. One of the primary reasons for working
capital deficits result from WRSB's recognition of a current liability for
deferred revenues which represents advance billings.
Net cash flows used in investing activities of WRSB reflect the acquisition
of WSS and the smaller security companies by WRSB throughout 1996. For the six
months ended June 30, 1997, investing activities of WRSB reflect the acquisition
of subscriber accounts through both its internal sales force and purchases from
dealers.
WRSB generated $16.6 million of net cash provided by operating activities
for the six months ended June 25, 1997. Net cash flows from operating activities
of WSS for the 52 and 53 weeks ended December 20, 1995 and December 30, 1996,
were $15.1 million and $23.7 million. The increase was primarily due to the
growing subscriber account base.
Capital expenditures
WRSB anticipates making routine capital expenditures during the remainder
of 1997 to replace and upgrade vehicles, computers and other capital items. WRSB
anticipates it will continue to grow its existing subscriber account base and
utilize capital to acquire and install these new customers. Capital requirements
given expected growth forecasts are expected to exceed operating cash flows for
the foreseeable future.
Western Resources, as parent, has historically funded internal growth and
provided financing for acquisitions. WRSB anticipates that capital requirements
in excess of operating cash flows throughout the remainder of 1997 will be
funded by Western Resources.
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THE WESTERN RESOURCES SECURITY BUSINESS
GENERAL
The Western Resources Security Business is comprised of WestSec and Westar
Security and their respective subsidiaries. WestSec and Westar Security are
indirect and direct wholly owned subsidiaries of Western Resources.
WRSB, formed in 1995, executed its planned growth in the security alarm
industry through acquisitions. From November 1995 to September 1996, WRSB
acquired the following security companies comprising at the time of their
respective acquisitions an aggregate of approximately 100,000 subscribers.
<TABLE>
<S> <C>
Communications & Signaling, Inc............................. November 1995
Mobilfone Security.......................................... December 1995
Security Monitoring Services ("CMS")........................ June 1996
Sentry Protective Alarms.................................... July 1996
SecureAmerica Alarm Systems................................. July 1996
Safeguard Alarms............................................ September 1996
</TABLE>
At June 30, 1997, these companies had a combined subscriber base of
approximately 114,000 customers, of which approximately 78% were wholesale or
managed accounts concentrated primarily in Florida, Kansas and Missouri. WRSB
also acquired central monitoring facilities in these states. The largest of
these acquisitions was CMS. At June 1997, CMS monitored approximately 81,000
accounts. CMS provides wholesale monitoring services for accounts owned by
independent dealers.
On December 30, 1996, WRSB significantly expanded its security operations
when it acquired the assets and assumed certain liabilities of WSS from
Westinghouse Electric Corporation. WRSB believes the addition of WSS's 310,000
subscribers made WRSB one of the largest residential security monitoring
companies in the United States.
HISTORY OF WSS AS A PREDECESSOR OF WESTSEC
WSS began its operations in March 1990, when WSS opened for business in
seven Texas cities. By the end of 1990, WSS had installed and was monitoring
over 12,000 owned accounts, located primarily in Texas, Florida, Georgia, North
Carolina, Colorado and the West Coast, through its centralized National Support
Center ("NSC"), its monitoring station. In 1990, WSS began to establish
relationships with other companies in the security services business whereby WSS
provided monitoring services on behalf of such companies for their customer
accounts. In September and October of 1990, WSS began providing monitoring
services for approximately 78,000 such accounts. With this sizable base of
accounts, WSS began to realize lower marginal costs for its operations.
WSS provided marketing, installation, monitoring and servicing in the
security alarm industry for residential and commercial customers for a periodic
fee. WSS's services ranged from protection of subscriber premises, including
detection of intrusion, fire, temperature and moisture anomalies and lightning
control, to protection of the subscriber's person, including monitoring for
medical and other personal emergencies. Although WSS's operations were primarily
concentrated in the monitoring of residential and small commercial security
systems, through joint development efforts with automotive and technological
partners WSS developed a product to be used for remote roadside assistance and
emergency mobile notification. This new technology combined cellular
communications, a global positioning satellite system and WSS's 24-hour
monitoring services to provide a new personal protection and vehicle security
service.
From 1990 to 1996, WSS continued to grow through an internally managed
field installation network as well as through the acquisition of subscriber
accounts. WSS entered into agreements during 1992 through 1994 to transfer
certain blocks of subscriber accounts to a third party. Under these agreements,
WSS continued to manage the accounts for the third party. Under an operating
services agreement, WSS guaranteed that the customer attrition would not exceed
certain agreed upon amounts or WSS would replace
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or repurchase the accounts from the investor. WSS also retained the right of
first refusal to repurchase the accounts in the future.
In 1995, WSS opened a new monitoring center in Irving, Texas. This facility
was the primary monitoring facility for the residential, small commercial and
mobile customers and is now the primary monitoring facility for WRSB. Over 150
monitoring and customer service representatives are currently employed to
respond to customer emergencies and inquiries on a 24-hour, seven-day-a-week
basis. The systems handle over 40,000 alarm signals, 10,000 inbound calls and
10,000 outbound calls per day.
WSS's monitoring system architecture was designed to route calls
automatically based on different skills (including bilingual capabilities) of
the operators, customer equipment or a variety of other variables. The customer
service emergency response operators are also cross-trained to handle calls
outside of their primary skill areas in the event of unusually high demand.
In addition to cross-training its operators, WRSB has replicated its
monitoring, customer service and billing systems at a back-up site to ensure
continuing customer service in the event of a primary and secondary system
failure. The back-up site, located within 10 miles of the primary center,
undergoes live testing on a monthly basis. WSS's central station facility is
listed with Underwriter Laboratories.
BUSINESS DESCRIPTION
WRSB is engaged in the sale, installation, continuous monitoring and
maintenance of electronic security alarm systems. WRSB provides security alarm
monitoring services for residential and small business subscribers. WRSB
currently has subscribers in the 46 states and has a high concentration of
subscribers in the states of California, Texas, Georgia and Florida.
WRSB's revenues consist primarily of recurring payments under written
contracts for the monitoring and servicing of security alarm systems. WRSB
monitors digital signals arising from burglaries, fires and other events through
security alarm systems installed at subscribers' premises. Most of these signals
are received and processed at WRSB's monitoring station located in Irving,
Texas.
Business Strategy
In an effort to create nationwide recognition of a name identified with
Western Resources' reputation for stability and quality, Western Resources
developed the "Westar" name for use in its non-regulated business ventures. Due
to minimal name recognition in the security area, WRSB began an advertising
campaign to increase public awareness of WRSB. WRSB has experimented with
several advertising techniques during the first half of 1997 . In addition, an
extensive subscriber orientation campaign was launched to inform WSS's
subscribers of the change in ownership from WSS to WRSB and to provide
assurances that the quality of services could be expected to remain constant,
and may improve, in the future. Management of WRSB believes attrition resulting
from the ownership changes in connection with WRSB's acquisitions is minimal.
With a greater national presence, WRSB management has begun to develop
marketing alliances and affinity programs with compatible businesses in other
industries. WRSB also believes that its existing subscriber base is a resource
for ongoing referral leads and is developing plans to build improved
relationships with its valued subscribers though future mailings, newsletters,
outbound calling, and other programs to enhance subscribers' perception of
value.
WRSB has introduced its SafetyNet program available to new subscribers and
its existing customer base that will reimburse subscribers for the amount of
their insurance deductibles in the event of a loss due to theft or fire. WRSB
believes that this is a critical component of its marketing approach, and will
reduce subscribers attrition compared to those of its competitors which do not
offer similarly valued services.
In an effort to minimize operating costs, WRSB has began to consolidate
locations in operating markets where (i) elimination of the additional locations
does not impair customer service, and (ii) the existence of multiple locations
does not incrementally increase revenues. WRSB has also increased performance
incentives for its field employees, including a bonus program for its
installation technicians based on installation and
97
<PAGE> 103
service call-back rates. Other quality control measures include WSRB's new
"surprise" field audit and inspection program and post-installation customer
satisfaction surveys.
WRSB management believes that a substantial portion of the historical
attrition rate of its predecessors was a result of insufficient subscriber
credit risk assessment practices. In an effort to minimize future attrition from
subscribers unwilling or unable to meet their contractual obligations to pay
monthly service fees, WRSB recently has taken steps to increase the credit
testing and scoring thresholds required for subscribers before such subscribers
are approved for an installation program involving little customer investment at
the time of installation. If credit scores fall below certain pre-established
levels, the amount of subscriber investment required upon installation is
increased to minimize the risk of loss to WRSB.
WRSB has also established subscriber retention practices to minimize the
rate at which subscribers cancel their service contracts. These policies include
offering certain allowances to be granted to subscribers who have had a
dissatisfying experience with their system's operation or with interaction with
WRSB personnel. The retention process also attempts to determine the possible
reasons for dissatisfaction and conveys any recurring problems to the
appropriate customer service area to facilitate improvements in operation
policies.
WRSB also has the flexibility to provide individual security dealers with a
wide range of account management services, including third-party monitoring of
dealers' accounts on behalf of such dealers, and full account management,
including billing, debt collection and data processing capabilities.
WRSB believes that its broad subscriber base, its unique national
distribution system and its highly skilled workforce provide it with the ability
to exploit new technologies. Given the rapid pace of technological change, WRSB
anticipates that it will explore partnering opportunities with premier companies
in a variety of industries.
Product Sourcing
WRSB does not manufacture any of the components used in its security alarm
services business, although it provides its own specifications to manufacturers
for certain security system components. This policy allows WRSB to obtain the
components of its systems from a number of different sources and, by so doing,
to supply its subscribers with the latest technology generally available in the
industry. WRSB is not dependent on any single source for its supplies and
components, and its predecessors historically have not experienced any material
shortages of components.
COMPETITION
The security alarm industry is highly competitive and highly fragmented.
New competitors, who have not necessarily had any previous involvement in the
security alarm industry, are continually entering the field. The central
monitoring stations utilized by the security alarm industry are characterized by
high fixed costs but generally incur low incremental costs associated with
monitoring additional subscribers. Opportunities exist within the industry to
achieve economies of scale by consolidation of monitoring and administrative
functions. Consequently, an increasing amount of industry consolidation is
currently taking place.
WRSB competes with major firms with substantial financial resources,
including ADT Operations Inc.; the Protection Securities Division of Honeywell,
Inc.; the National Guardian Corporation and Security Link, both of which are
subsidiaries of the Ameritech Corporation; and Brinks Home Security Inc., a
subsidiary of The Pittston Company. WRSB also competes with approximately 13,000
smaller regional and local companies. Strategies employed by WRSB's competitors
include purchasing subscriber accounts both through acquisitions of account
portfolios and through dealer programs.
Management believes that competition in the security alarm industry is
based primarily on reliability of equipment, market visibility, services
offered, reputation for quality of service and price. WRSB has sought to
differentiate itself through the development of value-added services, which are
responsive to changing lifestyles as well as continuing to offer competitive
pricing in the acquisition of new subscribers.
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<PAGE> 104
REGULATORY MATTERS
A number of local governmental authorities have adopted or are considering
various measures aimed at reducing the number of false alarms. Such measures
include (i) subjecting alarm monitoring companies to fines or penalties for
transmitting false alarms, (ii) licensing individual alarm systems and the
revocation of such licenses following a specified number of false alarms, (iii)
imposing fines on alarm subscribers for false alarms, (iv) imposing limitations
on the number of times the police will respond to alarms at a particular
location after a specified number of false alarms, and (v) requiring further
verification of an alarm signal before the police will respond.
WRSB's operations are subject to a variety of other laws, regulations and
licensing requirements of federal, state, and local authorities. In certain
jurisdictions, WRSB is required to obtain licenses or permits, to comply with
standards governing employee selection and training, and to meet certain
standards in the conduct of its business. Many jurisdictions also require
certain of WRSB's employees to obtain licenses or permits. The security alarm
industry is also subject to requirements imposed by various insurance, approval,
listing and standards organizations. Depending upon the type of subscriber
served, the type of security service provided, and the requirements of the
applicable local governmental jurisdiction, adherence to the requirements and
standards of such organizations is mandatory in some instances and voluntary in
others.
WRSB's advertising and sales practices are regulated by both the Federal
Trade Commission and state consumer protection laws. Such laws and regulations
include restrictions on the manner in which WRSB promotes the sale of its
security alarm systems and the obligation of WRSB to provide purchasers of its
alarm systems with certain recision rights.
WRSB's security alarm monitoring business utilizes telephone lines and
radio frequencies to transmit alarm signals. The cost of telephone lines, and
the type of equipment that may be used in telephone line transmission, are
currently regulated by both federal and state governments. The operation and
utilization of radio frequencies are regulated by the Federal Communications
Commission and state public utilities commissions.
RISK MANAGEMENT
The nature of the services provided by WRSB potentially exposes it to
greater risks of liability for employee acts or omissions, or system failure,
than may be inherent in other businesses. Substantially all of the WRSB security
alarm monitoring agreements, including those assumed as a result of its
acquisitions, and other agreements pursuant to which it sells its products and
services contain provisions limiting its liability to subscribers in an attempt
to reduce this risk.
WRSB carries insurance of various types, including general liability and
errors and omissions insurance. The loss experience of the predecessors of WRSB,
and other security service companies, may affect the availability and cost of
such insurance. Certain of WRSB's insurance policies, and the laws of some
states, may limit or prohibit insurance coverage for punitive or certain other
types of damages, or liability arising from gross negligence.
PRINCIPAL EXECUTIVE OFFICES
The principal executive offices of Westar Security and WestSec are located
at 4221 West John Carpenter Freeway, Irving, Texas 75063. Their shared telephone
number is 972-916-6100.
EMPLOYEES
As of September 30, 1997, WRSB had approximately 1,790 employees. None of
these employees is represented by unions or covered by collective bargaining
agreements. WRSB believes its relations with employees are generally good.
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<PAGE> 105
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION
The following pro forma financial information reflects the pro forma
effects of the Stock Acquisition Transaction, the Centennial Acquisition and the
Network Acquisition. The Stock Acquisition Transaction will be accounted for
under the purchase method of accounting. Although Protection One will be
acquiring WRSB, Western Resources will hold a controlling interest in Protection
One as a result of the Stock Acquisition Transaction. Accordingly, the Stock
Acquisition Transaction is considered, for accounting purposes, to be a "reverse
acquisition" in which WRSB is the "accounting acquirer". The Centennial
Acquisition and Network Acquisition will each be accounted for under the
purchase method of accounting. Accordingly, the unaudited pro forma combined
balance sheet at June 30, 1997 includes the accounts of WRSB on a historical
cost basis and the assets and liabilities of Protection One, Centennial and
Network Multi-Family at acquisition cost, allocated by relative estimated fair
value as of the date of the Share Issuance. The estimated purchase price
allocations have been made on a preliminary basis and may change as additional
information becomes known. The unaudited pro forma combined statements of
operations have been presented as if the Stock Acquisition Transaction, the
Centennial Acquisition and the Network Acquisition took place at January 1, 1996
and combine (i) Protection One's consolidated statements of operations for the
six months ended June 30, 1997 (unaudited) and for the fiscal year ended
September 30, 1996, (ii) WRSB's combined statements of operations for the six
months ended June 25, 1997 (unaudited) and for the year ended December 31, 1996,
(iii) WSS's statement of operations for the 53 weeks ended December 30, 1996,
(iv) Centennial's consolidated statements of operations for the six months ended
June 30, 1997 (unaudited) and for the fiscal year ended December 31, 1996, and
(v) Network Multi-Family's statements of operations for the six months ended
June 30, 1997 (unaudited) and for the fiscal year ended December 31, 1996. The
operations of WSS were acquired by WRSB on December 30, 1996.
The unaudited pro forma combined financial information is presented for
illustrative purposes only and is not necessarily indicative of the consolidated
financial position or results of operations for future periods or the results
that actually would have been realized had the Stock Acquisition Transaction,
the Centennial Acquisition and the Network Acquisition occurred on the dates
specified above. The unaudited pro forma combined financial information should
be read in conjunction with (i) the separate audited historical consolidated
financial statements of Protection One and the notes thereto, (ii) the separate
audited historical combined financial statements of WRSB and the notes thereto,
(iii) the separate audited historical financial statements of WSS and the notes
thereto, (iv) the separate audited historical financial statements of Centennial
and the notes thereto, and (v) the separate audited historical financial
statements of Network Multi-Family and the notes thereto, all of which are
included elsewhere in this Proxy Statement.
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<PAGE> 106
PROTECTION ONE, INC.
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
AS OF JUNE 30, 1997
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
NETWORK PRO FORMA
PROTECTION ONE WRSB CENTENNIAL MULTI-FAMILY PRO FORMA AS ADJUSTED
6/30/97 6/25/97 6/30/97 6/30/97 ADJUSTMENTS(A) 6/30/97
-------------- --------- ---------- ------------ -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Cash and cash
equivalents...... $ 1,105 $ 1,049 $ 910 $ 106 $ 3,170
Other current
assets........... 32,243 17,892 7,322 25,411 82,868
Subscriber
accounts......... 305,685 272,646 31,548 -- $ 6,724 616,603
Goodwill........... 3,240 216,724 9,956 -- 343,824 573,744
Investment in
finance
receivables...... -- -- -- 38,921 10,000 48,921
Other assets....... 15,294 10,694 9,484 8,030 (6,724) 36,778
-------- --------- -------- -------- --------- -----------
$357,567 $ 519,005 $ 59,220 $ 72,468 $353,824 $ 1,362,084
======== ========= ======== ======== ========= ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current
liabilities...... $ 43,902 $ 62,416 $ 5,192 $ 3,272 $ 114,782
Debt............... 279,750 42,967 21,127 38,200 $(24,613) 357,431
Deferred taxes..... 8,180 10,997 (6,303) 12,874
Other
liabilities...... 1,375 42,070 (42,070) 1,375
-------- --------- -------- -------- --------- -----------
333,207 105,383 68,389 52,469 (72,986) 486,462
Stockholders'
equity
(deficit)........ 24,360 413,622 (9,169) 19,999 426,810 875,622
-------- --------- -------- -------- --------- -----------
$357,567 $ 519,005 $ 59,220 $ 72,468 $353,824 $ 1,362,084
======== ========= ======== ======== ========= ===========
</TABLE>
See accompanying notes to unaudited pro forma combined condensed financial
information.
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<PAGE> 107
PROTECTION ONE, INC.
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
SIX MONTHS ENDED
JUNE 30, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NETWORK PRO FORMA
PROTECTION ONE WRSB CENTENNIAL MULTI-FAMILY AS ADJUSTED
SIX MOS. ENDED SIX MOS. ENDED SIX MOS. ENDED SIX MOS. ENDED PRO FORMA SIX MOS. ENDED
6/30/97 6/25/97 6/30/97 6/30/97(B) ADJUSTMENTS(C) 6/30/97
-------------- -------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Revenues.......... $ 49,293 $ 63,506 $ 9,727 $ 18,482 (700)(d) $140,308
Cost of
revenues........ 14,075 18,079 3,785 8,624 44,563
-------- ------- ------- ------- -------- --------
Gross
profit..... 35,218 45,427 5,942 9,858 (700) 95,745
Selling, general
and
administrative
expense......... 9,757 30,772 5,593 4,654 136(e) 50,912
Acquisition and
transition
expense......... 2,953 2,953
Amortization of
intangibles and
depreciation
expense......... 19,310 17,058 2,644 921 470(f) 40,403
-------- ------- ------- ------- -------- --------
Operating
income
(loss)..... 3,198 (2,403) (2,295) 4,283 (1,306) 1,477
Other expenses:
Interest
expense...... 14,911 5,096 1,092 1,758 (3,713)(g) 19,144
Loss on sales of
assets....... 107 -- -- 107
-------- ------- ------- ------- -------- --------
Loss before
income
taxes........ (11,820) (7,499) (3,387) 2,525 2,407 (17,774)
Income tax benefit
(expense)....... (112) 2,753 -- (1,019) (2,548)(h) (926)
-------- ------- ------- ------- -------- --------
Net income
(loss)....... $(11,932) $ (4,746) $ (3,387) $ 1,506 $ (141) $(18,700)
======== ======= ======= ======= ======== ========
Weighted average
number of common
shares (in
thousands)...... 13,726 82,177
======== ========
Loss per common
share........... $ (0.87) $ (.23)
======== ========
</TABLE>
See accompanying notes to unaudited pro forma combined condensed financial
information.
102
<PAGE> 108
PROTECTION ONE, INC.
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
TWELVE MONTHS ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
WRSB(I) NETWORK MULTI- PRO FORMA
PROTECTION ONE PRO FORMA CENTENNIAL FAMILY 12 AS ADJUSTED
12 MONTHS ENDED 12 MONTHS ENDED 12 MONTHS ENDED MONTHS ENDED PRO FORMA YEAR ENDED
9/30/96 12/31/96 12/31/96 12/31/96(B) ADJUSTMENTS(C) 12/31/96
--------------- --------------- --------------- --------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues................ $ 73,457 $ 118,978 $17,276 $35,281 $(2,000)(d) $ 242,992
Cost of revenues........ 21,578 29,307 7,243 14,973 73,101
--------------- --------------- --------------- --------------- ----------- -----------
Gross profit.......... 51,879 89,671 10,033 20,308 (2,000) 169,891
Selling, general and
administrative
expense............... 15,478 65,358 7,744 9,120 273(e) 97,973
Acquisition and
transition expense.... 4,219 4,219
Amortization of
intangibles and
depreciation expense.. 25,121 32,574 4,491 1,618 6,488(f) 70,292
--------------- --------------- --------------- --------------- ----------- -----------
Operating income
(loss)............. 7,061 (8,261) (2,202) 9,570 (8,761) (2,593)
Other expenses:
Interest expense...... 22,697 10,893 2,851 2,972 (5,140)(g) 34,273
Loss on sale of
assets............. 108 (3) 105
--------------- --------------- --------------- --------------- ----------- -----------
Loss before income
taxes.............. (15,744) (19,154) (5,050) 6,598 (3,621) (36,971)
Income tax benefit
(expense)............. 247 7,278 (2,555) (1,890)(h) 3,080
--------------- --------------- --------------- --------------- ----------- -----------
Net loss.............. (15,497) (11,876) (5,050) 4,043 (5,511) (33,891)
Preferred stock
dividends............. 248 248
--------------- --------------- --------------- --------------- ----------- -----------
Income (loss)
attributable to
common................ $ (15,745) $ (11,876) $(5,050) $ 4,043 $(5,511) $ (34,139)
============ ============ ============ ============ ========= ========
Weighted average number
of common shares (in
thousands)............ 11,250 79,701
============ ========
Loss per common share... $ (1.40) $ (.43)
============ ========
</TABLE>
See accompanying notes to unaudited pro forma combined condensed financial
information.
103
<PAGE> 109
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION
(a) The Stock Acquisition Transaction will be accounted for as a reverse
acquisition, wherein WRSB is considered the accounting acquirer of
Protection One for an assumed acquisition cost of $212 million. This
assumption is based on the number of Protection One's outstanding common
shares and the closing stock price on July 30, 1997, one day prior to the
announcement of the proposed transaction. The pro forma combined condensed
financial information also includes the Centennial Acquisition and the
Network Acquisition. In September of 1997 WRSB purchased the equity
securities of Network for approximately $171 million. In October of 1997,
WRSB agreed to acquire all of the equity securities of Centennial for $92
million; such acquisition is expected to be consummated in November of 1997.
The Contribution Agreement provides that if some or all of such securities
are acquired by WRSB and the Stock Acquisition occurs, such securities of
Centennial as are acquired by WRSB will be transferred to Protection One.
Protection One will have an option, exercisable by vote of a majority of the
Protection One Board of Directors as constituted after the Closing, to
acquire from WRSB all of the equity securities of Network. If the Centennial
and Network acquisitions occur, an aggregate of approximately $263 million,
plus expenses, will be paid by Protection One to WRSB. To the extent that
such amount exceeds the cash transferred in the Contribution Agreement, such
amount, which is expected to be approximately $13 million, will be loaned by
WRSB to Protection One. At this time both transactions are considered to be
probable. The table below displays the assumed allocation of acquisition
cost in excess of book value for each transaction:
<TABLE>
<CAPTION>
STOCK ACQUISITION CENTENNIAL NETWORK
TRANSACTION ACQUISITION ACQUISITION OTHER TOTAL
----------------- ----------- ----------- -------- ---------
<S> <C> <C> <C> <C> <C>
Acquisition cost in excess
of book value............. $ 187,640 $59,099(2) $ 151,001 $(13,000)(4) $ 384,740
======= ====== ======== ======== ========
Allocation of adjustments:
Goodwill.................. $ 204,124 $33,099 $ 106,601 $ 343,824
Investment in finance
receivables............ 10,000 10,000
Debt...................... (26,587)(1) 26,000(3) 38,200(3) $(13,000)(4) 24,613
Deferred tax liability.... 10,103 (3,800) 6,303
------- ------ -------- -------- --------
Total
adjustments..... $ 187,640 $59,099 $ 151,001 $(13,000) $ 384,740
======= ====== ======== ======== ========
</TABLE>
- ---------------
(1) Adjustment to reflect the market value of Protection One's senior
subordinated discount notes as of June 30, 1997.
(2) Such amount reflects the conversion of $42.1 million of mandatory
redeemable preferred stock to common stock prior to the consummation of
the acquisition.
(3) Adjustment to reflect the repayment of Centennial's and Network's
long-term debt prior to the contribution of these entities to
Protection One.
(4) Adjustment to reflect debt to Western Resources in connection with
contributions of Network and Centennial.
(b) The pro forma financial information reflects the financial position and
results of operations of Network Multi-Family, the wholly-owned subsidiary
of Network. The assets, results of operations and stockholders' equity of
Network Multi-Family comprises substantially all of the assets, results of
operations and stockholders' equity of Network. For the periods presented
there are no material differences between the financial position and results
of operations of Network and Network Multi-Family.
(c) Certain non recurring charges that are anticipated to be incurred, but that
are not included in the pro forma condensed statement of operations include
non-recurring costs discussed in "Management's Discussion and Analysis of
Financial Condition and Results of Operations of Protection One -- Pro
Forma," executive bonuses of approximately $2 million and a cash payment to
holders of certain options and warrants of $7.00 per share. To the extent
that such options are not exercised prior to the date of the close of the
Stock Acquisition Transaction a charge to operations will be made for such
payment. The maximum amount of that charge would be approximately $8.2
million.
(d) Adjustment to revenues reflects the reduction in interest income that
results from the adjustment to fair value of the finance receivables.
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<PAGE> 110
(e) Adjustment reflects the additional compensation expenses resulting from new
employment contracts between Protection One and each of Messrs. Mackenzie,
Hesse, Mack and Rankin.
(f) Adjustment reflects increased amortization expense arising from goodwill
amortization (40 year life) offset by reductions in amortization of
subscriber accounts and depreciation expense.
(g) Adjustment reflects repayment of Centennial and Network indebtedness, and
reduced interest expense associated with Protection One's senior
subordinated discount notes, offset by increased borrowings by Protection
One to fund such acquisitions.
(h) Pro forma income tax expense reflects an assumed federal and state 38%
combined tax rate applied to all pro forma adjustments except additional
goodwill amortization.
(i) WRSB purchased the operations of WSS on December 30, 1996. The unaudited pro
forma combined condensed operating data for WRSB for the year ended December
31, 1996 includes the accounts of WRSB and WSS, as if the acquisition of
WSS's operations by WRSB had occurred on January 1, 1996. The following data
reflects the respective historical operating results of WRSB and WSS,
adjusted for the additional amortization resulting from the application of
purchase accounting, and the related income tax effect.
<TABLE>
<CAPTION>
WSS FOR THE
WSRB FOR THE 53 WEEKS
YEAR ENDED ENDED DEC. PRO FORMA PRO FORMA
DEC. 31, 1996 30, 1996 ADJUSTMENTS AS ADJUSTED
------------- ------------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues.............................. $ 8,097 $ 110,881 $ 118,978
Cost of revenues...................... 3,348 25,959 29,307
------------- ------------- -----------
Gross profit................ 4,749 84,922 89,671
Selling, general and administrative
expense............................. 5,091 60,267 65,358
Amortization of subscriber accounts,
goodwill and depreciation expense... 610 21,613 $ 10,351 32,574
------------- ------------- ----------- -----------
Operating profit (loss)..... (952) 3,042 (10,351) (8,261)
Interest expense...................... 14 10,879 10,893
------------- ------------- ----------- -----------
Loss before income taxes.... (966) (7,837) (10,351) (19,154)
Income tax benefit (expense).......... 310 2,978 3,990 7,278
------------- ------------- ----------- -----------
Net loss.................... $ (656) $ (4,859) $ (6,361) $ (11,876)
========== ========== ========= ========
</TABLE>
105
<PAGE> 111
MANAGEMENT OF PROTECTION ONE AFTER
THE STOCK ACQUISITION TRANSACTION
DIRECTORS AND EXECUTIVE OFFICERS
The Board of Directors of Protection One presently consists of four
persons, all of whom are elected annually. As provided in the Contribution
Agreement, at the time of the Share Issuance, the Board of Directors of
Protection One will amend Protection One's By-laws to increase the size of the
Board of Directors from four to 12, and eight persons nominated by Western
Resources will be added to the Board. The nominees of Western Resources are
Peter C. Brown, Howard A. Christensen, Joseph J. Gardner, William J. Gremp,
Steven L. Kitchen, Carl M. Koupal, Jr., John C. Nettels, Jr. and Jane Dresner
Sadaka.
Certain information concerning the current directors of Protection One and
each of the persons nominated by Western Resources for election as a director is
set forth below:
Current Directors:
<TABLE>
<CAPTION>
NAME AGE POSITION(S) WITH PROTECTION ONE
- ------------------------------ --- --------------------------------------------
<S> <C> <C>
James M. Mackenzie, Jr. 50 President, Chief Executive Officer and
Director
Robert M. Chefitz 38 Director
Dr. Ben Enis 55 Director
James Q. Wilson 66 Director
</TABLE>
James M. Mackenzie, Jr. has been President and Chief Executive Officer and
a director of Protection One since September 1991.
Robert M. Chefitz has been a director of Protection One since September
1991. Mr. Chefitz joined Patricof & Co. Ventures, Inc., an investment management
firm, in 1987, where he currently serves as a Managing Director; 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.
Dr. Ben Enis has been a director of Protection One since October 1994. He
has been an independent investor and marketing consultant since 1996. Prior to
that time, he was a Professor of Marketing at the University of Southern
California. Dr. Enis currently serves on the Board of Directors of Countrywide
Credit Industries, Inc.
James Q. Wilson has been a Director of Protection One since June 1996. Mr.
Wilson has recently retired from his position as a Professor of Management at
the University of California at Los Angeles. Mr. Wilson is currently a director
of New England Electric System and State Farm Mutual Life Insurance Company.
Nominees of Western Resources:
<TABLE>
<CAPTION>
NAME AGE POSITION(S) WITH PROTECTION ONE
- ------------------------------ --- --------------------------------------------
<S> <C> <C>
Peter C. Brown 39 Director
Howard A. Christensen 64 Director
Joseph J. Gardner 60 Director
William J. Gremp 54 Director
Steven L. Kitchen 52 Director
Carl M. Koupal, Jr. 44 Director
John C. Nettels, Jr. 41 Director
Jane Dresner Sadaka 43 Director
</TABLE>
Peter C. Brown has served as President of AMC Entertainment Inc., an
entertainment company ("AMCE"), since January 1997. He served as Executive Vice
President of AMCE from August 1994 to January 1997, and has served as AMCE's
Chief Financial Officer since November 1991. Mr. Brown currently serves as a
director of AMC and is Chairman of the Board of Trustees of Entertainment
Properties Trust, a recently formed real estate investment trust.
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<PAGE> 112
Howard A. Christensen is President and Chief Executive Officer of
Christensen & Associates, an investor relations and strategic planning firm.
Joseph J. Gardner is the President of Condev Properties, a real estate
development company.
William J. Gremp has been Senior Vice President and Managing Director of
the Utilities and Strategic Finance Group of First Union Capital Markets Group,
a banking firm, since April 1996. Prior to that time, he was a Managing Director
in the Global Power Group at Chase Manhattan Bank. Mr. Gremp is also a director
of St. Joseph Light & Power Company.
Steven L. Kitchen is an Executive Vice President and the Chief Financial
Officer of Western Resources. He is also a director of Central National Bank.
Carl M. Koupal, Jr. has been Executive Vice President and the Chief
Administrative Officer for Western Resources since July 1995. From January 1995
to July 1995, Mr. Koupal was Executive Vice President of Corporate
Communications, Marketing and Economic Development for Western Resources. Prior
to that time, he served as Western Resources' Vice President, Corporate
Marketing, and Economic Development. Mr. Koupal also currently serves as a
director of Hanover Compressor Co.
John C. Nettels, Jr. is a partner in the law firm of Morrison & Hecker
L.L.P.
Jane Dresner Sadaka is an Advisory Board Member of DLJ Merchant Banking
Fund II. She served as a Special Limited Partner of Kellner, DiLeo & Co. from
1992 until 1997, and prior to that time was a General Partner, Head of Research,
for Kellner, DiLeo & Co. Ms. Sadaka is also Executive Vice President of the New
York University School of Business Alumni Association.
All directors of Protection One are elected annually. For a description of
certain agreements made by Western Resources in the Contribution Agreement as
how the shares of Common Stock owned by Western Resources will be voted with
respect to future elections of the directors of Protection One, see "The
Contribution Agreement -- Control by Western Resources; Certain Restrictions."
Each current director of Protection One has been and each person selected
by Western Resources to be a director will be, 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 Protection One.
DIRECTOR COMPENSATION; MEETINGS AND COMMITTEES
Director Compensation. Each of Dr. Enis and Mr. Wilson currently receives a
fee of $10,000 per year as compensation for his services as a director. All
directors are reimbursed for travel and other out-of-pocket expenses incurred in
attending meetings of the Board of Directors.
On March 20, 1997, Mr. Enis was granted an option to acquire 18,000 shares
of Common Stock, Mr. Wilson was granted an option to acquire 14,000 shares of
Common Stock and Patricof was granted an option to acquire 30,000 shares of
Common Stock. Each of such options has an exercise price of $9.50 per share, and
a 10-year-term and becomes exercisable (i) with respect to 20% of the shares
subject thereto beginning December 6, 1997; and (ii) as to an additional 20% of
such shares on each subsequent anniversary of such date. However, if the Stock
Acquisition Transaction is consummated, all of such options will be exercisable
in full.
If the Stock Transaction Acquisition is consummated, non-employee directors
of Protection One other than Mr. Chefitz will thereafter receive for their
services as directors an annual fee of $15,000 and an additional fee of $750 per
in-person meeting (or $500 per telephonic meeting) attended. In addition, each
non-employee director who is a director immediately after the Closing (including
the persons selected by Western Resources) will receive an option to acquire
2,500 shares of Common Stock. Each such option will
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<PAGE> 113
have a term of 10 years, will vest in full on the third anniversary of the grant
date and will have an exercise price equal to the closing price of the Common
Stock on the date granted. Any option that would otherwise be granted to Mr.
Chefitz will be granted to Patricof.
Committees. The Protection One 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 Protection One, and together with the Board of Directors administers
Protection One'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
Protection One and reviews the results and scope of the audits and other
services provided by Protection One's independent auditors. The Board of
Directors does not currently have a nominating committee. The membership of each
committee of the Board of Directors may be changed following consummation of the
Stock Acquisition Transaction.
Meetings. During the year ended September 30, 1997, the Board of Directors
of Protection One held 14 meetings and each of the Audit Committee and the
Compensation Committee held two 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.
Consulting Agreement with Dr. Enis. In February 1996, Protection One
entered into a consulting agreement with Dr. Enis pursuant to which Dr. Enis
advised and assisted Protection One in formulating and implementing advertising
and marketing objectives and strategies, and was compensated for such services
at a rate of $7,500 per month. The consulting agreement expired in March 1997;
however, Dr. Enis continues to provide such consulting services and is currently
compensated therefor at a rate of $3,750 per month.
EXECUTIVE OFFICERS
The name, age and current position(s) with Protection One of each executive
officer of Protection One 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. 50 President and Chief Executive Officer and
Director
John W. Hesse 47 Executive Vice President, Chief Financial
Officer and Secretary
John E. Mack, III 38 Executive Vice President -- Business
Development and Assistant Secretary
Thomas K. Rankin 39 Executive Vice President -- Branch
Management and Assistant Secretary
George A. Weinstock 60 Executive Vice President and Assistant
Secretary
</TABLE>
For information with respect to the business experience of Mr. Mackenzie,
see "Directors and Executive Officers" above.
John W. Hesse has been Executive Vice President, Chief Financial Officer
and Secretary of Protection One since September 1991.
John E. Mack, III was Vice President -- Business Development of Protection
One from September 1991 until August 1996, and has been Protection One's
Executive Vice President -- Business Development since August 1996 and Assistant
Secretary of Protection One since October 1994.
Thomas K. Rankin was Vice President -- Branch Management of Protection One
from September 1991 to August 1996, and has been Protection One's Executive Vice
President -- Branch Management since August 1996 and Assistant Secretary of
Protection One since October 1994.
George A. Weinstock has been Executive Vice President of Monitoring since
November 1993 and Executive Vice President of Protection One since June 1994,
and was a director of Protection One from November 1993 to May 1994. Prior to
November 1993, Mr. Weinstock served as President of American Home Security, Inc.
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<PAGE> 114
At the Closing, Steven A. Millstein, 45, will become Executive Vice
President -- New Market Development of Protection One and Monitoring. Mr.
Millstein has been President of WestSec since its formation in December 1996 and
President of Westar Security since May 1995. Prior to that time he was Vice
President, Marketing and Sales for Acoustics Development Corporation, a
manufacturer of telephone booths and interactive media enclosures.
All officers of Protection One are appointed by Protection One's Board of
Directors and hold such officers' respective offices until their respective
successors have been appointed, or their earlier death, resignation or removal
by the Board of Directors.
EXECUTIVE COMPENSATION
Employment Agreements, including Termination of Employment and
Change-of-Control Arrangements
Protection One currently has employment agreements with each of its
executive officers.
The existing employment agreements with Messrs. James M. Mackenzie, Jr.,
John W. Hesse, John E. Mack III and Thomas K. Rankin provide for minimum annual
base salaries in the current amounts of $301,000 (Mr. Mackenzie), $265,000 (Mr.
Hesse) and $200,000 (Messrs. Mack and Rankin). The term of each agreement is
continually extended so as to cause each such agreement to have a remaining term
of three years. Each executive officer may terminate his employment by
Protection One for any reason at any time after May 24, 1999 upon not less than
six months' prior notice to Protection One. Protection One may terminate the
employment of Messrs. Mackenzie, Hesse, Mack and Rankin for cause, including:
(i) unauthorized prolonged or repeated absence from duty (for reasons other than
health); (ii) habitual neglect of duties; (iii) engagement in any activity that
is in conflict with or adverse to Protection One's business interests; (iv)
violation in any material respect of any provision of such employment agreement;
(v) willful or serious misconduct by such officer relating to the performance of
duties or otherwise injurious to Protection One; or (vi) conviction of a felony
or crime involving moral turpitude. Each executive officer has agreed not to
compete with Protection One and not to solicit any Protection One employee, or
hire any Protection One employee whose annual base salary and fixed or
guaranteed bonus would be more than $50,000, prior to the later of the first
anniversary of the date on which such officer's employment by Protection One
terminates and May 24, 1999 (with respect to the restrictions on competition) or
May 24, 2000 (as to the solicitation of employees). Each of Messrs. Mackenzie,
Hesse, Mack and Rankin will be compensated for such covenants in an amount equal
to his compensation earned while employed by Protection One during the 12-month
period immediately preceding termination of his employment, net of any
termination payment he may receive.
Protection One'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 Protection One's Board of Directors. Protection One
may terminate Mr. Weinstock's employment for cause, including: (i) his
disability for a period in excess of one year; (ii) his conviction of a felony
involving moral turpitude; or (iii) material breach of or default under his
related non-competition agreement. If Mr. Weinstock's employment agreement is
terminated (a) by Protection One without cause, (b) due to a material breach of
the employment agreement by Protection One, or (c) as a result of a change of
control of Protection One, then Protection One will be required to 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 Protection One 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.
At the Closing, Messrs. Mackenzie, Hesse, Mack and Rankin will enter into
new employment agreements with Protection One. Under the new employment
agreements, the minimum base salaries of these executive officers will be
increased to $379,000 (Mr. Mackenzie), $315,000 (Mr. Hesse), and $270,800
(Messrs. Mack and Rankin). Each of these employment agreements provides for
participation by the
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<PAGE> 115
executive officer in the 1997 Long-Term Incentive Plan, Protection One's bonus
plan for senior executives and all other employee benefit plans of Protection
One. Each executive officer may terminate his employment by Protection One for
any reason at any time upon not less than 60 days' prior notice to Protection
One. If an employment agreement is terminated (i) by Protection One other than
for Cause (as defined) or as a result of the executive officer's death or
disability or (ii) by an executive officer for Good Reason (as defined), the
executive officer will be entitled to receive severance payments (the
"Termination Amount") equal in the aggregate to three times the executive
officer's then annual base salary plus the last annual bonus paid or payable to
such officer, and all options and other awards previously granted to such
officer will become exercisable and will remain exercisable for three years.
"Cause" is defined in the new employment agreements to mean: (i) an act of
fraud, embezzlement or similar conduct by the executive officer involving
Protection One, (ii) conviction of a felony involving moral turpitude, (iii) a
continuing, repeated willful failure or refusal by the executive officer to
perform his duties, (iv) willful or serious misconduct on the part of the
executive officer that continues and is demonstrably injurious to Protection
One, or (iv) an activity by the executive officer that is in conflict with or
adverse to the business interests of Protection One. "Good Reason" is defined by
the new employment agreements to mean an uncured breach of Protection One's
obligations under the new employment agreements or a material diminution in the
executive officer's current position, responsibilities or authority. Each
executive officer has agreed in his new employment agreement not to compete with
Protection One and not to solicit any Protection One employee, or hire any
Protection One employee whose annual base salary and fixed or guaranteed bonus
would be more than $50,000, prior to the later of the first anniversary of the
date on which the officer's employment by Protection One terminates and the date
on which the Termination Amount is paid in full.
Summary of Executive Compensation
The following table summarizes the compensation for the fiscal years ended
September 30, 1997, 1996 and 1995 of Protection One's Chief Executive Officer
and the four other executive officers of Protection One.
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
------------------------
RESTRICTED SECURITIES
ANNUAL COMPENSATION STOCK UNDERLYING ALL OTHER
--------------------- AWARD(S) OPTIONS COMPENSATION
NAME AND PRINCIPAL POSITION(S) YEAR SALARY($) BONUS($) ($)(1) GRANTED(#) ($)(2)
- ------------------------------- ---- --------- -------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
James M. Mackenzie, Jr. 1997 300,155 615,232 (3) -- 25,000 1,727
President and 1996 298,104 60,000 40,000(4) 100,000 1,818
Chief Executive Officer 1995 267,347 80,000 20,000(5) -- --
John W. Hesse 1997 264,155 561,233 (3) -- 25,000 1,524
Executive Vice President, 1996 250,728 60,000 40,000(4) 100,000 1,706
Chief Financial Officer 1995 226,600 80,000 20,000(5) -- --
and Secretary
John E. Mack, III 1997 199,172 463,758 (3) -- 25,000 1,159
Executive Vice President -- 1996 186,128 60,000 40,000(4) 100,000 263
Business Development and 1995 162,000 80,000 20,000(5) -- --
Assistant Secretary(6)
Thomas K. Rankin 1997 199,172 463,758 (3) -- 25,000 --
Executive Vice President -- 1996 186,128 60,000 40,000(4) 100,000 2,288
Branch Management and 1995 162,000 80,000 20,000(5) -- --
Assistant Secretary(7)
George A. Weinstock 1997 157,500 (8) -- -- 1,699
Executive Vice President and 1996 163,500 25,000 -- -- 2,096
Assistant Secretary 1995 157,500 25,000 -- -- --
</TABLE>
- ---------------
(1) Restricted stock is fully vested when awarded. The executive officer owning
such shares will receive the same dividends on these shares (including, but
not limited to, the Special Dividend) as are received by all other holders
of the Common Stock.
(2) Amounts stated reflect contributions made by Protection One to such
executive officer's account under Protection One's 401(k) plan.
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<PAGE> 116
(3) This performance bonus will be payable only if the Stock Acquisition
Transaction is consummated and in such event will be paid in fiscal 1998.
(4) Awarded and 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.
(5) 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.
(6) As described in "-- Executive Officers" above, prior to August 1996 Mr. Mack
was Vice President -- Business Development of Protection One.
(7) As described in "-- Executive Officers" above, prior to August 1996 Mr.
Rankin was Vice President -- Branch Management of Protection One.
(8) To be determined.
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.
During the year ended September 30, 1997, Mr. Hesse borrowed an aggregate
of $100,000 from Protection One pursuant to unsecured promissory notes. Such
borrowings bear interest at an annual rate of 8% and are payable on demand.
Performance Warrants
On September 16, 1991, Protection One 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 $.167 per share: Mr. Mackenzie (180,621), Mr.
Hesse (131,703), Mr. Mack (94,074) and Mr. Rankin (94,074). The Performance
Warrants originally were to become exercisable over a five-year period upon
Protection One's attainment of certain return on investment objectives. On June
29, 1994, the Board of Directors of Protection One modified the performance and
vesting criteria to provide that the Performance Warrants would be immediately
exercisable in full. However, each of Messrs. Mackenzie, Hesse, Mack and Rankin
agreed in connection with such modifications that such officer would not
exercise his Performance Warrant (i) prior to September 16, 1995, for more than
40% of the shares subject to such warrant, and (ii) prior to September 16, 1996,
for more than 70% of such shares, subject to earlier termination of such
restrictions on exercise in the event Protection One engaged in a merger, sale
of assets or other business combination in which the other party to the
transaction was the survivor or purchaser and consideration was distributed to
holders of the Common Stock. In the event the holder of a Performance Warrant
ceased to be an employee of Protection One, the Performance Warrant became
exercisable in whole or in part by the holder or his estate during the 90 days
following Protection One's receipt of notice of the termination, and to the
extent not exercised would have terminated on such 90th day. The Performance
Warrants expired on September 16, 2002.
111
<PAGE> 117
During the year ended September 30, 1997, all of the Performance Warrants
were exercised in full. The following table sets forth certain information
concerning such exercises:
AGGREGATED PERFORMANCE WARRANT EXERCISES IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
SHARES VALUE
ACQUIRED ON REALIZED(1)
NAME EXERCISE(#) ($)
----------------------------------------------------- ------------ -----------
<S> <C> <C>
James M. Mackenzie, Jr............................... 180,621 3,249,914
John W. Hesse........................................ 130,412(2) 2,346,503
John E. Mack, III.................................... 28,222 507,798
Thomas K. Rankin..................................... 94,074 1,692,673
</TABLE>
- ---------------
(1) Value is calculated by subtracting the exercise price from the fair market
value of the Common Stock at September 30, 1997 and multiplying the result
by the number of shares acquired. Fair market value is 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, 1997 ($18.16).
(2) An additional 1,291 shares of Common Stock otherwise issuable by Protection
One on exercise of this warrant were retained by Protection One in payment
of the exercise price.
Stock Option Grants
The following table sets forth certain information concerning grants of
stock options made during the fiscal year ended September 30, 1997 to the
executive officers named in the Summary Compensation Table.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE VALUE
AT ASSUMED
INDIVIDUAL GRANTS ANNUAL RATES OF
------------------------------ STOCK PRICE
NUMBER OF PERCENT OF APPRECIATION
SECURITIES TOTAL OPTIONS/ FOR OPTION
UNDERLYING SARS GRANTED TO EXERCISE OR TERM(4)
OPTIONS/SARS EMPLOYEES BASE PRICE EXPIRATION ----------------
NAME GRANTED(1) IN FISCAL YEAR ($/SH)(3) DATE 5%($) 10%($)
- ------------------------------ ------------ --------------- ----------- ---------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
James M. Mackenzie, Jr........ 12,500 3.3% 9.50 03/20/07 74,681 189,257
James M. Mackenzie, Jr........ 12,500 3.3% 15.00 03/20/07 5,931 120,507
John W. Hesse................. 12,500 3.3% 9.50 03/20/07 74,681 189,257
John W. Hesse................. 12,500 3.3% 15.00 03/20/07 5,931 120,507
John E. Mack, III............. 12,500 3.3% 9.50 03/20/07 74,681 189,257
John E. Mack, III............. 12,500 3.3% 15.00 03/20/07 5,931 120,507
Thomas K. Rankin.............. 12,500 3.3% 9.50 03/20/07 74,681 189,257
Thomas K. Rankin.............. 12,500 3.3% 15.00 03/20/07 5,931 120,507
</TABLE>
- ---------------
(1) Options were granted on March 20, 1997.
(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 an additional 20% on each anniversary date thereafter,
with full vesting occurring on the fifth anniversary of the date of grant.
If the Stock Acquisition Transaction is consummated, all of such options
will become exercisable in full.
(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
($9.50).
(4) The amounts shown for potential realizable values are based upon the
arbitrary assumption that the Common Stock appreciates at the annual rates
shown (compounded annually) from the date of grant until the expiration of
the option term. These numbers are calculated based upon the requirements
promulgated by the Commission, and do not represent an estimate by
Protection One of future stock price growth.
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<PAGE> 118
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option
Values; Certain Additional Grants
The following table sets forth, for each of the executive officers named in
the Summary Compensation Table above, certain information regarding the value of
stock options held at fiscal year end. No stock option was exercised by any such
executive officer during the fiscal year ended September 30, 1997.
AGGREGATED OPTION/SAR EXERCISES AND FISCAL YEAR-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF SHARES
OF STOCK UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED IN-THE-MONEY OPTIONS/SARS
OPTIONS/SARS AT 9/30/97 AT 9/30/97($)(2)
---------------------------- -------------------------
NAME EXERCISABLE/UNEXERCISABLE(1) EXERCISABLE/UNEXERCISABLE
------------------------------- ---------------------------- -------------------------
<S> <C> <C>
James M. Mackenzie, Jr......... 34,400/108,600 329,104/726,276
John W. Hesse.................. 44,000/111,000 441,040/754,260
John E. Mack, III.............. 48,800/112,200 497,008/768,252
Thomas K. Rankin............... 48,800/112,200 497,008/768,252
George A. Weinstock............ 9,600/2,400 111,936/27,984
</TABLE>
- ---------------
(1) If the Stock Acquisition Transaction is consummated, all of such options
will become exercisable in full.
(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, 1997 ($18.16). There is no guarantee that
if and when any such option is exercised, the option will have this value.
401(k) Plan
Protection One maintains a tax-qualified, defined contribution plan that
meets the requirements of Section 401(k) of the Code (the "401(k) Plan"). Each
employee who is at least 21 years old and who has provided services to
Protection One 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). Protection
One 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. Protection One'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 Protection One 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
Protection One contributions, if any, made on behalf of the participant.
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<PAGE> 119
COMPENSATION COMMITTEE REPORT ON
PROTECTION ONE EXECUTIVE COMPENSATION FOR FISCAL 1997
The compensation of Protection One'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.
Protection One 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 Protection One 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. Unregistered common
stock comprised 20% and 40% of bonuses paid to executive officers in fiscal 1995
and 1996, respectively. Of the stock options issued to executive officers in
fiscal 1996, 30% are exercisable at a price equal to a 87.5% premium to the
common stock price at the grant date. Similarly, in fiscal 1997, 50% of
executive officer stock options were granted with an exercise price equal to a
57.9% premium to the common stock price on the grant date. The Compensation
Committee believes linking executive compensation to the performance of
Protection One's common stock aligns the interests of the executive officers
with those of shareholders.
In determining the compensation of Protection One's executive officers, the
Compensation Committee considers a combination of objective and subjective
performance criteria, all of which the Compensation Committee believes
contribute to shareholder value. Objective criteria include:
<TABLE>
<S> <C>
- Revenue and EBITDA1 growth - Margin expansion
- Subscriber growth - Subscriber and MRR attrition
</TABLE>
The Compensation Committee, in conjunction with the Board of Directors,
reviews the business plans and projections prepared by management and compares
Protection One'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 Protection One's dealer program, strategic alliance, joint venture and
affinity program activities, management and Protection One's infrastructure
enhancements and success in capital formation. Bonuses paid for fiscal year 1997
performance reflect Protection One's successful formation of relationships with
PacifiCorp, Salt River Project (a Phoenix-based utility) and SBC Communications.
In addition, such bonuses recognize the important role the executive officers
have played in the proposed transaction with the security businesses of Western
Resources, including their agreement to serve in similar capacities for the
combined businesses post-merger. The Compensation Committee also considers
compensation paid to other persons with comparable skills and experience in the
security industry and other service industries, Protection One's performance in
comparison to its competitors and performance in each officer's specific area of
responsibility.
Robert Chefitz
Ben Enis
- ---------------
1 EBITDA is earnings before interest, taxes, depreciation and amortization.
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<PAGE> 120
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, with respect to each of Protection One's
directors, by each of Protection One's executive officers named in the Summary
Compensation Table and all directors and executive officers of Protection One as
a group: (i) the total number of shares of Common Stock beneficially owned as of
October 24, 1997, (ii) the percent of the Common Stock so owned as of that date,
(iii) the total number of shares of Common Stock to be beneficially owned after
the consummation of the Stock Acquisition Transaction, and (iv) the percent of
Common Stock to be so owned after the consummation of the Stock Acquisition
Transaction. 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.
Security Ownership of Management
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF AMOUNT AND NATURE OF
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
BEFORE THE STOCK AFTER THE STOCK
ACQUISITION TRANSACTION ACQUISITION TRANSACTION
------------------------- ------------------------
NUMBER OF PERCENT OF NUMBER OF PERCENT OF
NAME SHARES(1) CLASS(2) SHARES(3) CLASS(4)
- ----------------------------------------------- ---------- ---------- --------- ----------
<S> <C> <C> <C> <C>
James M. Mackenzie, Jr. ....................... 347,781 2.4 431,381 *
John W. Hesse.................................. 262,255 1.8 348,255 *
John E. Mack, III.............................. 184,640 1.3 271,840 *
Thomas K. Rankin............................... 187,389 1.3 274,589 *
George A. Weinstock............................ 54,777 * 57,177 *
Robert M. Chefitz(5)........................... 2,521,444 17.4 2,545,444 3.1
Ben Enis....................................... 7,200 * 30,000 *
James Q. Wilson................................ 4,100..... * 20,100 *
All directors and executive officers as a group
(8 individuals).............................. 3,569,586 24.1 3,978,786 4.8
</TABLE>
- ---------------
* Less than one percent.
(1) Includes shares subject to options held that are currently exercisable or
that become exercisable within 60 days after the date of this Proxy
Statement as follows: Mr. Mackenzie, 59,400 shares; Mr. Hesse, 69,000
shares; Mr. Mack, 73,800 shares; Mr. Rankin, 73,800 shares; Mr. Weinstock,
9,600 shares; Mr. Chefitz, 6,000 shares and all directors and executive
officers as a group, 302,800 shares. See "Executive Compensation -- Stock
Option Grants" and note (5) below.
(2) Based upon shares of Common Stock outstanding on October 24, 1997, as
adjusted for options that are currently exercisable or that become
exercisable within 60 days after such date.
(3) Includes shares of Common Stock subject to options held that are currently
exercisable or that will become exercisable in connection with the Stock
Acquisition Transaction, as follows: Mr. Mackenzie, 143,000 shares; Mr.
Hesse, 155,000 shares; Mr. Mack, 161,000 shares; Mr. Rankin, 161,000 shares;
Mr. Weinstock, 12,000 shares; Mr. Chefitz, 30,000 shares; and all directors
and executive officers as a group, 712,000 shares. See " Executive
Compensation -- Stock Option Grants" and note (5) below. As described in
"The Stock Acquisition Transaction -- Payments to Optionholders and
Acceleration of Options," in connection with the Stock Acquisition
Transaction, each director and executive officer (and each other holder of
an outstanding option to acquire shares of Common Stock other than Western
Resources) will receive a cash payment in the amount of $7.00 per share for
each share issuable upon the exercise of such options.
(4) Based upon shares of Common Stock outstanding on October 24, 1997, as
adjusted for an assumed issuance of 68,500,000 Shares in the Stock
Acquisition Transaction. Includes shares of Common Stock subject to options
that are currently exercisable or that will become exercisable in connection
with the Stock Acquisition Transaction.
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(5) Mr. Chefitz, a director of Protection One, is also General Partner of APA
Excelsior III, L.P. and APA Excelsior III/Offshore, L.P. and an officer of
Patricof, 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, 2,515,444 of which shares are owned by APA
Excelsior III L.P., APA Excelsior III/Offshore, LP. or CIN Ventures
Nominees, Ltd. and the remainder of which are subject to an option held by
Patricof.
The following table sets forth certain information with respect to
beneficial ownership of the Common Stock as of October 24, 1997 by each person
known to Protection One 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.
Security Ownership of Certain Beneficial Owners
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF BENEFICIAL
OWNERSHIP
-------------------------------------
PERCENT OF PERCENT OF
COMMON STOCK COMMON STOCK
BEFORE THE AFTER THE
NUMBER OF STOCK ACQUISITION STOCK ACQUISITION
NAME AND ADDRESS SHARES OWNED TRANSACTION(1) TRANSACTION(2)
- ------------------------------------------------ ------------ ----------------- -----------------
<S> <C> <C> <C>
APA Excelsior III, L.P. 1,756,008 12.1 2.1
c/o Patricof & Co. Ventures, Inc.(3)
445 Park Avenue, 11th Floor
New York, New York 10022
FMR Corp. 82 Devonshire Street 1,747,510(4) 11.5 2.1
Boston, Massachusetts 02109
The Capital Group Companies, Inc. and Capital 1,148,550(5) 7.8 1.4
Research and Management Company
333 South Hope Street
Los Angeles, California 90071
Oppenheimer Funds, Inc. 850,411(6) 5.9 1.0
Two World Trade Center, Suite 3400
New York, New York 10048-0203
APA Excelsior III/Offshore, L.P. 669,082 4.6 *
c/o Patricof & Co. Ventures, Inc.(3)
445 Park Avenue, 11th Floor
New York, New York 10022
CIN Venture Nominees, Ltd. 90,354 * *
c/o Patricof & Co. Ventures, Inc.(3)
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 October 24, 1997
(14,493,722 shares), as adjusted for shares issuable upon the exercise of
warrants or the conversion of Convertible Notes held.
(2) Based upon shares of Common Stock outstanding on October 24, 1997, as
adjusted for an assumed issuance of 68,500,000 Shares in the Stock
Acquisition Transaction. Although the number of shares of Common Stock
issuable upon the exercise of warrants or the conversion of Convertible
Notes will be adjusted in connection with the Stock Acquisition Transaction
the amounts of such adjustments cannot be calculated at this time. See "The
Stock Acquisition Transaction -- Warrant Adjustments and Payments;
Adjustments to Convertible Notes; Offer to Repurchase Discount Notes."
(3) Patricof is the manager of or investment adviser to this stockholder and
therefore may be deemed a beneficial owner of the shares owned by this
stockholder. See also note (5) to the "Security Ownership of Management"
table above.
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<PAGE> 122
(4) 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
does not have sole or shared voting power or shared dispositive power as to
any shares of Common Stock.
(5) Based on a Schedule 13G dated February 14, 1997, which states as follows:
The Capital Group Companies, Inc. ("TCGCI") is the parent holding company of
a group of investment management companies; Capital Research and Management
Company ("CRMC") is an investment adviser registered under Section 203 of
the Investment Advisers Act and a wholly owned subsidiary of TCGCI. Each of
CRMC and (solely by virtue of the relationship described above) TCGCI has
sole dispositive power, and neither CRMC or TCGCI has sole or shared voting
power, with respect to the shares listed in the table above. Such shares
include 278,550 shares of Common Stock issuable upon conversion of
$5,000,000 aggregate principal amount of the Convertible Notes.
(6) Based on a Schedule 13G dated February 5, 1997, which states that
Oppenheimer Funds, Inc. has neither shared nor sole voting power with
respect to, and shared power to dispose of, such shares.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT
Pursuant to Section 16(a) of the Securities Exchange Act and the rules
issued thereunder, Protection One's executive officers and directors are
required to file with the Commission and the Nasdaq National Market reports of
ownership and changes in ownership of shares of Common Stock. Copies of such
reports are required to be furnished to Protection One. Based solely on
Protection One's review of the copies of such reports furnished to Protection
One or on written representations to Protection One that no such reports were
required, Protection One believes that during the fiscal year ended September
30, 1997, all of Protection One'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, except that
one Form 4 disclosing the exercise of such officer's Performance Warrant was
filed three business days after the due date by each of Messrs. Mackenzie,
Hesse, Mack and Rankin.
APPROVAL OF THE 1997 LONG-TERM INCENTIVE PLAN
DESCRIPTION OF THE PLAN
On October 24, 1997, the Protection One Board of Directors adopted, subject
to the approval of the stockholders of the Company, the 1997 Long-Term Incentive
Plan (the "LTIP"), which is intended to constitute the "New Option Plan"
provided for in the Contribution Agreement and which is being submitted to the
stockholders of Protection One for approval in order to satisfy certain
requirements of the Code relating to deductibility of certain performance-based
executive compensation. The LTIP is similar to Protection One's 1994 Stock
Option Plan in that both plans provide for the granting of incentive and
nonqualified stock options; however, the LTIP also provides for the granting of
stock appreciation rights, restricted shares and restricted share units,
performance awards, dividend equivalents and other equity-based awards. If the
LTIP is approved at the Special Meeting, no further grants of options will be
made under the 1994 Stock Option Plan.
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<PAGE> 123
A copy of the LTIP is attached to this Proxy Statement as Appendix F. The
following summary of the LTIP is qualified in its entirety by reference to such
copy.
Purposes
The purposes of the LTIP are (i) to align the interests of Protection One's
stockholders and the recipients of awards under the LTIP by increasing the
proprietary interest of such recipients in Protection One's growth and success,
(ii) to advance the interests of Protection One by attracting and retaining for
Protection One the services of directors, officers and other key employees,
consultants and agents, and (iii) to motivate such persons to act in the
long-term best interests of Protection One's stockholders.
Administration.
The LTIP will be administered by the Compensation Committee of the Board of
Directors of Protection One or such other committee as may in the future be
appointed by the Board (the "Committee"), provided that each member of the
Committee must be both a "non-employee director" within the meaning of Rule
16b-3 under the Securities Exchange Act and an "outside director" within the
meaning of Treasury Regulation Section 1.162-27(e)(3) interpreting Section
162(m) of the Code.
Among the powers granted to the Committee are the authority to interpret
the LTIP, establish rules and regulations for its operation, select eligible
persons to receive awards under the LTIP and determine the form and amount and
other terms and conditions of such awards. The LTIP authorizes the Committee to
delegate its authority under the LTIP in certain circumstances; provided,
however, that only the Committee may select and grant awards to employees who
are subject to Section 16 of the Exchange Act or who are "covered employees," as
defined in Section 162(m) of the Code.
Available Shares
The LTIP provides for awards to be made in respect of a maximum of
4,200,000 shares of Common Stock. Shares of Common Stock that are the subject of
awards that are forfeited or terminated, expire unexercised, are settled in cash
in lieu of shares of Common Stock or in a manner such that all or some of the
shares covered thereby are not issued or are exchanged for awards that do not
involve Common Stock will again immediately become available for awards under
the LTIP.
In the event of certain changes affecting the outstanding shares of Common
Stock (including, but not limited to, a stock split or reverse stock split,
payment of a stock dividend, recapitalization, reorganization, merger,
consolidation, combination, separation (including a spin-off or other
distribution of stock or property), repurchase or share exchange or other
relevant changes in Protection One's capitalization), outstanding awards under
the LTIP will be subject to adjustment by the Committee at its discretion as to
the number, price and kind of shares or other consideration subject to, and
other terms and conditions of, such awards to reflect such changes in the
outstanding Common Stock and to prevent dilution or enlargement of participants'
rights under the LTIP. Also, in the event of any such changes in the outstanding
Common Stock, the aggregate number of shares available for grant of awards under
the LTIP also may be adjusted by the Committee.
As of November 6, 1997, the closing sales price of the Common Stock as
reported on the Nasdaq National Market was $17.875 per share.
Eligibility for Participation.
The individuals eligible to participate in the LTIP are the directors,
officers and employees of, and other service providers to, Protection One whose
performance can have an effect on the success of Protection One (approximately
250 persons) ; however, it is expected that awards will be limited to directors
(or, in the case of any Award that would otherwise be granted to Mr. Chefitz,
Patricof), executive officers and key employees. The selection of participants
is within the discretion of the Committee.
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<PAGE> 124
Types of Awards
The LTIP provides for the grant of any or all of the following types of
awards: (i) stock options, including options that qualify as "incentive stock
options" under Section 422 of the Code and options that do not so qualify
("nonqualified options"); (ii) stock appreciation rights; (iii) restricted
shares and restricted share units; (iv) performance awards; (v) dividend
equivalents; and (vi) other equity-based awards. Such awards may be granted
singly, in combination or in tandem so that the settlement or payment of one
automatically reduces or cancels the other. Awards also may be made in
combination or in tandem with, as alternative to, or as the payment for, grants
or rights under any other employee or compensation plan of Protection One or in
substitution for, or by the assumption of, awards issued under plans of an
acquired entity.
All awards will be embodied in an agreement and will be subject to the
terms and conditions of the LTIP; in addition, the Committee may, in its sole
judgment, subject any award to such other terms or conditions as the Committee
deems appropriate, provided that such additional terms and conditions are not
inconsistent with the terms of the LTIP.
Awards may not be pledged or otherwise encumbered and are not transferable
except by will or by the laws of descent and distribution. A participant may
designate a beneficiary to exercise such person's rights and received
distributions under the LTIP upon such person's death.
Stock Options. Options are rights to purchase a specified number of shares
of Common Stock at a specified price. Options granted under the LTIP may be
incentive stock options, nonqualified stock options or a combination of both;
provided, however, that only employees (including directors who are also
employees) of Protection One will be eligible to receive incentive stock
options. The Committee will, with regard to each stock option, determine the
number of shares and the exercise price per share of Common Stock subject to the
option, the date or dates on which the option becomes exercisable and the
option's term, subject to the limitations described below.
The exercise price of an incentive stock option may not be less than 100%
of the fair market value of the Common Stock on the effective date of the
option's grant, and 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 LTIP, 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
Protection One.
Upon exercise of an option, the exercise price must be paid in full in cash
or if the participant so elects, by delivering previously acquired shares of
Common Stock or surrendering another award or, in the case of nonqualified stock
options, by withholding shares that otherwise would be acquired on exercise. The
Committee will determine acceptable methods for tendering shares of Common Stock
or other awards to exercise an option. The Committee also may provide for
procedures to permit the exercise of options by use of proceeds to be received
from the sale of shares of Common Stock issuable pursuant to an option.
Stock Appreciation Rights. A stock appreciation right (an "SAR") is a right
to receive a payment, in cash or Common Stock, equal to the excess of the fair
market value of a specified number of shares of Common Stock on the date the
right is exercised (or another specified valuation) over a specified exercise
price. An SAR may be granted under the LTIP to the holder of an option with
respect to all or a portion of the shares of Common Stock subject to such option
or may be granted separately. For SARs granted in tandem with options, the
exercise price will be the same as the exercise price of the option; for other
SARs, the exercise price will be determined by the Committee. The terms and
conditions applicable to any SAR, including the term and the date or dates on
which the SARs becomes exercisable, will be determined by the Committee. Upon
the exercise of an SAR granted in tandem with an option, the related option will
be deemed to have terminated to the extent of the number of shares of Common
Stock with respect to which such SAR is exercised. Upon the exercise or
termination of an option, the related SAR, if any, will be deemed to have
terminated to the extent of the number of shares of Common Stock with respect to
which the option was exercised or terminated.
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<PAGE> 125
Restricted Shares and Restricted Share Units. Restricted shares are shares
of Common Stock that may not be sold, pledged or otherwise transferred or
encumbered until the expiration of a specified period and that generally will be
forfeited if the participant's employment by Protection One terminates prior to
the end of such period; restricted share units are rights to receive shares of
Common Stock or cash at the end of a specified period and that are subject to
restrictions on transfer and/or conditions of forfeiture similar to those
imposed on restricted shares. In addition to or in lieu of a specified period of
time, the Committee may establish a performance goal that must be achieved as a
condition of retention of the shares. Restrictions may be removed as to some or
all of the shares or units upon the occurrence of events determined by the
Committee in its sole discretion to justify such removal. The recipient of
restricted shares generally is entitled to receive dividends paid on, and vote,
the restricted shares, unless forfeited.
Performance Awards. A performance award involves the grant of a right to
receive cash, shares of Common Stock, other awards or other property upon the
satisfaction of certain performance-related objectives specified in the granting
instrument. A performance award will be paid, vested or otherwise deliverable
solely upon the attainment during a specified period or periods of one or more
pre-established, objective performance goals established by the Committee. A
performance goal may be based upon one or more business criteria that apply to
the participant, one or more subsidiaries of Protection One or Protection One as
a whole. Subject to the foregoing, the terms and conditions applicable to any
performance award will be determined by the Committee. Performance awards may be
payable in a single payment or in installments, and at such time or times as the
Committee may determine, and may be subject to such restrictions on transfer,
forfeiture provisions and other limitations as the Committee may specify.
Dividend Equivalents. Dividend equivalents may be granted to participants
under the LTIP, either as a component of another award or as a separate award.
In general, and subject to such terms and conditions as the Committee may
establish, an award of dividend equivalents will entitle the holder to receive,
in the event of a cash or stock dividend or other distribution paid or made on
the Common Stock, an amount equal to the dividend or other distribution that
would have been received by the participant had the shares of Common Stock
covered by the award been issued and outstanding on the record date established
for such dividend or other distribution. Dividend equivalents may be paid in
cash, shares of Common Stock, other awards under the LTIP or other property, or
a combination thereof, in a single payment or in installments, and at such time
or times as the Committee may determine.
Other Incentive Awards. The Committee may grant other awards under the LTIP
based upon, payable in or otherwise related to, in whole or in part, shares of
Common Stock if the Committee determines that such other incentive awards are
consistent with the purposes of the LTIP. Payment of other incentive awards
shall be made at such times and in such forms, which may be cash, shares of
Common Stock others awards under the LTIP, or other property, as established by
the Committee.
Tax Withholding
To satisfy applicable withholding tax requirements, the Committee may
require payment from an employee, may withhold from payments made under the
LTIP, or may withhold from other compensation payable to the employee.
Change in Control
The LTIP provides that in the event of a "Change of Control" (defined in
the LTIP to include generally any transaction that results in less than 50% of
the total voting securities of Protection One outstanding immediately after such
transaction, or less than 50% of the total assets owned by Protection One
immediately prior to the transaction, being beneficially owned by a party other
than Western Resources), unless otherwise provided in the related award
agreement, (i) each option then outstanding under the LTIP will become
exercisable in full; (ii) all restrictions and limitations applicable to
restricted shares and restricted share units, dividend equivalents and other
awards then outstanding under the LTIP will be deemed satisfied or waived; (iii)
all performance criteria and objectives applicable to performance awards and
other awards then outstanding under the LTIP will be deemed fully satisfied; and
(iv) at any time during the 60 days
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immediately following the Change in Control, participants in the LTIP may elect
to surrender outstanding awards and receive cash payments equal to the value of
those awards as determined in accordance with the LTIP.
Amendment; Term.
No award may be granted under the LTIP after October 24, 2007. The Board of
Directors of Protection One may at any time amend or otherwise modify, suspend
or terminate the LTIP without the consent of LTIP participants or Protection
One's stockholders for the purpose of addressing any change or changes in
applicable law or for any other purpose permitted by law. Notwithstanding the
foregoing, no such modification that would impair the rights of any LTIP
participant under any award then outstanding will be binding on that award
without the consent of such participant.
TAX ASPECTS
Set forth below is a summary of the federal income tax consequences to
Protection One and participants in the LTIP as a result of the grant and
exercise or settlement of awards under the LTIP. The summary is based on
applicable provisions of the Code and other existing laws, Treasury regulations
thereunder, judicial decisions and IRS rulings in effect as of the date of this
Proxy Statement, all of which are subject to change. Moreover, the following
discussion is intended to provide only an overview of the U.S. federal income
tax laws that are generally applicable to awards granted under the LTIP as of
the date of this Proxy Statement. Persons in differing circumstances may have
different tax consequences. This discussion is not be construed as tax advice.
Stock Options
Incentive Stock Options. No income will be recognized by an optionee for
federal income tax purposes upon the grant or exercise of an incentive stock
option. The basis of shares transferred to an optionee pursuant to the exercise
of an incentive stock option is the price paid for the shares. If the optionee
holds the shares for at least one year after transfer of the shares to the
optionee and two years after the grant of the option, the optionee will
recognize capital gain or loss upon sale of the shares received upon the
exercise equal to the difference between the amount realized on the sale and the
basis of the stock. Generally, if the shares are not held for that period, the
optionee will recognize ordinary income upon disposition in an amount equal to
the excess of the fair market value of the shares on the date of exercise over
the amount paid for such shares, or if less, the gain on disposition. Any
additional gain realized by the optionee upon such disposition will be a capital
gain.
The excess of the fair market value of shares received upon the exercise of
an incentive stock option over the option price for the shares is an item of
adjustment for the optionee for purposes of the alternative minimum tax.
Protection One is not entitled to a deduction upon the exercise of an
incentive stock option by an optionee. If the optionee disposes of the shares
received pursuant to such exercise prior to the expiration of one year following
transfer of the shares to the optionee or two years after grant of the option,
however, Protection One may, subject to the deduction limitations described
below, deduct an amount equal to the ordinary income recognized by the optionee
upon disposition of the shares at the time such income is recognized by the
optionee.
Nonqualified Stock Options. No income will be recognized by an optionee for
federal income tax purposes upon the grant of a nonqualified stock option. Upon
exercise of a nonqualified stock option, the optionee will recognize ordinary
income in an amount equal to the excess of the fair market value of the shares
on the date of exercise over the amount paid for such shares. Income recognized
upon the exercise of nonqualified stock options will be considered compensation
subject to withholding at the time the income is recognized and, therefore,
Protection One must make the necessary arrangements with the optionee to ensure
that the amount of the tax required to be withheld is available for payment.
Nonqualified stock options are designed to provide Protection One with a
deduction equal to the amount of ordinary income recognized by
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<PAGE> 127
the optionee at the time of such recognition by the optionee, subject to the
deduction limitations described below.
The basis of shares transferred to an optionee pursuant to exercise of a
nonqualified stock option is the price paid for such shares plus an amount equal
to any income recognized by the optionee as a result of the exercise of the
option. If an optionee thereafter sells shares acquired upon exercise of a
nonqualified stock option, any amount realized over the basis of the shares will
constitute capital gain to the optionee for federal income tax purposes.
Payment of Option Price with Previously Owned Shares. If an optionee
transfers previously held shares (other than shares acquired pursuant to
exercise of an incentive stock option that have not been held for the requisite
holding period) in satisfaction of part or all of the exercise price of an
incentive stock option or nonqualified stock option, no additional gain will be
recognized on the transfer of such previously held shares in satisfaction of the
exercise price. However, the optionee would still recognize ordinary
compensation income upon exercise of a nonqualified stock option in the manner
described above. In addition, if the previously held shares surrendered are
incentive stock option shares which have not been held for the requisite holding
period, the optionee will recognize taxable income in the manner described
above. That number of shares received upon exercise which equals the number of
shares surrendered therefor in satisfaction of the exercise price will have a
tax basis that equals, and a holding period that includes, the tax basis and
holding period of the previously held shares surrendered in satisfaction of the
exercise price. Any additional shares received upon exercise will have a tax
basis that equals the amount of cash (if any) paid by the optionee, plus the
amount of compensation income recognized by the optionee under the rules
described above.
Stock Appreciation Rights
There will be no federal income tax consequences to either the participant
or Protection One upon the grant of an SAR. Generally, the participant will
recognize ordinary income subject to withholding upon the receipt of payment
pursuant to an SAR in an amount equal to the aggregate amount of cash and the
fair market value of any shares of Common Stock received. Subject to the
deduction limitations described below, Protection One generally will be entitled
to a corresponding tax deduction equal to the amount includable in the
participant's income.
Restricted Shares
If the restrictions on an award of restricted shares are of a nature such
that the award is both subject to a substantial risk of forfeiture and is not
"freely transferable" within the meaning of Section 83 of the Code, the
participant will not recognize income for federal income tax purposes at the
time of the award unless such participant affirmatively elects to include the
fair market value of the shares of restricted stock upon on the date of the
award, less any amount paid therefor, in gross income for the year of the award
pursuant to Section 83(b) of the Code. In the absence of such an election, the
participant will be required to include in income for federal income tax
purposes in the year in which occurs the date the shares either become freely
transferable or are no longer subject to a substantial risk of forfeiture within
the meaning of Section 83 of the Code, the fair market value of the shares of
restricted stock on such date, less any amount paid therefor. The Company will
be entitled to a deduction at the time of income recognition to the participant
in an amount equal to the amount the participant is required to include in
income with respect to the shares, subject to the deduction limitations
described below. If a Section 83(b) election is made within 30 days after the
date the restricted shares are received, the participant will recognize ordinary
income at the time of the receipt of the restricted shares and Protection One
will be entitled to a corresponding deduction equal to the fair market value
(determined without regard to applicable restrictions) of the shares at such
time less the amount paid, if any, by the participant for the restricted shares.
If a Section 83(b) election is made, no additional income will be recognized by
the participant upon the lapse of restrictions on the restricted shares, but, if
the restricted shares are subsequently forfeited, the participant may not deduct
the income that was recognized pursuant to the Section 83(b) election at the
time of the receipt of the restricted shares. Dividends paid to a participant
holding restricted shares before the expiration of the restriction period will
be additional compensation taxable as ordinary income to the participant, unless
the participant made an election under Section 83(b). Subject to
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the deduction limitations described below, Protection One generally will be
entitled to a corresponding tax deduction equal to the dividends includable in
the participant's income as compensation. If the participant has made a Section
83(b) election, the dividends will be dividend income, rather than additional
compensation, to the participant.
If the restrictions on an award of restricted shares are not of a nature
that such shares are both subject to a substantial risk of forfeiture and not
freely transferable, within the meaning of Section 83 of the Code, the
participant will recognize ordinary income for federal income tax purposes at
the time of the award in an amount equal to the fair market value of the shares
of restricted stock on the date of the award, less any amount paid therefor.
Protection One will be entitled to a deduction at such time in an amount equal
to the amount the participant is required to include in income with respect to
the shares, subject to the deduction limitations described below.
Restricted Share Units
There will be no federal income taxes consequences to either the
participant or Protection One upon the grant of a restricted share unit. Upon
the exercise of a restricted share unit, the tax consequences to both the
participant and Protection One will be similar to the those described above for
Restricted Shares.
Dividend Equivalents and Performance Awards
There will be no federal income tax consequences to either the participant
or Protection One upon the grant of dividend equivalents or performance awards.
Generally, unless dividend equivalents or performance awards are restricted in a
manner that they are both subject to a substantial risk of forfeiture and are
not freely transferable, the participant will recognize ordinary income upon the
receipt of payment pursuant to dividend equivalents or performance awards in an
amount equal to the fair market value of the Common Stock and the aggregate
amount of cash received. Subject to the deduction limitations described below,
Protection One generally will be entitled to a corresponding tax deduction equal
to the amount includable in the participant's income. If dividend equivalents or
performance awards are restricted in a manner such that they both are subject to
a substantial risk of forfeiture and are not freely transferable, the
participant's and Protection One's tax consequences will be similar to the
consequences described above for restricted shares.
Limitations on the Company's Compensation Deduction. In order for the
amounts described above to be deductible by Protection One, such amounts must
constitute reasonable compensation for services rendered or to be rendered and
must be ordinary and necessary business expenses.
The ability of Protection One to obtain a deduction for future payments
under the LTIP also could be eliminated by the "golden parachute" payment rules
of Section 280G of the Code, which prevents the Company from deducting certain
"excess parachute payments" made in connection with a change in control of an
employer-corporation. Very generally, excess parachute payments arise from
certain payments made to disqualified individuals that are in the nature of
compensation and are contingent on certain changes in ownership or control of
Protection One. Disqualified individuals for this purpose include certain
employees and independent contractors who are officers, shareholders or
highly-compensated individuals. Accelerated vesting or payment of awards under
the LTIP upon a change in ownership or control of Protection One could result in
excess parachute payments. In addition to the deduction limitation applicable to
Protection One, a disqualified individual receiving an excess parachute payment
is subject to a 20 percent excise tax on the amount thereof.
Finally, Section 162(m) of the Code limits the deduction that Protection
One may take for otherwise deductible compensation payable to certain executive
officers of Protection One to the extent that compensation paid to such officers
for such year exceeds $1 million. However, an exception to the limitations of
Section 162(m) applies in the case of certain compensation that is
performance-based. It is intended that the description of the LTIP contained in
this Proxy Statement and the approval of the LTIP by the holders of the Common
Stock at the Special Meeting will satisfy certain requirements for the
performance-based exception and that Protection One will endeavor to comply with
the requirements of the Code and Treasury regulations Section 1.162-27 with
respect to the grant and payment of performance based awards under the LTIP so
as to
123
<PAGE> 129
be eligible for the performance-based exception. However, it may not be possible
in all cases to satisfy the requirements for the exception and Protection One
may, in its sole discretion, determine that in one or more cases it is in
Protection One's best interests to not satisfy the requirements for the
performance-based exception.
NEW PLAN BENEFITS
The Contribution Agreement provides that options for an aggregate of
1,600,000 shares of Common Stock will be granted under the LTIP at or
immediately after the Closing to Protection One's directors, executive officers,
and employees. Subject to the foregoing, the amount of compensation that will
accrue to Protection One's directors, executive officers and other employees
pursuant to the 1997 Long-Term Incentive Plan can not be determined at this
time. If the stockholders of Protection One do not approve the 1997 Long-Term
Incentive Plan, the 1994 Stock Option Plan will continue in effect in its
present form.
EXPERTS
The consolidated balance sheets of Protection One, Inc. and subsidiaries as
of September 30, 1996 and 1995 and the related consolidated statements of
operations, cash flows and changes in stockholders' equity (deficit) for each of
the three years in the period ended September 30, 1996 included in this Proxy
Statement are included herein in reliance on the report, which includes an
explanatory paragraph with respect to a change in method of accounting for
certain subscriber account acquisition and transition costs, of Coopers &
Lybrand L.L.P., independent accountants, given on the authority of that firm as
experts in accounting and auditing.
The combined balance sheet of the Western Resources Security Business as of
December 31, 1996 and the related combined statements of operations and cash
flows for the year ended December 31, 1996 and the balance sheet of Westinghouse
Security, a predecessor of WestSec, an indirect wholly owned subsidiary of
Western Resources, as of December 20, 1995 and the related statements of
operations and cash flows for the 53 weeks ended December 30, 1996 and the 52
weeks ended December 20, 1995 and 1994 included in this Proxy Statement have
been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their reports with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in giving said reports.
The consolidated financial statements of Centennial Security Holdings, Inc.
at December 31, 1996 and 1995, and for each of the two years in the period ended
December 31, 1996, appearing in this Proxy Statement have been audited by Ernst
& Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein, and are included in reliance upon such report given
upon the authority of such firm as experts in accounting and auditing.
INDEPENDENT AUDITORS
The financial statements of Network Multi-Family Security Corporation as of
December 31, 1996 and 1995 and for each of the three years in the period then
ended included in this Proxy Statement have been audited by Deloitte & Touche,
independent auditors, as stated in their report appearing herein.
LEGAL MATTERS
Certain federal income tax matters respecting Protection One will be passed
upon by Mitchell, Silberberg & Knupp LLP, Los Angeles, California, counsel to
Protection One. Certain federal income tax matters respecting Western Resources
and the Western Resources Security Business will be passed upon by Sullivan &
Cromwell, New York, New York, counsel to Western Resources.
124
<PAGE> 130
SUBMISSION OF STOCKHOLDER PROPOSALS
If the Stock Acquisition Transaction is not consummated, proposals of
stockholders of Protection One intended to be presented at the 1998 annual
meeting of Protection One's stockholders were required to have been received at
Protection One's executive offices at 6011 Bristol Parkway, Culver City,
California 90230, addressed to the attention of the Secretary, on or before
August 31, 1997 in order to be considered for inclusion in the proxy statement
and form of proxy relating to such meeting. If the Stock Acquisition Transaction
is consummated, the date of the 1998 annual meeting is expected to be advanced
to the second calendar quarter of 1998. In such event, Protection One will
notify stockholders of the new date by which proposals must be received in order
to be included in the proxy statement for such meeting.
By order of the Board of Directors,
/s/ JOHN W. HESSE
JOHN W. HESSE
Executive Vice President and
Secretary
Culver City, California
November 7, 1997
125
<PAGE> 131
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROTECTION ONE, INC.
Unaudited consolidated interim financial statements as of June 30, 1997 and for the
nine month periods ended June 30, 1997 and 1996:
Balance Sheets................................................................... F-3
Statements of Operations......................................................... F-4
Statements of Cash Flows......................................................... F-5
Notes to Financial Statements.................................................... F-6
Audited consolidated financial statements as of September 30, 1996 and 1995 and for
the years ended September 30, 1996, 1995 and 1994:
Report of Independent Accountants................................................ F-13
Balance Sheets................................................................... F-14
Statements of Operations......................................................... F-15
Statements of Cash Flows......................................................... F-16
Statements of Changes in Stockholders' Equity (Deficit).......................... F-17
Notes to Financial Statements.................................................... F-18
WESTERN RESOURCES SECURITY BUSINESS
Unaudited combined interim financial statements as of and for the six months ended
June 25, 1997:
Balance Sheet.................................................................... F-35
Statement of Operations.......................................................... F-36
Statement of Cash Flows.......................................................... F-37
Notes to Combined Interim Financial Statements................................... F-38
Audited combined financial statements as of and for the year ended December 31,
1996:
Report of Independent Public Accountants......................................... F-40
Balance Sheet.................................................................... F-41
Statement of Operations.......................................................... F-42
Statement of Cash Flows.......................................................... F-43
Notes to Combined Financial Statements........................................... F-44
WESTINGHOUSE SECURITY SYSTEMS, INC.
Audited financial statements as of December 20, 1995 and for the 53 week period
ended December 30, 1996 and the 52 week periods ended December 20, 1995 and 1994:
Report of Independent Public Accountants......................................... F-50
Balance Sheet.................................................................... F-51
Statements of Operations......................................................... F-52
Statements of Cash Flows......................................................... F-53
Notes to Financial Statements.................................................... F-54
</TABLE>
F-1
<PAGE> 132
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
CENTENNIAL SECURITY HOLDINGS, INC.
Unaudited consolidated interim financial statements as of June 30, 1997 and for the
six months ended June 30, 1997:
Balance Sheet.................................................................... F-60
Statement of Operations.......................................................... F-61
Statement of Stockholders' Equity (Deficit)...................................... F-62
Statement of Cash Flows.......................................................... F-63
Notes to Consolidated Interim Financial Statements............................... F-64
Audited consolidated financial statements as of December 31, 1996 and 1995 and for
the years ended December 31, 1996 and 1995:
Report of Independent Auditors................................................... F-67
Balance Sheets................................................................... F-68
Statements of Operations......................................................... F-69
Statements of Stockholders' Equity (Deficit)..................................... F-70
Statements of Cash Flows......................................................... F-71
Notes to Consolidated Financial Statements....................................... F-72
NETWORK MULTI-FAMILY SECURITY CORPORATION
Unaudited interim financial statements as of and for the six months ended June 30,
1997:
Balance Sheets................................................................... F-80
Income Statements................................................................ F-81
Statements of Cash Flows......................................................... F-82
Statement of Stockholders' Equity................................................ F-83
Notes to Interim Financial Statements............................................ F-84
Audited financial statements as of December 31, 1996 and 1995 and for the years
ended December 31, 1996, 1995 and 1994:
Independent Auditors' Report..................................................... F-85
Balance Sheets................................................................... F-86
Statements of Operations......................................................... F-87
Statements of Cash Flows......................................................... F-88
Statements of Stockholders' Equity............................................... F-89
Notes to Financial Statements.................................................... F-90
FINANCIAL SCHEDULE
Protection One, Inc., Schedule II -- Valuation and Qualifying Accounts.............. S-1
</TABLE>
F-2
<PAGE> 133
PROTECTION ONE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1996 1997
------------- -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................................... $ 1,782 $ 1,105
Restricted cash.................................................... 3,680 4,063
Receivables, net................................................... 12,743 15,167
Inventories........................................................ 1,920 1,785
Prepaid expenses................................................... 1,221 1,722
Deferred tax asset................................................. 7,561 9,506
------------- -----------
Total current assets....................................... 28,907 33,348
Property and equipment, net.......................................... 9,952 14,747
Subscriber accounts and intangibles, net............................. 257,354 308,925
Assets held for sale................................................. 775 --
Deposits............................................................. 648 547
------------- -----------
$ 297,636 $ 357,567
========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................... $ 2,278 $ 3,047
Accrued salaries, wages and benefits............................... 1,495 1,377
Other accruals..................................................... 1,048 2,317
Purchase holdbacks................................................. 9,942 13,616
Acquisition transition costs....................................... 4,326 6,137
Other current liabilities.......................................... 1,623 536
Capital leases payable............................................. -- 481
Deferred revenue................................................... 13,827 16,391
------------- -----------
Total current liabilities.................................. 34,539 43,902
Long-term debt, net of current portion............................... 225,650 279,750
Deferred tax liability............................................... 7,561 8,180
Other liabilities.................................................... 1,059 1,375
------------- -----------
Total liabilities.......................................... 268,809 333,207
------------- -----------
Commitments and contingencies (Note 8)
Stockholders' equity:
Common Stock, $0.01 par value, 40,000,000 shares authorized,
12,914,783 and 13,810,039 shares issued and outstanding, at
September 30, 1996 and June 30, 1997, respectively.............. 129 138
Additional paid-in capital......................................... 79,767 90,400
Accumulated deficit................................................ (51,069) (66,178)
------------- -----------
Total stockholders' equity................................. 28,827 24,360
------------- -----------
$ 297,636 $ 357,567
========== =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE> 134
PROTECTION ONE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JUNE 30,
--------------------
1996 1997
-------- --------
(UNAUDITED)
<S> <C> <C>
Revenues:
Monitoring and related services....................................... $ 48,550 $ 69,391
Other................................................................. 3,245 2,563
-------- --------
Total revenues................................................ 51,795 71,954
Cost of revenues:
Monitoring and related services....................................... 13,583 19,054
Other................................................................. 1,990 1,715
-------- --------
Total cost of revenues........................................ 15,573 20,769
-------- --------
Gross profit.................................................. 36,222 51,185
Selling, general and administrative expenses............................ 10,594 14,255
Acquisition and transition expenses..................................... 3,049 4,207
Amortization of intangibles and depreciation expense.................... 17,358 27,628
-------- --------
Operating income.............................................. 5,221 5,095
Other expenses:
Interest expense, net................................................. 3,052 6,450
Amortization of OID and debt issuance costs........................... 13,159 15,267
Loss on sales of assets............................................... 19 --
Loss on assets held for sale.......................................... -- 231
-------- --------
Loss before income taxes...................................... (11,009) (16,853)
Income tax (benefit) expense............................................ 90 (1,744)
-------- --------
Net loss...................................................... (11,099) (15,109)
Preferred stock dividends............................................... 248 --
-------- --------
Loss attributable to common stock............................. $(11,347) $(15,109)
======== ========
Net loss per common share..................................... $ (1.06) $ (1.11)
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
F-4
<PAGE> 135
PROTECTION ONE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JUNE 30,
---------------------
1996 1997
-------- --------
(UNAUDITED)
<S> <C> <C>
Cash flow from operating activities:
Net loss............................................................. $(11,099) $(15,109)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation...................................................... 1,250 2,274
Amortization of intangibles....................................... 16,108 25,353
Amortization of OID and debt issuance costs....................... 13,159 15,267
Deferred tax benefit.............................................. -- (1,326)
Provision for doubtful accounts................................... 1,518 2,426
Changes in assets and liabilities, net of effects of acquisitions:
Receivables....................................................... (5,359) (4,666)
Inventories....................................................... 528 174
Prepaid expenses and deposits..................................... (505) (437)
Accounts payable.................................................. 681 769
Accrued liabilities............................................... (389) 707
Deferred revenue.................................................. 663 676
-------- --------
Net cash provided by operating activities.................... 16,555 26,108
-------- --------
Cash flows from investing activities:
Cash restricted for acquisitions.................................. -- (383)
Purchases of property and equipment............................... (4,706) (5,744)
Sales of assets previously held for sale.......................... -- 205
Acquisitions, net of cash received................................ (72,275) (56,182)
Payments on purchase holdbacks.................................... (133) (1,099)
Deferred acquisition payments..................................... (1,438) (1,470)
Acquisition transition costs...................................... (2,272) (1,632)
-------- --------
Net cash used in investing activities........................ (80,824) (66,305)
-------- --------
Cash flows from financing activities:
Payments on long-term debt........................................ (23,828) (7,500)
Proceeds from long-term debt...................................... 72,619 47,579
Debt and equity issuance costs.................................... (666) (753)
Issuance of preferred and common stock and warrants............... 23,483 194
Cash dividends paid............................................... (248) --
-------- --------
Net cash provided by financing activities.................... 71,360 39,520
-------- --------
Net increase (decrease) in cash and cash equivalents......... 7,091 (677)
Cash and cash equivalents:
Beginning of period............................................... 1,256 1,782
-------- --------
End of period..................................................... $ 8,347 $ 1,105
======== ========
Interest paid during the period........................................ $ 3,181 $ 4,727
======== ========
Taxes paid during current year (see Note 6)............................ $ 93 $ 1,489
======== ========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
F-5
<PAGE> 136
PROTECTION ONE, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS)
1. BASIS OF CONSOLIDATION AND INTERIM FINANCIAL INFORMATION:
The accompanying unaudited consolidated financial statements include the
accounts of Protection One, Inc. ("POI") and its wholly owned subsidiary
Protection One Alarm Monitoring, Inc. ("Monitoring" and together with POI, the
"Company"). The assets, results of operations and stockholder's equity of
Monitoring comprise substantially all the assets, results of operations and
stockholders' equity of the Company on a consolidated basis. POI's principal
assets and sole operations are in and through its investment in Monitoring. All
significant intercompany balances and transactions have been eliminated in
consolidation. Separate financial statements for Monitoring have not been
provided because the Company does not believe such separate financial statements
are material to investors. Summarized consolidated financial information of
Monitoring is included in Note 9. The Company's unaudited consolidated financial
statements have been prepared in accordance with generally accepted accounting
principles for interim financial information and in accordance with the
instructions to Form 10-Q which mandate adherence to Rule 10-01 of Regulation
S-X. Accordingly, certain information and footnote disclosures normally included
in financial statements presented in accordance with generally accepted
accounting principles have been condensed or omitted. These financial statements
should be read in conjunction with the audited financial statements and notes
thereto for the year ended September 30, 1996 included in this Proxy Statement.
In the opinion of management of the Company, all adjustments, consisting only of
normal recurring adjustments, considered necessary for a fair presentation have
been included. The results of operations for the three and nine month periods
ended June 30, 1997 are not necessarily indicative of the results to be expected
for the full year.
Certain items in the September 30, 1996 financial statements have been
reclassified to conform to the June 30, 1997 presentation. See
"Overview -- Changes in Presentation Format" included in Item 2 hereof.
Recent Accounting Pronouncements: In February 1997, the Financial
Accounting Standards Board (FASB) issued Statement of Financial Accounting
Standards (SFAS) No. 128 -- "Earnings per Share", which is required to be
adopted in 1997. The unaudited pro forma "basic" and "diluted" earnings per
share under the new standard do not differ from the earnings per share
calculated under the existing standard.
In June 1997, FASB issued SFAS No. 130 -- "Reporting Comprehensive Income",
which is required to be adopted for fiscal years beginning after December 15,
1997. This statement requires that an enterprise (a) classify items of other
comprehensive income by their nature in a financial statement and (b) display
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid in capital in the equity section of a statement of
financial position. As the required disclosures will be supplementary to the
existing required financial information, the new pronouncement will not affect
previously reported results of operations.
2. RECEIVABLES:
Receivables, which consist primarily of trade accounts receivable, of
$24,393 at June 30, 1997 and $18,284 at September 30, 1996, have been reduced by
allowances for doubtful accounts of $9,226 and $5,541, respectively. Included in
receivables and deferred revenue at June 30, 1997 and September 30, 1996 are
invoices billed in advance of the periods in which services are provided
totalling $8,645 and $7,309, respectively.
F-6
<PAGE> 137
PROTECTION ONE, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. SUBSCRIBER ACCOUNTS AND INTANGIBLES:
Subscriber accounts and intangibles (at cost) consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1996 1997
------------- --------
<S> <C> <C>
Acquired subscriber accounts................................ $ 298,767 $374,427
Debt issuance costs......................................... 11,847 12,805
Goodwill and other.......................................... 2,497 4,049
------------- --------
313,111 391,281
Less accumulated amortization............................... (55,757) (82,356)
------------- --------
$ 257,354 $308,925
========== ========
</TABLE>
Reconciliation of acquired subscriber accounts:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
SEPTEMBER 30, JUNE 30,
1996 1997
------------- -----------
<S> <C> <C>
Balance, beginning of period............................... $ 184,463 $ 298,767
Acquisition of subscriber accounts......................... 119,629 79,132
Charges against purchase holdbacks......................... (5,325) (3,472)
------------- -----------
Balance, end of period..................................... $ 298,767 $ 374,427
========== =========
</TABLE>
In conjunction with certain purchases of subscriber accounts, the Company
holds back a portion of the purchase price to offset qualifying attrition of the
acquired subscriber accounts for a specified period as provided for in the
purchase agreements, and for purchase price settlements of assets acquired and
liabilities assumed.
Reconciliation of purchase holdbacks:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
SEPTEMBER 30, JUNE 30,
1996 1997
------------- -----------
<S> <C> <C>
Balance, beginning of period............................... $ 4,949 $ 9,942
Purchase holdback additions................................ 13,850 8,352
Charges against subscriber accounts........................ (5,325) (3,472)
Cash paid to sellers....................................... (3,532) (1,054)
Other...................................................... -- (152)
------------- -----------
Balance, end of period..................................... $ 9,942 $13,616
========== =========
</TABLE>
4. LOSS PER COMMON SHARE:
The computation of fully diluted net loss per share for each of the periods
presented was antidilutive; as such, no presentation of fully diluted earnings
per share has been included in the consolidated statements of
F-7
<PAGE> 138
PROTECTION ONE, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
operations. The weighted average shares outstanding used in the computation of
the net loss attributable to common shares are as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED THREE MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- -------------------------
1996 1997 1996 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Common Stock...................... 10,749,983 13,632,675 12,330,317 13,744,869
</TABLE>
5. DIVIDEND RESTRICTIONS:
The Company's Amended and Restated Credit Agreement (the "Credit
Agreement") governing its revolving credit facility (the "Revolving Credit
Facility") and the Indenture governing Monitoring's 13 5/8% Senior Subordinated
Discount Notes due 2005 (the "Discount Notes") place certain restrictions on
POI's and Monitoring's ability to make dividend payments, distributions and
other asset transfers in respect of such company's capital stock. At June 30,
1997, under provisions of the Credit Agreement (the most restrictive agreement),
no amounts were available for such dividend payments, distributions or other
transfers by POI or Monitoring.
6. INCOME TAXES:
At June 30, 1997, the Company had $26.4 million in Federal net operating
loss ("NOL") carryforwards for regular tax purposes and $27.5 million for
alternative minimum tax ("AMT NOL") purposes, which expire in the years
2006-2010. These carryforwards are available, subject to certain restrictions,
to reduce taxable income, alternative minimum taxable income and income taxes
payable in future years. As a result of the issuance of warrants in conjunction
with the Company's refinancing plan, as well as various prior issuances of
preferred and common stock and stock warrants, there are annual limitations on
the amount of regular tax NOL and AMT NOL carryforwards, that can be used to
reduce taxable income, alternative minimum taxable income and income tax
payable. Future substantial changes in the Company's ownership could create
additional limitations. The Company has utilized $5.9 million in net operating
loss carryforwards for the nine months ended June 30, 1997.
The tax effect of temporary differences that give rise to significant
portions of deferred tax assets and liabilities are presented below:
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1996 1997
------------- --------
<S> <C> <C>
Deferred tax assets:
Allowances for doubtful accounts........................... $ 2,214 $ 3,580
Acquisition transition costs and purchase holdbacks........ 5,701 7,666
Performance warrants....................................... 1,662 1,685
Net operating loss carryforwards........................... 12,814 9,607
OID amortization........................................... 8,634 13,685
Other...................................................... 139 61
Less valuation allowance................................... (1,907) (5,823)
------------- --------
Total deferred tax assets.......................... 29,257 30,461
Deferred tax liabilities:
Differences in depreciation, amortization and
acquisition basis..................................... (29,257) (29,135)
------------- --------
Net deferred tax asset............................. $ -- $ 1,326
========== ========
</TABLE>
The valuation allowances at September 30, 1996 and June 30, 1997 reflect
current estimates of limitations on utilization of NOL carryforwards for Federal
and state income tax purposes. For the nine
F-8
<PAGE> 139
PROTECTION ONE, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
months ended June 30, 1997, the Company increased its net deferred tax asset
valuation allowance by $3.9 million.
The balance sheet presentation of the net deferred tax asset is as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1996 1997
------------- --------
<S> <C> <C>
Current deferred tax asset..................................... $ 7,561 $9,506
Non-current deferred tax liability............................. 7,561 8,180
------------- --------
$ -- $1,326
========== ======
</TABLE>
In October, 1996, the Company acquired all of the outstanding shares of
Security Holdings, Inc. (which was merged into Monitoring in March 1997). For
financial reporting purposes, the assets acquired and the liabilities assumed
were valued at fair market value as of the date of purchase. For income tax
reporting purposes, the acquisition was treated as a non-taxable stock purchase
with acquired assets and liabilities retaining their historical tax basis. The
deferred tax liability resulting from the acquisition basis difference exceeded
the Company's existing net deferred tax asset (before reduction for valuation
allowance) at the date of acquisition. Consequently, the existing deferred tax
asset valuation allowance as of the acquisition date was eliminated. This
resulted in a reduction to the goodwill and deferred tax liability account
balances that were recognized as a result of the acquisition. For the nine
months ended June 30, 1997, the Company generated (subsequent to the
acquisition) additional deferred tax assets which exceeded the Company's net
deferred tax liability. To the extent these additional deferred tax assets
offset the net deferred tax liability that was required to be recognized on the
acquisition, a deferred income tax benefit was recognized on the Company's
income statement.
7. SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Acquisitions:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JUNE 30,
--------------------
1996 1997
-------- -------
<S> <C> <C>
Subscriber accounts acquired.................................... $ 95,506 $75,738
Goodwill........................................................ -- 1,523
Inventories..................................................... 786 39
Accounts receivable, net........................................ 1,588 282
Property and equipment.......................................... 1,884 18
Other assets acquired........................................... 1,674 61
-------- -------
Total assets acquired................................. $101,438 $77,661
======== =======
Cash paid to seller............................................. 72,757 54,489
Stock issued to seller.......................................... 6,843 10,448
Acquisition expenses............................................ 646 752
Purchase holdbacks.............................................. 8,682 3,674
Acquisition transition reserves................................. 4,781 3,443
Deferred revenue acquired....................................... 3,934 1,888
Other liabilities assumed....................................... 3,795 2,967
-------- -------
Purchase price and assumed liabilities................ $101,438 $77,661
======== =======
</TABLE>
Cash paid to sellers, payments for acquisition expenses and payments on
liabilities assumed in conjunction with acquisitions are included in cash used
in investing activities in the period paid. Deferred
F-9
<PAGE> 140
PROTECTION ONE, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
revenue, which represents advance billings to subscribers, is recognized as
revenue in the period in which the related service is provided. Such amounts are
considered a non-cash component of operations and are reflected as a reduction
in cash provided by operating activities.
The following reflects (decreases) in assets and decreases (increases) in
liabilities and capital stock resulting from non-cash investing and financing
activities which occurred in the nine months ended June 30, 1996:
<TABLE>
<CAPTION>
ADDITIONAL SERIES H
PURCHASE COMMON PAID-IN PREFERRED
INTANGIBLES HOLDBACKS STOCK CAPITAL STOCK
----------- --------- ------ ---------- ---------
<S> <C> <C> <C> <C> <C>
Charge off of purchase holdbacks....... $(3,911) $ 3,911 $ -- $ -- $ --
Conversion of Series H Preferred....... -- -- (7) (6,120) 6,127
Common shares issued for Metrol........ 6,843 -- (4) (6,839) --
Reclassification of stock offering
costs................................ (539) -- -- 539 --
----------- --------- ------ ---------- ---------
$ 2,393 $ 3,911 $(11) $ (12,420) $ 6,127
======== ======== ====== ======== =======
</TABLE>
The following reflects increases (decreases) in assets and increases in
liabilities and capital stock resulting from non-cash investing and financing
activities which occurred in nine months ended June 30, 1997:
<TABLE>
<CAPTION>
ADDITIONAL
OTHER ASSETS HELD PURCHASE COMMON PAID-IN
RECEIVABLES FOR SALE INTANGIBLES HOLDBACKS STOCK CAPITAL
----------- ----------- ----------- --------- ------ ----------
<S> <C> <C> <C> <C> <C> <C>
Chargeoff of purchase
holdbacks................ $(3,472) $ 3,472
Common shares issued for
acquisitions............. 10,448 $ (9) $ (10,439)
Sale of guard and patrol
operations............... $ 588 $(588)
----------- ----------- ----------- --------- ------ ----------
$ 588 $(588) $ 6,976 $ 3,472 $ (9) $ (10,439)
======== ======== ======== ======== ====== ========
</TABLE>
8. COMMITMENTS AND CONTINGENCIES:
The Company is a party to claims and other matters of litigation incidental
to the normal course of business. The ultimate outcome of these matters cannot
presently be determined; however, in the opinion of management of the Company,
the resolution of these matters will not have a material adverse effect on the
Company's consolidated financial position, results of operations and cash flows.
9. SUPPLEMENTAL SUBSIDIARY COMPANY SUMMARIZED FINANCIAL INFORMATION:
POI has fully and unconditionally guaranteed the Discount Notes and the
$103.5 million principal amount of Monitoring's 6 3/4% Convertible Senior
Subordinated Notes due 2003 (the "Convertible Notes") on a joint and several
basis. The assets, results of operations and stockholder's equity of Monitoring
comprise substantially all of the assets, results of operations and assets and
sole operations are in and through its investment in Monitoring. All significant
intercompany balances and transactions have been eliminated in consolidation.
Separate financial statements for Monitoring have not been provided because the
Company
F-10
<PAGE> 141
PROTECTION ONE, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
does not believe such separate financial statements and separate summarized
financial information are material to investors. Summarized consolidated
financial information of Monitoring is presented below:
<TABLE>
<CAPTION>
JUNE 30,
1997
SEPTEMBER 30, -----------
1996 (UNAUDITED)
-------------
(UNAUDITED)
<S> <C> <C>
Summarized Balance Sheet
Assets
Current assets.......................................... $ 28,907 $ 33,348
Subscriber accounts and intangibles, net................ $ 257,354 $ 308,925
Other non-current assets................................ $ 11,375 $ 15,294
Liabilities and Stockholders' Equity
Deferred revenue........................................ $ 13,827 $ 16,391
Other current liabilities............................... $ 20,712 $ 27,511
Long-term debt, net of current portion.................. $ 225,650 $ 279,750
Other long-term liabilities............................. $ 8,620 $ 9,555
Stockholders' equity.................................... $ 28,827 $ 24,360
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
------------------- ---------------------
1996 1997 1996 1997
------- ------- -------- --------
<S> <C> <C> <C> <C>
Summarized Statements of Operations
Revenue................................. $18,617 $24,879 $ 51,795 $ 71,954
Gross profit............................ $ 5,346 $ 7,049 $ 36,222 $ 51,185
Net loss................................ $(3,860) $(6,287) $(11,099) $(15,109)
</TABLE>
10. SUBSEQUENT EVENTS:
On July 30, 1997, POI entered into a Contribution Agreement dated as of
July 30, 1997 (the "Contribution Agreement"), with Western Resources, Inc., a
Kansas corporation ("Western Resources"). Pursuant to, and on and subject to the
terms and conditions of, the Contribution Agreement, Western Resources will
contribute to POI all of the outstanding capital stock of WestSec, Inc and
Westar Security, Inc., which provide security alarm monitoring services under
the Westinghouse, Westar and other trade names, and an aggregate of
approximately $370 million in cash, net; in consideration of such contribution,
POI will issue to Western Resources (the "Share Issuance") that number of shares
of the Common Stock, par value $.01 per share, of POI ("POI Common Stock") equal
to the product of (x) .801 and (y) the sum of (A) the aggregate number of shares
of POI Common Stock outstanding immediately following the issuance (including,
for this purpose, shares issued pursuant to the Contribution Agreement, but
excluding any shares issued pursuant to the Stock Option Agreement (as defined
below) and (B) the aggregate number of shares of POI Common Stock issuable as of
the closing under the Contribution Agreement (the "Closing") pursuant to then
outstanding options and warrants of POI. Following the Closing Date, POI will
(i) pay to the holders of record of POI Common Stock on the Closing Date a
dividend of $7.00 per share, (ii) pay a cash bonus to POI Common Stock option
holders an amount equal to $7.00 per share of Common Stock issuable upon the
exercise of options held by such persons, (iii) pay to the holders of record of
certain warrants who are entitled, pursuant to the terms governing other
warrants, to receive such payment, $7.00 with respect to each share of Common
Stock issuable upon exercise of such warrants. In accordance with the agreements
and other documents governing other warrants issued by POI, POI will reduce the
exercise price of, and/or increase the number of shares of POI Common Stock
issuable upon exercise of, such warrants.
Consummation of the Share Issuance is subject to, among other things, the
approval of the Share Issuance by the stockholders of POI and regulatory
approvals, including expiration or termination of the waiting period required
under the Hart-Scott-Rodino Antitrust Improvements Act of 1976.
F-11
<PAGE> 142
PROTECTION ONE, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Concurrently with entering into the Contribution Agreement, POI and Western
Resources entered into a Stock Option Agreement dated as of July 30, 1997 (the
"Stock Option Agreement"), pursuant to which POI granted Western Resources an
option to purchase up to 2,750,238 shares (subject to adjustment) of POI Common
Stock, which option is exercisable under certain circumstances (i) if the
Contribution Agreement is terminated, at a price of $13.50 per share, and (ii)
if the Share Issuance occurs, at a price of $15.50 per share. In addition, the
directors and officers of POI and certain other POI stockholders (the
"Stockholders") have entered into an Option and Voting Agreement dated as of
July 30, 1997 (the "Option and Voting Agreement"), with Western Resources
pursuant to which the Stockholders have agreed, among other things, (i) to grant
Western Resources an option under certain circumstances to buy all shares of POI
Common Stock owned by the Stockholders, and (ii) to grant Western Resources an
irrevocable proxy to vote all shares of POI Common Stock owned by the
Stockholders so as to facilitate consummation of the Share Issuance.
Copies of the Contribution Agreement, Stock Option Agreement and the Option
and Voting Agreements are attached as Exhibits 2.1, 10.1 and 10.2, respectively,
to the Company's Current Report on Form 8-K filed with the Securities and
Exchange Commission on August 1, 1997.
F-12
<PAGE> 143
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors
Protection One, Inc.
Culver City, California
We have audited the accompanying consolidated balance sheets of Protection
One, Inc. and Subsidiaries as of September 30, 1996 and 1995, the consolidated
statements of operations, cash flows and changes in stockholders' equity
(deficit) for each of the three years in the period ended September 30, 1996,
and the financial statement schedule. These financial statements and the
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and
the financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Protection One,
Inc. and Subsidiaries as of September 30, 1996 and 1995, and their consolidated
results of operations and cash flows for each of the three years in the period
ended September 30, 1996, in conformity with generally accepted accounting
principles. In addition, in our opinion, the financial statement schedule
referred to above, when considered in relation to the basic financial statements
taken as a whole, presents fairly, in all material respects, the information
required to be included therein.
As discussed in Note 2, effective October 1, 1994, the Company changed its
method of accounting for certain subscriber account acquisition and transition
costs.
COOPERS & LYBRAND L.L.P.
Portland, Oregon
December 10, 1996
F-13
<PAGE> 144
PROTECTION ONE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------------
1995 1996
-------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents............................................ $ 1,256 $ 1,782
Restricted cash...................................................... -- 3,680
Receivables, net..................................................... 5,806 12,743
Inventories.......................................................... 3,125 1,920
Prepaid expenses..................................................... 547 1,221
-------- --------
Total current assets......................................... 10,734 21,346
Property and equipment, net............................................ 5,307 9,952
Subscriber accounts and intangibles, net............................... 162,239 257,354
Assets held for sale................................................... -- 775
Deposits............................................................... 389 648
-------- --------
$178,669 $290,075
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable..................................................... $ 2,078 $ 2,278
Accrued salaries, wages and benefits................................. 1,401 1,495
Other accruals....................................................... 529 1,048
Purchase holdbacks................................................... 4,949 9,942
Acquisition transition costs......................................... 970 4,326
Other current liabilities............................................ 800 1,623
Deferred revenue..................................................... 9,166 13,827
-------- --------
Total current liabilities.................................... 19,893 34,539
Long-term debt, net of current portion................................. 146,023 225,650
Other liabilities...................................................... 279 1,059
-------- --------
Total liabilities............................................ 166,195 261,248
-------- --------
Commitments and contingencies (Note 14)
Series H cumulative convertible preferred stock, $.10 par value, 6,127
shares authorized, issued and outstanding at September 30, 1995...... 6,127 --
Stockholders' equity:
Common Stock, $.01 par value, 24,000,000 shares authorized, 9,047,638
and 12,914,783 shares issued and outstanding at September 30, 1995
and 1996 respectively............................................. 90 129
Additional paid-in capital........................................... 41,829 79,767
Accumulated deficit.................................................. (35,572) (51,069)
-------- --------
Total stockholders' equity................................... 6,347 28,827
-------- --------
$178,669 $290,075
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-14
<PAGE> 145
PROTECTION ONE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
----------------------------------
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Monitoring and related services.......................... $ 29,297 $ 48,909 $ 68,778
Other.................................................... 5,183 6,973 4,679
-------- -------- --------
Total revenues................................... 34,480 55,882 73,457
-------- -------- --------
Cost of revenues:
Monitoring and related services.......................... 8,355 13,627 19,065
Other.................................................... 3,224 3,887 2,513
-------- -------- --------
Total cost of revenues........................... 11,579 17,514 21,578
-------- -------- --------
Gross profit..................................... 22,901 38,368 51,879
Selling, general and administrative expenses............... 10,607 13,031 15,478
Loss on acquisition terminations........................... 26 208 --
Performance warrants compensation expense.................. 4,504 -- --
Acquisition and transition expenses........................ -- 3,090 4,219
Amortization of intangibles and depreciation expense....... 9,290 16,543 25,121
-------- -------- --------
Operating income (loss).......................... (1,526) 5,496 7,061
Other expenses:
Interest expense, net.................................... 6,932 7,626 4,885
Amortization of debt issuance costs and OID.............. 891 6,797 17,812
Loss on assets held for sale............................. -- -- 89
Loss on sales of assets.................................. -- 505 19
-------- -------- --------
Loss before income taxes, extraordinary items and
cumulative effect of change in accounting
method -- net of taxes......................... (9,349) (9,432) (15,744)
Income tax benefit......................................... 2,863 3,595 247
-------- -------- --------
Loss before extraordinary items and cumulative
effect of change in accounting method -- net of
taxes.......................................... (6,486) (5,837) (15,497)
Extraordinary items -- losses on early extinguishment of
debt -- net.............................................. (1,174) (8,906) --
Cumulative effect of change in accounting method -- net.... -- (1,955) --
-------- -------- --------
Net loss......................................... (7,660) (16,698) (15,497)
Preferred stock dividends.................................. 748 958 248
Accretion of redeemable preferred stock.................... 753 797 --
-------- -------- --------
Loss attributable to common stock................ $ (9,161) $(18,453) $(15,745)
======== ======== ========
Loss per common share:
Before extraordinary items and cumulative effect of
change in accounting method........................... $ (27.11) $ (0.87) $ (1.40)
Net loss per share....................................... $ (31.10) $ (2.12) $ (1.40)
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-15
<PAGE> 146
PROTECTION ONE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-----------------------------------
1994 1995 1996
-------- -------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss................................................ $ (7,660) $(16,698) $ (15,497)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation......................................... 518 1,083 1,845
Amortization of intangibles.......................... 8,772 15,460 23,275
Amortization of OID and debt issuance costs.......... 891 6,797 17,812
Performance warrants earned.......................... 4,504 -- --
Cumulative effect of change in accounting method..... -- 1,955 --
Loss on sales and abandonments....................... -- 713 --
Inventory received in settlements of claim........... -- (1,562) --
Deferred income tax benefit.......................... (2,863) (3,595) (792)
Extraordinary items.................................. 1,174 8,906 --
Provision for doubtful accounts...................... 789 1,751 2,649
Other................................................ -- -- (204)
Receivables.......................................... (1,362) (2,795) (8,737)
Inventories.......................................... (355) 89 2,002
Prepaid expenses and deposits........................ 383 (408) (752)
Accounts payable..................................... 621 (121) 199
Accrued liabilities.................................. 2,662 (2,247) 1,793
Deferred revenue..................................... (675) (832) 470
-------- -------- ---------
Net cash provided by operating activities....... 7,399 8,496 24,063
-------- -------- ---------
Cash flows from investing activities:
Purchases of property and equipment..................... (1,417) (3,268) (5,420)
Acquisitions, net of cash received...................... (60,069) (52,249) (89,776)
Acquisition payments held in escrow..................... (456) 456 (3,680)
Payments on purchase holdbacks.......................... (941) (3,626) (3,532)
Deferred acquisition payments........................... (469) (2,167) (1,613)
Acquisition transition costs............................ (3,136) (2,558) (3,111)
Payment of other liabilities............................ (322) (109) --
-------- -------- ---------
Net cash used in investing activities........... (66,810) (63,521) (107,132)
-------- -------- ---------
Cash flows from financing activities:
Payments on long-term debt.............................. (25,805) (118,699) (111,222)
Proceeds from long-term debt............................ 88,328 168,005 174,248
Debt and equity issuance costs.......................... (6,444) (6,780) (4,981)
Payments on stockholders' notes receivable.............. 15 47 --
Issuance of preferred and common stock and warrants..... 5,494 20,219 25,798
Redemption of preferred stock........................... (1,500) (2,125) --
Note redemption and premium costs....................... -- (2,627) --
Cash dividends paid on preferred stock.................. (965) (2,816) (248)
-------- -------- ---------
Net cash provided by financing activities....... 59,123 55,224 83,595
-------- -------- ---------
Net increase (decrease) in cash and cash
equivalents................................... (288) 199 526
Cash and cash equivalents:
Beginning of period..................................... 1,345 1,057 1,256
-------- -------- ---------
End of period........................................... $ 1,057 $ 1,256 $ 1,782
======== ======== =========
Interest paid during the period........................... $ 4,563 $ 9,968 $ 4,784
======== ======== =========
Income taxes paid during the period....................... $ -- $ -- $ 160
======== ======== =========
Supplemental disclosure (see Note 12)
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-16
<PAGE> 147
PROTECTION ONE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
CLASS B SERIES A ADDITIONAL STOCKHOLDERS'
COMMON COMMON PREFERRED PAID-IN NOTES ACCUMULATED
STOCK STOCK STOCK CAPITAL RECEIVABLE DEFICIT TOTAL
------ ------- --------- ---------- ------------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
September 30, 1993................... $ 10 $ 962 $ 7 $ (62) $ (9,713) $ (8,796)
Net loss............................. (7,660) (7,660)
Restatement of par value............. (9) (895) 904
Issuance of preferred shares......... 2,358 2,358
Cancellation of preferred shares..... (122) (122)
Issuance of common shares............ $ 18 982 1,000
Issuance of common stock warrants.... 4,494 4,494
Stock and warrant issuance costs..... (376) (376)
Accretion of Series C and E
Redeemable Preferred Stock......... (753) (753)
Payments on stockholders' notes
receivable......................... 15 15
Dividends on Series F Redeemable
Preferred Stock.................... (748) (748)
Exercise of stock purchase warrant... 1 (1)
Performance warrants................. 4,504 4,504
---- ---- ----- ------- ---- -------- --------
September 30, 1994................... 2 18 67 12,750 (47) (18,874) (6,084)
Net loss............................. (16,698) (16,698)
Issuance of common stock and
warrants........................... 30 20,120 20,150
Exercise of stock purchase
warrants........................... 2 71 73
Stock and warrant issuance costs..... (2,283) (2,283)
Accretion of Series C and E
Redeemable Preferred Stock......... (797) (797)
Dividends on Series A, F, and H
Preferred Stock.................... (876) (876)
Conversion to common stock........... 56 (18) (67) 12,844 12,815
Payments on stockholders' notes
receivable......................... 47 47
---- ---- ----- ------- ---- -------- --------
September 30, 1995................... 90 -- -- 41,829 -- (35,572) 6,347
Net loss............................. (15,497) (15,497)
Issuance of common shares............ 38 38,913 38,951
Exercise of stock purchase
warrants........................... 1 65 66
Stock issuance costs................. (792) (792)
Dividends on Series H Preferred
Stock.............................. (248) (248)
---- ---- ----- ------- ---- -------- --------
September 30, 1996................... $129 $ -- $ -- $ 79,767 $ -- $ (51,069) $ 28,827
==== ==== ===== ======= ==== ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-17
<PAGE> 148
PROTECTION ONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT FOR PER SHARE AMOUNTS)
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Consolidation and Business
The consolidated financial statements include the accounts of Protection
One, Inc. (POI) and its wholly-owned subsidiary, Protection One Alarm
Monitoring, Inc. (Monitoring) (together with POI, the Company). Monitoring's
former wholly-owned subsidiary, Protection One Alarm Services, Inc. was merged
into Monitoring in May 1996. The assets, results of operations and stockholders'
equity of Monitoring comprise substantially all of the assets, results of
operations and stockholders' equity of the Company on a consolidated basis.
POI's principal assets and sole operations are in and through its investment in
Monitoring. All significant intercompany balances and transactions have been
eliminated in consolidation. Separate audited financial statements for
Monitoring have not been provided because the Company does not believe such
separate financial statements are material to investors. Summarized financial
information of Monitoring is included in Note 16.
The Company provides security alarm monitoring services and sells, installs
and services security alarm systems for residential and small business
subscribers principally in the western United States.
Revenues
Revenues are recognized when installation of security alarm systems occurs
and when monitoring, extended service protection, patrol and repair services are
provided. The Company does not receive separate connection fees in any aspect of
its business. Subscribers are billed for monitoring, extended service protection
and patrol and alarm response services in advance of the period in which such
services are provided, on a monthly, quarterly or annual basis. Deferred
revenues result from billings in advance of performance of monitoring, extended
service protection and patrol service. Deferred revenues relating to subscriber
accounts acquired are recorded as part of the allocation of the purchase price
and are amortized to income during the period in which service is provided.
Costs of providing service and installations, including inventory, are charged
to income in the period incurred and when the installation occurs. Losses on
contracts for which future costs are anticipated to exceed revenues are accrued
in the period such losses are identified. Costs of services provided to dealers
are expensed as incurred and are included in acquisition and transition
expenses. Contracts for services are generally for an initial non-cancellable
term of one to five years with automatic renewal on an annual basis thereafter
unless terminated by either party. A substantial number of contracts are now on
an automatic renewal basis.
Inventories
Inventories, comprised of alarm systems and parts, are stated at the lower
of average cost or market.
Property and Equipment
Property and equipment is stated at cost and depreciated using the
straight-line method over its estimated useful life. Costs of property and
equipment of purchased businesses are based on estimated replacement costs at
the date of acquisition. When property and equipment is retired or sold, the
cost and the related allowance for depreciation is eliminated from the property
and allowance accounts. Gains or losses from retirements and dispositions of
property and equipment are recognized in the period realized. Repair and
maintenance costs are expensed as incurred.
Income Taxes
Deferred tax liabilities and assets reflect the tax effect of temporary
differences between the financial statement and tax bases of assets and
liabilities and the availability of net operating losses and tax credits.
F-18
<PAGE> 149
PROTECTION ONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT FOR PER SHARE AMOUNTS)
Subscriber Accounts and Intangibles
Subscriber accounts acquired and intangible assets are stated at cost. The
cost of acquired subscriber accounts includes the cost of accounts purchased and
the estimated fair value at the date of acquisition of the accounts acquired in
business acquisitions, including an accrual for estimated acquisition transition
costs. The Company's personnel and related support costs and duplicative costs
incurred solely in support of acquiring and transitioning subscriber accounts
are expensed as incurred. Direct and incremental external costs associated with
the acquisition of subscriber accounts are capitalized. If the acquisition is
terminated prior to completion of the purchase transaction the costs are
recorded as a loss in the period of termination. The accrual for transition
costs includes liabilities assumed and incremental external costs related to
customer changeover and transition, warranty obligation costs, employee and
lease termination costs and other related costs. Costs related to sales,
marketing and installation of systems for accounts internally generated are
expensed as incurred.
The cost of subscriber accounts acquired is amortized on a straight-line
basis over a 10 year period. It is the Company's policy to evaluate acquired
subscriber account attrition on a quarterly basis utilizing historical attrition
rates for the subscriber accounts in total and, when necessary, adjust the
remaining useful lives.
The Company periodically estimates future cash flows from the subscriber
accounts. Because the expected cash flows have exceeded the unamortized cost of
the subscriber accounts the Company has not recorded an impairment loss.
Intangible assets include goodwill, which is amortized on a straight-line
basis over the estimated life of 10 years, and debt issuance costs, which are
amortized over the respective lives of associated debt using the interest
method.
Cash and Cash Equivalents
All highly liquid investments purchased with a remaining maturity of three
months or less at the date acquired are cash equivalents. These investments,
consisting of money market funds, are stated at cost, which approximates market.
Restricted Cash
Restricted cash is held in escrow pursuant to an acquisition agreement
pending final determination of the purchase price of the assets acquired by the
Company.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of trade receivables from a
large number of customers, including both residential and commercial, dispersed
across a wide geographic base. The Company extends credit to its customers in
the normal course of business, performs periodic credit evaluations and
maintains allowances for potential credit losses.
Advertising Costs
The Company expenses advertising costs based on the timing of the release
of the advertising materials. Print materials, due to the short lead time
between incurrence of cost and the release, are generally expensed as incurred,
whereas broadcast advertising costs are generally recognized upon the first
broadcast of the respective advertisement. Total advertising expense was $497,
$411 and $374 during the years ended September 30, 1994, 1995 and 1996,
respectively.
F-19
<PAGE> 150
PROTECTION ONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT FOR PER SHARE AMOUNTS)
NEW ACCOUNTING PRONOUNCEMENTS
In March of 1995, the Financial Accounting Standards Board issued SFAS 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of" effective for financial statements for fiscal years beginning
after December 15, 1995. This statement requires that long-lived assets and
certain identifiable intangibles to be held and used by an entity be reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. The Company determines the
value of its subscriber accounts and intangibles, net based on the undiscounted
cash flows from the monthly recurring revenue (MRR) stream using the most recent
historical attrition rate and aggregate MRR. Based on estimates made as of
September 30, 1996, the Company does not anticipate a material impact on the
financial statements of the registrant that will result from the adoption of the
standard.
In October of 1995, the Financial Standards Accounting Board issued SFAS
123 "Accounting for Stock Based Compensation," which is effective for fiscal
years beginning after December 15, 1995. The Company has not made a decision
with regard to adoption of the optional provisions of the new standard.
Loss Per Common Share
The computation of fully diluted net loss per share for the years ended
September 30, 1994, 1995 and 1996 was antidilutive; as such, no presentation of
fully diluted earnings per share has been included in the consolidated
statements of operations. The weighted average shares outstanding used in the
computation of net loss attributable to common shares are as follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------------
1994 1995 1996
------- --------- ----------
<S> <C> <C> <C>
Common Stock.............................. 129,705 8,695,395 11,250,185
Class B Common Stock...................... 164,880 2,792 --
------- --------- ----------
294,585 8,698,187 11,250,185
======= ========= ==========
</TABLE>
Reclassifications
Certain prior period amounts were reclassified to conform to the September
30, 1996 presentation. Such reclassifications did not affect previously reported
net loss.
2. CHANGE IN ACCOUNTING METHOD:
In the third quarter of fiscal 1995, the Company changed its method of
accounting for certain subscriber account acquisition and transition costs,
effective as of October 1, 1994. Under the new method, the Company's personnel
and related support costs and duplicate costs incurred solely in support of
acquiring and transitioning subscriber accounts are expensed as incurred.
Capitalizable costs include the direct costs of accounts purchased and the
estimated fair value at the date of acquisition of the accounts acquired in
business acquisitions, including an accrual for estimated acquisition transition
costs. Such capitalized transition costs include incremental external costs
related to customer changeover and transition, warranty obligation costs,
employee and lease termination costs and other related costs.
The new method is consistent with the guidelines adopted by the Emerging
Issues Task Force of the Financial Accounting Standards Board in Issue 95-3,
Recognition of Liabilities in Conjunction with Purchase Business Combinations.
The consolidated financial statements for the year ended September 30, 1995
reflect the change in accounting method as of October 1, 1994. The effect of the
change on such year was to increase the loss before cumulative effect of the
accounting change, net loss and loss attributable to Common Stock by
approximately
F-20
<PAGE> 151
PROTECTION ONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT FOR PER SHARE AMOUNTS)
$1.5 million or $0.17 per share. The cumulative effect of the change as of
October 1, 1994 was approximately $1.95 million or $0.22 per share, net of
income taxes of $1.2 million, and is reported separately in the consolidated
statement of operations for the year ended September 30, 1995.
The following unaudited pro forma amounts reflect the results of operations
as if the change in accounting method had been retroactively applied:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER
30,
---------------------
1994 1995
-------- --------
<S> <C> <C>
Pro forma:
Loss before extraordinary items...................... $ (7,333) $ (5,837)
Net loss............................................. $ (8,508) $(14,743)
Net loss attributable to common stock................ $(10,008) $(16,498)
Loss per common share:
Before extraordinary item......................... $ (29.99) $ (.87)
Net loss per share................................ $ (33.97) $ (1.90)
Actual:
Net loss per share................................... $ (31.10) $ (2.12)
</TABLE>
3. PUBLIC EQUITY OFFERINGS AND CONVERSION OF PREFERRED STOCK:
Initial Public Offering and Borrowing Under Revolving Credit Facility
On October 6, 1994, POI issued 2,700,000 shares of its common stock (Common
Stock) at $6.50 per share in an initial public offering (IPO). On November 4,
1994, the Company's underwriters exercised their option to purchase an
additional 330,000 shares of Common Stock at $6.50 per share. In conjunction
with the issuance of shares on October 6, 1994, the Company borrowed $3 million
under Monitoring's revolving credit facility to pay accumulated unpaid
dividends, stock conversion inducements and accounts payable.
Conversion of Shares
In conjunction with the IPO, all outstanding shares of POI's Series A, B,
C, E and G Preferred Stock and Class B Common Stock were converted into a total
of 5,557,003 shares of Common Stock. At the time of conversion, the Company paid
accumulated unpaid dividends totaling $2,104 to the holders of the Series A, C
and E Preferred Stock and payments totaling $82 to the holders of the Series A
Preferred Stock to induce conversion of the shares into Common Stock. As a
result of the conversion, the Company recorded a charge to additional paid in
capital of $1,043 which reflects: (i) the accrual of dividends on the Series C
and E Redeemable Preferred Stock from September 30, 1994 through October 6, 1994
totaling $15, (ii) the acceleration of accretion to redemption value of the
Series C and E Redeemable Preferred Stock totaling $782, (iii) payment of
dividends to the holders of the Series A Preferred Stock totaling $164 and (iv)
payments of conversion inducements to the holders of the Series A Preferred
Stock totaling $82.
Secondary Public Offering and Conversion of Shares
On February 6, 1996, POI completed a public offering of 4.0 million shares
of Common Stock (2.5 million shares of which was sold by POI), resulting in net
proceeds to the Company of $23.1 million.
In connection with the secondary public offering, all the outstanding
shares of the Company's Series H preferred stock were converted into an
aggregate of 680,777 shares of common stock.
F-21
<PAGE> 152
PROTECTION ONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT FOR PER SHARE AMOUNTS)
4. EXTRAORDINARY ITEMS:
The extraordinary items all relate to losses on early extinguishment of
debt and include the following components:
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
-----------------
1994 1995
------ ------
<S> <C> <C>
Unamortized debt issuance costs............................ $1,174 $3,044
Unamortized OID............................................ -- 4,138
Conversion and tender fees and expenses.................... -- 2,635
------ ------
1,174 9,817
Deferred tax benefit....................................... -- (911)
------ ------
$1,174 $8,906
====== ======
</TABLE>
5. RECEIVABLES:
Receivables, which consist primarily of trade accounts receivable of $8,309
at September 30, 1995 and $18,284 at September 30, 1996, have been reduced by
allowances for doubtful accounts of $2,503 and $5,541, respectively. Included in
receivables and deferred revenue at September 30, 1995 and 1996 are October
invoices billed in advance of the periods in which the services are provided
totaling $4,667 and $7,309, respectively. The provisions for doubtful accounts
for the years ended September 30, 1994, 1995, and 1996 were $789, $1,751 and
$2,649, respectively.
6. PROPERTY AND EQUIPMENT:
Property and equipment are summarized as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------
1995 1996
------- -------
<S> <C> <C>
Furniture and fixtures................................... $ 2,004 $ 2,668
Data processing.......................................... 2,563 6,361
Vehicles................................................. 2,568 4,038
Leasehold improvements................................... 634 927
------- -------
7,769 13,994
Less accumulated depreciation and amortization........... (2,462) (4,042)
------- -------
$ 5,307 $ 9,952
======= =======
</TABLE>
7. SUBSCRIBER ACCOUNTS AND INTANGIBLES:
Subscriber accounts and intangibles (at cost) consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------------
1995 1996
-------- --------
<S> <C> <C>
Acquired subscriber accounts........................... $184,463 $298,767
Debt issuance costs.................................... 7,405 11,847
Goodwill and other..................................... 1,641 2,497
-------- --------
193,509 313,111
Less accumulated amortization.......................... (31,270) (55,757)
-------- --------
$162,239 $257,354
======== ========
</TABLE>
F-22
<PAGE> 153
PROTECTION ONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT FOR PER SHARE AMOUNTS)
Reconciliation of acquired subscriber accounts:
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------------
1995 1996
-------- --------
<S> <C> <C>
Balance, beginning of year............................. $122,330 $184,463
Cumulative effect of change in accounting method....... (3,802) --
Acquisition of subscriber accounts..................... 70,105 119,629
Charges against acquisition holdbacks.................. (2,025) (5,325)
Sale of subscriber accounts............................ (2,145) --
-------- --------
Balance, end of year................................... $184,463 $298,767
======== ========
Number of subscriber accounts acquired during the
year................................................. 63,611 91,325
======== ========
</TABLE>
In conjunction with certain purchases of subscriber accounts the Company
withholds a portion of the purchase price as a reserve to offset qualifying
attrition of the acquired subscriber accounts for a specified period as provided
for in the purchase agreements, and as a reserve for purchase price settlements
of assets acquired and liabilities assumed. During the year ended September 30,
1995, purchase holdbacks as a percentage of total purchase price ranged from 0%
to 20% and extended for periods of up to 30 months. During the year ended
September 30, 1996, purchase holdbacks as a percentage of total purchase price
ranged from 0% to 20% and extended for periods of up to 12 months.
Reconciliation of purchase holdbacks:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------
1995 1996
------- -------
<S> <C> <C>
Balance, beginning of year............................... $ 4,250 $ 4,949
Purchase holdbacks additions............................. 6,349 13,850
Charges against subscriber accounts...................... (2,025) (5,325)
Cash payments to sellers................................. (3,625) (3,532)
------- -------
Balance, end of year..................................... $ 4,949 $ 9,942
======= =======
</TABLE>
8. LONG-TERM DEBT
Long-term debt is comprised of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------------
1995 1996
-------- --------
<S> <C> <C>
Notes payable under credit agreements:
Senior Subordinated Discount Notes................... $166,000 $166,000
Unamortized original issue discount.................. (52,229) (35,628)
Convertible Senior Subordinated Notes................ -- 90,000
Revolving credit facility............................ 32,252 5,278
-------- --------
$146,023 $225,650
======== ========
</TABLE>
F-23
<PAGE> 154
PROTECTION ONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT FOR PER SHARE AMOUNTS)
Senior Subordinated Discount Notes
In May 1995, the Company completed a refinancing plan (the "Refinancing")
to increase its operating and financial flexibility and provide additional funds
to finance the acquisition of subscriber accounts. The principal components of
the Refinancing were:
1. The offering of $166 million principal amount of Monitoring's
Senior Subordinated Discount Notes (the Senior Subordinated Discount Notes)
and warrants to purchase 531,200 shares of Common Stock at $6.60 per share.
The net proceeds of $105.2 million were used to (i) repurchase all $50
million principal amount of the Series B Notes for an aggregate $52.5
million; (ii) repay $51.1 million of the Company's borrowings under the
Revolving Credit Facility; (iii) finance the repurchase of 25% of the
outstanding shares of the Series F Preferred Stock from the holder thereof;
and (iv) pay accrued interest on the Series B Notes to the date of
repurchase, accrued dividends on the Series F Preferred Stock to the date
of repurchase and certain fees relating to the extension of the maturity
date of the Revolving Credit Facility.
2. The execution of an amendment to the Revolving Credit Facility in
order to permit the consummation of the Refinancing and to provide for the
extension of the maturity date of the Revolving Credit Facility from
November 1996 to November 1997.
3. The repurchase by POI of 25% of the outstanding shares of Series F
Preferred Stock from the holder thereof for consideration consisting of
approximately $2.0 million in cash and the exchange of the remaining shares
of Series F Preferred Stock for POI's Series H Cumulative Convertible
Preferred Stock.
The Senior Subordinated Discount Notes are unsecured subordinated
obligations of Monitoring, limited to $166 million aggregate principal amount at
maturity, and will mature on June 30, 2005. These notes were sold at a
substantial discount from their principal amount, and will accrete to face value
through June 30, 1998. Although for federal income tax purposes a significant
amount of original issue discount, taxable as ordinary income, will be
recognized by a holder as such discount accrues from the issue date, no interest
will be payable prior to December 31, 1998. From and after June 30, 1998, cash
interest on the notes will accrue at the rate of 13 5/8% per annum, payable in
cash semiannually on June 30 and December 31, of each year, commencing December
31, 1998.
The Senior Subordinated Discount Notes are redeemable, at Monitoring's
option, in whole or in part, at any time or from time to time, on or after June
30, 2000 and prior to maturity, upon not less than 30 nor more than 60 days'
prior notice at certain specified redemption prices plus accrued and unpaid
interest.
The Senior Subordinated Discount Notes are fully, unconditionally and
jointly and severally guaranteed on a senior subordinated basis by POI and a
subsidiary of Monitoring, Security Holdings, Inc. (Security Holdings), purchased
by Monitoring in November 1996. As of September 30, 1996, Monitoring had no
subsidiaries.
The Senior Subordinated Discount Notes contain covenants which, among other
matters, limit the Company and its Subsidiaries' ability to incur indebtedness,
pay dividends, sell assets, make stock distributions or sell shares of certain
subsidiaries.
Senior Subordinated Notes
On November 3, 1993, the Company issued 50,000 units (the Units) with each
Unit consisting of one, $1,000 face value, 12%, Series A Senior Subordinated
Note (the Notes) of Monitoring and 28 detachable Warrants to purchase shares of
Common Stock. The Notes had an aggregate principal amount of $50,000 and were
scheduled to mature on November 1, 2003. Interest was payable semi-annually on
May 1 and
F-24
<PAGE> 155
PROTECTION ONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT FOR PER SHARE AMOUNTS)
November 1, commencing in May 1994. The Notes had optional redemption provisions
and mandatory redemption provisions in the event of change of control of the
Company. A portion of the proceeds from the Units was assigned as the value
attributable to the warrants resulting in a $4,494 original issue discount (OID)
which was being amortized over the maturity period of the Notes using the
effective interest method. The Company recorded discount amortization of $202
and $155 for the years ended September 30, 1994 and 1995, respectively; such
amounts are included in the consolidated statement of operations as a component
of interest expense. The Series B Notes were repaid with the proceeds from the
issuance of the Senior Subordinated Discount Notes.
Convertible Senior Subordinated Notes
In September 1996, Monitoring issued $90.0 million principal amount of
Convertible Senior Subordinated Notes (the "Convertible Notes"). In October
1996, the underwriters exercised an overallotment option, and Monitoring issued
an additional $13.5 million of Convertible Notes. The Convertible Notes are
unsecured subordinated obligations of Monitoring and rank pari passu with the
Senior Subordinated Discount Notes. The Convertible Notes mature on September
15, 2003 and are convertible, at any time, into Common Stock at a price of
$17.95 per share, subject to adjustment.
Interest on the Convertible Notes accrues at the rate of 6.75% per annum,
payable in cash semiannually on March 15 and September 15 of each year,
commencing March 15, 1997. The Convertible Notes are redeemable, at Monitoring's
option, in whole or in part, at any time or from time to time, on or after
September 19, 1999 and prior to maturity, upon not less than 30 days prior
notice at certain specified redemption prices plus accrued and unpaid interest.
The Convertible Notes are fully, unconditionally and jointly and severally
guaranteed on a senior subordinated basis by POI and Security Holdings.
The indenture under which the Convertible Notes were issued contains
covenants which limit the Company and its subsidiaries' ability to incur certain
indebtedness.
Revolving Credit Facility
At September 30, 1996 Monitoring had a $100 million revolving credit
facility (the Revolving Credit Facility) which matures in January 2000.
Borrowings under the Revolving Credit Facility bear interest at the lesser of
the bank's prime rate plus 1.00% (9.25% at September 30, 1996) or LIBOR plus
2.50% (7.93% at September 30, 1996). Borrowings made under the Revolving Credit
Facility are collateralized by substantially all of the Company's assets,
including the stock of Monitoring and the Company's rights and interests in
subscriber contracts and agreements. Availability of funds under the agreement
is subject to certain financial covenants including: (i) maximum senior debt to
annualized earnings before interest, taxes, depreciation and amortization
(EBITDA); (ii) maximum total debt to annualized EBITDA; and (iii) maximum senior
debt to monthly recurring revenues (MRR). At September 30, 1996, borrowings
under the Revolving Credit Facility amounted to $5,278, all of which bear
interest at LIBOR plus 2.50%.
F-25
<PAGE> 156
PROTECTION ONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT FOR PER SHARE AMOUNTS)
Annual scheduled maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDING SEPTEMBER 30,
----------------------------------------------------------
<S> <C>
1997...................................................... $ --
1998...................................................... --
1999...................................................... --
2000...................................................... 5,278
2001...................................................... --
Thereafter................................................ 256,000
--------
261,278
Less unamortized OID...................................... (35,628)
--------
$225,650
========
</TABLE>
9. OTHER LIABILITIES:
Other liabilities are comprised of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------
1995 1996
------ ------
<S> <C> <C>
Deferred acquisition payments.............................. $1,057 $2,297
Other...................................................... 22 385
------ ------
$1,079 $2,682
====== ======
Classified as follows:
Other current liabilities................................ $ 800 $1,623
Other liabilities........................................ 279 1,059
------ ------
$1,079 $2,682
====== ======
</TABLE>
At September 30, 1996 deferred acquisition payments are due as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDING SEPTEMBER 30,
------------------------------------------------------------
<S> <C>
1997........................................................ $1,238
1998........................................................ 621
1999........................................................ 438
------
$2,297
======
</TABLE>
10. STOCK WARRANTS AND OPTIONS:
Performance Warrants to purchase 500,472 shares of Common Stock at an
exercise price of $0.167 per share were issued to certain officers of the
Company on September 16, 1991 and were to be earned upon attainment of certain
return on investment objectives and were to vest over a five year period of
employment after the date of issuance. Such objectives were not achieved as of
June 29, 1994, when the Board of Directors and the officers modified the
earnings and vesting criteria such that vesting occurred on that date for all
Performance Warrants. Accordingly, compensation expense in an amount equal to
the excess of the fair market value of the Common Stock issuable on exercise of
the Performance Warrants over the exercise price is reflected as a non-cash
expense in the amount of $4,504 in the year ended September 30, 1994. The
Performance Warrants expire in September 2002.
On November 3, 1993, the Company issued 1,400,000 warrants to purchase
840,000 shares of Common Stock as a part of the Units offering. Each warrant,
when exercised, entitles the holder to receive six-tenths
F-26
<PAGE> 157
PROTECTION ONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT FOR PER SHARE AMOUNTS)
(0.6) of one share of Common Stock at an exercise price of $.167 per share,
subject to adjustment. The outstanding warrants are exercisable and expire on
November 1, 2003.
In June 1994, the Board of Directors adopted, and the stockholders of the
Company approved, the 1994 Stock Option Plan (the Plan). The Plan provides for
the award to directors, officers and key employees of qualified and nonqualified
options under the Internal Revenue Code. Nine hundred forty-four thousand
(944,000) shares are reserved for issuance under the Plan, subject to such
adjustment as may be necessary to reflect changes in the Common Stock or other
securities of POI.
During the year ended September 30, 1995, the Company granted options to
purchase an aggregate of 288,000 shares of Common Stock including 132,000 shares
granted to officers of the Company. Each option has a term of 10 years and vests
20% on each of the third through seventh anniversaries of the commencement of
the participant's employment with the Company. The purchase price of the shares
issuable pursuant to the options is equal to fair market value of Common Stock
at the date of option grant.
In connection with the issuance of the Senior Subordinated Discount Notes
in May 1995, the Company issued warrants to purchase 531,200 shares of Common
Stock at an exercise price of $6.60 per share, subject to adjustment. The
outstanding warrants are exercisable and expire in May of 2005.
During the year ended September 30, 1996, the Company granted options to
purchase an aggregate of 616,800 shares of Common Stock including 400,000 shares
granted to officers of the Company. Each option has a term of 10 years and vests
20% on each of the first through fifth anniversaries of the later of November
15, 1995 or the commencement of the participant's employment with the Company.
The purchase price of the shares issuable pursuant to the options is equal to
(or greater than) the fair market value of the Common Stock at the date of
option grant.
A summary of warrant and option activity is as follows:
<TABLE>
<CAPTION>
WARRANTS
AND OPTIONS PRICE RANGE
----------- -------------
<S> <C> <C>
Outstanding September 30, 1993................... 833,534 $0.167-$3.663
Granted.......................................... 840,000 $0.167
Exercised........................................ (99,841) $0.167
Surrendered...................................... (1,264) $0.167
---------
Outstanding September 30, 1994................... 1,572,429 $0.167-$3.663
Granted.......................................... 819,200 $5.875-$9.125
Exercised........................................ (256,799) $0.167-$6.50
Surrendered...................................... (14,400) $6.50
---------
Outstanding September 30, 1995................... 2,120,430 $0.167-$9.125
Granted.......................................... 616,800 $8.00-$16.75
Exercised........................................ (74,252) $0.167-$6.50
Surrendered...................................... (17,760) $6.50-$8.00
---------
Outstanding September 30, 1996................... 2,645,218 $0.167-$16.75
Exercisable:
September 30, 1994............................. 1,572,429 $0.167-$3.663
September 30, 1995............................. 1,907,310 $0.167-$6.50
September 30, 1996............................. 1,886,818 $0.167-$6.50
</TABLE>
F-27
<PAGE> 158
PROTECTION ONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT FOR PER SHARE AMOUNTS)
11. INCOME TAXES:
For the years ended September 30, 1995 and 1996, the Company recognized
federal and state deferred tax benefits of $3,595 and $247, respectively. Such
benefits were recognized because valuation allowances were reduced as a result
of utilization of net operating losses (NOL) to offset temporary differences
that generate deferred tax liabilities during the carryforward period. At
September 30, 1996, the Company had $32.1 million in NOL carryforwards for
regular federal tax purposes and $24.8 million for alternative minimum tax (AMT
NOL) purposes which expire in the years 2006-2010. The Company also has certain
general business and job credit carryforwards. These carryforwards are
available, subject to certain restrictions, to reduce taxable income,
alternative minimum taxable income and income taxes payable in future years. As
a result of the issuance of warrants in conjunction with the Company's
refinancing plan, as well as various prior issuances of preferred and common
stock and stock warrants, there are annual limitations on the amount of NOL and
AMT NOL carryforwards, as well as tax credits, that can be used to reduce
taxable income, alternative minimum taxable income and income tax payable.
Future substantial changes in the Company's ownership could create additional
limitations.
The components of deferred tax assets and liabilities are
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
---------------------
1995 1996
-------- --------
<S> <C> <C>
Deferred tax assets:
Accounts receivable, due to allowances for doubtful
accounts.......................................... $ 1,000 $ 2,214
Acquisition reserves and holdbacks................... 2,365 5,701
Performance warrants................................. 1,800 1,662
Net operating loss carryforwards..................... 15,688 12,814
OID amortization..................................... 2,174 8,634
Other................................................ 37 139
Less valuation allowance............................. (3,573) (1,907)
-------- --------
Total deferred tax assets.................... 19,491 29,257
Deferred tax liabilities:
Differences in depreciation and amortization......... (19,491) (29,257)
-------- --------
Net deferred tax liabilities................. $ -- $ --
======== ========
</TABLE>
The valuation allowances at September 30, 1995 and September 30, 1996
reflect current estimates of limitations on utilization of NOL carryforwards for
Federal and state income tax purposes. The valuation allowance at September 30,
1995 of $3,573 reflects a $2,953 increase over the valuation allowance at
September 30, 1994. The decrease in valuation allowance of $1,666 from September
30, 1995 to September 30, 1996 reflects amounts which were eliminated in
connection with the acquisition of Metrol Security Services, Inc. (see Note 17.)
F-28
<PAGE> 159
PROTECTION ONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT FOR PER SHARE AMOUNTS)
The income tax benefit is comprised of the following:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
---------------------------
1994 1995 1996
------ ------ -----
<S> <C> <C> <C>
Current
Federal......................................... $ -- $ -- $(463)
State........................................... -- -- (82)
------ ------ -----
Total current........................... -- -- (545)
------ ------ -----
Deferred
Federal......................................... 2,663 4,594 674
State........................................... 200 1,120 118
------ ------ -----
Total deferred.......................... 2,863 5,714 792
------ ------ -----
Total income tax benefit.......................... $2,863 $5,714 $ 247
====== ====== =====
</TABLE>
The differences between the income tax benefit at the Company's effective
tax rate and at the statutory rate are as follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------
1994 1995 1996
------ ------- -------
<S> <C> <C> <C>
Computed "expected" tax benefit................ $3,178 $ 7,620 $ 5,408
State income tax benefit, net.................. 537 1,336 948
Other.......................................... (8) (289) (188)
Loss without tax benefits...................... (844) (2,953) (5,921)
------ ------- -------
Total income tax benefit....................... $2,863 $ 5,714 $ 247
====== ======= =======
Income tax benefits included in the statement
of operations are as follows:
Continuing operations........................ $2,863 $ 3,595 $ 247
Extraordinary items-loss on early
extinguishment of debt.................... -- 911 --
Cumulative effect of change in accounting
method.................................... -- 1,208 --
------ ------- -------
$2,863 $ 5,714 $ 247
====== ======= =======
</TABLE>
The tax benefit of the extraordinary item and change in accounting method
resulted from recognition of the benefit of the related NOL carryforward to the
extent of available deferred tax credits. Such credits permitted full
recognition of the benefit related to the change in accounting method and
limited the benefit of the extraordinary item to $911.
F-29
<PAGE> 160
PROTECTION ONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT FOR PER SHARE AMOUNTS)
12. SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Acquisitions
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------------
1994 1995 1996
------- ------- --------
<S> <C> <C> <C>
Subscriber accounts acquired................. $81,525 $70,105 $119,629
Goodwill..................................... 1,641 -- 792
Cash acquired................................ 240 -- 31
Other assets acquired........................ 2,584 113 4,983
------- ------- --------
Total assets acquired.............. $85,990 $70,218 $125,435
======= ======= ========
Cash paid to seller.......................... $58,404 $49,361 $ 88,330
Stock issued to seller....................... 2,358 -- 8,960
Acquisition expenses......................... 1,905 1,451 943
Deferred revenue assumed..................... 4,567 3,213 3,676
Other assumed liabilities.................... 18,756 16,193 23,526
------- ------- --------
Purchase price and assumed liabilities....... $85,990 $70,218 $125,435
======= ======= ========
</TABLE>
Cash paid to sellers, payments for acquisition expenses and payments on
liabilities assumed in conjunction with acquisitions are included in cash used
in investing activities in the period paid. Deferred revenue, which represents
advance payments by subscribers, is recognized as revenues in the period in
which the related service is provided. Such amounts are considered a non-cash
component of operations and are reflected as a reduction in cash provided by
operating activities.
The following reflects increases (decreases) in assets and accumulated
deficit, and decreases (increases) in liabilities and capital stock resulting
from noncash investing and financing activities which occurred during the year
ended September 30, 1994:
<TABLE>
<CAPTION>
REDEEMABLE ADDITIONAL
SUBSCRIBER PURCHASE COMMON PREFERRED PREFERRED PAID-IN ACCUMULATED
ACCOUNTS HOLDBACKS STOCK STOCK STOCK CAPITAL DEFICIT
---------- --------- ------ ---------- --------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Restatement of par
value................... $ 9 $ 895 $ (904)
Charge-off of purchase
holdbacks............... $ (1,059) $ 1,059
Cancellation of Series G
preferred stock......... (122) 122
Exercise of stock purchase
warrants................ (1) 1
Accretion to redemption
value of preferred
stock................... $ (753) $ 753
------- ------ --- ----- ---- ----- ----
$ (1,181) $ 1,059 $ 8 $ (753) $ 895 $ (781) $ 753
======= ====== === ===== ==== ===== ====
</TABLE>
F-30
<PAGE> 161
PROTECTION ONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT FOR PER SHARE AMOUNTS)
The following reflects increases (decreases) in assets and accumulated
deficit, and decreases (increases) in liabilities and capital stock resulting
from noncash investing and financing activities which occurred during the year
ended September 30, 1995:
<TABLE>
<CAPTION>
CLASS B
REDEEMABLE COMMON AND ADDITIONAL
SUBSCRIBER PURCHASE COMMON PREFERRED PREFERRED PAID-IN
ACCOUNTS HOLDBACKS STOCK STOCK STOCK CAPITAL
---------- --------- ------ ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Accretion to redemption value of
preferred stock................. $ (15) $ 15
Charge-off of purchase
holdbacks....................... $ (2,025) $ 2,025
Accelerated accretion upon
conversion of preferred stock... (782) 782
Reclassification of IPO costs..... (1,305) 1,305
Conversion of Class B common and
preferred stock................. $(56) 12,897 $ 85 (12,926)
------- ------ ---- ------- --- --------
$ (3,330) $ 2,025 $(56) $ 12,100 $ 85 $ (10,824)
======= ====== ==== ======= === ========
</TABLE>
In 1995 the Company received inventory from a supplier in settlement of a
claim. The estimated fair value of the inventory was determined through a
subsequent sale to an independent third party. In connection with such
settlement, the Company recorded revenue of approximately $1.6 million, which is
reflected in other revenues in the Company's statement of operations.
The following reflects increases (decreases) in assets and accumulated
deficit, and decreases (increases) in liabilities and capital stock resulting
from noncash investing and financing activities which occurred during the year
ended September 30, 1996:
<TABLE>
<CAPTION>
ADDITIONAL SERIES H
PURCHASE COMMON PAID-IN PREFERRED
INTANGIBLES HOLDBACKS STOCK CAPITAL STOCK
----------- --------- ------ ---------- ---------
<S> <C> <C> <C> <C> <C>
Charge-off of purchase holdbacks........... $(5,325) $ 5,325
Conversion of Series H Preferred........... $ (7) $ (6,120) $ 6,127
Common shares issued for Metrol............ 6,843 (4) (6,839)
Common shares issued for Alltec............ 2,117 (2) (2,115)
Reclassification of stock offering costs... (792) 792
------ ------ ---- -------- ------
$ 2,843 $ 5,325 $(13) $ (14,282) $ 6,127
====== ====== ==== ======== ======
</TABLE>
13. EMPLOYEE BENEFIT PLANS:
401(k) Plan
The Company maintains a tax-qualified, defined contribution plan designed
to meet the requirements of Section 401(k) of the Internal Revenue Code (the
"401(k) Plan"). The Company at its election also may make contributions to the
401(k) Plan, which contributions are 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 Common Stock, in cash or in a combination of both stock and cash; the Company
made $70 of such contributions to the plan during the three year period ended
September 30, 1996.
F-31
<PAGE> 162
PROTECTION ONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT FOR PER SHARE AMOUNTS)
Employee Stock Purchase Plan
POI's Employee Stock Purchase Plan is designed to qualify as an "employee
stock purchase plan" within the meaning of Section 423 of the Internal Revenue
Code, and allows eligible employees to acquire shares of Common Stock at
periodic intervals through their accumulated payroll deductions. A total of
650,000 shares of Common Stock have been reserved for issuance under the
Employee Stock Purchase Plan, which is administered by the Compensation
Committee.
The purchase price of shares of Common Stock purchased under the Employee
Stock Purchase Plan during any purchase period is the lower of (i) 85% of the
fair market value of the Common Stock on the first day of that purchase period
or (ii) 85% of the fair market value of the Common Stock on the purchase date.
Termination of a participant's employment for any reason (including death,
disability or retirement) cancels participation in the Employee Stock Purchase
Plan immediately. The Employee Stock Purchase Plan will in all events terminate
upon the earliest to occur of (i) the last business day in September 2005, (ii)
the date on which all shares available for issuance under the plan have been
sold or (iii) the date on which all purchase rights are exercised in connection
with an acquisition of the Company or all or substantially all of its assets.
14. COMMITMENTS AND CONTINGENCIES:
The Company leases office facilities for lease terms maturing through 2005.
Future minimum lease payments under noncancelable operating leases are as
follows:
<TABLE>
<CAPTION>
YEAR ENDING SEPTEMBER 30,
------------------------------------------------------------
<S> <C>
1997........................................................ $1,641
1998........................................................ 1,431
1999........................................................ 1,102
2000........................................................ 969
Thereafter.................................................. 2,799
------
$7,942
======
</TABLE>
Total rent expense for the years ended September 30, 1994, 1995 and 1996
was $787, $1,261 and $1,101, respectively.
The Company is a party to claims and matters of litigation incidental to
the normal course of its business. The ultimate outcome of these matters cannot
presently be determined; however, in the opinion of management of the Company,
the resolution of these matters will not have a material adverse effect on the
Company's consolidated financial position, results of operations and cash flows.
The Company has entered into employment agreements with five of its
officers. The term of the employment agreements with three of the officers is
continually extended so as to cause each such agreement to have a remaining term
of three years; the other two agreements expire in September and November 1998.
15. FAIR VALUE OF FINANCIAL INSTRUMENTS:
For certain of the Company's financial instruments, including cash and cash
equivalents, accounts receivable, accounts payable and other accrued
liabilities, the carrying amounts approximate fair market value due to their
short maturities. The Company's Revolving Credit Facility, which bears a
floating market rate of interest, and the Series H Redeemable Preferred Stock
are carried at amounts which approximate fair market value.
F-32
<PAGE> 163
PROTECTION ONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT FOR PER SHARE AMOUNTS)
At September 30, 1996, the Senior Subordinated Discount Notes have an
estimated fair value of approximately $153,550 based on their quoted market
price as compared to their carrying value of $130,372.
At September 30, 1996, the Convertible Senior Subordinated Notes have an
estimated fair value of approximately $90,000 based on their quoted market price
as compared to their carrying value of $90,000.
The estimated fair values may not be representative of actual values of the
financial instruments that could have been realized at year end or may be
realized in the future.
16. SUPPLEMENTAL SUBSIDIARY COMPANY SUMMARIZED FINANCIAL INFORMATION:
The assets, results of operations and stockholders' equity of Monitoring
comprise substantially all of the assets, results of operations and
stockholders' equity of the Company on a consolidated basis. POI's principal
assets and sole operations are in and through its investment in Monitoring. All
significant intercompany balances and transactions have been eliminated in
consolidation. Separate audited financial statements for Monitoring have not
been provided because the Company does not believe such separate financial
statements are material to investors.
The summarized consolidated financial information of Monitoring is
presented below.
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
---------------------
1995 1996
-------- --------
<S> <C> <C>
Summarized Balance Sheet
Assets
Current assets.................................... $ 10,733 $ 21,345
Subscriber accounts and intangibles, net.......... $162,239 $257,354
Other non-current assets.......................... $ 5,696 $ 11,375
Liabilities and Stockholders' Equity
Deferred revenue.................................. $ 9,166 $ 13,827
Other current liabilities......................... $ 10,727 $ 20,712
Long-term debt, net of current portion............ $146,023 $225,650
Other long term liabilities....................... $ 279 $ 1,059
Shareholders' equity.............................. $ 12,473 $ 28,826
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
---------------------------------
1994 1995 1996
------- -------- --------
<S> <C> <C> <C>
Summarized Statements of Operations
Revenues.................................. $34,480 $ 55,882 $ 73,457
Gross profit.............................. $22,156 $ 36,663 $ 49,364
Loss before extraordinary items and
cumulative effect of change in
accounting method...................... $(6,492) $ (5,839) $(15,497)
Net loss.................................. $(7,666) $(16,700) $(15,497)
</TABLE>
17. METROL SECURITY SERVICES, INC. ACQUISITION:
On June 28, 1996 the Company acquired all of the outstanding stock of
Metrol Security Services, Inc. ("Metrol"). Metrol sells, installs, services and
monitors security alarm systems and provides guard and patrol services to
residential and commercial subscribers in Arizona and New Mexico.
F-33
<PAGE> 164
PROTECTION ONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT FOR PER SHARE AMOUNTS)
The following unaudited pro forma condensed consolidated results of
operations present information as if the acquisition had occurred as of the
beginning of each period presented. The pro forma information is presented after
giving effect to certain adjustments for the amortization of subscriber
accounts, interest expense and the disposition of Metrol's guard operations.
Certain of Metrol's expenses were estimated based on annual amounts incurred.
Management believes the estimates provide a reasonable approximation of actual
results. The pro forma information is provided for informational purposes only.
It is based on historical information and is not necessarily indicative of
future results of operations.
<TABLE>
<CAPTION>
PRO FORMA FOR THE
YEAR
ENDED SEPTEMBER 30,
---------------------
1995 1996
-------- --------
<S> <C> <C>
Revenues............................................. $ 67,093 $ 82,313
Net loss before extraordinary item and cumulative
effect of change in accounting method.............. (8,328) (14,275)
Net loss............................................. (16,355) (14,275)
Net loss before extraordinary item and cumulative
effect of change in accounting method, per share... $ (1.11) $ (1.26)
Net loss per common share............................ $ (1.99) $ (1.26)
</TABLE>
18. SUBSEQUENT EVENTS:
On October 4, 1996, Monitoring purchased all of the outstanding shares of
capital stock of Security Holdings in exchange for an aggregate of 551,888
shares of Common Stock. Of such shares, 68,985 shares have been placed in an
escrow account and will be delivered to the former shareholders of Security
Holdings in June 1997 if the actual postclosing attrition rate of Security
Holding's alarm accounts does not exceed the assumed rate reflected in the
purchase agreement.
Pursuant to the acquisition, Security Holdings became Monitoring's wholly
owned subsidiary and a guarantor of both the Senior Subordinated Discount Notes
and the Convertible Senior Subordinated Notes.
On December 18, 1996, the Company announced that it entered into a
definitive agreement to acquire substantially all of the assets of Phillips
Electronics, Inc. for an aggregate purchase price of $14.5 million. The Company
will issue to Phillips Electronics, Inc. $2.0 million of Common Stock to fund a
portion of the purchase price. The Company anticipates closing the acquisition
in early January, 1997.
F-34
<PAGE> 165
WESTERN RESOURCES SECURITY BUSINESS
UNAUDITED COMBINED BALANCE SHEET
AS OF JUNE 25, 1997
ASSETS
<TABLE>
<S> <C>
Current Assets:
Cash and cash equivalents.................................................... $ 1,049,401
Accounts receivable, net of allowance for doubtful accounts of $5,041,368.... 14,471,797
Current portion of note receivable........................................... 869,825
Inventories.................................................................. 1,972,951
Prepaid expenses............................................................. 244,354
Other........................................................................ 332,530
------------
Total current assets................................................. 18,940,858
Note receivable, net of current portion........................................ 1,181,794
Property and equipment, net.................................................... 5,894,970
Subscriber accounts, net....................................................... 272,645,922
Goodwill, net.................................................................. 216,724,380
Other.......................................................................... 3,616,675
------------
Total assets......................................................... $519,004,599
============
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities:
Accounts payable............................................................. $ 6,492,441
Accrued salaries, wages and benefits......................................... 7,673,617
Other accruals............................................................... 13,597,274
Current portion of long-term debt............................................ 20,681,634
Deferred revenues............................................................ 13,970,826
------------
Total current liabilities............................................ 62,415,792
Long-term debt, net of current portion......................................... 42,967,149
------------
Total liabilities.................................................... 105,382,941
------------
Stockholder's equity:
Contributed capital.......................................................... 419,023,725
Accumulated deficit.......................................................... (5,402,067)
------------
Total stockholder's equity........................................... 413,621,658
------------
Total liabilities and stockholder's equity........................... $519,004,599
============
</TABLE>
See accompanying notes to unaudited combined financial statements
F-35
<PAGE> 166
WESTERN RESOURCES SECURITY BUSINESS
UNAUDITED COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 25, 1997
<TABLE>
<S> <C>
Revenues:
Monitoring and service........................................................ $54,520,591
Installation and other........................................................ 8,984,976
-----------
Total revenues........................................................ 63,505,567
Costs and expenses:
Monitoring and service........................................................ 14,887,544
Other......................................................................... 3,191,497
-----------
Total costs and expenses.............................................. 18,079,041
-----------
Gross profit.......................................................... 45,426,526
Selling, general and administrative expenses.................................... 30,771,844
Amortization of intangibles and depreciation expense............................ 17,058,418
-----------
Operating loss........................................................ (2,403,736)
Other expenses:
Interest expense, net......................................................... 5,095,516
-----------
Loss before income taxes.............................................. (7,499,252)
Income tax benefit.............................................................. 2,753,000
-----------
Net loss.............................................................. $(4,746,252)
===========
</TABLE>
See accompanying notes to unaudited combined financial statements.
F-36
<PAGE> 167
WESTERN RESOURCES SECURITY BUSINESS
UNAUDITED COMBINED STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 25, 1997
<TABLE>
<S> <C>
Cash flows from operating activities:
Net loss..................................................................... $ (4,746,252)
Adjustments to reconcile net loss to net cash provided by operating
activities
Amortization of intangibles and depreciation expense...................... 17,058,418
Provision for doubtful accounts........................................... 1,204,198
Changes in other working capital items:
Accounts receivable..................................................... (3,104,235)
Note receivable......................................................... (2,051,619)
Inventories............................................................. 918,987
Prepaid expenses........................................................ (37,623)
Accounts payable........................................................ 4,907,614
Accrued liabilities..................................................... 4,691,843
Deferred monitoring revenue............................................. 970,395
Other................................................................... (3,201,437)
------------
Net cash flows provided by operating activities...................... 16,610,289
------------
Cash flows used in investing activities:
Purchase of security systems................................................. (7,810,498)
Purchase of property and equipment........................................... (1,223,334)
Subscriber account installations............................................. (13,323,255)
------------
Net cash flows used in investing activities.......................... (22,357,087)
------------
Cash flows from financing activities:
Net receipts from Western Resources, Inc..................................... 7,938,191
Repayments of long-term debt................................................. (1,404,449)
------------
Net cash flows provided by financing activities...................... 6,533,742
------------
Net increase in cash and cash equivalents...................................... 786,944
Cash and cash equivalents
Beginning of period.......................................................... 262,457
------------
End of period................................................................ $ 1,049,401
============
</TABLE>
See accompanying notes to unaudited combined financial statements.
F-37
<PAGE> 168
WESTERN RESOURCES SECURITY BUSINESS
NOTES TO UNAUDITED FINANCIAL STATEMENTS
JUNE 25, 1997
(1) THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited combined financial statements of WestSec, Inc.
(WestSec) and Westar Security, Inc. (Westar) comprise the Western Resources
Security Business (WRSB). WestSec and Westar are indirect and direct wholly
owned subsidiaries of Western Resources, Inc. (Western Resources), respectively.
WRSB provides alarm monitoring services and sells, installs and services
security alarm systems principally for residential and small business
subscribers. Most of the WRSB customers are in the southern portion of the
United States. WestSec closed its books on June 25, 1997.
These unaudited combined financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information. Accordingly, certain information and footnote disclosures normally
included in financial statements presented in accordance with generally accepted
accounting principles have been condensed or omitted. These financial statements
should be read in conjunction with the audited WRSB combined financial
statements for the year ended December 31, 1996. In the opinion of management of
WRSB, all adjustments considered necessary for a fair presentation have been
included. The results of operations for the six months ended June 25, 1997 are
not necessarily indicative of the results to be expected for the full year. WRSB
pays interest on a monthly basis and amounts paid for interest approximated
interest expense for the six months ended June 25, 1997.
(2) INCOME TAXES
Income taxes are allocated to WRSB as if they were filing a separate tax
return. WRSB is included in the consolidated federal income tax return filed by
Western Resources. WRSB accounts for income taxes in accordance with Statement
of Financial Accounting Standards No. 109 which requires that deferred tax
assets and liabilities be established for the basis differences between the
reported amounts of assets and liabilities for financial reporting purposes and
income tax purposes. The income tax attributes of WRSB are consolidated into the
tax returns filed by Western Resources. No cash was paid for income taxes for
the six months ended June 25, 1997. The net losses of WRSB have resulted in a
net deferred tax asset at June 25, 1997, which has been recorded in other assets
in the accompanying combined balance sheet. The effective tax rate recorded for
the six months ended June 25, 1997 is approximately 37%. The primary differences
between the effective tax rate and the Federal statutory rate is the impact of
state income taxes partially offset by the impact of goodwill amortization that
is not deductible for tax purposes.
(3) COMMITMENTS AND CONTINGENCIES
On January 8, 1997, Innovative Business Systems, Ltd. (IBS) filed suit
against Western Resources, Westinghouse Electric Company and its security
subsidiary (WSS), and WestSec, in Dallas County, Texas district court (Case No
97-00184) alleging, among other things, breach of contract by Westinghouse and
interference with contract against Western Resources in connection with the sale
by Westinghouse of the assets of WSS to WestSec. IBS claims that Westinghouse
improperly transferred software owned by IBS to WestSec and that WestSec is not
entitled to its use. Western Resources and WestSec have demanded Westinghouse
defend and indemnify it and Westinghouse has agreed to do so. Westinghouse and
Western Resources have denied IBS' allegations and are vigorously defending
against them. The loss of use of the software could have a material impact on
the operations of WestSec. Management and Westinghouse are vigorously defending
their position and believe meritorious defenses are available to support their
positions. It is not possible, at this date, to predict the ultimate resolution
of the vendor's lawsuit.
In April 1997, Westec Security, Inc. sued Westar and WestSec, et al in Los
Angeles district court alleging state and federal trademark infringement and
dilution, false designation of origin, and unfair competition for alleged use of
similar trade names. In the opinion of WRSB's management, the resolution of this
matter is not expected to have a material impact on WRSB's financial position or
results of operations.
F-38
<PAGE> 169
On August 12, 1997, a California company filed a lawsuit against Western
Resources, Westar, and WestSec challenging their ability to use the Westar
trademark and seeks $10 million in monetary damages and additional punitive
damages. Based on management's initial evaluation of this matter, the ultimate
resolution of this contingency is not expected to materially impact operating
results or financial position.
WRSB is a party to claims and matters of litigation incidental to the
normal course of its business. The ultimate outcome of these matters cannot
presently be determined; however, in the opinion of management of the WRSB, the
resolution of these matters will not have a material adverse effect on the WRSB
combined financial position, results of operations and cash flows.
(4) BUSINESS COMBINATION
On July 30, 1997, Protection One, Inc. ("Protection One"), a publicly held
security provider, and Western Resources entered into an agreement to combine
the security assets of both companies. Under the agreement, Western Resources
will contribute its security business assets, approximately $250 million in cash
and additional funding for a special dividend to current Protection One
shareholders of $7.00 per share and per common share equivalent in exchange for
an 80.1% equity interest on a fully-diluted basis. The aggregate amount of this
dividend is expected to approximate $117 million. Protection One will assume
WRSB debt with an estimated fair value of approximately $65 million. Western
Resources and Protection One have agreed that any Western Resources security
acquisitions that occur prior to closing and are acceptable to Protection One
may be contributed to Protection One by Western Resources. The value of any such
acquisitions would reduce the cash paid to Protection One at the closing up to
$250 million. An unsecured note would be issued to Western Resources by
Protection One for amounts greater than this total. Interest on this note would
be fixed at 10%.
Protection One serves approximately 236,000 customers with a large
concentration of its customers in the western portion of the United States. The
proposed transaction is subject to satisfaction of customary conditions,
including approval by Protection One shareholders. The company expects to
consummate this transaction during the second half of 1997.
F-39
<PAGE> 170
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholder of WestSec, Inc. and Westar Security, Inc.:
We have audited the accompanying combined balance sheet of WestSec, Inc.
and Westar Security, Inc., collectively Western Resources Security Business, as
of December 31, 1996, and the accompanying combined statements of operations and
cash flows for the year ended December 31, 1996. These financial statements are
the responsibility of the companies' management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined financial position of Western Resources
Security Business, as of December 31, 1996, and the combined results of their
operations and their cash flows for the year then ended, in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Kansas City, Missouri
August 25, 1997
F-40
<PAGE> 171
WESTERN RESOURCES SECURITY BUSINESS
COMBINED BALANCE SHEET
AS OF DECEMBER 31, 1996
ASSETS
<TABLE>
<S> <C>
Current Assets:
Cash and cash equivalents.................................................... $ 168,626
Restricted cash.............................................................. 93,831
Accounts receivable, net of allowance for doubtful accounts of $4,412,939.... 12,571,760
Inventories.................................................................. 2,891,938
Prepaid expenses............................................................. 407,485
Other........................................................................ 131,776
------------
Total current assets................................................. 16,265,416
Property and equipment, net.................................................... 5,445,882
Subscriber accounts, net....................................................... 265,529,507
Goodwill, net.................................................................. 218,991,215
Other.......................................................................... 415,238
------------
Total assets......................................................... $506,647,258
===========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities:
Accounts payable............................................................. $ 1,584,827
Accrued salaries, wages and benefits......................................... 4,806,692
Other accruals............................................................... 11,772,356
Current portion of long-term debt............................................ 4,547,805
Deferred revenues............................................................ 13,000,431
------------
Total current liabilities............................................ 35,712,111
Long-term debt, net of current portion......................................... 60,505,427
------------
Total liabilities.................................................... 96,217,538
------------
Stockholder's equity:
Contributed capital.......................................................... 411,067,810
Accumulated deficit.......................................................... (638,090)
------------
Total stockholder's equity........................................... 410,429,720
------------
Total liabilities and stockholder's equity........................... $506,647,258
===========
</TABLE>
See accompanying notes to combined financial statements.
F-41
<PAGE> 172
WESTERN RESOURCES SECURITY BUSINESS
COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<S> <C>
Revenues:
Monitoring and service......................................................... $6,381,885
Installation and other......................................................... 1,715,379
----------
Total revenues......................................................... 8,097,264
Costs and expenses:
Monitoring and service......................................................... 1,760,503
Other.......................................................................... 1,587,443
----------
Total costs and expenses............................................... 3,347,946
----------
Gross profit........................................................... 4,749,318
Selling, general and administrative expenses..................................... 5,091,414
Amortization of intangibles and depreciation expense............................. 609,592
----------
Operating loss................................................................. (951,688)
Other expenses:
Interest expense, net.......................................................... 14,577
----------
Loss before income taxes.................................................... (966,265)
Income tax benefit............................................................... 310,450
----------
Net loss............................................................... $ (655,815)
=========
</TABLE>
See accompanying notes to combined financial statements.
F-42
<PAGE> 173
WESTERN RESOURCES SECURITY BUSINESS
COMBINED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<S> <C>
Cash flows used in operating activities:
Net loss.................................................................... $ (655,815)
Adjustments to reconcile net loss to net cash used in operating activities
Amortization of intangibles and depreciation expense..................... 609,592
Provision for doubtful accounts.......................................... 183,954
Changes in other working capital items:
(net of effects from acquisitions)
Accounts receivable.................................................... (1,424,438)
Inventories............................................................ (540,332)
Prepaid expenses....................................................... (32,181)
Accounts payable....................................................... 40,975
Accrued liabilities.................................................... 1,749,340
Deferred monitoring revenue............................................ 178,440
Other.................................................................. (200,244)
-------------
Net cash flows used in operating activities......................... (90,709)
-------------
Cash flows used in investing activities:
Purchase of security systems................................................ (367,166,899)
Purchase of property and equipment.......................................... (976,703)
Subscriber account installations............................................ (1,392,421)
-------------
Net cash flows used in investing activities......................... (369,536,023)
-------------
Cash flows from financing activities:
Net receipts from Western Resources, Inc.................................... 369,629,081
Proceeds from long-term debt................................................ 53,232
-------------
Net cash flows provided by financing activities..................... 369,682,313
-------------
Net increase in cash and cash equivalents..................................... 55,581
Cash and cash equivalents
Beginning of year........................................................... 113,045
-------------
End of year................................................................. $ 168,626
============
Supplemental schedule of noncash investing and financing activities:
Western Resources issued common equity securities with an estimated fair
value of approximately $9.6 million for purchases of security businesses
in 1996.
</TABLE>
See accompanying notes to combined financial statements.
F-43
<PAGE> 174
WESTERN RESOURCES SECURITY BUSINESS
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(1) THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) General
The accompanying combined financial statements of WestSec, Inc. (WestSec)
and Westar Security, Inc. (Westar) comprise the Western Resources Security
Business (WRSB). WestSec and Westar are indirect and direct wholly owned
subsidiaries of Western Resources, Inc. (Western Resources), respectively. WRSB
provides alarm monitoring services and sells, installs and services security
alarm systems principally for residential and small business subscribers.
WestSec acquired the assets comprising the security business of
Westinghouse Security Systems (WSS), from Westinghouse Electric Company
(Westinghouse), on December 30, 1996 for approximately $358 million in cash,
subject to adjustment, and assumed debt with an estimated fair value of
approximately $65 million. This acquisition significantly expanded the security
operations of WRSB. Most of the WSS customers are in the southern portion of the
United States. Net assets acquired in the WSS acquisition represent
approximately 94% of Western Resources' total investment in its security
services business at December 31, 1996. Six other smaller security companies
were purchased at various dates from November 1995 to September 1996.
Each acquisition has been accounted as a purchase and is included in the
accompanying statement of operations from the respective date acquired.
Therefore, the results of operations for 1996 do not include WSS. The purchase
price for each acquisition has been allocated to the assets acquired and
liabilities assumed based upon estimated fair value at the date of each
respective acquisition. Certain purchase price allocations including WSS have
been made on a preliminary basis and are subject to change.
(b) Revenues
Monitoring revenues, generally derived from contracts for an initial
non-cancelable term, are recognized monthly as services are provided. Amounts
billed in advance are deferred and recognized in the month service occurs.
Installation revenues are generally recognized in the period an alarm system is
installed. Service revenue is recognized in the period the services are
provided.
(c) Inventories
Inventories, comprised of alarm systems and parts held for installation and
service, are stated at the lower of average cost or market.
(d) Property and Equipment
Property and equipment is stated at cost and depreciated using the
straight-line method over its estimated useful life of five to ten years. When
property and equipment is retired or sold, the cost and the related accumulated
depreciation is eliminated from their respective accounts. Gains or losses from
retirements and dispositions of property and equipment are recognized in the
period realized. Repair and maintenance costs are expensed as incurred.
(e) Income Taxes
Income taxes are allocated to WRSB as if they were filing a separate tax
return. WRSB is included in the consolidated federal income tax return filed by
Western Resources. The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards No. 109 (SFAS 109) which requires
that deferred tax assets and liabilities be established for the basis
differences between the reported amounts of assets and liabilities for financial
reporting purposes and income tax purposes.
F-44
<PAGE> 175
WESTERN RESOURCES SECURITY BUSINESS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996
(f) Advertising Costs
WRSB generally expenses broadcast and print advertising costs based on the
timing of the release of the advertising materials. Advertising development
costs are generally recognized upon the first broadcast of the respective
advertisement.
(g) Subscriber Accounts
Subscriber accounts installed are stated at cost. WRSB's policy is to
capitalize direct costs of installed accounts. These direct costs include
materials and equipment on subscriber premises, installation labor, and other
direct installation costs. Accounts purchased are capitalized at amounts paid to
acquire these accounts. Such capitalized costs are amortized on a straight-line
basis over the average life of a subscriber. For subscribers acquired in the WSS
acquisition, new installations or purchases the average remaining estimated life
is ten years.
(h) Goodwill
Goodwill, which represents the excess of purchase price over the fair value
of net assets acquired, is amortized on a straight-line basis over 40 years.
(i) Cash and Cash Equivalents
Western Resources performs the cash management function for WRSB.
Disbursements are funded centrally by Western Resources and intercompany
accounts are used to accumulate net amounts owned or borrowed. WRSB maintains
certain bank accounts primarily related to payroll, permit fees and customer
referral payments. The balances of such accounts are included in cash and cash
equivalents in the accompanying combined balance sheet.
For purposes of the combined statement of cash flows, WRSB considers all
highly liquid investments purchased with a remaining maturity of three months or
less at the date acquired to be cash equivalents.
(j) Related Party Transactions
WRSB, as wholly owned subsidiaries of Western Resources, receives a number
of administrative and support services from Western Resources and participates
in certain Western Resources employee benefit plans. Further information about
such relationships and transactions is included in notes 5 and 6.
(k) Long-Lived Assets
WRSB evaluates the expected recoverability of its long-lived assets,
including subscriber accounts as events or circumstances change that may
indicate an asset impairment has been incurred. Management utilizes expected
undiscounted net cash flows to be generated from the assets under consideration
in this evaluation. No impairment charges for long-lived assets were recorded in
1996.
(l) Concentration of Credit Risk
Financial instruments which potentially subject WRSB to concentrations of
credit risk consist principally of trade receivables from a large number of
customers, including both residential and commercial, dispersed across a wide
geographic base. WRSB extends credit to its customers in the normal course of
business, performs periodic credit evaluations and maintains allowances for
potential credit losses.
F-45
<PAGE> 176
WESTERN RESOURCES SECURITY BUSINESS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996
(m) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reported
period. On an ongoing basis, management reviews its estimates based on currently
available information. Actual results could differ from those estimates.
(2) PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1996, consists of the following:
<TABLE>
<S> <C>
Office equipment......................................................... $3,285,137
Furniture and fixtures................................................... 986,253
Telecommunications equipment............................................. 1,412,860
----------
5,684,250
Less accumulated depreciation............................................ (238,368)
----------
$5,445,882
=========
</TABLE>
(3) LONG-TERM DEBT
During 1992 and through 1994, WSS entered into a series of agreements (the
"Agreements") to sell certain rights in security alarm monitoring contracts (the
"Contracts") to an investor for approximately $76.9 million in cash. The
investor financed the transactions through the issuance of three series of
secured five-year notes (the "Investor Notes"). For financial reporting
purposes, WSS accounted for the transactions as a financing arrangement and
recorded the proceeds received from the investor as long-term debt. The amounts
recorded as debt were amortized using the interest method. Generally, principal
and interest payments on the debt consist of 65% of the monitoring revenues
collected under the Contracts. In addition, as part of the Agreements, WSS
provided the investor with certain guarantees with respect to the attrition of
Contracts.
Under the Agreements, WSS had the right but not the obligation, exercisable
not more than 15 months or less than 12 months prior to the stated maturity of
any series of Investor Notes, to repurchase the Contracts or cause the
disposition of Contracts securing a particular series of Investor Notes, for an
amount equal to the then fair market value of such Contracts, provided such fair
market value will not be less than the amount necessary to satisfy all
obligations of the investor related to such series of Investor Notes plus
certain taxes, if any (the "Minimum Purchase Price"). In the event of an
unsolicited third party offer in excess of the then Minimum Purchase Price to
purchase such Contracts prior to 12 months before the stated maturity of any
series of Investor Notes, the Agreements provided WSS a right of first refusal
to buy such Contracts. In addition, the Agreements provided that WSS would
receive 60% of the excess of the fair market value over the Minimum Purchase
Price, if any, if WSS repurchases or arranges the sale of such Contracts.
On December 30, 1996, Westinghouse assigned to WestSec all of
Westinghouse's rights, title and interest, and WestSec agreed to assume all of
Westinghouse's liabilities and obligations under the Agreements in connection
with the purchase. This assumption of liabilities requires WestSec to purchase
the Contracts on the respective stated maturity date of the Investor Notes. The
purchase price payable by WestSec shall be equal to the greater of a) Minimum
Purchase Price plus 40% of the excess of the fair market value over the Minimum
Purchase Price or b) 30 times total monthly recurring revenue related to the
Contracts. As a condition of assuming the debt obligation, WestSec issued a
letter of credit for $85 million to ensure the debt holder the obligation would
be repaid. If the estimated fair value currently recorded differs from the
amount
F-46
<PAGE> 177
WESTERN RESOURCES SECURITY BUSINESS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996
determined at maturity, a gain or loss would be recorded for the difference
between the actual amount paid and the recorded obligation. WRSB pays interest
on this obligation on a monthly basis and amounts of interest actually paid
approximated interest expense for the year ended December 31, 1996.
In allocating the purchase price among WSS' net assets, WRSB recorded the
long-term obligations at its estimated fair value at December 31, 1996. Thus the
carrying amount of long-term debt on the accompanying combined balance sheet is
believed to approximate fair value.
The effective interest rate related to these Agreements approximates 15%.
The estimated minimum payment for each of the years subsequent to December 31,
1996 based upon current estimates of fair value are as follows: 1997 -- $4.5
million, 1998 -- $26.2 million and 1999 -- $34.3 million.
(4) SECURITY ACQUISITIONS
WRSB acquired WSS on December 30, 1996 and four other smaller security
companies during 1996 as follows: Security Monitoring Services in June, Sentry
Protective Alarms and Secure America Alarm Systems in July and Safeguard Alarms
in September. Consideration paid, assets acquired and liabilities assumed in
connection with these acquisitions is summarized as follows:
<TABLE>
<CAPTION>
(MILLIONS)
---------
<S> <C>
Fair value of assets acquired.............................................. $ 475.6
Cash paid.................................................................. (367.2)
Fair value of Western Resources equity securities issued................... (9.6)
---------
Total Liabilities assumed........................................ $ 98.8
=======
</TABLE>
Pro Forma Results. Pro forma unaudited results of operations assuming the
acquisition of WSS had occurred as of January 1, 1996 are as follows:
<TABLE>
<CAPTION>
FOR THE YEAR
ENDED
DECEMBER 31, 1996
-----------------
(MILLIONS)
<S> <C>
Revenues............................................................. $ 119.0
Net loss............................................................. $ (11.9)
</TABLE>
(5) INCOME TAXES
Components of the income tax benefit recorded for 1996 are as follows:
<TABLE>
<S> <C>
Federal................................................................... $265,020
State..................................................................... 45,430
--------
Total........................................................... $310,450
========
</TABLE>
The difference between the income tax benefit at the federal statutory rate
and income tax benefit in the accompanying combined statement of operations is
as follows:
<TABLE>
<S> <C>
Federal statutory tax rate..................................................... (35)%
State income taxes, net of Federal benefit..................................... (6)
Non-deductible goodwill........................................................ 9
---
(32)%
===
</TABLE>
F-47
<PAGE> 178
WESTERN RESOURCES SECURITY BUSINESS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996
The income tax attributes of WRSB are consolidated into the tax returns
filed by Western Resources. As a result, the cumulative tax losses of Westar
have been utilized by Western Resources. No cash was paid for income taxes for
the year ended December 31, 1996. The resulting net deferred tax asset has been
contributed to WRSB and is recorded as Additional Paid-in Capital in the
accompanying combined balance sheet. Therefore, no deferred tax assets and
liabilities are recorded at December 31, 1996. The WSS acquisition was
structured as an asset purchase for tax purposes. There are no material
temporary differences between book and tax basis at December 31, 1996.
(6) RELATED PARTY TRANSACTIONS
Western Resources provides certain services to its business units and
subsidiaries, including WRSB. These services include information system support,
certain accounting functions and legal services. As substantially all of the
security companies acquired by WRSB throughout 1996 were only subsidiaries of
Western Resources during a portion of the year, Western Resources did not
allocate any charges to WRSB for these services. Management believes the value
of the services received during 1996 was not significant.
(7) EMPLOYEE BENEFIT PLANS
WSS maintains savings plans which qualify under Section 401(k) of the
Internal Revenue Code. The savings plans allow eligible employees to contribute
up to 15% in 1996 of their income on a pretax basis to such savings plans. WSS,
at its discretion, matches 50% of the employee's contribution up to the first 6%
of the employee's compensation.
(8) COMMITMENTS AND CONTINGENCIES
WRSB leases office space and other equipment under noncancellable operating
leases that require aggregate minimum future rentals of:
<TABLE>
<CAPTION>
IN THOUSANDS
------------
<S> <C>
Year ending December 31
1997................................................................ $2,456
1998................................................................ 1,980
1999................................................................ 1,470
2000................................................................ 1,104
2001................................................................ 864
Thereafter.......................................................... 1,810
------------
$9,684
=========
</TABLE>
On January 8, 1997, Innovative Business Systems, Ltd. (IBS) filed suit
against Western Resources, Westinghouse, WSS, and WestSec, in Dallas County,
Texas district court (Case No. 97-00184) alleging, among other things, breach of
contract by Westinghouse and interference with contract against Western
Resources in connection with the sale by Westinghouse of the assets of WSS to
WestSec. IBS claims that Westinghouse improperly transferred software owned by
IBS. WestSec and that WestSec is not entitled to its use. Western Resources and
WestSec have demanded Westinghouse defend and indemnify it and Westinghouse has
agreed to do so. Westinghouse and Western Resources have denied IBS' allegations
and are vigorously defending against them. The loss of use of the software could
have a material impact on the operations of WestSec. Management and Westinghouse
are vigorously defending their position and believe
F-48
<PAGE> 179
WESTERN RESOURCES SECURITY BUSINESS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996
meritorious defenses are available to support their positions. It is not
possible, at this date, to predict the ultimate resolution of the vendor's
lawsuit.
In April 1997, Westec Security, Inc. sued Westar and WestSec, et al in Los
Angeles district court alleging state and federal trademark infringement and
dilution, false designation of origin, and unfair competition for alleged use of
similar trade names. In the opinion of WRSB's management, the resolution of this
matter is not expected to have a material impact on WRSB's combined financial
position or results of operations.
On August 12, 1997, a California company filed a lawsuit against Western
Resources, Westar, and WestSec challenging their ability to use the Westar
trademark and seeks $10 million in monetary damages and additional punitive
damages. Based on management's initial evaluation of this matter, the ultimate
resolution of this contingency is not expected to materially impact WRSB's
combined financial position or results of operations.
The Company is a party to claims and matters of litigation incidental to
the normal course of its business. The ultimate outcome of these matters cannot
presently be determined; however, in the opinion of management of the Company,
the resolution of these matters will not have a material adverse effect on the
Company's combined financial position or results of operations.
(9) SUBSEQUENT EVENTS (UNAUDITED)
On July 30, 1997, Protection One, Inc. ("Protection One"), a publicly held
security provider, and Western Resources entered into an agreement to combine
the security assets of both companies. Under the agreement, Western Resources
will contribute its security business assets, approximately $250 million in cash
and additional funding for a special dividend to current Protection One
shareholders of $7.00 per share and per common share equivalent in exchange for
an 80.1% equity interest on a fully-diluted basis. The aggregate amount of this
dividend is expected to approximate $117 million. Protection One will assume
WRSB debt with an estimated fair value of approximately $65 million. Western
Resources and Protection One have agreed that any Western Resources security
acquisitions that occur prior to closing and are acceptable to Protection One
may be contributed to Protection One by Western Resources. The value of any such
acquisitions would reduce the cash paid to Protection One at the closing up to
$250 million. An unsecured note would be issued to Western Resources by
Protection One for amounts greater than this total. Interest on this note would
be fixed at 10%.
Protection One serves approximately 236,000 customers with a large
concentration of its customers in the western portion of the United States. The
proposed transaction is subject to satisfaction of customary conditions,
including approval by Protection One shareholders. Western Resources expects to
consummate this transaction during the second half of 1997.
F-49
<PAGE> 180
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholder of WestSec, Inc.:
We have audited the accompanying balance sheet of Westinghouse Security (a
predecessor of WestSec, Inc., an indirect wholly-owned subsidiary of Western
Resources, Inc.), as of December 20, 1995 and the related statements of
operations and cash flows for the 52 weeks ended December 20, 1995 and 1994 and
the 53 weeks ended December 30, 1996. These financial statements are the
responsibility of the company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Westinghouse Security (a
predecessor of WestSec, Inc., an indirect wholly-owned subsidiary of Western
Resources, Inc.), as of December 20, 1995, and the results of its operations and
its cash flows for the 52 weeks ended December 20, 1995 and 1994 and the 53
weeks ended December 30, 1996 in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Kansas City, Missouri
August 22, 1997
F-50
<PAGE> 181
WESTINGHOUSE SECURITY
BALANCE SHEET
AS OF DECEMBER 20, 1995
(PREDECESSOR FINANCIAL STATEMENTS FOR WESTSEC, INC., AN INDIRECT
WHOLLY-OWNED SUBSIDIARY OF WESTERN RESOURCES, INC.)
ASSETS
<TABLE>
<S> <C>
Current Assets:
Cash and cash equivalents.................................................... $ 134,071
Restricted cash.............................................................. 212,590
Accounts receivable, net of allowance for doubtful accounts of $2,655,758.... 11,908,431
Inventories.................................................................. 3,792,397
Prepaid expenses............................................................. 172,996
Other........................................................................ 20,631
------------
Total current assets................................................. 16,241,116
Property and equipment, net.................................................... 3,982,377
Subscriber accounts, net....................................................... 138,620,284
Goodwill, net.................................................................. 11,396,647
Other.......................................................................... 666,296
------------
Total assets......................................................... $170,906,720
============
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities:
Accounts payable............................................................. $ 3,282,621
Accrued salaries, wages and benefits......................................... 2,342,432
Other accruals............................................................... 6,517,524
Current portion of long-term debt............................................ 5,105,810
Deferred revenues............................................................ 12,027,263
------------
Total current liabilities............................................ 29,275,650
Long-term debt, net of current portion......................................... 52,511,402
------------
Total liabilities.................................................... 81,787,052
------------
Stockholder's equity:
Contributed capital.......................................................... 92,584,845
Accumulated deficit.......................................................... (3,465,177)
------------
Total stockholder's equity........................................... 89,119,668
------------
Total liabilities and stockholder's equity........................... $170,906,720
============
</TABLE>
See accompanying notes to financial statements.
F-51
<PAGE> 182
WESTINGHOUSE SECURITY
STATEMENTS OF OPERATIONS
(PREDECESSOR FINANCIAL STATEMENTS FOR WESTSEC, INC., AN INDIRECT
WHOLLY-OWNED SUBSIDIARY OF WESTERN RESOURCES, INC.)
<TABLE>
<CAPTION>
FOR THE 52 FOR THE 52 FOR THE 53
WEEKS ENDED WEEKS ENDED WEEKS ENDED
DECEMBER 20, 1994 DECEMBER 20, 1995 DECEMBER 30, 1996
----------------- ----------------- -----------------
<S> <C> <C> <C>
Revenues:
Monitoring and service...................... $60,094,798 $74,910,825 $93,764,756
Installation and other...................... 7,157,827 13,798,886 17,116,696
----------- ----------- -----------
Total revenues...................... 67,252,625 88,709,711 110,881,452
Costs and expenses:
Monitoring and service...................... 14,191,368 16,843,088 24,986,830
Other....................................... 1,032,224 436,726 972,783
----------- ----------- -----------
Total costs and expenses............ 15,223,592 17,279,814 25,959,613
----------- ----------- -----------
Gross profit........................ 52,029,033 71,429,897 84,921,839
Selling, general and administrative
expenses.................................... 27,447,753 51,020,299 60,266,888
Amortization of intangibles and
depreciation expense........................ 13,959,112 17,803,686 21,613,326
----------- ----------- -----------
Operating income......................... 10,622,168 2,605,912 3,041,625
Other expenses:
Interest expense, net....................... 13,467,127 12,159,139 10,879,438
----------- ----------- -----------
Loss before income taxes................. (2,844,959) (9,553,227) (7,837,813)
Income tax benefit............................ 1,081,084 3,630,226 2,978,369
----------- ----------- -----------
Net loss............................ $(1,763,875) $(5,923,001) $(4,859,444)
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-52
<PAGE> 183
WESTINGHOUSE SECURITY
STATEMENTS OF CASH FLOWS
(PREDECESSOR FINANCIAL STATEMENTS FOR WESTSEC, INC., AN INDIRECT
WHOLLY-OWNED SUBSIDIARY OF WESTERN RESOURCES, INC.)
<TABLE>
<CAPTION>
FOR THE 52 FOR THE 52 FOR THE 53
WEEKS ENDED WEEKS ENDED WEEKS ENDED
DECEMBER 20, 1994 DECEMBER 20, 1995 DECEMBER 30, 1996
----------------- ----------------- -----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................... $ (1,763,875) $ (5,923,001) $ (4,859,444)
Adjustments to reconcile net loss to net
cash provided by operating activities
Amortization of intangibles and
depreciation expense................... 13,959,112 17,803,686 21,613,326
Provision for doubtful accounts.......... 3,074,756 2,542,277 3,108,240
Changes in other working capital items:
Restricted Cash........................ (207,069) (5,521) 118,759
Accounts receivable.................... (4,989,907) (3,448,675) (2,169,768)
Inventories............................ 713,456 (754,922) 1,491,052
Prepaid expenses....................... (231,889) 311,094 (182,483)
Accounts payable....................... 2,335,743 384,562 (1,835,049)
Accrued liabilities.................... 4,022,069 922,351 5,876,448
Deferred monitoring revenue............ 1,306,587 2,331,985 633,059
Other.................................. 3,425,247 909,032 (64,741)
------------ ------------ ------------
Net cash flows provided by operating
activities........................ 21,644,230 15,072,868 23,729,399
------------ ------------ ------------
Cash flows used in investing activities:
Purchase of property and equipment.......... (1,680,668) (2,793,754) (1,219,113)
Subscriber account installations and
purchases................................ (45,060,425) (40,299,949) (39,241,396)
------------ ------------ ------------
Net cash flows used in investing
activities........................ (46,741,093) (43,093,703) (40,460,509)
------------ ------------ ------------
Cash flows from financing activities:
Net receipts from Westinghouse.............. 11,398,941 34,934,549 21,880,141
Repayments of long-term debt................ (7,008,839) (6,805,918) (5,146,236)
Proceeds from long-term debt................ 17,896,844
------------ ------------ ------------
Net cash flows provided by financing
activities........................ 22,286,946 28,128,631 16,733,905
------------ ------------ ------------
Net increase (decrease) in cash and cash
equivalents.............................. (2,809,917) 107,796 2,795
Cash and cash equivalents
Beginning of period......................... 2,836,192 26,275 134,071
------------ ------------ ------------
End of period............................... $ 26,275 $ 134,071 $ 136,866
============ ============ ============
</TABLE>
See accompanying notes to financial statements.
F-53
<PAGE> 184
WESTINGHOUSE SECURITY
NOTES TO FINANCIAL STATEMENTS
(PREDECESSOR FINANCIAL STATEMENTS FOR WESTSEC, INC., AN INDIRECT
WHOLLY-OWNED SUBSIDIARY OF WESTERN RESOURCES, INC.)
(1) BACKGROUND INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) General
On December 30, 1996, Western Resources, Inc. ("Western Resources"),
through its indirect wholly owned subsidiary, WestSec, Inc. ("WestSec"),
purchased the assets and assumed certain liabilities comprising the security
business of Westinghouse Security Systems ("WSS") ("the Company"), from
Westinghouse Electric Corporation ("Westinghouse"). The historical financial
position and results of operations of WSS are presented herein (as predecessor
financial statements for WestSec) and do not reflect the adjustments related to
the Western Resources' purchase at December 30, 1996. Prior to 1996, WSS closed
its fiscal year on December 20. A balance sheet at December 30, 1996 of WestSec
reflecting the purchase of WSS is included with the Western Resources Security
Business audited financial statements included elsewhere herein this Proxy
statement.
WSS provided alarm monitoring services and sold, installed and serviced
security alarm systems principally for residential and small business
subscribers. Most of the WSS customers were in the southern portion of the
United States.
(b) Revenues
Monitoring revenues, generally derived from contracts for an initial
non-cancelable term, are recognized monthly as services are provided. Amounts
billed in advance are deferred and recognized in the month service occurs.
Installation revenues are recognized in the period of installation of the alarm
system. Service revenues are recognized in the period that the services are
provided.
(c) Inventories
Inventories, comprised of alarm systems and parts held for installation and
service, are stated at the lower of average cost or market. For the 52 weeks
ended December 20, 1994 and 1995 and the 53 weeks ended December 30, 1996,
approximately $1,219,000, $650,000 and $1,634,000, respectively, was charged to
expense resulting from the write down of inventory to its respective market
values.
(d) Property and Equipment
Property and equipment is stated at cost and depreciated using the
straight-line method over its estimated useful life (five to ten years for
furniture and other equipment). When property and equipment is retired or sold,
the cost and the related accumulated depreciation is eliminated from their
respective accounts. Gains or losses from retirements and dispositions of
property and equipment are recognized in the period realized. Repair and
maintenance costs are expensed as incurred.
(e) Income Taxes
WSS historically has been included in the consolidated Federal income tax
return filed by Westinghouse. Income taxes have been allocated to WSS as if they
were filing a separate tax return. WSS accounts for income taxes in accordance
with Statement of Financial Accounting Standards No. 109 which requires that
deferred tax assets and liabilities be established for the basis differences
between the reported amounts of assets and liabilities for financial reporting
purposes and income tax purposes.
F-54
<PAGE> 185
WESTINGHOUSE SECURITY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(PREDECESSOR FINANCIAL STATEMENTS FOR WESTSEC, INC., AN INDIRECT
WHOLLY-OWNED SUBSIDIARY OF WESTERN RESOURCES, INC.)
(f) Advertising Costs
WSS generally expensed broadcast and print advertising costs based on the
timing of the release of the advertising materials. Advertising costs are
generally recognized upon the first broadcast of the respective advertisement.
(g) Subscriber Accounts
Subscriber accounts installed are stated at cost. Direct costs of installed
accounts are capitalized. These direct costs include materials and equipment on
subscriber premises, installation labor, and other direct installation costs.
Accounts purchased are capitalized at amounts paid to acquire these accounts.
Such capitalized costs are amortized on a straight-line basis over the average
subscriber life of ten years.
(h) Goodwill
Goodwill, which represents the excess of purchase price over the fair value
of net assets acquired, is amortized on a straight-line basis over 40 years.
(i) Cash and Cash Equivalents
Westinghouse historically performed cash management functions for WSS.
Disbursements were funded and deposits were swept centrally by Westinghouse and
intercompany accounts were used to accumulate net amounts owed or borrowed. WSS
maintained certain bank accounts primarily related to payroll, permit fees and
customer referral payments. The balances of such accounts are included in cash
and cash equivalents in the accompanying balance sheet.
For purposes of the statement of cash flows, WSS considered all highly
liquid investments purchased with a remaining maturity of three months or less
at the date acquired to be cash equivalents.
(j) Related Party Transactions
WSS received a number of administrative and support services from
Westinghouse, participated in certain Westinghouse employee benefit plans, and
its results of operations were included in certain of Westinghouse's
consolidated income tax returns. Further information about such relationships
and transactions is included in notes 5, 6 and 7.
(k) Long-Lived Assets
WSS evaluated the expected recoverability of its long-lived assets,
including subscriber accounts, as changed events or circumstances indicated that
an asset impairment may have been incurred. WSS's management utilized expected
undiscounted net cash flows to be generated from the assets under consideration
in this evaluation. No impairment charges for long-lived assets were recorded in
1994, 1995 or 1996.
(l) Concentration of Credit Risk
Financial instruments which potentially subjected WSS to concentrations of
credit risk consist principally of trade receivables from a large number of
customers, including both residential and commercial, dispersed across a wide
geographic base. WSS extended credit to its customers in the normal course of
business, performs periodic credit evaluations and maintains allowances for
potential credit losses.
F-55
<PAGE> 186
WESTINGHOUSE SECURITY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(PREDECESSOR FINANCIAL STATEMENTS FOR WESTSEC, INC., AN INDIRECT
WHOLLY-OWNED SUBSIDIARY OF WESTERN RESOURCES, INC.)
(m) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reported
period. On an ongoing basis, management reviews its estimates based on currently
available information. Actual results could differ from those estimates.
(2) PROPERTY AND EQUIPMENT
Property and equipment at December 20, 1995 consist of the following:
<TABLE>
<S> <C>
Office equipment........................................ $ 4,456,169
Furniture and fixtures.................................. 1,125,643
Telecommunications equipment............................ 993,444
-----------
6,575,256
Less accumulated depreciation........................... (2,592,879)
-----------
$ 3,982,377
===========
</TABLE>
(3) SUBSCRIBER ACCOUNTS
Subscriber accounts at December 20, 1995 consist of the following:
<TABLE>
<S> <C>
Subscriber accounts.................................... $179,310,610
Less accumulated amortization.......................... (40,690,326)
------------
$138,620,284
============
</TABLE>
During the 52 week period ended December 20, 1995, WSS added approximately
81,000 subscriber accounts and capitalized approximately $40.3 million.
(4) LONG-TERM DEBT
During 1992 and through 1994, WSS entered into a series of agreements (the
"Agreements") to sell certain rights in security alarm monitoring contracts (the
"Contracts") to an investor for approximately $76.9 million in cash. The
investor financed the transactions through the issuance of three series of
secured five-year notes (the "Investor Notes"). For financial reporting
purposes, WSS accounted for the transactions as a financing arrangement and
recorded the proceeds received from the investor as long-term debt. The amounts
recorded as debt were amortized under the interest method. Generally, principal
and interest payments on the debt consist of 65% of the monitoring revenues
collected under the Contracts. In addition, as part of the Agreements, WSS has
provided the investor with certain guarantees with respect to the attrition of
Contracts.
Under the Agreements, WSS had the right but not the obligation, exercisable
not more than 15 months or less than 12 months prior to the stated maturity of
any series of Investor Notes, to repurchase the Contracts or cause the
disposition of Contracts securing a particular series of Investor Notes, for an
amount equal to the then fair market value of such Contracts, provided such fair
market value will not be less than the amount necessary to satisfy all
obligations of the investor related to such series of Investor Notes plus
certain taxes, if any (the "Minimum Purchase Price"). In the event of an
unsolicited third party offer in excess of the then Minimum Purchase Price to
purchase such Contracts prior to 12 months before the stated maturity of any
series of Investor Notes, the Agreements provided WSS a right of first refusal
to buy such Contracts. In addition, the Agreements provided that WSS would
receive 60% of the excess of the fair market value over the
F-56
<PAGE> 187
WESTINGHOUSE SECURITY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(PREDECESSOR FINANCIAL STATEMENTS FOR WESTSEC, INC., AN INDIRECT
WHOLLY-OWNED SUBSIDIARY OF WESTERN RESOURCES, INC.)
Minimum Purchase Price, if any, if WSS repurchases or arranges the sale of such
Contracts. If WSS does not repurchase or elect to cause the disposition of the
Contracts, the then outstanding long-term debt and cost of such disposed
Contracts, which are included in subscriber accounts on the balance sheet, and
their related accumulated amortization will be eliminated and the resulting gain
or loss will be recognized.
Based upon management's estimate of the Minimum Purchase Price, as defined
in the Agreements, of the underlying subscriber accounts, the fair value of this
debt obligation at December 30, 1996 is estimated at approximately $65 million.
Management's estimate of fair value has been estimated based on anticipated
monthly recurring revenue per account upon the maturity of the respective
Agreements and a recurring revenue multiple which is believed to be
representative of current market conditions for purchases of aggregate accounts
net of any amounts that may be owed to WSS as discussed above. Future repayments
given a current estimated fair value of $65 million are as follows: 1997 -- $4.5
million, 1998 -- $26.2 million and 1999 -- $34.3 million. Amounts of interest
actually paid approximated interest expense in 1994, 1995 and 1996.
(5) INCOME TAXES
Components of the income tax benefit are as follows:
<TABLE>
<CAPTION>
53 WEEKS
52 WEEKS ENDED ENDED
----------------------------- ------------
DECEMBER 20, DECEMBER 20, DECEMBER 30,
1994 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
Federal:
Current........................... $ 630,190 $ 11,650,634 $ 9,461,664
Deferred.......................... 335,272 (8,865,598) (7,172,046)
State:
Current............................. 86,819 1,605,059 1,303,494
Deferred............................ 28,803 (759,869) (614,743)
------------ ------------ ------------
Total............................. $1,081,084 $ 3,630,226 $ 2,978,369
========== ========== ==========
</TABLE>
The difference between the income tax benefit at the federal statutory rate
and income tax benefit in the accompanying statements of operations is as
follows:
<TABLE>
<CAPTION>
53 WEEKS
52 WEEKS ENDED ENDED
----------------------------- ------------
DECEMBER 20, DECEMBER 20, DECEMBER 30,
1994 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
Federal statutory tax rate............ 35% 35% 35%
State income taxes, net of Federal
benefit............................. 3% 3% 3%
-- -- -- --
----
38% 38% 38%
==== ==== ====
</TABLE>
No cash was paid for income taxes for the 52 weeks ended December 20, 1994
and 1995 and the 53 weeks ended December 30, 1996.
(6) RELATED PARTY TRANSACTIONS
During 1994, 1995 and 1996, WSS purchased products from and sold products
to other Westinghouse operations on a limited basis. WSS was charged directly
for the costs of certain services that Westinghouse provided. These services
included information system support, certain accounting functions, such as
transac-
F-57
<PAGE> 188
WESTINGHOUSE SECURITY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(PREDECESSOR FINANCIAL STATEMENTS FOR WESTSEC, INC., AN INDIRECT
WHOLLY-OWNED SUBSIDIARY OF WESTERN RESOURCES, INC.)
tion processing, legal services, human resources and telecommunications.
Westinghouse also provided WSS with other services, as needed, including
printing, productivity and other consulting services. For the 52 weeks ended
December 20, 1994 and 1995, amounts charged for these services were not
significant. For the 53 weeks ended December 30, 1996, approximately $1.1
million was charged to WSS for these services, primarily for telecommunications.
Historically, these transactions were not settled in cash, but instead recorded
in intercompany payable accounts. Since this obligation was not repaid by WSS to
Westinghouse, amounts accrued were recorded as contributed capital in the
accompanying balance sheet of WSS. At December 31, 1995 this intercompany
balance approximated $34.9 million.
Westinghouse allocated a portion of its corporate expenses to its business
units and subsidiaries. These allocated costs include certain corporate
overhead, including among others, corporate legal, environmental and insurance.
These corporate expenses were allocated primarily based on payroll costs and
revenue. Such allocations were not necessarily indicative of actual results and
it is not practical for management to estimate the level of expenses that might
have been incurred had WSS operated as a separate stand-alone entity. Amounts
allocated to WSS by Westinghouse approximated $652,000, $660,000 and $802,000 in
1994, 1995 and 1996, respectively.
(7) EMPLOYEE BENEFIT PLANS
WSS maintained savings plans which qualify under Section 401(k) of the
Internal Revenue Code. The savings plans allowed eligible employees to
contribute up to 15% of their income on a pretax basis to such savings plans.
WSS, at its discretion, may have elected to match 50% of the employee's
contribution up to the first 6% of the employee's compensation. The charge to
operations for WSS' matching contribution approximated $135,000, $376,000 and
$449,000 in 1994, 1995 and 1996, respectively.
(8) COMMITMENTS AND CONTINGENCIES
WSS leased office space and other equipment under noncancellable operating
leases that require aggregate minimum future rentals of:
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
Year ending December 31
1997......................................... $2,206
1998......................................... 1,739
1999......................................... 1,248
2000......................................... 882
2001......................................... 642
Thereafter................................... 1,701
-----------
$8,418
===========
</TABLE>
Total rental expense recognized for the 52 weeks ended December 20, 1994
and 1995 and the 53 weeks ended December 30, 1996 for operating leases was
approximately $1,887,000, $3,356,000, and $3,409,000, respectively.
During the 52 weeks ended December 20, 1994 and 1995, WSS recognized losses
related to a remaining purchase commitment of $850,000 and $650,000,
respectively, based upon management's estimate of the current market value of
certain equipment inventory which was substantially less than the remaining
contractual commitment.
F-58
<PAGE> 189
WESTINGHOUSE SECURITY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(PREDECESSOR FINANCIAL STATEMENTS FOR WESTSEC, INC., AN INDIRECT
WHOLLY-OWNED SUBSIDIARY OF WESTERN RESOURCES, INC.)
WSS was a party to claims and matters of litigation incidental to the
normal course of its business. The resolution of these matters is not expected
to have a material adverse effect on WSS's financial position or results of
operations.
F-59
<PAGE> 190
CENTENNIAL SECURITY HOLDINGS, INC.
UNAUDITED CONSOLIDATED BALANCE SHEET
AS OF JUNE 30, 1997
ASSETS
<TABLE>
<S> <C>
Current assets:
Cash and cash equivalents..................................................... $ 909,923
Accounts receivable, net of allowance of $280,310............................. 4,218,322
Note receivable............................................................... 75,000
Inventory..................................................................... 1,938,183
Prepaid expenses.............................................................. 1,090,636
-----------
Total current assets............................................................ 8,232,064
Fixed assets, net............................................................... 6,173,259
Intangibles, net................................................................ 44,141,911
Other assets.................................................................... 672,921
-----------
Total assets.................................................................... $59,220,155
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable, current portion................................................ $ 44,438
Accounts payable.............................................................. 1,622,914
Accrued expenses.............................................................. 1,161,305
Customer Deposit Liability.................................................... 533,532
Unearned income............................................................... 1,829,750
-----------
Total current liabilities....................................................... 5,191,939
Notes payable, less current portion............................................. 11,126,605
Subordinated notes payable...................................................... 10,000,000
Mandatory Redeemable Preferred stock, $.001 par value:
Series A (91,000 shares authorized, 91,000 issued and outstanding)............ 1,820,000
Series B (438,049 shares authorized, 438,049 issued and outstanding).......... 11,935,801
Series C (150,000 shares authorized, 150,000 issued and outstanding).......... 5,250,000
Series D (860,716 shares authorized, 860,716 issued and outstanding).......... 23,064,372
-----------
Total liabilities............................................................... 68,388,717
-----------
Stockholders' equity
Common stock, $.001 par value: (1,500,000 shares authorized, 95,199 issued and
outstanding)............................................................... 95
Additional paid in capital.................................................... 327,405
Accumulated deficit........................................................... (9,496,062)
-----------
Total stockholders' equity (deficit)............................................ (9,168,562)
-----------
Total liabilities and stockholders' equity...................................... $59,220,155
===========
</TABLE>
See accompanying notes to unaudited financial statements.
F-60
<PAGE> 191
CENTENNIAL SECURITY HOLDINGS, INC.
UNAUDITED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1997
<TABLE>
<S> <C>
REVENUES
Monitoring revenues......................................................... $ 5,876,491
Installation revenues....................................................... 3,154,939
Service revenues............................................................ 695,890
-----------
Total revenues................................................................ 9,727,320
-----------
Cost of revenues:
Monitoring expenses......................................................... 1,042,018
Installation expenses....................................................... 1,500,264
Service expenses............................................................ 1,242,934
-----------
Total cost of revenues........................................................ 3,785,216
-----------
Gross profit.................................................................. 5,942,104
Operating expenses
Selling and marketing expenses.............................................. 2,948,411
General and administrative expenses......................................... 2,644,814
Depreciation and amortization............................................... 2,644,440
-----------
Operating loss................................................................ (2,295,560)
Interest expense, net......................................................... 1,091,964
-----------
Net loss...................................................................... $(3,387,524)
==========
</TABLE>
See accompanying notes to unaudited financial statements.
F-61
<PAGE> 192
CENTENNIAL SECURITY HOLDINGS, INC.
UNAUDITED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE SIX MONTHS ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON PAID-IN ACCUMULATED STOCKHOLDERS'
STOCK CAPITAL DEFICIT EQUITY (DEFICIT)
------ ---------- ----------- ----------------
<S> <C> <C> <C> <C>
Balance at December 31, 1996............... $ 95 $ 327,405 $(6,108,538) $ (5,781,038)
Net loss................................... -- -- (3,387,524) (3,387,524)
--- -------- ----------- -----------
Balance at June 30, 1997................... $ 95 $ 327,405 $(9,496,062) $ (9,168,562)
=== ======== =========== ===========
</TABLE>
F-62
<PAGE> 193
CENTENNIAL SECURITY HOLDINGS, INC.
UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1997
<TABLE>
<S> <C>
Cash flows from operating activities:
Net loss..................................................................... $ (3,387,524)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation and amortization............................................. 2,644,441
Changes in operating assets and liabilities:
Accounts receivable....................................................... (1,601,113)
Inventory................................................................. (597,309)
Intangibles............................................................... (1,174,749)
Other assets.............................................................. (518,797)
Accounts payable, accrued expenses and other.............................. (9,315)
Unearned income........................................................... 462,902
------------
Net cash used by operating activities................................... (4,181,463)
------------
Cash flows from investing activities:
Purchase of security companies (net of cash acquired)........................ (6,899,626)
Purchases of property, plant and equipment................................... (2,691,580)
------------
Net cash used in investing activities................................... (9,591,206)
------------
Cash flows from financing activities:
Issuance of preferred stock.................................................. 21,564,400
Proceeds from borrowings..................................................... 6,900,000
Payments on borrowings....................................................... (14,071,002)
------------
Net cash provided from financing activities............................. 14,393,398
------------
Net increase in cash and cash equivalents............................... 620,729
Cash at beginning of period.................................................... 289,194
------------
Cash at end of year............................................................ $ 909,923
============
</TABLE>
See accompanying notes to unaudited financial statements.
F-63
<PAGE> 194
CENTENNIAL SECURITY HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS)
1. BASIS OF CONSOLIDATION AND INTERIM FINANCIAL INFORMATION:
The accompanying unaudited consolidated financial statements include the
accounts of Centennial Security Holdings, Inc. ("Centennial Holdings") and its
wholly owned subsidiary Centennial Security, Inc. ("Centennial"). The assets,
results of operations and stockholders' equity of Centennial comprise
substantially all the assets, results of operations and stockholders' equity of
Centennial Holdings on a consolidated basis. Centennial Holdings' principal
assets and sole operations are in and through its investment in Centennial. All
significant intercompany balances and transactions have been eliminated in
consolidation. Separate financial statements for Centennial have not been
provided because Centennial Holdings does not believe such separate financial
statements are material to investors. Centennial Holdings' unaudited
consolidated financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information and
in accordance with the instructions to Form 10-Q which mandate adherence to Rule
10-01 of Regulation S-X. Accordingly, certain information and footnote
disclosures normally included in financial statements presented in accordance
with generally accepted accounting principles have been condensed or omitted.
These financial statements should be read in conjunction with the audited
financial statements and notes thereto for the year ended December 31, 1996
included in this Proxy Statement. In the opinion of management of Centennial
Holdings, all adjustments, consisting of only normal recurring adjustments,
considered necessary for a fair presentation have been included. The results of
operations for the six month period ended June 30, 1997 is not necessarily
indicative of the results to be expected for the full year.
Recent Accounting Pronouncements: In June 1997, FASB issued SFAS No.
130 -- "Reporting Comprehensive Income," which is required to be adopted for
fiscal years beginning after December 15, 1997. This statement requires that an
enterprise (a) classify items of other comprehensive income by their nature in a
financial statement and (b) display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid in
capital in the equity section of the statement of financial position. As the
required disclosures will be supplementary to the existing required financial
information, the new pronouncement will not affect previously reported results
of operations.
2. SUBSCRIBER ACCOUNTS AND INTANGIBLES:
Subscriber accounts and intangibles (at cost) consist of the following:
<TABLE>
<CAPTION>
JUNE 30, 1997
-------------
<S> <C>
Acquired subscriber accounts.................................... $36,398
Debt issuance costs............................................. 1,387
Goodwill and other.............................................. 12,450
-------
50,235
Less accumulated amortization................................... (6,093)
-------
$44,142
=======
</TABLE>
3. AMENDMENTS TO REVOLVING CREDIT FACILITY:
On October 17, 1996, Centennial entered into a $50,000 loan agreement (the
"T-D Loan Agreement") with Toronto-Dominion (Texas), Inc. as Agent, several
financial institutions (the "Lenders") and The Toronto-Dominion Bank as Issuing
Bank. The terms of the T-D Loan Agreement include various covenants which
provide among other things, for the maintenance of certain predefined ratios
among debt, senior debt, interest expense and cash flow as well as restricting
the payment of dividends. At June 30, 1997, Centennial would have been in
technical violation of these covenants if the Agent and the Lenders had not
waived compliance with those respective covenants. On June 25, 1997, Centennial
and the Agent and the Lenders
F-64
<PAGE> 195
CENTENNIAL SECURITY HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS)
executed the First Amendment, Supplement and Limited Waiver to Loan Agreement
(the "First Amendment") which reduced the available commitment to $15,700,
reduced certain covenants and removed the restrictions on the repurchase of
certain shares of Common Stock and Series B Preferred Stock. On July 22, 1997,
Centennial and the Agent executed the Second Amendment and Supplement to Loan
Agreement (the "Second Amendment") which increased the available commitment to
$25,700 upon pro forma compliance with certain covenants, and provided for the
reinstatement of the original $50,000 commitment. Management believes that
Centennial is in compliance with all of the requirements of the T-D Loan
Agreement as amended by the Second Amendment and the full $50,000 commitment
would be reinstated upon request to the Agent and the Lenders.
4. INCOME TAXES:
Differences between the tax basis of assets and liabilities and their
financial reporting amounts that give rise to significant portions of deferred
income tax items are as follows:
<TABLE>
<CAPTION>
JUNE 30, 1997
-------------
<S> <C>
Deferred tax assets (liabilities):
Net operating losses.................................. $ 2,925
Acquired subscriber accounts.......................... (153)
Other................................................. 5
-------------
2,777
Valuation allowance..................................... (2,777)
Net deferred tax assets................................. $ --
==========
</TABLE>
Centennial Holdings had net operating loss carry-forwards, subject to
certain limitations, for regular federal income tax purposes of approximately
$7,500 at June 30, 1997, which begin expiring in 2009 and continue to expire
through 2011. Utilization of the net operating losses may be subject to a
substantial annual limitation due to the ownership change provisions of Internal
Revenue Code Section 382. The valuation allowance has been established until it
is more likely than not that the deferred tax assets will be realized.
5. COMMITMENTS AND CONTINGENCIES:
Centennial Holdings is party to claims and other matters of litigation
incidental to the normal course of business. The ultimate outcome of these
matters cannot presently be determined; however, in the opinion of management of
Centennial Holdings, the resolution of these matters will not have a material
adverse effect on Centennial Holdings consolidated financial position, results
of operations and cash flows.
6. TRANSACTIONS WITH AFFILIATED AND RELATED PARTIES:
During June 1997, the Company entered into a Stock Purchase, Assignment and
Termination Agreement (the "Masada Agreement") with Masada Security, Inc.
("Masada") to repurchase all of the Common Stock and all of the Series B
Preferred Stock owned by Masada for $1,500. The Masada Agreement also provided
for the termination of the June 10, 1994 Monitoring Agreement as amended and for
Masada to assign and Centennial to assume all of Masada's rights, title and
interest in and to the Purchase Agreement dated June 10, 1994, the B Preferred
Stock Purchase Agreement dated July 11, 1995, the Registration Agreement dated
July 11, 1995 and the Stockholders Agreement dated July 11, 1995. The Masada
Agreement also provided for Centennial to pay the outstanding balance on the May
1, 1996 Promissory Note in the amount of $29 plus accrued interest. This
transaction was closed in July 1997.
F-65
<PAGE> 196
CENTENNIAL SECURITY HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS)
On June 30, 1997, Centennial acquired substantially all of the assets of
the Shiver Security Systems Unlimited Inc. for $5,274. The President and
principal owner of Shiver Security Systems Unlimited Inc. is a relative of
Centennial's Chief Executive Officer and President. Centennial believes that the
terms of this acquisition were comparable to those that would have been
negotiated with a non-related party.
7. SUBSEQUENT EVENTS:
On October 2, 1997, Centennial entered into a Stock Purchase Agreement
dated as of October 2, 1997 (the "Purchase Agreement") with Westar Capital,
Inc., a Kansas corporation ("Westar") or its permitted assignee ("Buyer").
Pursuant to the Purchase Agreement, Westar or Buyer will purchase all of the
capital stock of Centennial.
On July 30, 1997, Protection One, Inc. ("POI") entered into a contribution
agreement dated July 30, 1997 (the "Contribution Agreement") with Western
Resources, Inc., a Kansas corporation ("Western Resources"). Pursuant to, and on
and subject to the terms and conditions of, the Contribution Agreement, Western
Resources will contribute to POI all of the outstanding capital stock of
Westsec, Inc. and Westar Security, Inc., which comprise all of Western Resources
security alarm monitoring services.
Consummation of the Purchase Agreement and Contribution Agreement is
subject to various approvals including expiration or termination of the waiting
period required under the Hart-Scott-Rodino Antitrust Improvements Act of 1976.
Subsequent to June 30, 1997, Centennial purchased three security companies.
Aggregate acquisition costs were $11,428, excluding liabilities assumed of
$1,689. Consideration consisted of cash of $8,501 and liabilities of $1,238. The
acquisitions have been accounted for under the purchase method.
F-66
<PAGE> 197
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Centennial Security Holdings, Inc.
We have audited the accompanying consolidated balance sheets of Centennial
Security Holdings, Inc. as of December 31, 1996 and 1995, and the related
consolidated statements of operations, stockholders' equity (deficit) and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Centennial
Security Holdings, Inc. at December 31, 1996 and 1995, and the consolidated
results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Cincinnati, Ohio
March 22, 1997
F-67
<PAGE> 198
CENTENNIAL SECURITY HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1996 1995
----------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents....................................... $ 289,194 $ 4,431,574
Accounts receivable, net of allowances of $492,000 ($265,000 in
1995)........................................................ 2,692,209 1,218,062
Note receivable -- officer...................................... -- 200,000
Inventory....................................................... 1,340,874 867,428
Prepaid expenses................................................ 356,335 404,664
----------- -----------
Total current assets.............................................. 4,678,612 7,121,728
Fixed assets, net................................................. 4,122,894 2,221,960
Intangibles, net.................................................. 38,441,486 37,289,062
Other assets...................................................... 517,730 488,932
----------- -----------
Total assets...................................................... $47,760,722 $47,121,682
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Notes payable, current portion.................................. $ 2,162,393 $ 1,955,688
Accounts payable................................................ 2,701,398 1,458,758
Accrued expenses................................................ 1,416,348 1,930,196
Customer deposit liability...................................... 709,320 --
Unearned income................................................. 1,366,848 1,478,206
----------- -----------
Total current liabilities......................................... 8,356,307 6,822,848
Notes payable, less current portion............................... 16,179,652 12,024,145
Subordinated notes payable........................................ 10,000,000 10,000,000
Mandatory Redeemable Preferred stock, $.001 par value:
Series A (91,000 shares authorized, 91,000 issued and
outstanding in 1996 and 1995)............................... 1,820,000 1,820,000
Series B (438,049 shares authorized, 438,049 issued and
outstanding in 1996 and 1995)............................... 11,935,801 11,935,801
Series C (150,000 shares authorized, 150,000 issued and
outstanding in 1996 and 1995)............................... 5,250,000 5,250,000
----------- -----------
Total liabilities....................................... 53,541,760 47,852,794
----------- -----------
Stockholders' equity (deficit):
Common stock, $.001 par value:
(1,500,000 shares authorized, 95,199 issued and outstanding
in 1996 and 1995)........................................... 95 95
Common stock -- Class A, $.001 par value (300,000 shares
authorized, none issued in 1996 or 1995).................... -- --
Common stock -- Class B, $.001 par value (5,000 shares
authorized, none issued in 1996 or 1995).................... -- --
Additional paid-in capital........................................ 327,405 327,405
Accumulated deficit............................................... (6,108,538) (1,058,612)
----------- -----------
Total stockholders' equity (deficit).............................. (5,781,038) (731,112)
----------- -----------
Total liabilities and stockholder's equity (deficit).............. $47,760,722 $47,121,682
========== ==========
</TABLE>
See accompanying notes.
F-68
<PAGE> 199
CENTENNIAL SECURITY HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1996 1995
----------- ----------
<S> <C> <C>
REVENUES
Monitoring revenues................................................ $10,361,956 $1,072,240
Installation revenues.............................................. 5,534,587 886,572
Service revenues................................................... 1,379,306 128,993
----------- ----------
Total revenues..................................................... 17,275,849 2,087,805
COST OF REVENUE:
Monitoring expenses.............................................. 1,584,578 179,447
Installation expenses............................................ 3,119,019 593,415
Service expenses................................................. 2,539,273 109,984
----------- ----------
Total cost of revenues............................................. 7,242,870 882,846
----------- ----------
Gross profit....................................................... 10,032,979 1,204,959
OPERATING EXPENSES
Selling and marketing expenses..................................... 3,538,116 391,351
General and administrative expenses................................ 4,202,474 1,347,088
Depreciation and amortization...................................... 4,491,238 389,799
----------- ----------
Operating loss..................................................... (2,198,849) (923,279)
Interest (expense) income, net..................................... (2,851,077) 76,834
----------- ----------
Net loss........................................................... $(5,049,926) $ (846,445)
=========== ==========
</TABLE>
See accompanying notes.
F-69
<PAGE> 200
CENTENNIAL SECURITY HOLDINGS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
COMMON COMMON
STOCK STOCK ADDITIONAL TOTAL
COMMON CLASS CLASS PAID-IN ACCUMULATED STOCKHOLDERS'
STOCK A B CAPITAL DEFICIT EQUITY (DEFICIT)
------ ------ ------ ---------- ----------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1995............................... $ -- $ 28 $ 5 $327,467 $ (212,167) $ 115,333
Conversion of Class A and B common shares.............. 95 (28) (5) (62) -- --
Net loss............................................... -- -- -- -- (846,445) (846,445)
--- ---- --- -------- ----------- -----------
Balance at December 31, 1995............................. 95 -- -- 327,405 (1,058,612) (731,112)
Net loss............................................... -- -- -- -- (5,049,926) (5,049,926)
--- ---- --- -------- ----------- -----------
Balance at December 31, 1996............................. $ 95 $ -- $ -- $327,405 $(6,108,538) $ (5,781,038)
=== ==== === ======== =========== ===========
</TABLE>
See accompanying notes.
F-70
<PAGE> 201
CENTENNIAL SECURITY HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1996 1995
----------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss......................................................... $(5,049,926) $ (846,445)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization.................................. 4,491,238 389,799
Changes in operating assets and liabilities:
Accounts receivable......................................... (600,446) (313,844)
Inventory................................................... (273,663) (117,605)
Intangibles................................................. (2,625,522) (23,875)
Prepaid expenses and other assets........................... (59,613) (391,734)
Accounts payable and accrued expenses....................... 274,077 (914,778)
Unearned income and customer deposits....................... 96,437 (222,573)
----------- ------------
Net cash used by operating activities............................ (3,747,418) (2,441,055)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of security companies, net of cash acquired............. (2,199,161) (12,580,881)
Purchase of fixed assets......................................... (2,558,013) (530,182)
----------- ------------
Net cash used in investing activities............................ (4,757,174) (13,111,063)
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of preferred and common stock........................... -- 11,935,801
Proceeds from borrowings......................................... 6,050,000 6,317,000
Payments on borrowings........................................... (1,687,788) (7,211)
----------- ------------
Net cash provided from financing activities...................... 4,362,212 18,245,590
----------- ------------
Net (decrease) increase in cash and cash equivalents............. (4,142,380) 2,693,472
Cash at beginning of year........................................ 4,431,574 1,738,102
----------- ------------
Cash at end of year.............................................. $ 289,194 $ 4,431,574
=========== ============
</TABLE>
See accompanying notes.
F-71
<PAGE> 202
CENTENNIAL SECURITY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. THE COMPANY
Centennial Security Holdings, Inc. provides protective services to
commercial and residential customers primarily by selling, installing, servicing
and monitoring electronic security systems principally in the Midwestern and
Northeastern United States.
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of Centennial
Security Holdings, Inc. ("Centennial Holdings") and its wholly owned subsidiary,
Centennial Security, Inc., ("Centennial" and collectively "the Company.") The
Company began operations with its first acquisition in March 1995. The assets,
results of operations and stockholders' equity of Centennial comprise
substantially all the assets, results of operations and stockholders' equity of
Centennial Holdings on a consolidated basis. Centennial Holdings principal
assets and sole operations are in and through its investment in Centennial. All
significant intercompany balances and transactions have been eliminated in the
consolidation. Separate financial statements for Centennial have not been
provided because Centennial Holdings does not believe such separate financial
statements are material to investors.
2. SUMMARY OF SIGNIFICANT POLICIES
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash on hand, in banks, and highly
liquid investments with a maturity of less than three months when purchased.
Included in 1995's cash and cash equivalents is a $1,945,722 certificate of
deposit held as security for an outstanding letter of credit issued as
collateral for notes payable in connection with an acquisition. The note was
paid in full in 1996 and the restriction was released.
INVENTORY
Inventory is recorded at the lower of cost or market, using the first-in,
first-out method. Inventory is comprised of alarm systems and parts for new
installations and maintenance of existing systems.
REVENUES
Security system installation revenues are recognized when installation of
the system is complete. Monitoring and service revenue are recognized when
services have been provided. Unearned income results from billings in advance of
performance of the monitoring service.
FIXED ASSETS
Fixed assets are recorded at cost. Depreciation and amortization are
determined using the straight-line method over the following estimated useful
lives:
<TABLE>
<S> <C>
Capitalized security systems.......... 5 years
Vehicles.............................. 2-5 years
Central station equipment............. 7 years
Furniture, fixtures, and equipment.... 5-10 years
Leasehold improvements................ Lesser of life of lease or asset
</TABLE>
Capitalized security systems, which are located on the subscribers'
premises, include materials, direct installation labor, and an allocation of
overhead.
F-72
<PAGE> 203
CENTENNIAL SECURITY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
2. SUMMARY OF SIGNIFICANT POLICIES (CONTINUED)
INTANGIBLES
Included in intangibles are subscriber accounts, covenants not to compete,
deferred financing costs, and goodwill. Subscriber accounts and covenants not to
compete were determined by independent appraisals of the net assets acquired.
Goodwill represents the excess of cost over fair value of the net assets
acquired.
The cost of the subscriber accounts is being amortized over ten years. It
is the policy of the Company to periodically review the actual account attrition
and, if necessary, adjust the remaining lives.
Goodwill is amortized on a straight-line basis over 20 years. Covenants not
to compete are amortized on a straight-line basis ranging from 5 to 15 years,
based on the terms of the related agreements. Deferred financing costs are
amortized over the terms of the related agreements.
INCOME TAXES
Deferred tax liabilities and assets reflect the tax effect of temporary
differences between the financial statement and tax basis of assets and
liabilities using enacted tax rates in effect for the year the differences are
expected to reverse in accordance with Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes."
RECLASSIFICATIONS
Certain 1995 amounts have been reclassified to conform with the
current-year presentation.
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
3. ACQUISITIONS
During 1996, the Company purchased two security companies. Aggregate
acquisition costs in 1996 were $3,334,463, excluding liabilities assumed of
$887,957. Consideration consisted of cash of $2,199,161 and liabilities of
$247,345. The acquisitions have all been accounted for under the purchase
method. These financial statements include the results of operations of the
acquired companies from their respective dates of acquisition.
During 1995, the Company purchased four security companies. Aggregate
acquisition costs in 1995 was $35,476,603, excluding liabilities assumed of
$6,415,480. Consideration consisted of cash of $12,580,881, notes of
$17,645,722, and 150,000 shares of Series C preferred stock, with an ascribed
value of $5,250,000. The acquisitions have all been accounted for under the
purchase method. These financial statements include the results of operations of
the acquired companies from their respective dates of acquisition.
The following unaudited pro forma condensed consolidated results of
operations present information as if the acquisition had occurred as of the
beginning of each period presented. The pro forma information is presented after
giving effect to certain adjustments for the amortization of subscriber accounts
and interest expense. Certain of the acquisitions' expenses were estimated based
on annual amounts incurred. Management believes the estimates provide a
reasonable approximation of actual results. The pro forma information is
F-73
<PAGE> 204
CENTENNIAL SECURITY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
provided for informational purposes only. It is based on historical information
and is not necessarily indicative of future results of operations.
<TABLE>
<CAPTION>
PRO FORMA FOR THE YEAR ENDED
DECEMBER 31
----------------------------
1996 1995
----------- ------------
<S> <C> <C>
Revenues......................................... $18,072,825 $ 13,120,652
Net loss......................................... (4,991,493) (1,859,121)
</TABLE>
4. FIXED ASSETS
Fixed assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------
1996 1995
---------- ----------
<S> <C> <C>
Capitalized security systems........................ $3,687,145 $1,378,183
Vehicles............................................ 104,189 121,335
Central station equipment........................... 376,467 367,484
Furniture, fixtures, and equipment.................. 698,437 411,763
Leasehold improvements.............................. 43,423 9,980
---------- ----------
4,909,661 2,288,745
Accumulated depreciation............................ (786,767) (66,785)
---------- ----------
$4,122,894 $2,221,960
========= =========
</TABLE>
5. INTANGIBLES
A summary of intangible assets is as follows:
<TABLE>
<CAPTION>
DECEMBER 31
---------------------------
1996 1995
----------- -----------
<S> <C> <C>
Subscriber accounts............................... $30,401,784 $27,656,400
Covenants not to compete.......................... 1,358,166 1,155,519
Goodwill.......................................... 9,698,181 8,704,396
Deferred financing costs.......................... 860,202 --
Organization cost and trademark................... 239,585 92,329
----------- -----------
42,557,918 37,608,644
Accumulated amortization.......................... (4,116,432) (319,582)
----------- -----------
$38,441,486 $37,289,062
========== ==========
</TABLE>
Effective January 1, 1996, the Company adopted the provisions of Financial
Accounting Standards Board Statement No. 121, "Accounting for the Impairment of
Long-Lived Assets To Be Disposed Of." This statement requires impairment losses
to be recognized for long-lived assets used in operations when events and
circumstances indicates that the assets might be impaired and the undiscounted
cash flows are not sufficient to recover the asset's carrying amount. The
adoption of this statement did not have a material impact on the Company's
consolidated financial statements.
F-74
<PAGE> 205
CENTENNIAL SECURITY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
6. OTHER ASSETS
A summary of other assets is as follows:
<TABLE>
<CAPTION>
DECEMBER 31
---------------------------
1996 1995
----------- -----------
<S> <C> <C>
Operating lease deposits.......................... $ 67,730 $ 38,932
Note receivable................................... 450,000 450,000
----------- -----------
$ 517,730 $ 488,932
========== ==========
</TABLE>
The note receivable is related to one of the security companies acquired in
1995 and will be paid at the time of Centennial's last two interest payments due
in July 2000 and January 2001. (See Note 7 for further discussion of notes
payable.)
7. NOTES PAYABLE
Notes payable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
---------------------------
1996 1995
----------- -----------
<S> <C> <C>
Revolving credit facility (i)..................... $10,450,000 $ 6,300,000
Note payable -- acquisition (ii).................. 5,700,000 7,645,722
Note payable -- term (iii)........................ 2,000,000 --
Notes payable -- other (iv)....................... 192,045 34,111
----------- -----------
18,342,045 13,979,833
Current maturities of notes payable............... 2,162,393 1,955,688
----------- -----------
$16,179,652 $12,024,145
========== ==========
</TABLE>
(i) On October 17, 1996, the Company entered into a $50,000,000
revolving credit loan agreement with the Toronto-Dominion Bank replacing
the 1995 Midlantic Bank N.A. credit facility. The revolving credit loan
agreement matures on October 17, 2001 and is available to provide working
capital to fund the growth and development of the Company. As of December
31, 1996, the Company has utilized $16,150,000 of the available credit
line, $10,450,000 in actual advances, and $5,700,000 for letters of credit
contracts issued as collateral for notes issued in connection with an
acquisition. Subsequent to year-end, the Company repaid the $10,450,000 in
advances whereby only the $5,700,000 letters of credit are outstanding
against the $50,000,000 credit line. The revolving credit loan bears
interest at prime plus 1.25 percent with an interest rate of 9.50 percent
at December 31, 1996. The terms of the revolving credit agreement includes
various covenants which provide, among other things, for the maintenance of
certain predefined ratios among debt, senior debt, interest expense, and
cash flow as well as restricting the payment of dividends. At December 31,
1996, the Company was in technical violation of certain of these covenants.
The lenders have waived compliance with those respective covenants as of
March 31, 1997. As a result of the Series D preferred stock offering, the
Company is presently in compliance and anticipates remaining so throughout
the year (See Note 9).
(ii) In connection with the acquisition of a security company in
December 1995, the Company issued notes to the seller aggregating
$7,645,722. In January 1996, the Company paid $1,945,722 and the balance,
$5,700,000 is due in January 2001. Interest is at 12 percent per annum and
is payable semi-annually.
F-75
<PAGE> 206
CENTENNIAL SECURITY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
7. NOTES PAYABLE (CONTINUED)
(iii) The Company was a party to a $2,000,000 subordinated six month
bridge loan, bearing interest at 10 percent. The notes and $45,479 of
accrued interest were converted into Series D Preferred Stock on January 8,
1997.
(iv) Notes payable -- other consist primarily of various notes payable
to banks. Interest on these notes ranges from 8.25 percent to 10.64
percent.
Scheduled maturities of notes payable is as follows:
<TABLE>
<S> <C>
1997............................................ $ 2,162,393
1998............................................ 21,125
1999............................................ 7,093
2000............................................ 1,434
2001............................................ 16,150,000
-----------
$18,342,045
==========
</TABLE>
Interest paid during 1996 and 1995 was $2,484,090 and $101,795,
respectively.
The carrying value of the Company's debt approximates fair market value.
8. SUBORDINATED NOTES PAYABLE
The Company issued unsecured subordinated notes payable aggregating
$10,000,000 in connection with the acquisition of a security company. The notes
bear interest at the rate of 8 percent per annum and are payable annually in
arrears. Principal payments are due in four annual installments of $1,000,000
beginning in December 2001 with a balloon payment of $6,000,000 due at December
2005.
9. REDEEMABLE PREFERRED STOCK
Series A Preferred Stock -- the Company has 91,000 outstanding shares of
Series A convertible preferred stock at December 31, 1996 and 1995. Each share
is convertible into one share of the Company's common stock. At any time after
July 2002 and prior to the consummation of a public offering, each holder of the
Series A preferred stock shall have the right to require the Company to
repurchase all or any portion of the Series A preferred stock at $20.00 per
share. If the Series A preferred stock has been converted, each shareholder
shall have the right to put the stock back to the Company at market value as
determined by an investment banking firm selected by the Company and the
shareholders exercising the put option.
Series B Preferred Stock -- the Company has 438,049 outstanding shares of
Series B convertible preferred stock at December 31, 1996 and 1995. Each share
is convertible into one share of the Company's common stock. At any time after
July 2002 and prior to the consummation of a public offering, each shareholder
of the Series B preferred stock shall have the right to require the Company to
repurchase all or a portion of the Series B preferred stock at $27.50 per share.
If the Series B preferred stock has been converted to common stock, each
shareholder shall have the right to put the stock back to the Company, based on
the same method as for the Series A preferred stock discussed previously.
Series C Preferred Stock -- the Company has 150,000 outstanding shares of
Series C convertible preferred stock at December 31, 1996 and 1995. Prior to the
1997 Series D issuance, each share was convertible into one share of the
Company's common stock. If and only if the holders of the Series A or Series B
preferred stock have required the Company to purchase all or a portion of their
shares, then each holder of Series C preferred stock shall have the right to
require the Company to repurchase all or any portion of the Series C preferred
stock held by such holder at $35.00 per share. If and only if the holders of the
Series A or Series B preferred stock have required the Company to purchase all
or a portion of their shares,
F-76
<PAGE> 207
CENTENNIAL SECURITY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
9. REDEEMABLE PREFERRED STOCK (CONTINUED)
then each Series C preferred stockholder has the same put rights as for the
Series A and B holders discussed previously.
Subsequent to year-end, the Company issued 860,716 shares of a new class of
preferred stock (Series D) at a price of $28.00 per share. Each share is
convertible into one share of the Company's common stock. At any time after July
2002 and prior to the consummation of a public offering, each shareholder of the
Series D preferred stock shall have the right to require the Company to
repurchase all or a portion of the Series D preferred stock at $28.00 per share.
If the Series D preferred stock has been converted to common stock, each
shareholder shall have the right to put the stock back to the Company based on
the same method as for the Series A, B, and C holders discussed previously.
Additionally, the issuance of the Series D preferred shares triggered the
anti-dilution provisions of the Series C stock purchase agreement which resulted
in the Series C multiple being increased to 1.21 common shares per preferred
share which yields an effective price per common share of $28.84.
If the Company, in good faith, is unable to honor the redemptions discussed
above because it cannot obtain sufficient financing or because of restrictions
contained in the Company's debt documents, the Company shall use its best
efforts to take all such actions as are necessary to honor the redemption,
including the refinancing of the Company's debt or the sale of the Company.
In July 1995, the outstanding Class A and B common stock was converted to
95,199 shares of common stock. All of the preferred and common shares have
identical voting rights.
10. STOCK OPTION PLAN
The Board of Directors adopted, and the stockholders of the Company
approved, a stock option plan (the Plan). The Plan provides for the award of
incentive stock options to directors, officers, and key employees. These options
are intended to qualify as incentive stock options (ISOs) under the Internal
Revenue Code or nonstatutory stock options (NSOs) which are not intended to
qualify. The Company has reserved 200,000 shares of common stock for issuance
under the Plan. All stock options have been granted at fair value as determined
by the Company's Board of Directors.
At December 31, 1996, options for 24,370 shares were exercisable at prices
of $10.00 to $27.50 per share. There were 3,264 options exercisable at a price
of $10.00 per share at December 31, 1995.
<TABLE>
<CAPTION>
NUMBER OF OPTION PRICE
SHARES PER SHARE
--------- -------------
<S> <C> <C>
Outstanding at January 1, 1995.................... 9,600 $10.00
Options granted................................. 22,000 $22.50-$27.50
-------
Outstanding at December 31, 1995.................. 31,600 $10.00-$27.50
Options granted................................. 79,150 $22.50
Options terminated.............................. (14,500) $22.50
-------
Outstanding at December 31, 1996.................. 96,250 $10.00-$27.50
=======
</TABLE>
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees," and related Interpretations in
accounting for the participants' options because the alternative fair value
accounting provided for under FASB Statement No. 123, "Accounting for Stock
Based Compensation," requires use of option valuation models that were not
developed for use in valuing such options. However, the effect of applying
Statement No. 123's fair value method results in net earnings that are not
materially different from amounts reported.
F-77
<PAGE> 208
CENTENNIAL SECURITY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
11. INCOME TAXES
Differences between the tax basis of assets and liabilities and their
financial reporting amounts that give rise to significant portions of deferred
income tax items are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1996 1995
---------- ----------
<S> <C> <C>
Deferred tax assets (liabilities):
Net operating losses............................ $2,125,000 $ 381,000
Acquired subscriber accounts.................... (220,000) (645,000)
Accrued liabilities............................. 161,000 460,000
Other........................................... 312,000 29,000
---------- ----------
2,378,000 225,000
Valuation allowance............................... (2,378,000) (225,000)
---------- ----------
Net deferred tax assets........................... $ -- --
========== ==========
</TABLE>
The Company has net operating loss carry-forwards, subject to certain
limitations, for regular federal income tax purposes of approximately $6,200,000
and $859,000 at December 31, 1996 and 1995, respectively, which begin expiring
in 2009 and continue to expire through 2011. Utilization of the net operating
losses may be subject to a substantial annual limitation due to the ownership
change provisions of Internal Revenue Code Section 382. The valuation allowance
has been established until it is more likely than not that the deferred tax
assets will be realized.
12. LEASES
Company leases vehicles, computer equipment, and office space under various
operating lease arrangements. Future lease payments due under these leases are
as follows at December 31, 1996:
<TABLE>
<S> <C>
1997..................................................... $ 536,004
1998..................................................... 209,064
1999..................................................... 128,893
2000..................................................... 84,510
2001..................................................... 77,405
Thereafter............................................... 39,874
----------
$1,075,750
==========
</TABLE>
Total rental expense related to operating leases was $604,825 in 1996
($60,925 in 1995).
13. TRANSACTIONS WITH AFFILIATED AND RELATED PARTIES
The Company has entered into a strategic alliance with Masada Security,
Inc., a stockholder. In consideration for Masada's common stock equity interest,
the Company entered into a trademark and intellectual property agreement
granting the Company the right to use the trade name Masada and certain
intellectual property in the northern United States and Canada. The value
ascribed to Masada's common stock equity interest was $47,500.
During 1995, the Company acquired substantially, all of the assets of the
BDC Security Group, Inc. for $345,900. During 1996, the Company acquired
substantially all of the assets of BDC Security Holdings, Inc. for $1,510,715.
The Company's chief executive officer and president owned, on a fully diluted
basis, a majority of the outstanding equity of the acquired companies. The
Company believes that the terms of these
F-78
<PAGE> 209
CENTENNIAL SECURITY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
acquisitions were not more favorable to the Company than those that would have
been negotiated with a nonaffiliated party.
During 1995, the Company also held a note receivable from an officer in the
amount of $200,000 with interest at 7 percent per annum. This note was repaid
during 1996.
14. COMMITMENTS AND CONTINGENCIES:
Centennial Holdings is party to claims and other matters of litigation
incidental to the normal course of business. The ultimate outcome of these
matters cannot presently be determined; however, in the opinion of management of
Centennial Holdings, the resolution of these matters will not have a material
adverse effect on Centennial Holdings consolidated financial position, results
of operations and cash flows.
F-79
<PAGE> 210
NETWORK MULTI-FAMILY SECURITY CORPORATION
UNAUDITED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER
JUNE 30, 31,
1997 1996
----------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents....................................... $ 105,759 $ 0
Accounts receivable, net........................................ 2,262,761 2,759,343
Investment in finance receivables............................... 14,907,518 14,824,776
Inventories..................................................... 2,791,104 2,487,860
Alarm installation contracts.................................... 5,242,188 4,802,980
Other........................................................... 207,633 238,671
----------- -----------
Total current assets.................................... 25,516,963 25,113,630
Investment in finance receivables, net............................ 38,921,436 37,193,612
Property and equipment, net....................................... 6,233,875 5,574,287
License agreements, net........................................... 1,310,686 1,571,650
Other assets.................................................... 485,751 120,129
----------- -----------
$72,468,711 $69,573,308
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt............................... $ 0 $ 3,846,760
Accounts payable................................................ 1,843,846 1,340,348
Accrued expenses................................................ 1,316,706 1,226,128
Accrued interest................................................ 112,197 391,223
----------- -----------
Total current liabilities............................... 3,272,749 6,804,459
Long-term debt -- term loan....................................... 0 16,699,862
Long-term debt -- revolving loan.................................. 38,200,000 6,557,388
Long-term debt -- subordinated note to related party.............. 0 4,200,000
Deferred income taxes............................................. 10,997,195 9,988,189
----------- -----------
Total liabilities....................................... 52,469,944 44,249,898
----------- -----------
STOCKHOLDER'S EQUITY:
Common stock ($.01 par value, 100,000 shares authorized, issued
and outstanding)............................................. 1,001 1,001
Additional capital.............................................. 10,033,299 9,883,299
Retained earnings............................................... 9,964,467 15,439,110
----------- -----------
Total stockholder's equity.............................. 19,998,767 25,323,410
----------- -----------
$72,468,711 $69,573,308
========== ==========
</TABLE>
See notes to financial statements.
F-80
<PAGE> 211
NETWORK MULTI-FAMILY SECURITY CORPORATION
UNAUDITED INCOME STATEMENTS
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
JUNE 30
-----------------------------
1997 1996
----------- -----------
<S> <C> <C>
OPERATING REVENUES:
Sales......................................................... $ 7,157,275 $ 6,354,425
Service fees.................................................. 5,184,956 4,289,534
Interest...................................................... 6,090,374 5,992,751
Other operating income........................................ 49,005 60,716
----------- -----------
18,481,610 16,697,426
----------- -----------
OPERATING COSTS:
Cost of sales................................................. 5,486,349 4,592,816
Cost of services.............................................. 3,137,779 2,408,067
General and administrative.................................... 3,297,152 3,359,355
----------- -----------
11,921,280 10,360,238
----------- -----------
OPERATING INCOME................................................ 6,560,330 6,337,188
OTHER EXPENSE:
Provision for bad debt........................................ (1,356,998) (1,053,471)
Depreciation and amortization expense......................... (1,126,792) (797,573)
Interest expense (including interest to related party of
$157,000 in 1997 and $100,000 in 1996)..................... (1,551,315) (1,404,481)
----------- -----------
INCOME BEFORE INCOME TAXES...................................... 2,525,225 3,081,663
----------- -----------
INCOME TAXES:
Current taxes................................................. (10,002) (10,002)
Deferred...................................................... (1,009,006) (1,242,979)
----------- -----------
(1,019,008) (1,252,981)
----------- -----------
NET INCOME...................................................... $ 1,506,217 $ 1,828,682
=========== ===========
</TABLE>
See notes to financial statements.
F-81
<PAGE> 212
NETWORK MULTI-FAMILY SECURITY CORPORATION
UNAUDITED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
JUNE 30,
------------------------------
1997 1996
------------ -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income..................................................... $ 1,506,217 $ 1,828,682
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation expense......................................... 460,244 306,290
Amortization expense......................................... 666,548 491,283
Deferred taxes............................................... 1,009,006 1,242,979
Provision for bad debt....................................... 1,356,998 1,053,471
Gain on sale of property and equipment....................... (49,005) (60,716)
Changes in investment in finance receivables and alarm
installation contracts:
Gross additions.............................................. (5,503,369) (4,567,676)
Gross receipts of principal.................................. 1,701,629 1,237,489
Other........................................................ 432,718 294,157
Changes in:
Accounts receivable.......................................... 215,541 (834,079)
Inventories.................................................. (303,244) 315,903
Other assets................................................. (541,004) (151,874)
Accounts payable and accrued expenses........................ 315,049 321,250
Other liabilities............................................ 0 (30,006)
------------ -----------
Net cash provided by operating activities 1,267,328 1,447,153
------------ -----------
INVESTING ACTIVITIES:
Purchase of property and equipment............................. (1,275,704) (1,561,940)
Proceeds from the sale of property and equipment............... 49,005 60,716
------------ -----------
Net cash used by investing activities.......................... (1,226,699) (1,501,224)
------------ -----------
FINANCING ACTIVITIES:
Principal payments on Long-Term Debt........................... (32,510,934) (7,800,666)
Proceeds on Long-Term Debt..................................... 39,406,924 8,987,248
Dividends...................................................... (6,980,860) (1,137,150)
Capital contributions.......................................... 150,000 0
------------ -----------
Net cash used by financing activities.......................... 65,130 49,432
------------ -----------
NET INCREASE (DECREASE) IN CASH................................ 105,759 (4,639)
CASH AT BEGINNING OF PERIOD.................................... 0 4,639
------------ -----------
CASH AT END OF PERIOD.......................................... $ 105,759 $ 0
=========== ==========
</TABLE>
See notes to financial statements.
F-82
<PAGE> 213
NETWORK MULTI-FAMILY SECURITY CORPORATION
UNAUDITED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
------------------ ADDITIONAL RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
------- ------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996.... 100,000 $1,001 $ 9,883,299 $15,439,110 $25,323,410
Net income...................... -- -- -- 1,506,217 1,506,217
Dividends....................... -- -- -- (6,980,860) (6,980,860)
Capital Contribution............ -- -- 150,000 -- 150,000
------- ------ ----------- ----------- -----------
Balance at June 30, 1997........ 100,000 $1,001 $10,033,299 $ 9,964,467 $19,998,767
======= ====== ========== ========== ==========
</TABLE>
See notes to financial statements.
F-83
<PAGE> 214
NETWORK MULTI-FAMILY SECURITY CORPORATION
NOTE TO INTERIM FINANCIAL STATEMENTS
FOR THE PERIODS ENDED JUNE 30, 1997
1. INTERIM FINANCIAL INFORMATION
The accompanying unaudited financial statements of Network Multi-Family
Security Corporation (the "Company") should be read in conjunction with the
annual financial statements as of and for the year ended December 31, 1996. In
the opinion of management, all adjustments and eliminations, consisting of
normal, recurring adjustments, necessary to present fairly the financial
position of the Company as of June 30, 1997 and the results of its operations
and cash flows for the six months ended June 30, 1997 have been included. The
results of operations for the six months ended June 30, 1997 are not necessarily
indicative of the results for the full year.
2. SUBSEQUENT EVENTS
On September 22, 1997, the Company was purchased by Westar Capital, Inc., a
wholly owned subsidiary of Western Resources, Inc. Upon consummation of the
purchase, approximately $38 million of the proceeds were used to retire the
Company's long-term indebtedness.
F-84
<PAGE> 215
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
Network Multi-Family Security Corporation
Dallas, Texas
We have audited the accompanying balance sheets of Network Multi-Family Security
Corporation
(Company) as of December 31, 1996 and 1995, and the related statements of
operations, cash flows and stockholders' equity for each of the three years in
the period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 1996 and
1995, and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 1996 in conformity with generally
accepted accounting principles.
Deloitte & Touche LLP
Des Moines, Iowa
February 27, 1997
F-85
<PAGE> 216
NETWORK MULTI-FAMILY SECURITY CORPORATION
BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents.............................................. $ -- $ 5
Accounts receivable, net of allowance of $649 in 1996 and $325 in
1995................................................................ 2,759 2,027
Current portion of investment in finance receivables................... 14,825 13,721
Inventories............................................................ 2,488 3,436
Alarm installation contracts........................................... 4,803 2,979
Other.................................................................. 239 299
------- -------
Total current assets........................................... 25,114 22,467
Investment in finance receivables, net................................... 37,193 34,687
Property and equipment, net.............................................. 5,574 3,488
License agreements and other assets, net of accumulated amortization of
$1,038 in 1996 and $516 in 1995........................................ 1,692 2,265
------- -------
$69,573 $62,907
======= =======
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt...................................... $ 3,847 $ 3,171
Accounts payable....................................................... 1,341 1,449
Accrued expenses....................................................... 1,617 853
------- -------
Total current liabilities...................................... 6,805 5,473
Long-term debt........................................................... 23,257 27,545
Subordinated note-related party.......................................... 4,200 --
Other liabilities........................................................ -- 39
Deferred income taxes.................................................... 9,988 7,433
------- -------
Total liabilities.............................................. 44,250 40,490
STOCKHOLDER'S EQUITY:
Common stock ($.01 par value, 100,000 shares authorized, issued and
outstanding)........................................................ 1 1
Additional capital..................................................... 9,883 9,883
Retained earnings...................................................... 15,439 12,533
------- -------
Total stockholder's equity..................................... 25,323 22,417
------- -------
$69,573 $62,907
======= =======
</TABLE>
See notes to financial statements.
F-86
<PAGE> 217
NETWORK MULTI-FAMILY SECURITY CORPORATION
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
OPERATING REVENUES:
Sales....................................................... $ 6,849 $ 9,862 $13,615
Service fees................................................ 4,495 7,401 9,237
Interest.................................................... 12,294 12,008 12,054
Other....................................................... 197 318 375
------- ------- -------
23,835 29,589 35,281
OPERATING COSTS:
Cost of sales............................................... 4,292 7,059 9,569
Cost of services............................................ 2,392 3,563 5,404
General and administrative.................................. 8,110 10,331 10,800
------- ------- -------
14,794 20,953 25,773
------- ------- -------
OPERATING INCOME.............................................. 9,041 8,636 9,508
INTEREST EXPENSE (includes interest to related party of $356
in 1996).................................................... 1,819 2,884 2,910
------- ------- -------
INCOME BEFORE INCOME TAXES.................................... 7,222 5,752 6,598
INCOME TAXES.................................................. 2,704 2,203 2,555
------- ------- -------
NET INCOME.................................................... $ 4,518 $ 3,549 $ 4,043
======= ======= =======
</TABLE>
See notes to financial statements.
F-87
<PAGE> 218
NETWORK MULTI-FAMILY SECURITY CORPORATION
STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income.................................................... $ 4,518 $ 3,549 $ 4,043
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................... 240 1,334 1,680
Deferred taxes.............................................. 2,726 2,203 2,555
Provision for doubtful accounts............................. 1,872 1,996 2,279
Gain on sale of property and equipment...................... (188) (318) (125)
Changes in investment in finance receivables and alarm
installation contracts:
Gross additions............................................. (5,948) (6,690) (10,535)
Gross receipts of principal................................. 1,430 2,264 2,705
Other....................................................... 1,313 245 432
Changes in:
Accounts receivable......................................... (629) (925) (1,135)
Inventories................................................. (501) (1,438) 948
Other assets................................................ (171) (253) 50
Accounts payable and accrued expenses....................... 55 669 656
Other liabilities........................................... 139 (797) (39)
------- ------- -------
Net cash provided by operating activities........... 4,856 1,839 3,514
------- ------- -------
INVESTING ACTIVITIES:
Purchases of property and equipment........................... (720) (1,755) (3,095)
Proceeds from sales of property and equipment................. 188 318 125
Acquisition, net of cash acquired............................. (3,923) (435) --
------- ------- -------
Net cash used in investing activities....................... (4,455) (1,872) (2,970)
------- ------- -------
FINANCING ACTIVITIES:
Principal payments on long-term debt.......................... (4,744) (4,725) (9,649)
Proceeds from long-term debt.................................. 13,582 4,200 10,237
Capital contributions......................................... -- 84 --
Cash dividends................................................ (8,895) -- (1,137)
------- ------- -------
Net cash used in financing activities............... (57) (441) (549)
------- ------- -------
NET INCREASE (DECREASE) IN CASH............................... 344 (474) (5)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF YEAR..................................................... 135 479 5
------- ------- -------
CASH AND CASH EQUIVALENTS AT END OF YEAR...................... $ 479 $ 5 $ 0
======= ======= =======
</TABLE>
See notes to financial statements.
F-88
<PAGE> 219
NETWORK MULTI-FAMILY SECURITY CORPORATION
STATEMENTS OF STOCKHOLDER'S EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK
------------------ ADDITIONAL RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
-------- ------ ---------- -------- -------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1994................ 100,000 $1 $ 9,799 $ 13,361 $23,161
Net income................................ 4,518 4,518
Dividends................................. (8,895) (8,895)
--
------- ------ ------- -------
Balance at December 31, 1994.............. 100,000 1 9,799 8,984 18,784
Net income................................ 3,549 3,549
Capital contribution...................... 84 84
--
------- ------ ------- -------
Balance at December 31, 1995.............. 100,000 1 9,883 12,533 22,417
Net income................................ 4,043 4,043
Cash dividends............................ (1,137) (1,137)
--
------- ------ ------- -------
Balance December 31, 1996................. 100,000 $1 $ 9,883 $ 15,439 $25,323
======= == ====== ======= =======
</TABLE>
See notes to financial statements.
F-89
<PAGE> 220
NETWORK MULTI-FAMILY SECURITY CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Ownership. Network Holdings, Inc. ("Network") owns 100% of the common stock
of Network Multi-Family Security Corporation ("Multi-Family"). Onyx Holdings,
Inc. ("Onyx"), through its wholly-owned subsidiary, Elm, Inc. ("Elm"), owns
substantially all of the common stock of Network. The assets, results of
operations and stockholder's equity of Multi-Family comprise substantially all
the assets, results of operations and stockholder's equity of Network and Elm on
a consolidated basis. Network's and Elm's principal assets and sole operations
are in and through their investments in Multi-Family and Network, respectively.
No significant intercompany balances and transactions exist between Network and
Multi-Family. Separate financial statements for Network and Elm have not been
provided because Multi-Family does not believe such separate financial
statements are material to investors.
Nature of Business. Multi-Family provides sales, financing, installation,
and service of alarm systems and private telecommunications services to
multi-family residential complexes. Multi-Family provides services to customers
throughout the United States with the highest concentrations in Texas, Florida,
California, and Nevada.
Cash and Cash Equivalents. Multi-Family considers all highly liquid debt
instruments purchased with a maturity of three months or less from the date of
purchase to be cash equivalents.
Inventories. Inventories are stated at the lower of average cost or market.
Alarm Installation Contracts. Alarm installation contracts represent the
estimated costs incurred to date, plus a normal profit margin, for contract
installations in process.
Investment in Finance Receivables. Multi-Family provides financing for
alarm systems under long-term lease agreements with terms typically ranging from
five to sixteen years. The leases generally allow for rate escalations, at
Multi-Family's option, up to the increase in the Consumer Price Index and
generally include renewal options for periods up to five years. Multi-Family
records these leases as sale-type leases in accordance with the provisions of
Statement of Financial Accounting Standards No. 13, "Accounting for Leases."
Multi-Family establishes an allowance for default or cancellation of the
finance receivables based upon management's estimates of the inherent risks in
the finance receivable portfolio. These estimates are based upon factors such as
identification of specific problem receivables, past collection and attrition
experience, and economic conditions. Ultimate losses may vary from current
estimates.
Property and Equipment. Property and Equipment is recorded at cost and
depreciated using the straight-line method over the estimated useful lives of
the assets ranging from three to ten years.
License Agreements. License agreements represent the right to exclusively
market alarm systems to residents of certain multi-family complexes. The cost of
license agreements acquired is amortized on the straight-line method over the
estimated average useful life of five years.
Income Taxes. Income tax expense is calculated based on pretax financial
accounting income adjusted for permanent differences between such income and
taxable income including differences related to the acquisition of other alarm
operations. Deferred income taxes are provided for items reflected in income and
expense in different time periods for financial accounting purposes and tax
purposes, primarily related to accounting for leases and net operating loss
carryforwards.
Use of Estimates. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
F-90
<PAGE> 221
NETWORK MULTI-FAMILY SECURITY CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
Fair Value of Financial Instruments. The carrying value of all current
assets and current liabilities is a reasonable estimate of their fair value due
to the short maturity of these instruments. The carrying value of long-term debt
approximates its fair value as substantially all long-term debt is repriced at
prevailing market rates as changes in market rates occur.
2. BUSINESS COMBINATION
Effective December 1, 1994, Multi-Family acquired 100% of the common stock
of Metroplex Security Systems, Inc. ("Metroplex") for cash of approximately
$3,950,000. The fair value of assets acquired was $5,526,000 and liabilities
assumed totaled $1,576,000. The acquisition was accounted for as a purchase; as
such the results of Metroplex have been included from the acquisition date.
Metroplex was merged with Multi-Family in early 1995.
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31 (in
thousands):
<TABLE>
<CAPTION>
1995 1996
------ -------
<S> <C> <C>
Property and equipment:
Leased alarm equipment................................ $1,694 $ 2,141
Equipment............................................. 1,535 1,840
Vehicles.............................................. 521 546
Telecommunications equipment.......................... 89 1,949
------ -------
3,839 6,476
Accumulated depreciation and amortization............... (967) (1,969)
------ -------
2,872 4,507
Construction in process................................. 616 1,067
------ -------
$3,488 $ 5,574
====== =======
</TABLE>
4. INVESTMENT IN FINANCE RECEIVABLES
Following are the components of finance receivables at December 31 (in
thousands):
<TABLE>
<CAPTION>
1995 1996
-------- --------
<S> <C> <C>
Estimated future lease payments...................... $166,672 $171,543
Unearned income...................................... (82,490) (80,369)
Service fee income................................... (29,564) (31,932)
Allowance for uncollectible finance receivables...... (6,210) (7,224)
-------- --------
48,408 52,018
Less current portion................................. 13,721 14,825
-------- --------
$ 34,687 $ 37,193
======== ========
</TABLE>
The estimated lease payments include approximately $84,000,000 and
$87,000,000 at December 31, 1995 and 1996, respectively, related to the
anticipated exercise of the renewal options. The unearned income will be
amortized to income over the life of the lease agreements using the effective
interest method. Service fee income is associated with providing monitoring and
maintenance services and will be recognized as incurred over the term of the
lease contracts.
F-91
<PAGE> 222
NETWORK MULTI-FAMILY SECURITY CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
Contractual maturities of the finance receivables, including service fee
income and anticipated renewals, as of December 31, 1996, are as follows (in
thousands):
<TABLE>
<CAPTION>
DATE TOTAL
---------------------------------------------------------- --------
<S> <C>
1997...................................................... $ 19,842
1998...................................................... 19,160
1999...................................................... 18,507
2000...................................................... 17,896
2001...................................................... 17,278
Thereafter................................................ 78,860
--------
$171,543
========
</TABLE>
Because these amounts are subject to change due to prepayments,
uncollectability and/or renewals prior to maturity, the foregoing should not be
regarded as a forecast of future cash collections.
5. LONG-TERM DEBT
Long-term debt consists of the following at December 31 (in thousands):
<TABLE>
<CAPTION>
1995 1996
------- -------
<S> <C> <C>
Term loan.............................................. $17,400 $14,862
Revolving credit facility.............................. 9,720 6,557
Standby term loans..................................... 3,596 5,685
Subordinated notes..................................... -- 4,200
------- -------
30,716 31,304
Less current portion................................... 3,171 3,847
------- -------
$27,545 $27,457
======= =======
</TABLE>
Multi-Family's credit agreement provides a $20,000,000 five-year term loan
and a $13,000,000 revolving credit facility. In September, 1996, the unused
portion of the $12,000,000 standby term loan commitment expired. The term loan
and standby term loans are payable in various quarterly installments through
September, 1999 and the revolving credit facility is due and payable on
September 30, 1999. At Multi-Family's option, interest accrues at prime plus one
and one-quarter percent or London InterBank Offering Rate ("LIBOR") plus three
and one-quarter percent. Interest based on prime is payable quarterly and
interest based on LIBOR is payable at date of conversion or continuation. At
December 31, 1996, the interest rates on the LIBOR based loans were
approximately 8.8%. The credit agreement is secured by substantially all assets
of Multi-Family and contains restrictions including the maintenance of certain
financial covenants including levels of net worth and interest coverage ratio
among others.
In April, 1996, Multi-Family executed $4,200,000 in subordinated notes
payable to Dogwood, Inc., a subsidiary of Onyx. The notes are due and payable on
March 31, 2000. Interest accrues at 12% payable annually in January. Each
interest payment obligation is to be satisfied by the execution of a new
subordinated note.
Interest expense in 1996 was approximately $2,910,000, including related
party interest on the subordinated notes totaling $356,000. Interest expense in
1995 and 1994 approximated $2,884,000 and $1,819,000, respectively.
F-92
<PAGE> 223
NETWORK MULTI-FAMILY SECURITY CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
Annual maturities of long-term debt as of December 31, 1996 are as follows
(in thousands):
<TABLE>
<CAPTION>
DUE TOTAL
------------------------------------------------- -------
<S> <C>
1997............................................. $ 3,847
1998............................................. 4,047
1999............................................. 19,210
2000............................................. 4,200
-------
$31,304
=======
</TABLE>
6. OPERATING LEASES
Multi-Family leases certain property and equipment under non-cancelable
operating leases. The leases expire over the next seven years and some contain
renewal options. Rental expense on operating leases was approximately $544,000
in 1994, $593,000 in 1995 and $546,000 in 1996.
Future minimum lease payments under non-cancelable operating leases as of
December 31, 1996 are as follows (in thousands):
<TABLE>
<CAPTION>
DUE TOTAL
-------------------------------------------------- ------
<S> <C>
1997.............................................. $ 408
1998.............................................. 402
1999.............................................. 373
2000.............................................. 368
2001 374
Thereafter........................................ 507
------
$2,432
======
</TABLE>
Multi-Family leases alarm equipment to others under operating leases for
periods generally less than one year. Anticipated minimum future rentals on
non-cancelable operating leases are approximately $1,492,000 in 1997.
7. BENEFIT PLAN
Multi-Family has a defined contribution plan which qualifies under Section
401(k) of the Internal Revenue Code, Employees who are at least 20 1/2 years of
age and have completed one year of service are eligible to participate in the
plan. Multi-Family makes contributions equal to 50 percent of the contribution
made by the participating employees, but not to exceed four percent of the total
compensation of each participant. Multi-Family's contributions to the plan were
approximately $61,000 in 1994, $62,000 in 1995 and $73,000 in 1996.
F-93
<PAGE> 224
NETWORK MULTI-FAMILY SECURITY CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
8. INCOME TAXES
Deferred income taxes consist of the following assets and liabilities at
December 31 (in thousands):
<TABLE>
<CAPTION>
1995 1996
------- -------
<S> <C> <C>
ASSETS
Accounts receivable.................................. $ 120 $ 240
Inventory............................................ 269 417
Property on sale/leaseback........................... -- --
Other assets......................................... 248 129
Other liabilities.................................... 15 134
Net operating loss carryforwards..................... 6,073 5,022
------- -------
Gross deferred tax assets......................... 6,725 5,942
------- -------
LIABILITIES
Investment in finance receivables.................... 14,031 15,697
Property and equipment............................... 127 233
------- -------
Gross deferred tax liabilities.................... 14,158 15,930
------- -------
Total deferred tax liability................. $ 7,433 $ 9,988
======= =======
</TABLE>
Components of income tax expense are as follows (in thousands):
<TABLE>
<CAPTION>
1994 1995 1996
------ ------ ------
<S> <C> <C> <C>
Current
Federal........................................ $ (22) $ -- $ --
State.......................................... -- -- --
------ ------ ------
Total current.......................... (22) $ -- $ --
------ ------ ------
Deferred
Federal........................................ 2,509 2,030 2,357
State.......................................... 217 173 198
------ ------ ------
Total deferred......................... 2,726 2,203 2,555
------ ------ ------
Total income tax expense $2,704 $2,203 $2,555
====== ====== ======
</TABLE>
The differences between income tax expense at Multi-Family's effective tax
rate and at the statutory rate are as follows:
<TABLE>
<CAPTION>
1994 1995 1996
------ ------ ------
<S> <C> <C> <C>
Computed "expected" income tax expense........... $2,455 $1,956 $2,243
State income tax expense, net.................... 217 173 198
Other............................................ 32 74 114
------ ------ ------
Total income tax expense............... $2,704 $2,203 $2,555
====== ====== ======
</TABLE>
Multi-Family and its parent company, Network, file a consolidated tax
return with Onyx. Income taxes are provided for financial statement purposes as
if Multi-Family were a separate taxpayer before consideration of alternative
minimum tax. Multi-Family has approximately $13,600,000 of net operating loss
carryforwards expiring over the next 11 to 14 years.
F-94
<PAGE> 225
NETWORK MULTI-FAMILY SECURITY CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
9. SUPPLEMENTAL CASH FLOW INFORMATION
Total interest paid in 1994, 1995 and 1996 was approximately $1,714,000,
$2,945,000 and $2,604,000, respectively. No income taxes were paid in cash in
1996, 1995 and 1994.
10. ACCRUED EXPENSES CONSIST OF THE FOLLOWING AT DECEMBER 31, (IN THOUSANDS):
<TABLE>
<CAPTION>
1995 1996
---- ------
<S> <C> <C>
Accrued interest............................................ $ 85 $ 391
Accrued payroll............................................. 358 612
Accrued taxes, other than income taxes...................... 213 325
Other....................................................... 197 289
---- ------
$853 $1,617
==== ======
</TABLE>
F-95
<PAGE> 226
PROTECTION ONE, INC. AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO CHARGED TO BALANCE
BEGINNING COSTS AND OTHER AT END
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS(a) DEDUCTIONS(b) OF PERIOD
- ------------------------------------ ---------- ---------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C>
YEAR ENDED SEPTEMBER 30, 1994
Allowances deducted from assets for
doubtful accounts................. $ 610 $ 789 $ 994 $(1,211) $ 1,182
====== ====== ====== ======= ======
YEAR ENDED SEPTEMBER 30, 1995
Allowances deducted from assets for
doubtful accounts................. $1,182 $1,751 -- $ (430) $ 2,503
====== ====== ====== ======= ======
YEAR ENDED SEPTEMBER 30, 1996
Allowances deducted from assets for
doubtful accounts................. $2,503 $2,649 $ 1,218 $ (829) $ 5,541
====== ====== ====== ======= ======
</TABLE>
- ---------------
(a) Allowances recorded on receivables purchased in conjunction with acquisition
of customer accounts.
(b) Results from write-offs of accounts receivable.
S-1
<PAGE> 227
APPENDIX A
CONTRIBUTION AGREEMENT
BETWEEN
WESTERN RESOURCES, INC.
AND
PROTECTION ONE, INC.
DATED AS OF JULY 30, 1997,
AS AMENDED
<PAGE> 228
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C> <C>
RECITALS................................................................................ A-1
ARTICLE I
THE SHARE ISSUANCE; CLOSING
1.1. The Share Issuance............................................................... A-2
1.2. Legends.......................................................................... A-2
ARTICLE II
REPRESENTATIONS AND WARRANTIES
2.1. Representations and Warranties of Western........................................ A-3
(a) Organization, Good Standing and Qualification............................. A-3
(b) Capitalization............................................................ A-3
(c) Corporate Authority and Approval.......................................... A-4
(d) Governmental Filings; No Violations....................................... A-4
(e) Financial Statements...................................................... A-5
(f) Absence of Certain Changes................................................ A-5
(g) Litigation and Liabilities................................................ A-5
(h) Employee Benefits......................................................... A-5
(i) Compliance with Laws; Permits............................................. A-7
(j) Environmental Matters..................................................... A-7
(k) Tax Matters............................................................... A-8
(l) Taxes..................................................................... A-8
(m) Labor Matters............................................................. A-8
(n) Insurance................................................................. A-9
(o) Intellectual Property..................................................... A-9
(p) Brokers and Finders....................................................... A-9
(q) Real Property............................................................. A-10
(r) Security Systems Business................................................. A-10
(s) Westinghouse Acquisition Agreement........................................ A-10
2.2. Representations and Warranties of Protection One................................. A-11
(a) Organization, Good Standing and Qualification............................. A-11
(b) Capitalization............................................................ A-11
(c) Corporate Authority and Approval.......................................... A-12
(d) Governmental Filings; No Violations....................................... A-12
(e) Protection One Reports; Financial Statements.............................. A-13
(f) Absence of Certain Changes................................................ A-13
(g) Litigation and Liabilities................................................ A-14
(h) Employee Benefits......................................................... A-14
(i) Compliance with Laws; Permits............................................. A-15
(j) Takeover Statutes......................................................... A-16
(k) Environmental Matters..................................................... A-16
(l) Tax Matters............................................................... A-16
(m) Taxes..................................................................... A-16
(n) Labor Matters............................................................. A-16
(o) Insurance................................................................. A-17
(p) Intellectual Property..................................................... A-17
(q) Brokers and Finders....................................................... A-17
</TABLE>
i
<PAGE> 229
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C> <C>
(r) Real Property............................................................. A-18
(s) Opinion of Financial Advisor.............................................. A-18
ARTICLE III
COVENANTS
3.1. Interim Operations............................................................... A-18
3.2. Acquisition Proposals............................................................ A-20
3.3. Information Supplied............................................................. A-21
3.4. Stockholders Meeting............................................................. A-21
3.5. Filings; Other Actions; Notification............................................. A-22
3.6. Taxation......................................................................... A-23
3.7. Access........................................................................... A-23
3.8. Nasdaq Listing................................................................... A-23
3.9. Publicity........................................................................ A-23
3.10. Election to Protection One's Board of Directors.................................. A-24
3.11. Expenses......................................................................... A-24
3.12. Takeover Statute................................................................. A-24
3.13. Indemnification; Directors' and Officers' Insurance.............................. A-24
3.14. Headquarters..................................................................... A-25
3.15. Post-Closing Actions; Security Systems Business.................................. A-25
3.16. Indemnification.................................................................. A-26
3.17. Dividend......................................................................... A-26
3.18. Standstill....................................................................... A-27
3.19. New Option Plan.................................................................. A-27
3.20. Closing Schedule................................................................. A-28
ARTICLE IV
CONDITIONS
4.1. Conditions to Each Party's Obligation to Effect the Share Issuance............... A-28
(a) Stockholder Approval...................................................... A-28
(b) Nasdaq Quotation.......................................................... A-28
(c) Regulatory Consents....................................................... A-28
(d) Litigation................................................................ A-29
4.2. Conditions to Obligations of Protection One...................................... A-29
(a) Representations and Warranties............................................ A-29
(b) Performance of Obligations of Western..................................... A-29
(c) Consents Under Agreements................................................. A-29
(d) Cash Amount............................................................... A-29
(e) Transferred Subsidiary Shares............................................. A-29
(f) No Transferred Subsidiary Material Adverse Effect......................... A-29
4.3. Conditions to Obligation of Western.............................................. A-29
(a) Representations and Warranties............................................ A-29
(b) Performance of Obligations of Protection One.............................. A-30
(c) Consents Under Agreements................................................. A-30
(d) Tax Opinion............................................................... A-30
(e) Employment and Non-Compete Agreements..................................... A-30
(f) Acquired Shares........................................................... A-30
(g) No Protection One Material Adverse Effect................................. A-30
</TABLE>
ii
<PAGE> 230
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C> <C>
ARTICLE V
TERMINATION
5.1. Termination by Mutual Consent.................................................... A-30
5.2. Termination by Either Protection One or Western.................................. A-30
5.3. Termination by Western........................................................... A-30
5.4. Termination by Protection One.................................................... A-31
5.5. Effect of Termination and Abandonment............................................ A-31
ARTICLE VI
MISCELLANEOUS AND GENERAL
6.1. Survival......................................................................... A-31
6.2. Modification or Amendment........................................................ A-32
6.3. Waiver of Conditions............................................................. A-32
6.4. Counterparts..................................................................... A-32
6.5. Governing Law and Venue; Waiver of Jury Trial.................................... A-32
6.6. Notices.......................................................................... A-33
6.7. Entire Agreement; No Other Representations....................................... A-33
6.8. No Third Party Beneficiaries..................................................... A-34
6.9. Obligations of Protection One and of Western..................................... A-34
6.10. Severability..................................................................... A-34
6.11. Interpretation................................................................... A-34
6.12. Assignment....................................................................... A-34
</TABLE>
iii
<PAGE> 231
CONTRIBUTION AGREEMENT
CONTRIBUTION AGREEMENT (hereinafter called this "Agreement"), dated as of
July 30, 1997, among Western Resources, Inc., a Kansas corporation ("Western")
and Protection One, Inc., a Delaware corporation ("Protection One").
RECITALS
WHEREAS, the respective boards of directors of each of Protection One and
Western have each approved the issuance (the "Protection One Share Issuance") by
Protection One to Western as of the Closing (as defined below) of that number of
shares of Common Stock, par value $0.01 per share, of Protection One ("Common
Stock") equal to the product of (i) .801 and (ii) the sum of (x) the aggregate
number of shares of Common Stock outstanding as of the Closing (including, for
purposes of calculating the outstanding number of shares of Common Stock, the
shares of Common Stock to be issued pursuant to this Agreement but excluding any
shares of Common Stock issued pursuant to the Stock Option Agreement (as defined
below) at or prior to the Closing) and (y) the aggregate number of shares of
Common Stock issuable as of the Closing pursuant to outstanding Options and
Warrants (each as defined in Section 2.2(b) below) after giving effect to the
distributions referred to in Section 3.17 (the "Acquired Shares") upon the terms
and subject to the conditions set forth herein;
WHEREAS, the board of directors of Protection One has determined (i) to
declare and pay a dividend of $7.00 on each share of Common Stock held by each
Holder of Record (as defined in Section 3.17 below) and (ii) to distribute (as a
cash bonus, in the case of Holders of Record of Options or Warrants who are
directors, officers or employees of Protection One or any of its Subsidiaries,
or as an antidilution cash payment, in the case of Holders of Record of Warrants
who are entitled, pursuant to the terms governing such Warrants, to elect such a
cash payment) $7.00 with respect to each share of Common Stock issuable upon
exercise of Options or Warrants held by each Holder of Record or, in accordance
with the agreements and other documents governing such Options and Warrants, to
reduce the exercise price of, and/or increase the number of shares of Common
Stock issuable upon exercise of, such Options and Warrants;
WHEREAS, the respective boards of directors of each of Protection One and
Western have each approved the Protection One Share Issuance in consideration of
the contribution (together with the Protection One Share Issuance, the "Share
Issuance") to Protection One by Western of (i) all of the issued and outstanding
common stock, no par value, of WestSec, Inc., a Kansas corporation ("WestSec")
and all of the issued and outstanding common stock, no par value, of Westar
Security, Inc., a Kansas corporation ("Westar Security") (all issued and
outstanding shares of such common stock of WestSec and Westar Security being
hereinafter referred to as the "Subsidiary Shares") and (ii) $250,000,000 in
cash and certain publicly traded securities plus $7.00 multiplied by the
aggregate number of shares of Common Stock of Protection One outstanding or
issuable upon exercise of Options and Warrants outstanding as of the Closing
(the "Cash Amount") upon the terms and subject to the conditions set forth
herein;
WHEREAS, the respective boards of directors of each of Protection One and
Western have determined that the Share Issuance is fair to and in the best
interests of it and its shareholders;
WHEREAS, it is intended that, for federal income tax purposes, the
contribution of the Subsidiary Shares and the Investment Shares (as defined in
Section 1.1 below) shall qualify as a contribution to a controlled corporation
under the provisions of Section 351 of the Internal Revenue Code of 1986, as
amended (the "Code"), and the regulations promulgated thereunder;
WHEREAS, concurrently with the execution and delivery of this Agreement and
as a condition and inducement to Western's willingness to enter into this
Agreement, (i) Protection One and Western have entered into a Stock Option
Agreement dated as of the date of this Agreement and attached hereto as Exhibit
A (the "Stock Option Agreement"), pursuant to which Protection One has granted
to Western an option to purchase shares of Common Stock of Protection One equal
to up to 19.9% of the outstanding number of shares of Common Stock under certain
circumstances and (ii) Western and certain stockholders of Protection One have
entered into an Option and Voting Agreement dated as of the date of this
Agreement(the
A-1
<PAGE> 232
"Option and Voting Agreement"), pursuant to which such stockholders have agreed,
among other things, to vote their shares of Common Stock of Protection One in
favor of the amendment (the "Charter Amendment") to the certificate of
incorporation of Protection One increasing the number of authorized shares of
Common Stock of Protection One to 100,000,000 and the Share Issuance and have
granted to Western an option to purchase their respective shares of Common Stock
of Protection One under certain circumstances; and
WHEREAS, Western and Protection One desire to make certain representations,
warranties, covenants and agreements in connection with this Agreement.
NOW, THEREFORE, in consideration of the premises, and of the
representations, warranties, covenants and agreements contained herein, the
parties hereto agree as follows:
ARTICLE I
THE SHARE ISSUANCE; CLOSING
1.1. The Share Issuance. Upon the terms and subject to the conditions set
forth herein, in the Share Issuance (i) Protection One shall issue and transfer
to Western the Acquired Shares and (ii) in consideration therefor, Western shall
contribute to Protection One the Subsidiary Shares and the Cash Amount. Without
limiting the generality of the foregoing, Protection One and Western acknowledge
and agree that up to $10 million of the Cash Amount may be contributed in the
form of securities (the "Investment Shares") issued by one or more entities
engaged in the business of selling and servicing residential or commercial
monitoring and response security systems which securities are listed for trading
on a national securities exchange or quoted on an interdealer quotation system.
Each such Investment Share so contributed by Western shall be valued at the
higher of (i) the closing sale price thereof on a national securities exchange
or interdealer quotation system two business days prior to the Closing Date and
(ii) the historical price at which Western or one of its Subsidiaries purchased
such Investment Share. Except for any Investment Shares contributed by Western
in accordance with this Section 1.1, the Cash Amount shall be contributed
entirely in cash. The closing of the Share Issuance (the "Closing") shall take
place as promptly as practicable after the satisfaction or waiver of the
conditions set forth in Article IV. At the Closing, (i) Protection One shall
deliver to Western a certificate representing the Acquired Shares issued in the
name of Western or its designee and bearing the legends set forth in Section 1.2
and (ii) Western shall deliver to Protection One (A) certificates representing
the Subsidiary Shares and the Investment Shares, duly endorsed in blank or
accompanied by stock powers in blank with all necessary transfer stamps affixed
thereto (at the expense of Western), and such other instruments or documents as
are necessary to transfer the Subsidiary Shares and Investment Shares to
Protection One free and clear of all liens, claims, pledges, charges, security
interests, limitations, encumbrances and restrictions whatsoever of any kind
("Liens"), and (B) the cash portion of the Cash Amount by wire transfer in
immediately available funds to such bank account designated by Protection One
pursuant to written instructions delivered by Protection One to Western not
fewer than two business days prior to the Closing Date.
1.2. Legends. The certificate representing the Acquired Shares delivered
pursuant to Section 1.1 and each certificate issued upon the registration of the
transfer to Protection One of the Subsidiary Shares delivered pursuant to
Section 1.1 shall bear a legend in substantially the following form:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY BE REOFFERED OR SOLD ONLY
IF SO REGISTERED OR IF AN EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE.
A-2
<PAGE> 233
ARTICLE II
REPRESENTATIONS AND WARRANTIES
2.1. Representations and Warranties of Western. Except as set forth in the
corresponding sections or subsections of the disclosure letter delivered to
Protection One by Western on or prior to entering into this Agreement (the
"Western Disclosure Letter"), Western hereby represents and warrants to
Protection One that:
(a) Organization, Good Standing and Qualification. Western and each of
the Transferred Subsidiaries (as defined below) is a corporation duly organized,
validly existing and in good standing under the laws of its respective
jurisdiction of organization and has all requisite corporate or similar power
and authority and all necessary governmental approvals to own and operate its
properties and assets and to carry on its business as presently conducted and is
qualified to do business and is in good standing as a foreign corporation in
each juris diction where the ownership or operation of its properties or conduct
of its business requires such qualification, except where the failure to be so
qualified or in good standing, when taken together with all other such failures,
is not reasonably likely to have a Transferred Subsidiary Material Adverse
Effect (as defined below). Western has made available to Protection One a
complete and correct copy of Western's and each Transferred Subsidiary's
certificates of incorporation and by-laws (or similar organizational documents),
each as amended to date. Western's and each Transferred Subsidiary's
certificates of incorporation and by-laws (or similar organizational documents)
so delivered are in full force and effect, and neither Western nor any
Transferred Subsidiary is in violation of any provision of its certificate of
incorporation or by-laws (or similar organizational documents).
As used in this Agreement, the term (i) "Subsidiary" means, with respect
to any party, as the case may be, any entity, whether incorporated or
unincorporated, of which at least a majority of the securities or ownership
interests having by their terms ordinary voting power to elect a majority of the
board of directors or other persons performing similar functions is directly or
indirectly owned or controlled by such party or by one or more of its respective
Subsidiaries or by such party and any one or more of its respective
Subsidiaries, (ii) "Transferred Subsidiaries" means WestSec, Westar Security and
each of their respective Subsidiaries that are engaged in the sale and service
of residential and commercial monitoring and response security systems, and
(iii) "Transferred Subsidiary Material Adverse Effect" means any change or
effect that is materially adverse to the financial condition, properties,
business or results of operations of the Transferred Subsidiaries, taken as a
whole; provided, however, that any such effect resulting from any change (i) in
law, rule, or regulation that applies to both Protection One and the Transferred
Subsidiaries or (ii) in economic or business conditions generally or in the
security monitoring industry specifically shall not be considered when
determining if a Transferred Subsidiary Material Adverse Effect has occurred.
(b) Capitalization. The authorized capital stock of WestSec consists of
1,000 shares of common stock, no par value, all of which are issued and
outstanding. The authorized capital stock of Westar Security consists of 1000
shares of common stock, no par value, all of which are issued and outstanding.
All of the outstanding shares of Common Stock of WestSec and Westar Security
have been duly authorized and are validly issued, fully paid and nonassessable.
There are no preemptive or other outstanding rights, options, warrants,
conversion rights, convertible securities, stock appreciation rights, redemption
rights, repurchase rights, agreements, arrangements or commitments to issue or
to sell any shares of capital stock or other securities of WestSec or Westar
Security or any of the other Transferred Subsidiaries or any securities or
obligations convertible or exchangeable into or exercisable for, or giving any
Person a right to subscribe for or acquire, any securities of WestSec or Westar
Security or any of the other Transferred Subsidiaries, and no securities or
obligation evidencing such rights are authorized, issued or outstanding. There
are no outstanding contractual obligations of any of the Transferred
Subsidiaries to repurchase, redeem or otherwise acquire any capital stock of any
Transferred Subsidiary or to provide funds to or make any investment (in the
form of a loan, capital contribution or otherwise) in any such Transferred
Subsidiary or any other entity. All of the outstanding shares of Capital Stock
of WestSec and Westar Security are owned beneficially by Western and all of the
shares of capital stock of the other Transferred Subsidiaries are owned
beneficially and of record by WestSec, Westar Security or another Transferred
Subsidiary, in each case free and clear of all Liens. None of
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<PAGE> 234
WestSec, Westar Security or any of the other Transferred Subsidiaries has
outstanding any bonds, debentures, notes or other obligations the holders of
which have the right to vote (or convertible into or exercisable for securities
having the right to vote) with the stockholders of Western on any matter
("Western Voting Debt"). A true and complete list of all of the Transferred
Subsidiaries, together with the jurisdiction of incorporation of each such
Transferred Subsidiary and the percentage of each Transferred Subsidiary's
outstanding capital stock owned by WestSec, Westar Security or another
Transferred Subsidiary, or by Western or any of its Subsidiaries, is set forth
in Section 2.1(b) of the Western Disclosure Letter. There are no voting trusts,
shareholder agreements, proxies or other agreements or understandings in effect
with respect to the voting or transfer of any shares of capital stock of any
Transferred Subsidiary. The stock register of each Transferred Subsidiary
accurately records (i) the name and address of each person owning shares of
capital stock of such Transferred Subsidiary and (ii) the certificate number of
each certificate evidencing shares of capital stock issued by such Transferred
Subsidiary, the number of shares evidenced by each such certificate, the date of
issuance thereof and, in the case of cancellation, the date of cancellation.
(c) Corporate Authority and Approval. (i) No vote of holders of capital
stock of Western is necessary to approve this Agreement and the Share Issuance
and the other transactions contemplated hereby. Western has all requisite
corporate power and authority and has taken all corporate action necessary in
order to execute, deliver and perform its obligations under this Agreement and
the Stock Option Agreement, as the case may be, and to consummate the Share
Issuance and the other transactions contemplated hereby and thereby. This
Agreement and the Stock Option Agreement are legal, valid and binding agreements
of Western, enforceable against Western in accordance with their terms.
(ii) The board of directors of Western has approved this Agreement
and the Stock Option Agreement and the consummation of the Share Issuance and
the other transactions contemplated hereby and thereby.
(d) Governmental Filings; No Violations. (i) Other than the filings
and/or notices (A) under the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended (the "HSR Act"), the Exchange Act and the Securities Act of
1933, as amended (the "Securities Act"), (B) to comply with state securities or
"blue-sky" laws, and (C) other filings listed in the Western Disclosure Letter,
no notices, reports or other filings are required to be made by Western or any
Transferred Subsidiary with, nor are any consents, registrations, approvals,
permits or authorizations required to be obtained by Western or any Transferred
Subsidiary from, any domestic governmental or regulatory authority, agency,
commission, body or other governmental entity ("Governmental Entity"), in
connection with the execution and delivery of this Agreement and the Stock
Option Agreement by Western and the consummation by Western of the Share
Issuance and the other transactions contemplated hereby and thereby, except
those that the failure to make or obtain are not, individually or in the
aggregate, reasonably likely to have a Transferred Subsidiary Material Adverse
Effect or prevent, materially delay or materially impair the ability of Western
to consummate the transactions contemplated by this Agreement.
(ii) Subject to the approvals, amendments, filings, notices, reports,
consents and authorizations referred to in paragraph (i) of this Section 2.1(d),
the execution, delivery and performance of this Agreement, the Stock Option
Agreement and the Option and Voting Agreement by Western does not, and the
consummation by Western of the Share Issuance and the other transactions
contemplated hereby and thereby will not, constitute or result in (A) a breach
or violation of, or a default under, the certificate of incorporation or by-laws
(or similar organizational documents) of Western or any Transferred Subsidiary,
(B) breach or violation of any law, rule, regulation, order, judgment or decree
applicable to Western or any Transferred Subsidiary or by which any of their
respective properties or assets is bound or affected, or (C) breach or violation
of, or a default under, result in the loss of any material benefit under, or
give to others any right of termination, amendment, acceleration or cancellation
of, or result in the creation of a Lien on the assets of Western or any
Transferred Subsidiary (with or without notice, lapse of time or both) pursuant
to, any agreement, lease, contract, note, mortgage, indenture, arrangement or
other obligation (collectively, "Contracts") to which Western or any Transferred
Subsidiary is a party or by which Western or any Transferred Subsidiary or any
of their respective properties or assets is bound or affected, except, in the
case of clause (B) or (C) above, for any breach, violation, default,
acceleration, creation or change that, individually or in the
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<PAGE> 235
aggregate, is not reasonably likely to have a Transferred Subsidiary Material
Adverse Effect or prevent, materially delay or materially impair the ability of
Western to consummate the transactions contemplated by this Agreement. Section
2.1(d) of the Western Disclosure Letter sets forth a correct and complete list
of Contracts of Western and the Transferred Subsidiaries pursuant to which
consents or waivers are or may be required prior to consummation of the
transactions contemplated by this Agreement (subject to the exception set forth
with respect to clauses (B) and (C) above).
(e) Financial Statements. The balance sheets (including the related
notes and schedules) set forth in Section 2.1(e) of the Western Disclosure
Letter fairly present the financial position of the Transferred Subsidiaries as
of their respective dates and the statements of income and of changes in
financial position (including any related notes and schedules) set forth in
Section 2.1(e) of the Western Disclosure Letter fairly present the results of
operations, retained earnings and changes in financial position, as the case may
be, of the Transferred Subsidiaries for the periods set forth therein (subject,
to notes and normal and recurring year-end audit adjustments that will not be
material in amount or effect), and were prepared in accordance with generally
accepted accounting principles ("GAAP") consistently applied during the periods
involved, except as may be noted therein.
(f) Absence of Certain Changes. Since December 31, 1996 the Transferred
Subsidiaries have conducted their respective businesses only in, and have not
engaged in any material transaction other than according to, the ordinary and
usual course of such businesses and there has not been (i) any change in the
financial condition, properties, business or results of operations of any
Transferred Subsidiary or any development or combination of developments that,
individually or in the aggregate, has had or is reasonably likely to have a
Transferred Subsidiary Material Adverse Effect; (ii) any material damage,
destruction or other casualty loss with respect to any material asset or
property owned, leased or otherwise used by any Transferred Subsidiary, whether
or not covered by insurance; (iii) any declaration, setting aside or payment of
any dividend or other distribution in respect of the capital stock of WestSec or
Westar Security or any redemption, purchase or other acquisition of their
respective securities; or (iv) any change by any Transferred Subsidiary in
accounting principles, practices or methods. Since December 31, 1996, except as
provided for herein, there has not been any increase in the compensation payable
or that could become payable by any Transferred Subsidiary to officers or key
employees or any amendment of any of the Compensation and Benefit Plans other
than increases or amendments in the ordinary course of business consistent with
past practice.
(g) Litigation and Liabilities. (i) There are no civil, criminal or
administrative actions, suits, claims, hearings, investigations or proceedings
(collectively, "Actions") pending or, to the knowledge of Western, threatened
against any Transferred Subsidiary except for those that are not, individually
or in the aggregate, reasonably likely to have a Transferred Subsidiary Material
Adverse Effect and could not reasonably be expected to adversely affect the
legality, validity or enforceability of this Agreement or the consummation of
the transactions contemplated hereby.
(ii) There are no obligations or liabilities, whether or not accrued,
contingent or otherwise and whether or not required to be disclosed, including
those relating to matters involving any Environmental Law (as defined in Section
2.1(j)), or any other facts or circumstances that could result in any claims
against, obligations or liabilities of, or Liens on any assets or properties of,
any Transferred Subsidiary except for (A) obligations or liabilities under the
SAMCO Agreements (as defined in the Westinghouse Acquisition Agreement), and (B)
obligations and liabilities other than for borrowed money (1) adequately
reflected or reserved against on the balance sheets for the Transferred
Subsidiaries set forth in Section 2.1(e) of the Western Disclosure Letter, (2)
incurred since December 31, 1996 in the ordinary course of business consistent
with past practice of the Transferred Subsidiaries or (3) that are not
reasonably likely, individually or in the aggregate, to have a Transferred
Subsidiary Material Adverse Effect.
(h) Employee Benefits.
(i) A copy of each bonus, deferred compensation, pension, retirement,
profit-sharing, thrift, savings, employee stock ownership, stock bonus, stock
purchase, restricted stock, stock option, employment, termination, severance,
compensation, medical, health, incentive compensation, disability, retiree
medical, life
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<PAGE> 236
insurance, fringe benefits or other plan, agreement, policy or arrangement
established or administered by any of the Transferred Subsidiaries that covers
employees, directors, former employees or former directors of any Transferred
Subsidiary (the "Compensation and Benefit Plans") and any (i) trust agreement or
insurance contract forming a part of such Compensation and Benefit Plans (ii)
the most recent annual report on Form 5500 (and related schedules and financial
statements or opinions required in connection therewith, (iii) the most recent
actuarial report and financial statements with respect to each Compensation and
Benefit Plan, if applicable, (iv) the most recent summary plan description
required to be provided to plan participants, and (v) the most recent IRS
determination letter, if any, has been made available to Protection One prior to
the date hereof. The Compensation and Benefit Plans are listed in Section 2.1(h)
of the Western Disclosure Letter.
(ii) Except for instances of non-compliance which would not be
material, all Compensation and Benefit Plans are, and have been operated, in
compliance with all applicable law, including the Code and the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"). Each Compensation
and Benefit Plan that is an "employee pension benefit plan" within the meaning
of Section 3(2) of ERISA (a "Pension Plan") and that is intended to be qualified
under Section 401(a) of the Code has received a favorable determination letter
from the Internal Revenue Service (the "IRS") that the Pension Plan and related
trusts are qualified and exempt from federal income taxes under Sections 401(a)
and 501(a), respectively, of the Code, and, there are no circumstances
reasonably likely to result in revocation of any such favorable determination
letter. No event has occurred and no circumstances exist that have adversely
affected or could reasonably be expected to adversely affect the tax
qualification of such Pension Plans. As of the date hereof, there is no pending
or, to the knowledge of Western, threatened material litigation, investigations,
terminations, proceedings or other claims (except for benefit claims payable in
the normal operation of the Compensation and Benefit Plans) relating to the
Compensation and Benefit Plans or any plan maintained by any other person or
entity that, together with Western and the Transferred Subsidiaries, is treated
as a single employer under Section 414(b), (c), (m) or (0) of the Code (an
"ERISA Affiliate"), and no event has occurred and no circumstances exist that
have given rise to or could reasonably be expected to give rise to any material
liability in the event of any such investigation, claim or proceeding. Neither
Western nor any Transferred Subsidiary with respect to any Compensation and
Benefit Plan has engaged in a "prohibited transaction" (as such term is defined
in Section 406 of ERISA or 4975 of the Code) or any other breach of fiduciary
duty that, assuming the taxable period of such transaction expired as of the
date hereof, would subject Western or any Transferred Subsidiary to a material
tax or penalty imposed by either Section 4975 of the Code or Section 502 of
ERISA.
(iii) As of the date hereof, no liability under Title IV of ERISA has
been or is expected to be incurred by any Transferred Subsidiary or any ERISA
Affiliate thereof with respect to any ongoing, frozen or terminated "single-
employer plan", within the meaning of Section 4001(a)(15) of ERISA, currently or
formerly maintained by it. No Transferred Subsidiary nor any ERISA Affiliate
thereof has incurred nor expects to incur any withdrawal liability with respect
to a multiemployer plan under Subtitle E to Title IV of ERISA. No Transferred
Subsidiary has contributed, or been obligated to contribute, to a multiemployer
plan under Subtitle E of Title IV of ERISA at any time since September 26, 1980.
No notice of a "reportable event", within the meaning of Section 4043 of ERISA
for which the 30-day reporting requirement has not been waived, has been
required to be filed for any Pension Plan or by any ERISA Affiliate within the
30-month period ending on the date hereof or will be required to be filed in
connection with the transactions contemplated by this Agreement.
(iv) All contributions and payments required to be made under the
terms of any Compensation and Benefit Plan as of the date hereof have been
timely made or have been reflected on the most recent balance sheet of the
relevant Transferred Subsidiary. Neither any Pension Plan nor any
single-employer plan of an ERISA Affiliate has an "accumulated funding
deficiency" (whether or not waived) within the meaning of Section 412 of the
Code or Section 302 of ERISA. No Transferred Subsidiary has provided, nor is
required to provide, security to any Pension Plan or to any single-employer plan
of an ERISA Affiliate pursuant to Section 401(a)(29) of the Code; none of the
assets of Western or any Transferred Subsidiary is the subject of
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any lien arising under Section 302 of ERISA or Section 412(n) of the Code; and
no fact or circumstance exists which could give rise to any such lien
requirement to post any such security.
(v) Under each Pension Plan which is a single- employer plan, as of
the last day of the most recent plan year ended prior to the date hereof, the
actuarially deter mined present value of all "benefit liabilities", within the
meaning of Section 4001(a)(16) of ERISA (as determined on the basis of the
actuarial assumptions contained in the Pension Plan's most recent actuarial
valuation), did not exceed the then current value of the assets of such Pension
Plan, and there has been no material change in the financial condition of such
Pension Plan since the last day of the most recent plan year.
(vi) No Transferred Subsidiary has any obligations for retiree health
and life benefits under any Compensation and Benefit Plan, except as set forth
in the Western Disclosure Letter. Each Transferred Subsidiary may amend or
terminate any such plan under the terms of such plan at any time without
incurring any material liability thereunder.
(vii) The consummation of the Share Issuance and the other
transactions contemplated by this Agreement, the Stock Option Agreement and the
Option and Voting Agreement will not (x) entitle any employees of any
Transferred Subsidiary to severance pay, (y) accelerate the time of payment or
vesting or trigger any payment of compensation or benefits under, increase the
amount payable or trigger any other material obligation pursuant to, any of the
Compensation and Benefit Plans or (z) result in any breach or violation of, or a
default under, any of the Compensation and Benefit Plans. No Compensation and
Benefit Plan exists which could result in the payment to any Transferred
Subsidiary employee that would constitute an excess parachute payment within the
meaning of Code Section 280G.
(viii) No Transferred Subsidiary has incurred any liability under,
and each Transferred Subsidiary has complied in all respects with, the Worker
Adjustment Retraining Notification Act ("WARN Act") and the rules and
regulations promulgated thereunder, and no Transferred Subsidiary reasonably
expects to incur any such liability prior to the Closing.
(i) Compliance with Laws; Permits. The businesses of the Transferred
Subsidiaries have not been, and are not being, conducted in violation of any
federal, state, local or foreign law, statute, ordinance, rule, regulation,
judgment, order, injunction, decree, arbitration award, agency requirement,
license or permit of any Governmental Entity (collectively, "Laws"), except for
violations or -- possible violations that, individually or in the aggregate, are
not reasonably likely to have a Transferred Subsidiary Material Adverse Effect
or prevent or materially burden or materially impair the ability of Western to
consummate the transactions contemplated by this Agreement. No investigation or
review by any Governmental Entity with respect to any Transferred Subsidiary is
pending or, to the knowledge of Western, threatened, nor has any Governmental
Entity indicated an intention to conduct the same, except for those the outcome
of which are not, individually or in the aggregate, reasonably likely to have a
Transferred Subsidiary Material Adverse Effect or prevent or materially burden
or materially impair the ability of Western to consummate the transactions
contemplated by this Agreement. No material change is required in any
Transferred Subsidiary's processes, properties or procedures in connection with
any such Laws, and no Transferred Subsidiary has received any notice or
communication of any material noncompliance with any such Laws that has not been
cured. Each Transferred Subsidiary has all permits, licenses, franchises,
variances, exemptions, orders and other governmental authorizations, consents
and approvals necessary to conduct its business as presently conducted except
those the absence of which are not, individually or in the aggregate, reasonably
likely to have a Transferred Subsidiary Material Adverse Effect or prevent or
materially burden or materially impair the ability of Western to consummate the
Share Issuance and the other transactions contemplated by this Agreement.
(j) Environmental Matters. Except for such matters that, alone or in the
aggregate, are not reasonably likely to have a Transferred Subsidiary Material
Adverse Effect: (i) each Transferred Subsidiary is currently in compliance with
and has complied with all applicable Environmental Laws; (ii) the properties
currently owned or operated by the Transferred Subsidiaries (including soils,
groundwater, surface water, buildings or other structures) are not contaminated
with any Hazardous Substances; (iii) no Transferred Subsidiary is subject to
liability for any Hazardous Substance disposal or contamination on any third
party property; (iv) no Transferred Subsidiary has been associated with any
release or threat of release of any
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Hazardous Substance; (v) no Transferred Subsidiary has received any notice,
demand, letter, claim or request for information alleging that may be in
violation of or liable under any Environmental Law; (vi) no Transferred
Subsidiary is subject to any orders, decrees, injunctions or other arrangements
with any Governmental Entity and is not subject to any indemnity or other
agreement with any third party relating to liability under any Environmental Law
or relating to Hazardous Substances; and (vii) there are no circumstances or
conditions involving any Transferred Subsidiary that could reasonably be
expected to result in any claims, liability, investigations, costs or
restrictions on the ownership, use, or transfer of any property of any
Transferred Subsidiary pursuant to any Environmental Law.
As used herein, the term "Environmental Law" means any federal, state,
local or foreign law, statute, ordinance, regulation, judgment, order, decree,
arbitration award, agency requirement, license, permit, authorization or
opinion, relating to: (A) the protection, investigation or restoration of the
environment, health and safety, or natural resources, (B) the handling, use,
presence, transportation, disposal, release or threatened release of any
Hazardous Substance or (C) noise, odor, wetlands, pollution, contamination or
any injury or threat of injury to persons or property.
As used herein, the term "Hazardous Substance" means any substance that
is: (A) defined, listed, classified or regulated pursuant to any Environmental
Law; (B) any petroleum product or by-product, asbestos-containing material,
lead-containing paint or plumbing, polychlorinated biphenyls, radioactive
materials or radon; or (C) any other substance, pollutant or contaminant which
may be the subject of regulatory action by any Governmental Entity pursuant to
any Environmental Law.
(k) Tax Matters. Neither Western nor any Transferred Subsidiary has
taken or agreed to take any action that would prevent the contribution of the
Subsidiary Shares and the Investment Shares from qualifying as a contribution to
a controlled corporation within the meaning of Section 351 of the Code.
(l) Taxes. Solely as to the operations of the Transferred Subsidiaries,
Western and each of its Subsidiaries (i) have prepared in good faith and duly
and timely filed (taking into account any extension of time within which to
file) all Tax Returns (as defined below) required to be filed by any of them;
(ii) have paid all Taxes (as defined below) that are shown as due on such filed
Tax Returns or that Western or any of its Subsidiaries are obligated to withhold
from amounts owing to any employee, creditor or third party, except with respect
to matters contested in good faith; and (iii) have not waived any statute of
limitations with respect to Taxes or agreed to any extension of time with
respect to a Tax assessment or deficiency. Solely as to the operations of the
Transferred Subsidiaries, as of the date hereof, there are not pending or, to
the knowledge of Western threatened, any audits, examinations, investigations or
other proceedings in respect of Taxes or Tax matters with respect to any of the
Transferred Subsidiaries. Western has made available to Protection One true and
correct copies of any tax sharing agreement between or among Western and/or any
of the Transferred Subsidiaries.
As used in this Agreement, (i) the term "Tax" (including, with
correlative meaning, the terms "Taxes", and "Taxable") includes all federal,
state, local and foreign income, profits, franchise, gross receipts,
environmental, customs duty, capital stock, severances, stamp, payroll, sales,
employment, unemployment, disability, use, property, withholding, excise,
production, value added, occupancy and other taxes, duties or assessments of any
nature whatsoever, together with all interest, penalties and additions imposed
with respect to such amounts and any interest in respect of such penalties and
additions, and (ii) the term "Tax Return" includes all returns and reports
(including elections, declarations, disclosures, schedules, estimates and
information returns) required to be supplied to a Tax authority relating to
Taxes.
(m) Labor Matters. No Transferred Subsidiary is a party to or otherwise
bound by any collective bargaining agreement, contract or other agreement or
understanding with a labor union or labor organization, nor is any Transferred
Subsidiary the subject of any material proceeding asserting that such
Transferred Subsidiary has committed an unfair labor practice or is seeking to
compel it to bargain with any labor union or labor organization nor is there
pending or, to the knowledge of Western, threatened, nor is there existing any
labor strike, dispute, walk-out, work stoppage, slow-down or lockout involving
any Transferred Subsidiary.
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(n) Insurance. All material fire and casualty, general liability,
business interruption, product liability, sprinkler and water damage and errors
and omissions insurance policies maintained by or for the benefit of any
Transferred Subsidiary are with reputable insurance carriers, provide full and
adequate coverage for all normal risks incident to the business of such
Transferred Subsidiary and its properties and assets, and are in character and
amount at least equivalent to that carried by persons engaged in similar
businesses and subject to the same or similar perils or hazards, except for any
such failures to maintain insurance policies that, individually or in the
aggregate, are not reasonably likely to have a Transferred Subsidiary Material
Adverse Effect.
(o) Intellectual Property.
(i) The Transferred Subsidiaries own, or are licensed or otherwise
possess legally enforceable rights to use, all patents, trademarks, trade names,
service marks, copyrights, and any applications therefor, technology, know-how,
computer software programs or applications, and tangible or intangible
proprietary information or materials (collectively, "Intellectual Property")
that are used or held for use in the businesses of the Transferred Subsidiaries
as currently conducted, except for any such failures to own, be licensed or
possess that, individually or in the aggregate, are not reasonably likely to
have a Transferred Subsidiary Material Adverse Effect, and all such patents,
trademarks, trade names, service marks and copyrights held by any Transferred
Subsidiary are valid and subsisting.
(ii) Except as is not reasonably likely to have a Transferred
Subsidiary Material Adverse Effect:
(A) no Transferred Subsidiary is, nor will it be as a result of
the execution and delivery by Western of this Agreement, the Stock Option
Agreement or the Option and Voting Agreement, in violation of any licenses,
sublicenses and other agreements as to which such Transferred Subsidiary is
a party and pursuant to which any Transferred Subsidiary is authorized to
use any third-party patents, trademarks, service marks, and copyrights
("Third-Party Intellectual Property Rights");
(B) no claims with respect to (I) the patents, registered and
material unregistered trademarks and service marks, registered copyrights,
trade names, and any applications therefor owned by any Transferred
Subsidiary (the "Transferred Subsidiary Intellectual Property Rights");
(II) any trade secret material to the Transferred Subsidiaries, taken as a
whole; or (III) Third-Party Intellectual Property Rights are currently
pending or threatened by any Person (meaning any individual, corporation
(including not-for-profit), general or limited partnership, limited
liability company, joint venture, estate, trust, association, organization,
Governmental Entity (as defined in Section 2.1(d)) or other entity of any
kind or nature);
(C) there exist no valid grounds for any bona fide claims (I) to
the effect that the manufacture, sale, licensing or use of any product as
now used, sold or licensed or proposed for use, sale or license by any
Transferred Subsidiary, infringes on any copyright, patent, trademark,
service mark or trade secret; (II) against the use by any Transferred
Subsidiary, of any trademarks, trade names, trade secrets, copyrights,
patents, technology, know-how or computer software programs and
applications used in the business of any Transferred Subsidiary as
currently conducted or as proposed to be conducted; (III) challenging the
ownership, validity or effectiveness of any Transferred Subsidiary
Intellectual Property Rights or other trade secret material to the
Transferred Subsidiaries, taken as a whole; or (IV) challenging the license
or legally enforceable right to use of the Third-Party Intellectual
Property Rights by any Transferred Subsidiary; and
(D) there is no unauthorized use, infringement or
misappropriation of any Transferred Subsidiary Intellectual Property Rights
by any third party, including any employee or former employee of any
Transferred Subsidiary.
(p) Brokers and Finders. Neither Western nor any of its Subsidiaries nor
any of their respective officers, directors or employees has employed any broker
or finder or incurred any liability for any brokerage fees, commissions or
finders fees in connection with the Share Issuance or the other transactions
contemplated by this Agreement, the Stock Option Agreement or the Option and
Voting Agreement, except that Western
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has employed Bear Stearns & Co. Inc. ("Bear Stearns") and Barnes Associates
("Barnes Associates") as its financial advisors.
(q) Real Property. (i) Section 2.1(q)(i) of the Western Disclosure
Letter contains a true, complete and correct list of the street address of each
parcel of Western Owned Real Property; (ii) Section 2.1(q)(ii) of the Western
Disclosure Letter contains a true, complete and correct list of the street
address of each parcel of Western Leased Real Property; (iii) the Transferred
Subsidiaries have sufficient title to or leasehold interests in all the Western
Real Property to conduct their respective businesses as currently conducted or
as contemplated to be conducted, with only such exceptions as, individually or
in the aggregate, would not have a Transferred Subsidiary Material Adverse
Effect; (iv) each parcel of Western Real Property (A) is owned or leased free
and clear of all Liens, other than (1) Liens for current taxes and assessments
not yet past due, (2) inchoate mechanics' and materialmen's Liens for
construction in progress, (3) workmen's, repairmen's, warehousemen's and
carriers' Liens arising in the ordinary course of business of the Transferred
Subsidiaries consistent with past practice, and (4) all matters of record, Liens
and other imperfections of title and encumbrances which, individually or in the
aggregate, would not have a Transferred Subsidiary Material Adverse Effect
(collectively, "Western Permitted Liens"), and (B) is neither subject to any
governmental decree or order to be sold nor is being condemned, expropriated or
otherwise taken by any public authority with or without payment of compensation
therefor, nor has any such condemnation, expropriation or taking been proposed;
(v) all leases of real property leased for the use or benefit of any Transferred
Subsidiary or to which any Transferred Subsidiary is a party requiring rental
payments in excess of $25,000 per year during the period of the lease, and all
amendments and modifications thereto, are in full force and effect and there
exists no default under any such lease by any Transferred Subsidiary, nor any
event which with notice or lapse of time or both would constitute a default
thereunder by any Transferred Subsidiary, except as, individually or in the
aggregate, would not have a Transferred Subsidiary Material Adverse Effect; and
(vi) as used herein, (A) "Western Leased Real Property" shall mean all real
property leased by any Transferred Subsidiary, as tenant, together with, to the
extent leased by any such Transferred Subsidiary, all buildings and other
structures, facilities or improvements currently or hereafter located thereon,
all fixtures, systems, equipment and items of personal property of any such
Transferred Subsidiary attached or appurtenant thereto, and all easements,
licenses, rights and appurtenances relating to the foregoing; (B) "Western Owned
Real Property" shall mean all real property owned by any Transferred Subsidiary,
together with all buildings and other structures, facilities or improvements
currently or hereafter located thereon, all fixtures, systems, equipment and
items of personal property of any such Transferred Subsidiary attached or
appurtenant thereto and all easements, licenses, rights and appurtenances
relating to the foregoing; and (C) "Western Real Property" shall mean the
Western Leased Real Property and the Western Owned Real Property.
(r) Security Systems Business. Except as set forth on Section 2.1(r) of
the Western Disclosure Schedule, the Transferred Subsidiaries own, lease or have
the legal right to use all of the properties and assets that are used or held
for use in connection with, necessary for, or otherwise material to the conduct
of, the business and operations of Western relating to the sale and service of
residential and commercial monitoring and response security systems (the
"Monitoring Business"), and neither Western, directly, nor any other Subsidiary
of Western, directly or indirectly, owns, leases or has the legal right to use
any properties or assets that are used or held for use in connection with,
necessary for, or otherwise material to the Monitoring Business. The Transferred
Subsidiaries do not hold any properties or assets that are unrelated to the
Business and are not subject to any obligations or liabilities other than those
related to the Monitoring Business. For purposes of this Section 2.1(r), the
parties agree and acknowledge that Western's beneficial ownership for investment
purposes of shares of Common Stock of Tyco International, Inc. shall not be
deemed part of the Monitoring Business and will not be contributed to Protection
One in connection with the consummation of the Share Issuance.
(s) Westinghouse Acquisition Agreement. The asset purchase agreement,
dated as of December 16, 1996 (as amended, and together with any other document,
instrument, contract, agreement or arrangement between or among the parties
thereto in connection therewith, the "Westinghouse Acquisition Agreement"),
among Westinghouse Electric Corporation, a Pennsylvania corporation
("Westinghouse"), Western and WestSec (i) is valid and binding on the respective
parties thereto and is in full force and effect
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and (ii) upon consummation of the Share Issuance and the other transactions
contemplated by this Agreement, will continue in full force and effect without
penalty or other adverse consequence. From and after the Closing, except as
provided in Section 3.16 hereof, Western shall not exercise any rights it may
retain under the Westinghouse Acquisition Agreement unless and until WestSec
shall have exercised in full its rights thereunder. Neither Western nor any
Subsidiary thereof is in material breach of or default under the Westinghouse
Acquisition Agreement.
2.2. Representations and Warranties of Protection One. Except as set forth
in the corresponding sections or subsections of the disclosure letter delivered
to Western by Protection One on or prior to entering into this Agreement (the
"Protection One Disclosure Letter"), Protection One hereby represents and
warrants to Western that:
(a) Organization, Good Standing and Qualification. Each of Protection
One and its Subsidiaries is a corporation duly organized, validly existing and
in good standing under the laws of its respective jurisdiction of organization
and has all requisite corporate or similar power and authority and all necessary
governmental approvals to own and operate its properties and assets and to carry
on its business as presently conducted and is qualified to do business and is in
good standing as a foreign corporation in each jurisdiction where the ownership
or operation of its properties or conduct of its business requires such
qualification, except where the failure to have such approvals or to be so
qualified or in such good standing, when taken together with all other such
failures, is not reasonably likely to have a Protection One Material Adverse
Effect (as defined below). Protection One has made available to Western a
complete and correct copy of Protection One's and its Subsidiaries' certificates
of incorporation and by-laws (or similar organizational documents), each as
amended to the date hereof. Protection One's and its Subsidiaries' certificates
of incorporation and by-laws (or similar organizational documents) so delivered
are in full force and effect and neither Protection One nor any of its
Subsidiaries is in violation of any provision of its certificate of
incorporation or by-laws (or similar organizational documents).
As used in this Agreement, the term "Protection One Material Adverse
Effect" means any change or effect that is materially adverse to the financial
condition, properties, business or results of operations of Protection One and
its Subsidiaries taken as a whole; provided, however, that any such effect
resulting from any change (i) in law, rule or regulation that applies to both
Protection One and the Transferred Subsidiaries or (ii) in economic or business
conditions generally or in the security monitoring industry specifically shall
not be considered when determining if a Protection One Material Adverse Effect
has occurred.
(b) Capitalization. The authorized capital stock of Protection One
consists of 40,000,000 shares of Common Stock, par value $0.01 per share, of
which 13,820,290 shares were outstanding as of the close of business on July 29,
1997. All of the outstanding shares of Common Stock have been duly authorized
and are validly issued, fully paid and nonassessable. Protection One has no
Common Stock reserved for issuance, except for the numbers of shares set forth
in the Protection One Disclosure Letter as reserved for issuance pursuant to (i)
the Protection One 1994 Stock Option Plan, as amended, and the Protection One
1996 Non-Qualified Stock Option Plan (together, the "Protection One Stock Option
Plans"), the Protection One Employee Stock Purchase Plan (the "ESPP"), the
profit-sharing plan maintained by Protection One and its Subsidiaries (the
"Protection One 401k Plan"), (ii) the option issued by Protection One to Jimmy
Raines & Company (the "Raines Option" and, together with the Protection One
Stock Option Plans, the "Options"), (iii) the warrants issued by Protection One
pursuant to the Warrant Agreement, dated as of May 17, 1995, between Protection
One and State Bank and Trust Company, as Warrant Agent (the "1995 Protection One
Warrants"), (iv) the warrants issued by Protection One pursuant to the Warrant
Agreement, dated as of November 3, 1993, between Protection One and United
States Trust Company of New York, as Warrant Agent (the "1993 Protection One
Warrants"), (v) the Amended and Restated Stock Purchase Warrant, dated September
16, 1991, issued by Protection One to Kansallis-Osake-Pankii (the "KOP
Warrant"), (vi) the Stock Purchase Warrant, dated December 31, 1992, issued by
Protection One to Chemical Bank (the "Chemical Warrant"), (vii) the Common Stock
Performance Warrants, dated September 16, 1991 (the "Performance Warrants" and,
together with the 1995 Protection One Warrants, the 1993 Protection One
Warrants, the KOP Warrant and the Chemical Warrant the "Warrants"), and (viii)
the 6 3/4% convertible senior subordinated notes due 2003 issued by Protection
One Monitoring Services, Inc. and guaranteed by
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Protection One (the "Protection One Convertible Notes"). Except as set forth on
Section 2.2(b) of the Protection One Disclosure Letter, there are no preemptive
or other outstanding rights, options, warrants, conversion rights, convertible
securities, stock appreciation rights, redemption rights, repurchase rights,
agreements, arrangements or commitments to issue or to sell any shares of
capital stock or other securities of Protection One or any of its Subsidiaries
or any securities or obligations convertible or exchangeable into or exercisable
for, or giving any Person a right to subscribe for or acquire, any securities of
Protection One or any of its Subsidiaries, and no securities or obligation
evidencing such rights are authorized, issued or outstanding. There are no
outstanding contractual obligations of Protection One to repurchase, redeem or
otherwise acquire any capital stock of Protection One or to provide funds to or
make any investment (in the form of a loan, capital contribution or otherwise)
in Protection One or any other entity. Each of the outstanding shares of capital
stock of each of Protection One's Subsidiaries is duly authorized, validly
issued, fully paid and nonassessable and owned by a direct or indirect
wholly-owned subsidiary of Protection One, free and clear of any Lien. Except
for the Protection One Convertible Notes, Protection One does not have
outstanding any bonds, debentures, notes or other obligations the holders of
which have the right to vote (or convertible into or exercisable for securities
having the right to vote) with the stockholders of Protection One on any matter
("Protection One Voting Debt"). A true and complete list of all of Protection
One's Subsidiaries, together with the jurisdiction of incorporation of each such
Subsidiary and the percentage of such Subsidiary's outstanding capital stock
owned by Protection One or one of its Subsidiaries, is set forth in Section
2.2(b) of the Protection One Disclosure Letter. There are no voting trusts,
shareholder agreements, proxies or other agreements or understandings in effect
with respect to the voting or transfer of any shares of capital stock of
Protection One. The stock register of Protection One accurately records (i) the
name and address of each person owning shares of capital stock of Protection One
and (ii) the certificate number of each certificate evidencing shares of capital
stock issued by Protection One, the number of shares evidenced by each such
certificate, the date of issuance thereof and, in the case of cancellation, the
date of cancellation.
(c) Corporate Authority and Approval. (i) Subject only to any
stockholder approval necessary to authorize the Charter Amendment and the New
Option Plan (as defined in Section 3.19 hereof) and to permit the issuance of
the shares of Common Stock required to be issued pursuant to Section 1.1 hereof
(the "Protection One Requisite Vote") Protection One has all requisite corporate
power and authority and has taken all corporate action necessary in order to
execute, deliver and perform its obligations under this Agreement and the Stock
Option Agreement, as the case may be, and to consummate, the Share Issuance and
the other transactions contemplated hereby and thereby. This Agreement and the
Stock Option Agreement are legal, valid and binding agreements of Protection
One, enforceable against Protection One, in accordance with their respective
terms.
(ii) Prior to the Closing, assuming Protection One stockholder
approval of the Charter Amendment and the Share Issuance, Protection One will
have taken all necessary corporate action to permit it to issue the number of
shares of Common Stock required to be issued pursuant to Section 1.1 hereof and
to effect the payment of the dividend and other distributions permitted by
Section 3.17 hereof. The Common Stock, when issued, will be validly issued,
fully paid and nonassessable, and no stockholder of Protection One will have any
preemptive right of subscription or purchase in respect thereof.
(d) Governmental Filings; No Violations. (i) Other than the filings
and/or notices (A) under the HSR Act, the Securities Act and the Exchange Act,
(B) to comply with state securities or "blue sky" laws, (C) required to be made
with Nasdaq and (D) other filings listed in the Protection One Disclosure
Letter, no notices, reports or other filings are required to be made by
Protection One with, nor are any consents, registrations, approvals, permits or
authorizations required to be obtained by Protection One from, any Governmental
Entity, in connection with the execution and delivery of this Agreement and the
Stock Option Agreement by Protection One and the consummation by Protection One
of the Share Issuance and the other transactions contemplated hereby and
thereby, except those that the failure to make or obtain are not, individually
or in the aggregate, reasonably likely to have a Protection One Material Adverse
Effect or prevent, materially delay or materially impair the ability of
Protection One to consummate the Share Issuance or the other transactions
contemplated by this Agreement and the Stock Option Agreement.
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(ii) Subject to the approvals, amendments, filings, notices, reports,
consents and authorizations referred to in Section 2.2(c) and paragraph (i) of
this Section 2.2(d), the execution, delivery and performance of this Agreement
and the Stock Option Agreement by Protection One does not, and the consummation
by Protection One of the Share Issuance and the other transactions contemplated
hereby and thereby will not, constitute or result in (A) a breach or violation
of, or a default under, the certificate of incorporation or by-laws of
Protection One or the comparable governing instruments of any of its
Subsidiaries, (B) a breach or violation of any law, rule, regulation, order,
judgement or decree applicable to Protection One or any of its Subsidiaries or
by which any of their respective properties or assets is bound or affected, or
(C) a breach or violation of, or a default under, result in the loss of any
material benefit under, or give to others any right of termination, amendment,
acceleration or cancellation of, or result in the creation of a Lien on the
assets of Protection One or any of its Subsidiaries (with or without notice,
lapse of time or both) pursuant to, any Contracts to which Protection One or any
of its Subsidiaries is a party or by which Protection One or any of its
Subsidiaries or any of their respective properties or assets is bound or
affected, except, in the case of clause (B) or (C) above, for breach, violation,
default, acceleration, creation or change that, individually or in the
aggregate, is not reasonably likely to have a Protection One Material Adverse
Effect or prevent, materially delay or materially impair the ability of
Protection One to consummate the Share Issuance or the other transactions
contemplated by this Agreement or the Stock Option Agreement. Section 2.1(d) of
the Protection One Disclosure Letter sets forth a correct and complete list of
Contracts of Protection One and the Subsidiaries pursuant to which consents or
waivers are or may be required prior to consummation of the transactions
contemplated by this Agreement (subject to the exemption set forth with respect
to clauses (B) and (C) above).
(e) Protection One Reports; Financial Statements. Protection One has
delivered or otherwise made available to Western each registration statement,
report, proxy statement or information statement prepared by it under the
Securities Act or the Exchange Act since December 31, 1994, including (i)
Protection One's Annual Reports on Form 10-K for the years ended September 30,
1994, 1995 and 1996 and (ii) Protection One's Quarterly Report on Form 10-Q for
the periods ended December 31, 1996 and March 31, 1997, each in the form
(including exhibits, annexes and any amendments thereto) filed with the SEC
(collectively, including any such reports filed subsequent to the date hereof,
the "Protection One Reports"). As of their respective dates, the Protection One
Reports (i) complied in all material respects with the applicable requirements
of the Securities Act and the Exchange Act, as the case may be, and (ii) did
not, and any Protection One Reports filed with the SEC subsequent to the date
hereof will not, contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements made therein, in light of the circumstances in which they were made,
not misleading. Each of the consolidated balance sheets included in or
incorporated by reference into the Protection One Reports (including the related
notes and schedules) complied as to form in all material respects with the
applicable published rules and regulations of the SEC with respect thereto and
fairly presents, or will fairly present, the consolidated financial position of
Protection One and its Subsidiaries as of its date and each of the consolidated
statements of income and of changes in financial position included in or
incorporated by reference into the Protection One Reports (including any related
notes and schedules) complied as to form in all material respects with the
applicable published rules and regulations of the SEC with respect thereto and
fairly presents, or will fairly present, the results of operations, retained
earnings and changes in financial position, as the case may be, of Protection
One and its Subsidiaries for the periods set forth therein (subject, in the case
of unaudited statements, to notes and normal and recurring year-end audit
adjustments that will not be material in amount or effect), in each case in
accordance with GAAP consistently applied during the periods involved, except as
may be noted therein.
(f) Absence of Certain Changes. Except as disclosed in the Protection
One Reports filed prior to the date hereof, since September 30, 1996 (the
"Protection One Audit Date") Protection One and its Subsidiaries have conducted
their respective businesses only in, and have not engaged in any material
transaction other than according to, the ordinary and usual course of such
businesses and there has not been (i) any change in the financial condition,
properties, business or results of operations of Protection One and its
Subsidiaries or any development or combination of developments that,
individually or in the aggregate, has had or is reasonably likely to result in a
Protection One Material Adverse Effect; (ii) any material damage,
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destruction or other casualty loss with respect to any material asset or
property owned, leased or otherwise used by Protection One or any of its
Subsidiaries, whether or not covered by insurance; (iii) any change by
Protection One in accounting principles, practices or methods; or (iv) any
declaration, setting aside or payment of any dividend or other distribution in
respect of the Common Stock of Protection One or any redemption, purchase or
other acquisition of their respective securities. Since the Protection One Audit
Date, except as provided for herein or as disclosed in the Protection One
Reports filed prior to the date hereof, there has not been any increase in the
compensation payable or that could become payable by Protection One or any of
its Subsidiaries to officers or key employees or any amendment of any of the
Protection One Compensation and Benefit Plans (as defined in Section 2.2(h))
other than increases or amendments in the ordinary course of business consistent
with past practice.
(g) Litigation and Liabilities. Except as disclosed in the Protection
One Reports filed prior to the date hereof, there are no (i) pending or, to the
knowledge of Protection One, threatened against Protection One or any of its
Subsidiaries or (ii) obligations or liabilities, whether or not accrued,
contingent or otherwise and whether or not required to be disclosed, including
those relating to matters involving any Environmental Law, or any other facts or
circumstances that could result in any claims against, or obligations or
liabilities of, Protection One or any of its Subsidiaries, except for those that
are not, individually or in the aggregate, reasonably likely to have a
Protection One Material Adverse Effect or prevent or materially burden or
materially impair the ability of Protection One to consummate the Share Issuance
or the other transactions contemplated by this Agreement, the Stock Option
Agreement and the Option and Voting Agreement.
(h) Employee Benefits.
(i) A copy of each bonus, deferred compensation, pension, retirement,
profit-sharing, thrift, savings, employee stock ownership, stock bonus, stock
purchase, restricted stock, stock option, employment, termination, severance,
compensation, medical, health, incentive compensation, disability, retiree
medical or life insurance, fringe benefits, or other plan, agreement, policy or
arrangement that covers employees, directors, former employees or former
directors of Protection One and its Subsidiaries (the "Protection One
Compensation and Benefit Plans") and any (i) trust arrangement or insurance
contract forming a part of such Protection One Compensation and Benefits Plans
(ii) the most recent annual report on Form 5500 (and related schedules and
financial statements or opinions required in connection therewith, (iii) the
most recent actuarial report and financial statements with respect to each
Protection One Compensation and Benefit Plan, if applicable, (iv) the most
recent summary plan description required to be provided to plan participants,
and (v) the most recent IRS determination letter, if any has been made available
to Western prior to the date hereof. The Protection One Compensation and Benefit
Plans are listed in Section 2.2(h) of the Protection One Disclosure Letter and
any "change of control" or similar provision therein are specifically identified
in Section 2.2.(h) of the Protection One Disclosure Letter.
(ii) Except for instances of non-compliance which would not be
material, all Protection One Compensation and Benefit Plans are, and have been
operated, in compliance with all applicable law, including the Code and ERISA.
Each Protection One Compensation and Benefit Plan that is an "employee pension
benefit plan" within the meaning of Section 3(2) of ERISA (a "Protection One
Pension Plan") and that is intended to be qualified under Section 401(a) of the
Code has received a favorable determination letter from the IRS that such
Protection One Pension Plan and related trusts are qualified and exempt from
federal income taxes under Sections 401(a) and 501(a), respectively, of the
Code, and Protection One has no knowledge of any circumstances reasonably likely
to result in revocation of any such favorable determination letter. No event has
occurred and no circumstances exist that have adversely affected or could
reasonably be expected to adversely affect the tax qualification of such
Protection One Pension Plans. As of the date hereof, there is no pending or, to
the knowledge of Protection One, threatened material litigation investigations,
terminations, proceedings or other claims (except for benefit claims payable in
the normal operation of the Protection One Compensation and Benefits Plans),
relating to the Protection One Compensation and Benefit Plans or any plan
maintained by one of Protection One's "ERISA Affiliates" as that term is defined
in Section 414(b)(c)(m) or (o) of the Code, and no event has occurred and no
circumstances exist that have given rise to or could reasonably be expected to
give rise to any material liability in the event of any such investigation,
claim or proceeding. Neither Protection One nor any of its Subsidiaries with
respect to any
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Protection One Compensation and Benefit Plan has engaged in a
"prohibited transaction" (as such term is defined in Section 406 of ERISA or
4975 of the Code) or any other breach of fiduciary duty that, assuming the
taxable period of such transaction expired as of the date hereof, would subject
Protection One or any of its Subsidiaries to a material tax or penalty imposed
by either Section 4975 of the Code or Section 502 of ERISA.
(iii) Protection One and its ERISA Affiliates do not sponsor or
maintain and have not sponsored or maintained in the last five years any
ongoing, frozen or terminated plans subject to Title IV of ERISA and as of the
date hereof, no liability under Title IV of ERISA has been or is expected to be
incurred by Protection One or any Subsidiary. Neither Protection One nor any of
its Subsidiaries nor any of Protection One's ERISA Affiliates has incurred or
expects to incur any withdrawal liability with respect to a multiemployer plan
under Subtitle E to Title IV of ERISA. Protection One and its Subsidiaries have
not contributed, or been obligated to contribute, to a multiemployer plan under
Subtitle E of Title IV of ERISA at any time.
(iv) All contributions and payments required to be made under the
terms of any Protection One Compensation and Benefit Plan or of the date hereof
have been timely made or have been reflected on the most recent consolidated
balance sheet filed or incorporated by reference in the Protection One Reports
prior to the date hereof. Neither any Protection One Pension Plan nor any
single-employer plan of an ERISA Affiliate has an "accumulated funding
deficiency" (whether or not waived) within the meaning of Section 412 of the
Code or Section 302 of ERISA.
(v) Neither Protection One nor its Subsidiaries have any obligations
for retiree health and life benefits under any Protection One Compensation and
Benefit Plan.
(vi) The consummation of the Share Issuance and the other
transactions contemplated by this Agreement, the Stock Option and the Option and
Voting Agreement will not (x) entitle any employees of Protection One or its
Subsidiaries to severance pay, (y) accelerate the time of payment or vesting or
trigger any payment of compensation or benefits under, increase the amount
payable or trigger any other material obligation pursuant to, any of the
Protection One Compensation and Benefit Plans or (z) result in any breach or
violation of, or default under, any of the Protection One Compensation and
Benefit Plans. No Protection One Compensation and Benefit Plan exists which
could result in the payment to any employee of Protection One or any Subsidiary
that would constitute an excess parachute payment within the meaning of Code
Section 280G.
(vii) Neither Protection One nor any of its Subsidiaries has incurred
any liability under, and each of them has complied in all respects with, the
WARN Act and the rules and regulations promulgated thereunder and none of them
reasonably expects to incur any such liability as a result of actions taken or
not taken prior to the Closing.
(i) Compliance with Laws; Permits. Except as set forth in the Protection
One Reports filed prior to the date hereof, the businesses of each of Protection
One and its Subsidiaries have not been, and are not being, conducted in
violation of any Laws, except for violations or possible violations that,
individually or in the aggregate, are not reasonably likely to have a Protection
One Material Adverse Effect or prevent or materially burden or materially impair
the ability of Protection One to consummate the Share Issuance or the other
transactions contemplated by this Agreement and the Stock Option Agreement.
Except as set forth in the Protection One Reports filed prior to the date
hereof, no investigation or review by any Governmental Entity with respect to
Protection One or any of its Subsidiaries is pending or, to the knowledge of
Protection One, threatened, nor has any Governmental Entity indicated an
intention to conduct the same, except for those the outcome of which are not,
individually or in the aggregate, reasonably likely to have a Protection One
Material Adverse Effect or prevent or materially burden or materially impair the
ability of Protection One to consummate the Share Issuance or the other
transactions contemplated by this Agreement and the Stock Option Agreement. No
material change is required in Protection One's or any of its Subsidiaries'
processes, properties or procedures in connection with any such Laws, and
neither Protection One nor any of its Subsidiaries has received any notice or
communication of any material noncompliance with any such Laws that has not been
cured. Protection One and each of its Subsidiaries has all permits, licenses,
franchises,
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variances, exemptions, orders and other governmental authorizations,
consents and approvals necessary to conduct its respective business as presently
conducted except those the absence of which are not, individually or in the
aggregate, reasonably likely to have a Protection One Material Adverse Effect or
prevent or materially burden or materially impair the ability of Protection One
to consummate the Share Issuance or the other transactions contemplated by this
Agreement or the Stock Option Agreement.
(j) Takeover Statutes. The prohibitions of Section 203 of the DGCL are
not applicable to Protection One or Western in connection with, and will not be
applicable to Protection One or Western as a result of, the Share Issuance or
the other transactions contemplated by this Agreement, the Stock Option
Agreement or the Option and Voting Agreement. No other "fair price,"
"moratorium," "control share acquisition" or other similar anti-takeover statute
or regulation or provision in Protection One's certificate of incorporation and
by-laws is, or at the Closing will be, applicable to Protection One, the Share
Issuance or the other transactions contemplated by this Agreement, the Stock
Option Agreement or the Option and Voting Agreement.
(k) Environmental Matters. Except as disclosed in the Protection One
Reports filed prior to the date hereof and except for such matters that, alone
or in the aggregate, are not reasonably likely to have a Protection One Material
Adverse Effect: (i) Protection One and its Subsidiaries are currently in
compliance with and have complied with all applicable Environmental Laws; (ii)
the properties currently owned or operated by Protection One and its
Subsidiaries (including soils, groundwater, surface water, buildings or other
structures) are not contaminated with any Hazardous Substances; (iii) Protection
One and its Subsidiaries are not subject to liability for any Hazardous
Substance disposal or contamination on any third party property; (iv) Protection
One and its Subsidiaries have not been associated with any release or threat of
release of any Hazardous Substance; (v) Protection One and its Subsidiaries have
not received any notice, demand, letter, claim or request for information
alleging that may be in violation of or liable under any Environmental Law; (vi)
Protection One and its Subsidiaries are not subject to any orders, decrees,
injunctions or other arrangements with any Governmental Entity and is not
subject to any indemnity or other agreement with any third party relating to
liability under any Environmental Law or relating to Hazardous Substances; and
(vii) there are no circumstances or conditions involving Protection One and its
Subsidiaries that could reasonably be expected to result in any claims,
liability, investigations, costs or restrictions on the ownership, use, or
transfer of any property of Protection One and its Subsidiaries pursuant to any
Environmental Law.
(l) Tax Matters. Neither Protection One nor any of its Subsidiaries has
taken or agreed to take any action that would prevent the contribution of the
Subsidiary Shares and the Investment Shares from qualifying as a contribution to
a controlled corporation within the meaning of Section 351 of the Code.
(m) Taxes. Protection One and each of its Subsidiaries (i) have prepared
in good faith and duly and timely filed (taking into account any extension of
time within which to file) all Tax Returns required to be filed by any of them;
(ii) have paid all Taxes that are shown as due on such filed Tax Returns or that
Protection One or any of its Subsidiaries are obligated to withhold from amounts
owing to any employee, creditor or third party, except with respect to matters
contested in good faith; and (iii) have not waived any statute of limitations
with respect to Taxes or agreed to any extension of time with respect to a Tax
assessment or deficiency. As of the date hereof, there are not pending or, to
the knowledge of Protection One, threatened any audits, examinations,
investigations or other proceedings in respect of Taxes or Tax matters.
Protection One has made available to Western true and correct copies of the
United States federal income Tax Returns filed by Protection One and its
Subsidiaries for each of the fiscal years ended December 31, 1994, 1995 and
1996.
(n) Labor Matters. Neither Protection One nor any of its Subsidiaries is
a party to or otherwise bound by any collective bargaining agreement, contract
or other agreement or understanding with a labor union or labor organization,
nor, as of the date hereof, is Protection One or any of its Subsidiaries the
subject of any material proceeding asserting that Protection One or any of its
Subsidiaries has committed an unfair labor practice or is seeking to compel it
to bargain with any labor union or labor organization nor is there
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pending or, to the knowledge of Protection One, threatened, nor is there
existing any labor strike, dispute, walk-out, work stoppage, slow-down or
lockout involving Protection One or any of its Subsidiaries.
(o) Insurance. All material fire and casualty, general liability,
business interruption, product liability, and sprinkler and water damage and
errors and omissions insurance policies maintained by or for the benefit of
Protection One or any of its Subsidiaries are with reputable insurance carriers,
provide full and adequate coverage for all normal risks incident to the business
of Protection One and its Subsidiaries and their respective properties and
assets, and are in character and amount at least equivalent to that carried by
persons engaged in similar businesses and subject to the same or similar perils
or hazards, except for any such failures to maintain insurance policies that,
individually or in the aggregate, are not reasonably likely to have a Protection
One Material Adverse Effect.
(p) Intellectual Property.
(i) Protection One and/or each of its Subsidiaries owns, or is
licensed or otherwise possesses legally enforceable rights to use, all
Intellectual Property that are used or held for use in the business of
Protection One and its Subsidiaries as currently conducted, except for any such
failures to own, be licensed or possess that, individually or in the aggregate,
are not reasonably likely to have a Protection One Material Adverse Effect, and
all such patents, trademarks, trade names, service marks and copyrights held by
Protection One and/or its Subsidiaries are valid and subsisting.
(ii) Except as disclosed in Protection One Reports filed prior to the
date hereof or as is not reasonably likely to have a Protection One Material
Adverse Effect:
(A) Protection One is not, nor will it be as a result of its
execution and delivery of this Agreement the Stock Option Agreement or the
Option and Voting Agreement or the performance of its obligations hereunder
or thereunder, in violation of any licenses, sublicenses and other
agreements as to which Protection One is a party and pursuant to which
Protection One is authorized to use any third-party patents, trademarks,
service marks, and copyrights ("Protection One Third-Party Intellectual
Property Rights");
(B) no claims with respect to (I) the patents, registered and
material unregistered trademarks and service marks, registered copyrights,
trade names, and any applications therefor owned by Protection One or any
its Subsidiaries (the "Protection One Intellectual Property Rights"); (II)
any trade secret material to Protection One and its Subsidiaries taken as a
whole; or (III) Protection One Third-Party Intellectual Property Rights are
currently pending or threatened by any Person;
(C) there exist no valid grounds for any bona fide claims (I) to
the effect that the manufacture, sale, licensing or use of any product as
now used, sold or licensed or proposed for use, sale or license by
Protection One or any of its Subsidiaries, infringes on any copyright,
patent, trademark, service mark or trade secret; (II) against the use by
Protection One or any of its Subsidiaries, of any trademarks, trade names,
trade secrets, copyrights, patents, technology, know-how or computer
software programs and applications used in the business of Protection One
or any of its Subsidiaries as currently conducted or as proposed to be
conducted; (III) challenging the ownership, validity or effectiveness of
any of the Protection One Intellectual Property Rights or other trade
secret material to Protection One and its Subsidiaries, taken as a whole;
or (IV) challenging the license or legally enforceable right to use of the
Protection One Third- Party Intellectual Rights by Protection One or any of
its Subsidiaries; and
(D) there is no unauthorized use, infringement or
misappropriation of any of the Protection One Intellectual Property Rights
by any third party, including any employee or former employee of Protection
One or any of its Subsidiaries.
(q) Brokers and Finders. Neither Protection One nor any of its
Subsidiaries nor any of their respective officers, directors or employees has
employed any broker or finder or incurred any liability for any brokerage fees,
commissions or finders fees in connection with the Share Issuance or the other
transactions contemplated by this Agreement, the Stock Option Agreement and the
Option and Voting Agreement, except
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that Protection One has employed Morgan Stanley & Co. Incorporated as its
financial advisor, the arrangements with which have been disclosed in writing to
Western prior to the date hereof.
(r) Real Property. (i) Section 2.2(r)(i) of the Protection One
Disclosure Letter contains a true, complete and correct list of the street
address of each parcel of Protection One Owned Real Property; (ii) Section
2.2(r) of the Protection One Disclosure Letter contains a true, complete and
correct list of the street address of each parcel of Protection One Leased Real
Property; (iii) Protection One and its Subsidiaries have sufficient title to or
leasehold interest in all the Protection One Real Property to conduct their
respective businesses as currently conducted or as contemplated to be conducted,
with only such exceptions as, individually or in the aggregate, would not have a
Protection One Material Adverse Effect; (iv) each parcel of Protection One Real
Property (A) is owned or leased free and clear of all Liens, other than (1)
Liens for current taxes and assessments not yet past due, (2) inchoate
mechanics' and materialmen's Liens for construction in progress, (3) workmen's,
repairmen's, warehousemen's and carriers' Liens arising in the ordinary course
of business of the Transferred Subsidiaries consistent with past practice, and
(4) all matters of record, Liens and other imperfections of title and
encumbrances which, individually or in the aggregate, would not have a
Protection One Material Adverse Effect (collectively, "Protection One Permitted
Liens"), and (B) is neither subject to any governmental decree or order to be
sold nor is being condemned, expropriated or otherwise taken by any public
authority with or without payment of compensation therefor, nor has any such
condemnation, expropriation or taking been proposed; (v) all leases of real
property leased for the use or benefit of Protection One or any of its
Subsidiaries or to which Protection One or any of its Subsidiaries is a party
requiring rental payments in excess of $25,000 per year during the period of the
lease, and all amendments and modifications thereto, are in full force and
effect and there exists no default under any such lease by Protection One or any
of its Subsidiaries, nor any event which with notice or lapse of time or both
would constitute a default thereunder by Protection One or any of its
Subsidiaries, except as, individually or in the aggregate, would not have a
Protection One Material Adverse Effect; and (vi) as used herein, (A) "Protection
One Real Property" shall mean all real property leased by Protection One or any
of its Subsidiaries, as tenant, together with, to the extent leased by
Protection One or any of its Subsidiaries, all buildings and other structures,
facilities or improvements currently or hereafter located thereon, all fixtures,
systems, equipment and items of personal property of Protection One or any of
its Subsidiaries attached or appurtenant thereto, and all easements, licenses,
rights and appurtenances relating to the foregoing; (B) "Protection One Owned
Real Property" shall mean all real property owned by Protection One or any of
its Subsidiaries, together with all buildings and other structures, facilities
or improvements currently or hereafter located thereon, all fixtures, systems,
equipment and items of personal property of Protection One or any of its
Subsidiaries attached or appurtenant thereto and all easements, licenses, rights
and appurtenances relating to the foregoing; and (C) "Protection One Real
Property" shall mean the Protection One Leased Real Property and the Protection
One Owned Real Property.
(s) Opinion of Financial Advisor. The financial advisor of Protection
One, Morgan Stanley & Co. Incorporated, has delivered to Protection One an
opinion dated the date of this Agreement to the effect that the consideration to
be received by Protection One upon consummation of the Share Issuance and the
distributions to Holders of Record of Common Stock referred to in the recitals
to this Agreement, taken together, are fair from a financial point of view to
Protection One and the holders of shares of Common Stock.
ARTICLE III
COVENANTS
3.1. Interim Operations. Except as set forth in Section 3.1 of the Western
Disclosure Letter, Western covenants and agrees as to itself and the Transferred
Subsidiaries that, after the date hereof and prior to the Closing (unless
Protection One shall otherwise approve in writing, and except as otherwise
expressly contemplated by this Agreement, the Stock Option Agreement and the
Option and Voting Agreement):
(a) the businesses of the Transferred Subsidiaries shall be conducted in
the ordinary and usual course and, to the extent consistent therewith, Western
shall cause the Transferred Subsidiaries to use all reasonable efforts to
preserve their respective business organizations intact and maintain their
respective
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existing relations and goodwill with customers, suppliers, distributors,
creditors, lessors, employees and business associates;
(b) neither Western nor any of its Subsidiaries shall (i) issue, sell,
pledge, dispose of, encumber or accelerate, modify, or amend the terms of any
shares of, or securities convertible into or exchangeable or exercisable for, or
options, warrants, calls, commitments or rights of any kind to acquire, any
shares of any capital stock in any Transferred Subsidiary; (ii) amend the
certificate of incorporation or by-laws of any Transferred Subsidiary; (iii)
split, combine or reclassify the outstanding shares of capital stock of any
Transferred Subsidiary; (iv) declare, set aside or pay any dividend payable in
cash, stock or property in respect of any capital stock of WestSec or Westar
Security; (v) repurchase, redeem or otherwise acquire, or permit any of its
Subsidiaries to purchase or otherwise acquire, any shares of capital stock of
any Transferred Subsidiary or any securities convertible into or exchangeable or
exercisable for any shares of capital stock of any Transferred Subsidiary; (vi)
other than in the ordinary and usual course of business, transfer, lease,
license, guarantee, sell, mortgage, pledge, dispose of or encumber any other
property or assets, real, personal or mixed (including, without limitation,
leasehold interests and intangible assets and capital stock of any Transferred
Subsidiary) of any Transferred Subsidiary or permit any Transferred Subsidiary
to incur or modify any material indebtedness or other liability; or (vii) permit
any Transferred Subsidiary to make or authorize or commit for any capital
expenditures or, by any means, permit any Transferred Subsidiary to make any
acquisition of, or investment in, assets or stock of any other Person or entity,
except for (A) acquisitions of security monitoring accounts in the ordinary
course of business consistent with past practice, (B) other acquisitions of
security monitoring accounts not to exceed $5,000,000 in the aggregate and (C)
other capital expenditures not to exceed $500,000 in the aggregate;
(c) neither Western nor any of its Subsidiaries shall terminate,
establish, adopt, enter into, make any new grants or awards under, amend or
otherwise modify, any Compensation and Benefit Plans or increase the salary,
wage, bonus or other compensation of any employees of any Transferred Subsidiary
except grants, awards or increases occurring in the ordinary and usual course of
business (which shall include normal periodic performance reviews and related
compensation and benefit grants, awards or increases);
(d) neither Western nor any of its Subsidiaries shall settle or
compromise any material claims or litigation involving any Transferred
Subsidiary or, except in the ordinary and usual course of business modify, amend
or terminate any material Contracts to which a Transferred Subsidiary is party
or waive, release or assign any material rights or claims of any Transferred
Subsidiary;
(e) neither Western nor any of its Subsidiaries shall make any Tax
election with respect to Taxes payable by any Transferred Subsidiary or permit
any insurance policy naming any Transferred Subsidiary as a beneficiary or
loss-payable payee to be cancelled or terminated except in the ordinary and
usual course of business;
(f) neither Western nor any of its Subsidiaries shall take any action or
omit to take any action that would cause any of its representations and
warranties herein to become untrue in any material respect; and
(g) neither it nor any of its Subsidiaries will authorize or enter into
an agreement to do any of the fore going.
Except as set forth in Section 3.1 of the Protection One Disclosure
Letter, Protection One covenants and agrees as to itself and its Subsidiaries
that, after the date hereof and prior to the Closing (unless Western shall
otherwise approve in writing, and except as otherwise expressly contemplated by
this Agreement, the Stock Option Agreement and the Option and Voting Agreement):
(h) the business of Protection One and its Subsidiaries shall be
conducted in the ordinary and usual course and, to the extent consistent
therewith, Protection One and its Subsidiaries shall use all reasonable efforts
to preserve their respective business organizations intact and maintain their
respective existing relations and goodwill with customers, suppliers,
distributors, creditors, lessors, employees and business associates;
(i) neither Protection One nor any of its Subsidiaries shall (i) issue,
sell, pledge, dispose of, encumber or accelerate, modify, or amend the terms of
any shares of, or securities convertible into or
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exchangeable or exercisable for, or options, warrants, calls, commitments or
rights of any kind to acquire, any shares of any capital stock of Protection One
or any of its Subsidiaries; (ii) amend the certificate of incorporation or
by-laws of Protection One or any of its Subsidiaries; (iii) split, combine or
reclassify the outstanding shares of capital stock of Protection One or any of
its Subsidiaries; (iv) declare, set aside or pay any dividend payable in cash,
stock or property in respect of any capital stock other than dividends from
Protection One's direct or indirect wholly-owned Subsidiaries and the dividend
and other distributions referred to in the recitals to this Agreement; or (v)
repurchase, redeem or otherwise acquire any shares of capital stock or any
securities convertible into or exchangeable or exercisable for any shares of
capital stock of Protection One or any of its Subsidiaries; (vi) other than in
the ordinary and usual course of business, transfer, lease, license, guarantee,
sell, mortgage, pledge, dispose of or encumber any other property or assets,
real, personal or mixed (including, without limitation, leasehold interests and
intangible assets and (including capital stock of any of Protection One's
Subsidiaries) or incur or modify any material indebtedness or other liability;
or (vii) make or authorize or commit for any capital expenditures or, by any
means, make any acquisition of, or investment in, assets or stock of any other
Person or entity, except for (A) acquisitions of security monitoring accounts in
the ordinary course of business consistent with past practice, (B) other
acquisitions of security monitoring accounts not to exceed $5,000,000 in the
aggregate and (C) other capital expenditures not to exceed $500,000 in the
aggregate;
(j) neither Protection One nor any of its Subsidiaries shall terminate,
establish, adopt, enter into, make any new grants or awards under, amend or
otherwise modify, any Protection One Compensation and Benefit Plans or increase
the salary, wage, bonus or other compensation of any employees except grants,
awards or increases occurring in the ordinary and usual course of business
(which shall include normal periodic performance reviews and related
compensation and benefit grants, awards or increases) except for the bonuses
referred to in the recitals to this Agreement;
(k) neither Protection One nor any of its Subsidiaries shall settle or
compromise any material claims or litigation or, except in the ordinary and
usual course of business modify, amend or terminate any of its material
Contracts or waive, release or assign any material rights or claims;
(l) neither Protection One nor any of its Subsidiaries shall make any
Tax election or permit any insurance policy naming it as a beneficiary or
loss-payable payee to be cancelled or terminated except in the ordinary and
usual course of business;
(m) neither Protection One nor any of its Subsidiaries shall take any
action or omit to take any action that would cause any of its representations
and warranties herein to become untrue in any material respect; and
(n) neither Protection One nor any of its Subsidiaries will authorize or
enter into an agreement to do any of the foregoing.
3.2. Acquisition Proposals. Protection One agrees that neither it nor any
of its Subsidiaries nor any of the officers and directors of it or its
Subsidiaries shall, and that it shall direct and use its best efforts to cause
its and its Subsidiaries' employees, agents and representatives (including any
investment banker, attorney or accountant retained by it or any of its
Subsidiaries) not to, directly or indirectly, initiate, solicit, encourage or
otherwise facilitate any inquiries or the making of any proposal or offer with
respect to a merger, reorganization, share exchange, consolidation or similar
transaction involving, or any purchase of all or any significant portion of the
assets or any equity securities of, it or any of its Subsidiaries (any such
proposal or offer being hereinafter referred to as an "Acquisition Proposal").
Protection One further agrees that neither it nor any of its Subsidiaries nor
any of the officers and directors of it or its Subsidiaries shall, and that it
shall direct and use its best efforts to cause its and its Subsidiaries'
employees, agents and representatives (including any investment banker, attorney
or accountant retained by it or any of its Subsidiaries Subsidiaries) not to,
directly or indirectly, engage in any negotiations concerning, or provide any
confidential information or data to, or have any discussions with, any Person
relating to an Acquisition Proposal, or otherwise facilitate any effort or
attempt to make or implement an Acquisition Proposal; provided, however, that
nothing contained in this Agreement shall prevent Protection One or its Board of
Directors from (A) complying with Rule 14e-2 promulgated under the Exchange Act
with regard to an Acquisition Proposal; (B) providing information in
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response to a request therefor by a Person who has made an unsolicited
Acquisition Proposal if the Board of Directors receives from the Person so
requesting such information an executed confidentiality agreement on terms
substantially similar to those contained in the Confidentiality Agreement (as
defined in Section 3.7); it being understood that such confidentiality agreement
need not prohibit the making, or amendment, of an Acquisition Proposal; (C)
engaging in any negotiations or discussions with any Person who has made an
unsolicited bona fide written Acquisition Proposal; or (D) recommending such an
Acquisition Proposal to the stockholders of Protection One if and only to the
extent that, in each such case referred to in clause (B),(C) or (D) above, the
Board of Directors of Protection One determines in good faith after consultation
with outside legal counsel that such action is necessary in order for its
directors to comply with their respective fiduciary duties under applicable law.
Protection One agrees that it will immediately cease and cause to be terminated
any existing activities, discussions or negotiations with any parties conducted
heretofore with respect to any of the foregoing. Protection One agrees that it
will take the necessary steps to promptly in form the individuals or entities
referred to in the first sentence hereof of the obligations undertaken in this
Section 3.2 and in the Confidentiality Agreement. Protection One agrees that it
will notify Western immediately if any such inquiries, proposals or offers are
received by, any such information is requested from, or any such discussions or
negotiations are sought to be initiated or continued with, any of its
representatives indicating, in connection with such notice, the name of such
Person. Protection One further agrees that it will notify Western of the
material terms and conditions of any Acquisition Proposal at least 72 hours
prior to the execution by Protection One of any letter of intent or agreement
with respect to such Acquisition Proposal. Protection One also agrees that it
will promptly request each Person that has heretofore executed a confidentiality
agreement in connection with its consideration of acquiring it or any of its
Subsidiaries to return all confidential information heretofore furnished to such
Person by or on behalf of it or any of its Subsidiaries.
3.3. Information Supplied. Western and Protection One each agrees, as to
itself and its Subsidiaries, that none of the information supplied or to be
supplied by it or its Subsidiaries for inclusion or incorporation by reference
in the proxy statement (such proxy statement, as amended or supplemented, the
"Proxy Statement") to be filed by Protection One with the SEC in connection with
the meeting of Protection One's stockholders to consider proposals concerning
the Share Issuance, the Charter Amendment and the New Option Plan will, at the
date of mailing to stockholders and at the time of the meeting of stockholders
of Protection One to be held in connection with the Share Issuance, the Charter
Amendment and the New Option Plan contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the circumstances
under which they were made, not misleading. As soon as practicable after the
date hereof, Western shall deliver or cause to be delivered to Protection One
audited financial statements for the calendar years ended December 31, 1994,
1995 and 1996 with respect to those Transferred Subsidiaries for which audited
financial statements are required by Section 3-05 of Regulation S-X promulgated
by the SEC for inclusion in the Proxy Statement (the "Proxy Statement
Financials"). The Proxy Statement Financials shall, and Western hereby
represents and warrants to Protection One that such financial statements will,
as of the date the Proxy Statement is mailed to Protection One Stockholders and
as of the Closing Date, (i) comply in all material respects with the
requirements of Section 3-05 of Regulation S-X promulgated by the SEC, (ii)
present fairly the financial condition and results of operations of those
Transferred Subsidiaries covered by the Proxy Statement Financials as of the
dates thereof or for the periods covered thereby and have been prepared in
accordance with GAAP except as noted therein or in Section 3.3 of the Western
Disclosure Letter, and (iii) include all adjustments (consisting only of normal
recurring accruals) that are necessary for a fair presentation of the financial
condition and results of operations of those Transferred Subsidiaries covered by
the Proxy Statement Financials as of the dates thereof or for the periods
covered thereby, and (iv) the interim financial statements for the six-month
period ended June 25, 1997 will not vary in any material respect from, and treat
capitalization of costs associated with account growth consistent with, the
financial statements for such period with respect to the Transferred
Subsidiaries set forth in Section 2.1(e) of the Western Disclosure Letter except
with respect to those variances and adjustments noted in Section 3.3 of the
Western Disclosure Letter.
3.4. Stockholders Meeting. Protection One will take, in accordance with its
certificate of incorporation and by-laws, all action necessary to convene a
meeting of holders of Common Stock as promptly as practicable to consider and
vote upon the approval of the Charter Amendment, the Share Issuance and the New
Option
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Plan (as defined in Section 3.19 hereof). Subject to fiduciary obligations under
applicable law, Protection One's board of directors shall recommend such
approval and shall take all reasonable action to solicit such approval.
3.5. Filings; Other Actions; Notification. (a) Protection One shall as
promptly as practicable prepare and file with the SEC the Proxy Statement and as
promptly as practicable after receipt of comments from the SEC staff with
respect thereto mail the Proxy Statement to the stockholders of Protection One.
(b) Western and Protection One shall cooperate with each other and use
(and shall cause their respective Subsidiaries to use) their respective
reasonable efforts to take or cause to be taken all actions, and do or cause to
be done all things, necessary, proper or advisable on its part under this
Agreement and applicable Laws to consummate and make effective the Share
Issuance and the other transactions contemplated by this Agreement, the Stock
Option Agreement and the Option and Voting Agreement as soon as practicable,
including preparing and filing as promptly as practicable all documentation to
effect all necessary notices, reports and other filings and to obtain as
promptly as practicable all consents, registrations, approvals, permits and
authorizations necessary or advisable to be obtained from any third party and/or
any Governmental Entity in order to consummate the Share Issuance or any of the
other transactions contemplated by this Agreement, the Stock Option Agreement
and the Option and Voting Agreement. Subject to applicable laws relating to the
exchange of information, Protection One, on the one hand and Western, on the
other hand, shall have the right to review in advance, and to the extent
practicable each will consult the other on, all the information relating to
Protection One or Western, as the case may be, and any of their respective
Subsidiaries, that appear in any filing made with, or written materials
submitted to, any third party and/or any Governmental Entity in connection with
the Share Issuance and the other transactions contemplated by this Agreement,
the Stock Option Agreement and the Option and Voting Agreement. In exercising
the foregoing right, each of Western and Protection One shall act reasonably and
as promptly as practicable.
(c) Western and Protection One each shall, upon request by the other,
furnish the other with all information concerning itself, its Subsidiaries,
directors, officers and stockholders and such other matters as may be reasonably
necessary or advisable in connection with the Proxy Statement or any other
statement, filing, notice or application made by or on behalf of Protection One,
Western or any of their respective Subsidiaries to any third party and/or any
Governmental Entity in connection with the Share Issuance and the other
transactions contemplated by this Agreement, the Stock Option Agreement and the
Option and Voting Agreement.
(d) Western and Protection One each shall keep the other apprized of the
status of matters relating to completion of the transactions contemplated
hereby, including promptly furnishing the other with copies of notices or other
communications received by Protection One or Western, as the case may be, or any
of their respective Subsidiaries, from any third party and/or any Governmental
Entity with respect to the Share Issuance and the other transactions
contemplated by this Agreement, the Stock Option Agreement and the Option and
Voting Agreement. Western and Protection One each shall give prompt notice to
the other of any change that is reasonably likely to result in a Transferred
Subsidiaries Material Adverse Effect or Protection One Material Adverse Effect,
respectively.
(e) Without limiting the generality of the undertakings pursuant to this
Section 3.5, Western and Protection One agree to take or cause to be taken the
following actions: (i) provide promptly to any and all federal, state, local or
foreign court or Government Entity with jurisdiction over enforcement of any
applicable antitrust laws ("Government Antitrust Entity") information and
documents requested by any Government Antitrust Entity or necessary, proper or
advisable to permit consummation of the Share Issuance and the other
transactions contemplated by this Agreement, the Stock Option Agreement and the
Option and Voting Agreement; and (ii) take promptly, in the event that any
permanent or preliminary injunction or other order is entered or becomes
reasonably foreseeable to be entered in any proceeding that would make
consummation of the Share Issuance in accordance with the terms of this
Agreement unlawful or that would prevent or delay consummation of the Share
Issuance or the other transactions contemplated by this Agreement, the Stock
Option Agreement and the Option and Voting Agreement, any and all steps
(including the appeal thereof, the posting of a bond or the taking of the steps
contemplated by clause (ii) of this paragraph) necessary to vacate,
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modify or suspend such injunction or order so as to permit such consummation on
a schedule as close as possible to that contemplated by this Agreement, the
Stock Option Agreement and the Option and Voting Agreement.
(f) Without limiting the generality of the foregoing, Western and
Protection One agree to use their respective reasonable best efforts from and
after the date of this Agreement until the Closing to cooperate with respect to
developing plans and timetables for, and completing such preparatory work as is
commercially reasonable in connection with, the integration and coordination of
the operations, systems, information technology and personnel of Protection One
and its Subsidiaries and the Transferred Subsidiaries, respectively, in order
that such integration and coordination can be effected as soon after the Closing
as reasonably practicable.
3.6. Taxation. Neither Protection One nor Western shall take or cause to be
taken any action, whether before or after the Closing, that would disqualify the
contribution of the Subsidiary Shares and the Investment Shares as a
contribution to a controlled corporation within the meaning of Section 351 of
the Code. At or prior to the Closing Protection One shall become a party to the
Western tax sharing arrangements previously in effect (as described in Section
3.16 of the Western Disclosure Letter).
3.7. Access. Upon reasonable notice, and except as may otherwise be
required by applicable law, each party hereto shall (and shall cause its
Subsidiaries to) afford the other's officers, employees, counsel, accountants
and other authorized representatives ("Representatives") access, during normal
business hours throughout the period prior to the Closing, to the properties,
books, contracts and records of the Transferred Subsidiaries and Protection One
and its Subsidiaries, respectively, and, during such period, each shall (and
shall cause its Subsidiaries to) furnish promptly to the other all information
concerning the business, properties and personnel of the Transferred
Subsidiaries and Protection One and its Subsidiaries, respectively, as may
reasonably be requested, provided that no investigation pursuant to this Section
shall affect or be deemed to modify any representation or warranty made by
Western or Protection One, and provided, further, that the foregoing shall not
require Western or Protection One to permit any inspection, or to disclose any
information, that in the reasonable judgment of Western or Protection One, as
the case may be, would result in the disclosure of any trade secrets of third
parties or violate any of its obligations with respect to confidentiality if
Western or Protection One, as the case may be, shall have used reasonable best
efforts to obtain the consent of such third party to such inspection or
disclosure. All requests for information made pursuant to this Section shall be
directed to an executive officer of Western or Protection One, as the case may
be, or such Person as may be designated by either of its officers, as the case
may be. Each party hereto agrees that any non-public information furnished to it
or any of its Representatives by or on behalf of the other party hereto, whether
before or after the date of this Agreement, together with any reports, analyses,
compilations, memoranda, notes and any other writings prepared by such party or
its Representatives which contain, reflect or are based upon such information
(collectively, the "Confidential Information"), will be treated confidentially
and will not be used by such party in any way detrimental to the other party;
provided, however, that each party may disclose Confidential Information
regarding the other party to the extent such disclosure is legally required.
Upon execution of this Agreement, the Confidentiality Agreement between Western
and Protection One entered into in connection with the transactions contemplated
by this Agreement (the "Confidentiality Agreement") shall be deemed terminated
and shall have no further force or effect.
3.8. Nasdaq Listing. Protection One shall use its best efforts to cause the
shares of Common Stock to be issued in the Share Issuance to be accepted for
quotation on the Nasdaq, subject to official notice of issuance, prior to the
Closing.
3.9. Publicity. The initial press release with respect to the transactions
contemplated by this Agreement and the Stock Option Agreement shall be a joint
press release and thereafter Western and Protection One each shall consult with
each other prior to issuing any press releases or otherwise making public
announcements with respect to the Share Issuance and the other transactions
contemplated by this Agreement, the Stock Option Agreement and the Option and
Voting Agreement and prior to making any filings with any third party and/or any
Governmental Entity (including any national securities exchange) with respect
thereto, except as may be required by law or by obligations pursuant to any
listing agreement with or rules of any
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national securities exchange or interdealer quotation system; provided, however,
that neither Western nor Protection One shall be required to consult with the
other prior to filing a current report on Form 8-K with the SEC attaching a copy
of the initial press release and a copy of this Agreement (excluding therefrom
the Western Disclosure Letter and the Protection One Disclosure Letter).
3.10. Election to Protection One's Board of Directors. At the Closing of
the Share Issuance, Protection One shall promptly increase the size of its Board
of Directors from four to twelve directors in order to permit Western to appoint
eight persons. Any vacancies that Western is entitled to fill pursuant to this
Section 3.10 may be filled from time to time by such persons as Western may from
time to time select. Until the second anniversary of the Closing, Western shall
vote all shares of Common Stock beneficially owned by Western to elect, and
Protection One shall use its best efforts to cause to be elected, the four
current directors of Protection One and eight individuals selected by Western
(some or all of whom, at Western's sole discretion, may be independent persons).
From and after the second anniversary of the Closing, and for so long as Western
shall own, directly or indirectly, more than 50 percent of the issued and
outstanding Common Stock of Protection One, Western shall vote all shares of
Common Stock beneficially owned by Western to elect, and Protection One shall
use its best efforts to cause to be elected, (i) one individual selected from
the executive officers of Protection One, (ii) at least three individuals who
are independent persons ("Independent Directors") and (iii) eight individuals
selected by Western (some or all of whom, at Western's sole discretion, may be
"independent persons"). For purposes of this Agreement, "independent persons"
shall mean a person who (i) is in fact independent, (ii) does not have any
direct financial interest or any material indirect financial interest in
Western, Protection One or any entity or person that beneficially owns greater
than two percent of the outstanding Protection One Common Stock or any of their
respective affiliates, and (iii) is not connected with Western, Protection One
or any entity or person that beneficially owns greater than two percent of the
outstanding Protection One Common Stock or any of their respective affiliates as
an officer, employee, consultant, agent, representative, trustee, partner,
director (other than of Protection One) or person performing similar functions.
The Chairman of the board of directors of Protection One at all times shall be a
person selected by Western.
3.11. Expenses. Except as otherwise provided in Section 5.5(b), each party
hereto shall pay all costs and expenses incurred by it in connection with this
Agreement and the Share Issuance and the other transactions contemplated hereby.
3.12. Takeover Statute. If any "fair price," "moratorium," "control share
acquisition" or other similar anti-takeover statute or regulation is or may
become applicable to the Share Issuance or the other transactions contemplated
by this Agreement, the Stock Option Agreement or the Option and Voting
Agreement, each of Protection One and Western and its board of directors shall
grant such approvals and take such actions as are necessary so that the Share
Issuance and the other transactions contemplated by this Agreement, the Stock
Option Agreement and the Option and Voting Agreement may be consummated as
promptly as practicable on the terms contemplated hereby and thereby and
otherwise act to eliminate or minimize the effects of such statute or regulation
on such transactions.
3.13. Indemnification; Directors' and Officers' Insurance. (a) The
provisions with respect to indemnifi-cation set forth in the certificate of
incorporation and by-laws of Protection One shall not be amended, repealed or
otherwise modified for a period of six years from the Closing in any manner that
would affect adversely the rights thereunder of individuals who at the Closing
were directors or officers of Protection One, unless such modification shall be
required by law. From and after the Closing, Protection One will indemnify and
hold harmless each present and former director and officer of Protection One
(when acting in such capacity), determined as of the Closing, against any costs
or expenses (including reasonable attorneys' fees), judgments, fines, losses,
claims, damages, liabilities or settlement amounts (collectively, "Costs")
incurred or paid in connection with any claim, action, suit, proceeding or
investigation, whether civil, criminal, administrative or investigative, arising
out of or pertaining to matters existing or occurring at or prior to the
Closing, whether asserted or claimed prior to, at or after the Closing, to the
fullest extent that Protection One is permitted under Delaware law (and
Protection One shall also advance expenses as incurred to the fullest extent
permitted under applicable law provided the Person to whom expenses are advanced
provides an undertaking to repay such advances if it is ultimately determined
that such Person is not entitled to
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indemnification); and provided, further, that any determination required to be
made with respect to whether an officer's or director's conduct complies with
the standards set forth under Delaware law shall be made by independent counsel
selected by Protection One.
(b) Any Indemnified Party wishing to claim indemnification under
paragraph (a) of this Section 3.13, upon learning of any such claim, action,
suit, proceeding or investigation, shall promptly notify Protection One thereof,
but the failure to so notify shall not relieve Protection One of any liability
it may have to such Indemnified Party if such failure does not materially
prejudice Protection One. In the event of any such claim, action, suit,
proceeding or investigation (whether arising before or after the Closing), (i)
Protection One shall have the right to assume the defense thereof and Protection
One shall not be liable to such Indemnified Parties for any legal expenses of
other counsel or any other expenses subsequently incurred by such Indemnified
Parties in connection with the defense thereof, except that if Protection One
elects not to assume such defense, the Indemnified Parties may retain counsel
satisfactory to them, and Protection One shall pay all reasonable fees and
expenses of such counsel for the Indemnified Parties promptly as statements
therefor are received; provided, however, that Protection One shall be obligated
pursuant to this paragraph (b) to pay for only one firm of counsel for all
Indemnified Parties in any jurisdiction, (ii) the Indemnified Parties will
cooperate in the defense of any such matter and (iii) Protection One shall not
be liable for any settlement effected without its prior written consent; and
provided, further, that Protection One shall not have any obligation hereunder
to any Indemnified Party if and when a court of competent jurisdiction shall
ultimately determine, and such determination shall have become final, that the
indemnification of such Indemnified Party in the manner contemplated hereby is
prohibited by applicable law.
(c) Protection One shall maintain its existing officers' and directors'
liability insurance ("D&O Insurance") for a period of six years after the
Closing so long as the annual premium therefor is not in excess of 150 percent
of the last annual premium paid prior to the date hereof (the "Current
Premium"); provided, however, that if the existing D&O Insurance expires, is
terminated or cancelled during such six (6)-year period, Protection One will use
its reasonable efforts to obtain as much D&O Insurance as can be obtained for
the remainder of such period for a premium not in excess (on an annualized
basis) of 150 percent of the Current Premium.
(d) If Protection One or any of its successors or assigns (i) shall
consolidate with or merge into any other corporation or entity and shall not be
the continuing or surviving corporation or entity of such consolidation or
merger or (ii) shall transfer all or substantially all of its properties and
assets to any individual, corporation or other entity, then, and in each such
case, proper provisions shall be made so that the successors and assigns of
Protection One shall assume all of the obligations set forth in this Section.
(e) The provisions of this Section are intended to be for the benefit
of, and shall be enforceable by, each of the Indemnified Parties, their heirs
and their representatives.
3.14. Headquarters. Until the third anniversary of the Closing, the
corporate headquarters of Protection One shall be located in Los Angeles,
California and the finance headquarters of Protection One shall be located in
Dallas, Texas.
3.15. Post-Closing Actions; Security Systems Business. From and after the
Closing, for so long as Western shall own, directly or indirectly, more than 50
percent of the outstanding Common Stock of Protection One, Western shall cause
Protection One to perform each and every one of its obligations hereunder. From
and after the Closing, for so long as Western shall own, directly or indirectly,
more than 50 percent of the outstanding Common Stock of Protection One, neither
Western nor any of its Subsidiaries (other than Protection One and its
Subsidiaries) shall engage in, or invest in, acquire any equity securities of,
or enter into any material business relationship with, any person engaged in the
business of selling and servicing residential (other than multi-family
residential) or commercial monitoring and response security systems, access
control systems, closed-circuit television and video monitoring systems, vehicle
location and monitoring systems or security guard services (the "Business");
provided, however, that Western and its Subsidiaries may (i) engage in the
business of selling and servicing multi-family residential monitoring and
response security systems (the "Multi-Family Monitoring Business"), (ii) invest
in, acquire any equity securities of, or enter into any material business
relationship with, any person engaged in the Business provided
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such person derives at least 75 percent of its revenues from Multi-Family
Monitoring and/or any other business other than the Business and (iii) engage in
the Business to the extent such business is acquired pursuant to the foregoing
clause (ii). Notwithstanding the foregoing, neither Western nor any of its
Subsidiaries shall be permitted to invest in, acquire any equity securities of,
or enter into any material business relationship with any person engaged in the
Business if, following such investment, acquisition or entrance into, Western
and its Subsidiaries would derive aggregate annual revenues from the Business in
an amount equal to 7.5% or greater of the aggregate annual revenues at such time
of Protection One and its Subsidiaries.
3.16. Indemnification. (a) Western shall indemnify Protection One and its
affiliates, and their respective officers, directors, employees, agents,
successors and assigns with respect to, and hold each of them harmless from and
against, any and all liabilities, losses, damages, claims, costs and expenses,
interest, awards, judgments and penalties (including, without limitation,
attorneys' and consultants' fees and expenses) suffered, incurred or sustained
by any of them or to which any of them becomes subject (including, without
limitation, any Action brought or otherwise initiated by any of them)
(collectively, "Losses"), resulting from, arising out of or relating to (i) (A)
United States federal, state and local and foreign income Taxes of the
Transferred Subsidiaries attributable to taxable periods (or portions thereof)
ending on or before the Closing Date, and (B) all United States federal, state
and local Taxes of Western and any entity, other than the Transferred
Subsidiaries, which is or has been affiliated with Western as a result of
Treasury Regulation Section 1. 1502-6(a) or similar state or local Tax
provisions, (ii) any increase in the purchase price payable under the
Westinghouse Acquisition Agreement and (iii) the matter of Westec Security, Inc.
v. Westsec, Inc., et al. Western and Protection One further hereby acknowledge
and agree that any increase, reduction or other adjustment in the purchase price
payable under the Westinghouse Acquisition Agreement shall be solely for the
account of Western and that Western shall be entitled in all respects, without
notice to or consultation with Protection One, to control and manage any
proceedings, negotiations or settlements undertaken in connection with such
purchase price adjustment. Western and Protection One further hereby acknowledge
and agree that (i) Protection One shall pay and/or shall indemnify Western for
the first $1,000,000 of Losses suffered by Western, the Transferred Subsidiaries
or Protection One resulting from, arising out of or relating to the matter of
Innovative Business Systems (Overseas) Ltd., and Innovative Business Software
Inc. v. Westinghouse Electric Corporation, Westinghouse Security Systems Inc.,
WestSec Inc., Western Resources Inc. and Renee T. Kingsley, and any related
claims or actions (the "IBS Litigation") and (ii) Western shall pay and/or
indemnify Protection One and the Transferred Subsidiaries for all Losses in
excess of $1,000,000 suffered by Western, the Transferred Subsidiaries or
Protection One resulting from, arising out of or relating to the IBS Litigation.
Without limiting the generality of the foregoing, Western shall be entitled in
its sole discretion, without notice to or consultation with Protection One, to
control and manage any proceedings, negotiations or settlements undertaken in
connection with the IBS Litigation.
(b) In consideration of the indemnification for federal income Taxes set
forth in Section 3.16(a), the parties acknowledge that the Transferred
Subsidiaries shall pay to Western an amount in respect to the Transferred
Subsidiaries' federal income Tax liability for the period from January 1, 1997
to the Closing Date computed on a stand-alone basis, which amounts shall be
calculated and paid as soon as practicable for such period (to the extent not
paid under previous tax-sharing arrangements), and adjusting payments made as
necessary. The tax-sharing arrangements previously in effect between the
Transferred Subsidiaries and Western (as described in Schedule 3.16(b) hereof)
shall continue in full force and effect after the Closing Date.
(c) The obligation of Western to indemnify and hold harmless Protection
One pursuant to this Section 3.16 with respect to Tax liabilities shall
terminate upon the expiration of the applicable statutes of limitations with
respect to the Tax liabilities in question (giving effect to any waiver,
mitigation or extension thereof).
3.17. Dividend. Prior to the Closing, Protection One shall declare, and as
soon as practicable following the Closing, Protection One shall (i) distribute
$7.00 per share with respect to each share of Common Stock held by a Holder of
Record and (ii) distribute (as a cash bonus, in the case of Holders of Record of
Options or Warrants who are directors, officers or employees of Protection One
or any of its Subsidiaries, or as an anti-dilution cash payment, in the case of
Holders of Record of Warrants who are entitled, pursuant to the terms
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governing such Warrants, to elect such a cash payment) $7.00 with respect to
each share of Common Stock issuable upon exercise of Options or Warrants held by
each Holder of Record or, in accordance with the agreements and other documents
governing such Options and Warrants, reduce the exercise price of, and/or
increase the number of shares of Common Stock issuable upon exercise of, such
Options and Warrants; provided that, in the event that the Closing shall occur
before December 31, 1997, Protection One shall pay the dividend referred to in
clause (i) above after the Closing Date and on or before December 31, 1997; and
provided further that, in the event that the Closing shall occur on or after
December 31, 1997, Protection One shall pay the dividend referred to in clause
(i) above on the Closing Date. "Holder of Record" shall mean each holder of
record of a share of Common Stock or an Option or Warrant, other than Western or
any of its Subsidiaries, as of the date of, and immediately prior to, the
Closing (the "Record Date").
3.18. Standstill. (a) For the purposes of this Section 3.18, each of the
following terms shall have the following meaning:
(i) "Western Group" shall mean Western, its Subsidiaries and
Affiliates, and any person acting on behalf of Western or any of such
Subsidiaries or Affiliates.
(ii) "Voting Securities" shall mean the shares of Protection One
Common Stock and any other issued and outstanding securities of Protection One
generally entitled to vote for the election of directors of Protection One and
other matters for which the holders of Protection One Common Stock are entitled
to vote.
(b) Except as set forth in clauses (c) and (d) below, during the period
beginning on the date hereof and ending on the tenth anniversary of the Closing
Date (unless earlier terminated pursuant to the provisions of this Agreement,
the "Standstill Period"), Western shall not, and shall cause the other members
of the Western Group not to, directly or indirectly, (i) in any manner acquire,
agree to acquire, make any proposal to acquire or announce or disclose any
intention to make a proposal to acquire, directly or indirectly, any Voting
Securities, except (A) pursuant to the Share Issuance in accordance with the
terms and conditions of this Agreement; and (B) pursuant to and in accordance
with the terms and conditions of the Stock Option Agreement and the Option and
Voting Agreement; or (ii) propose to enter into, or announce or disclose any
intention to propose to enter into, directly or indirectly, any merger or
business combination involving Protection One or to purchase, directly or
indirectly, all or substantially all of the assets of Protection One.
(c) Notwithstanding the provisions of clause (b) above, following the
Closing Date until the six-month anniversary of the Closing Date, Western may in
any manner acquire Voting Securities representing in the aggregate up to but not
exceeding 85% of the Voting Securities issued and outstanding at such time.
Following the six-month anniversary of the Closing Date Western (i) at any such
time as Protection One Convertible Notes representing in the aggregate more than
$51,750,000 in aggregate principal amount thereof remain outstanding, may in any
manner acquire Voting Securities representing in the aggregate up to but not
exceeding 88.5% of the Voting Securities issued and outstanding at such time and
(ii) at any such time as Protection One Convertible Notes representing in the
aggregate less than $51,750,000 in aggregate principal amount thereof remain
outstanding, may in any manner acquire Voting Securities representing in the
aggregate up to but not exceeding 85% of the Voting Securities issued and
outstanding at such time.
(d) Notwithstanding the provisions of clause (b) above, following the
Closing Date, Western may make a tender offer or exchange offer for all
outstanding shares of Protection One Common Stock or Voting Securities or take
any of the actions described in clause (b)(ii) above; provided that any such
action satisfies the following additional requirements (i) if a tender offer,
the offer must be a "tender offer" for purposes of, and must be made in
compliance with, Rules 14d-1 and 13e-3 under the Exchange Act (or any successor
provisions thereto), and (ii) any such action must be at a price and on terms
that are fair to the stockholders of Protection One (as determined by a majority
of the Independent Directors after the receipt of a fairness opinion with
respect to any such proposed transaction from a nationally recognized investment
banking firm selected by a majority of the Independent Directors and reasonably
acceptable to Western, and must be approved by a majority of the Independent
Directors.
3.19. New Option Plan. Subject to the required Stockholder approval, upon
or promptly following the Closing Date, Protection One shall, or Western shall
cause Protection One to, establish a stock option plan
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(the "New Option Plan") for the benefit of officers and key employees of
Protection One and its Subsidiaries (including the Transferred Subsidiaries).
The New Option Plan shall contain such terms and conditions as are determined by
the board of directors of Protection One and approved by the board of directors
of Western; provided, however, that (i) the New Option Plan shall provide for
the issuance of a total of up to 4,200,000 shares of Common Stock in respect of
stock options granted thereunder and (ii) on the Closing Date, options shall be
granted to officers and key employees of Protection One and its Subsidiaries
(including the Transferred Subsidiaries) under the New Option Plan with respect
to 1,600,000 shares of such Common Stock.
3.20. Closing Schedule. Not later than two business days preceding the
Closing Date, Protection One shall deliver to Western a Schedule setting forth
(i) the cash payments to be paid with respect to, the reduction in the exercise
price of, and/or the increase in the number of shares of Common Stock issuable
upon exercise of, each Option, Warrant and Protection One Convertible Note as a
result of the payment to the Holders of Record of Common Stock of the dividend
contemplated by Section 3.17 hereof and (ii) the number of Acquired Shares,
after giving effect to the payments, reductions and increases referred to in
clause (i). In the event that following the Closing, Western shall notify
Protection One, (which notice shall specify in reasonable detail the facts and
circumstances upon which it is based) that any calculation on the Schedule was
incorrect, and that as a result thereof either (i) Western was not issued as of
the Closing the correct number of Acquired Shares or (ii) Protection One has
been required to make distributions or adjustments not contemplated by the
Schedule, then, as promptly as practicable after Western and the Independent
Directors have agreed thereto, such agreement not be unreasonably withheld,
Protection One shall issue additional shares of Common Stock to Western at no
cost to Western to rectify such incorrect calculation. With respect to
distributions or adjustments to exercise prices not contemplated by the Schedule
that Protection One is required to make, Western shall be entitled to receive
for each $1,000,000 of such payments or adjustments that number of shares of
Common Stock equal to .1% of the number of Acquired Shares.
ARTICLE IV
CONDITIONS
4.1. Conditions to Each Party's Obligation to Effect the Share
Issuance. The respective obligation of each party to effect the Share Issuance
is subject to the satisfaction or waiver at or prior to the Closing of each of
the following conditions:
(a) Stockholder Approval. The Charter Amendment, the Share Issuance and
the New Option Plan shall have been duly approved by the holders of Common Stock
constituting the Protection One Requisite Vote.
(b) Nasdaq Quotation. The shares of Common Stock issuable to Western
pursuant to the Share Issuance shall have been authorized for quotation on the
Nasdaq.
(c) Regulatory Consents. The waiting period applicable to the
consummation of the Share Issuance and the other transactions contemplated by
this Agreement under the HSR Act shall have expired or been terminated and all
notices, reports and other filings required to be made prior to the Closing by
Western or Protection One or any of their respective Subsidiaries with, and all
consents, registrations, approvals, permits and authorizations required to be
obtained prior to the Closing by Western or Protection One or any of their
respective Subsidiaries from, any Governmental Entity (collectively,
"Governmental Consents") in connection with the execution and delivery of this
Agreement and the consummation of the Share Issuance and the other transactions
contemplated hereby by Western and Protection One shall have been made or
obtained (as the case may be), except those that the failure to make or to
obtain are not, individually or in the aggregate, reasonably likely to have a
Transferred Subsidiary Material Adverse Effect or a Protection One Material
Adverse Effect or to provide a reasonable basis to conclude that the parties
hereto or any of their affiliates or respective directors, officers, agents,
advisors or other representatives would be subject to the risk of criminal
liability.
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(d) Litigation. No court or Governmental Entity of competent
jurisdiction shall have enacted, issued, promulgated, enforced or entered any
law, statute, ordinance, rule, regulation, judgment, decree, injunction or other
order (whether temporary, preliminary or permanent) that is in effect and
restrains, enjoins or otherwise prohibits consummation of the Share Issuance
(collectively, an "Order").
4.2. Conditions to Obligations of Protection One. The obligations of
Protection One to effect the Share Issuance are also subject to the satisfaction
or waiver by Protection One at or prior to the Closing of the following
conditions:
(a) Representations and Warranties. The representations and warranties
of Western set forth in this Agreement shall be true and correct as of the date
of this Agreement and as of the Closing as though made on and as of the Closing
(except to the extent any such representation or warranty expressly speaks as of
an earlier date), and Protection One shall have received certificates signed on
behalf of Western by an executive officer of Western to such effect; provided,
however, that notwithstanding anything herein to the contrary, this Section
4.2(a) shall be deemed to have been satisfied even if such representations or
warranties are not so true and correct unless the failure of such
representations or warranties to be so true and correct, individually or in the
aggregate, has had, or is reasonably likely to have, Transferred Subsidiary
Material Adverse Effect or is reasonably likely to prevent or to materially
burden or materially impair the ability of Western to consummate the Share
Issuance and the other transactions contemplated by this Agreement.
(b) Performance of Obligations of Western. Western shall have performed
in all material respects all obligations required to be performed by it under
this Agreement at or prior to the Closing Date, and Protection One shall have
received certificates signed on behalf of Western by an executive officer of
Western to such effect.
(c) Consents Under Agreements. Each of Western and Western Sub shall
have obtained the consent or approval of each Person whose consent or approval
shall be required under any Contract to which Western or any Transferred
Subsidiary is a party, except those for which the failure to obtain such consent
of approval, individually or in the aggregate, is not reasonably likely to have
a Transferred Subsidiary Material Adverse Effect or is not reasonably likely to
prevent or to materially burden or materially impair the ability of Western to
consummate the Share Issuance or the other transactions contemplated by this
Agreement.
(d) Cash Amount. Protection One shall have received the Cash Amount (i)
by wire transfer in immediately available funds to a bank account designated by
Protection One pursuant to written instructions delivered by Protection One to
Western not fewer than two business days prior to the Closing Date and (ii) by
delivery to Protection One of certificates representing the Investment Shares,
duly endorsed in blank or accompanied by stock powers in blank with all
necessary transfer stamps affixed thereto (at the expense of Western), and such
other instruments or documents as are necessary to transfer such securities to
Protection One free and clear of any Liens.
(e) Transferred Subsidiary Shares. Protection One shall have received
stock certificates evidencing the Subsidiary Shares duly endorsed in blank, or
accompanied by stock powers duly executed in blank, in form satisfactory to
Protection One and with all required stock transfer tax stamps affixed.
(f) No Transferred Subsidiary Material Adverse Effect. No event or
events shall have occurred, or shall be reasonably likely to occur, which,
individually or in the aggregate, have had, or could reasonably be expected to
have, a Transferred Subsidiary Material Adverse Effect.
4.3. Conditions to Obligation of Western. The obligation of Western to
effect the Share Issuance is also subject to the satisfaction or waiver by
Western at or prior to the Closing of the following conditions:
(a) Representations and Warranties. The representations and warranties
of Protection One set forth in this Agreement shall be true and correct as of
the date of this Agreement and as of the Closing Date as though made on and as
of the Closing Date (except to the extent any such representation and warranty
expressly speaks as of an earlier date), and Western shall have received a
certificate signed on behalf of Protection One by an executive officer of
Protection One to such effect; provided, however, that notwithstanding anything
herein to the contrary, this Section 4.3(a) shall be deemed to have been
satisfied even if such
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representations or warranties are not so true and correct unless the failure of
such representations or warranties to be so true and correct, individually or in
the aggregate, has had, or is reasonably likely to have, a Protection One
Material Adverse Effect or is reasonably likely to prevent or to materially
burden or materially impair the ability of Protection One to consummate the
transactions contemplated by this Agreement.
(b) Performance of Obligations of Protection One. Protection One shall
have performed in all material respects all obligations required to be performed
by it under this Agreement at or prior to the Closing Date, and Western shall
have received a certificate signed on behalf of Protection One by an executive
officer of Protection One to such effect.
(c) Consents Under Agreements. Protection One shall have obtained the
consent or approval of each Person whose consent or approval shall be required
in order to consummate the transactions contemplated by this Agreement under any
Contract to which Protection One or any of its Subsidiaries is a party, except
those for which failure to obtain such consents and approvals, individually or
in the aggregate, is not reasonably likely to have a Protection One Material
Adverse Effect or is not reasonably likely to prevent or to materially burden or
materially impair the ability of Protection One to consummate the Share Issuance
or the other transactions contemplated by this Agreement.
(d) Tax Opinion. Western shall have received the opinion of Sullivan &
Cromwell, counsel to Western and the Transferred Subsidiaries, dated the Closing
Date, to the effect that the contribution of the Subsidiary Shares and the
Investment Shares will be treated for Federal income tax purposes as a
contribution to a controlled corporation within the meaning of Section 351 of
the Code.
(e) Employment and Non-Compete Agreements. Protection One and/or a
Subsidiary of Protection One shall have entered into an Employment and
Non-Compete Agreement with each of the persons listed on Section 4.3(e) of the
Western Disclosure Letter in the form attached as Exhibit B.
(f) Acquired Shares. Western shall have received stock certificates
evidencing the duly authorized, validly issued, fully paid and nonassessable
Acquired Shares.
(g) No Protection One Material Adverse Effect. No event or events shall
have occurred, or shall be reasonably likely to occur, which, individually or in
the aggregate, have had, or could reasonably be expected to have, a Protection
One Material Adverse Effect.
ARTICLE V
TERMINATION
5.1. Termination by Mutual Consent. This Agreement may be terminated and
the Share Issuance may be abandoned at any time prior to the Closing, whether
before or after the approval by stockholders of Protection One referred to in
Section 4.1(a), by mutual written consent of Western and Protection One by
action of their respective Boards of Directors.
5.2. Termination by Either Protection One or Western. This Agreement may be
terminated and the Share Issuance may be abandoned at any time prior to the
Closing by action of the Board of Directors of either Protection One or Western
if (i) the Share Issuance shall not have been consummated by January 31, 1998,
whether such date is before or after the date of approval by the stockholders of
Protection One, (ii) the approval of Protection One's stockholders as required
by Section 4.1(a) shall not have been obtained at a meeting duly convened
therefor or (iii) any Order permanently restraining, enjoining or otherwise
prohibiting consummation of the Share Issuance shall become final and
non-appealable (whether before or after the approval by the stockholders of
Protection One); provided, that the right to terminate this Agreement pursuant
to clause (i) above shall not be available to any party that has breached in any
material respect its obligations under this Agreement in any manner that shall
have proximately contributed to the occurrence of the failure of the Share
Issuance to be consummated.
5.3. Termination by Western. This Agreement may be terminated and the Share
Issuance may be abandoned at any time prior to the Closing, whether before or
after the approval by stockholders of Protection
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One referred to in Section 4.1(a), by action of the Board of Directors of
Western if (a) the Board of Directors of Protection One shall have withdrawn or
adversely modified its approval or recommendation of this Agreement or (b) there
has been a material breach by Protection One of any representation, warranty,
covenant or agreement contained in this Agreement that is not curable or, if
curable, is not cured within 30 days after written notice of such breach is
given by Western to Protection One; provided, however, that Western shall not be
entitled to terminate this Agreement pursuant to this Section 5.3(a)(ii) if such
breach, individually or in the aggregate with any other such breaches, has not
had, or is not reasonably likely to have, a Protection One Material Adverse
Effect, and is not reasonably likely to prevent or materially burden or impair
the ability of Protection One or Western to consummate the transactions
contemplated by this Agreement and the Stock Option Agreement.
5.4. Termination by Protection One. This Agreement may be terminated and
the Share Issuance may be abandoned at any time prior to the Closing, whether
before or after the approval by the stockholders of Protection One referred to
in Section 4.1(a), by action of the Board of Directors of Protection One:
(a) if there has been a material breach by Western of any
representation, warranty, covenant or agreement contained in this Agreement that
is not curable or, if curable, is not cured within 30 days after written notice
of such breach is given by Protection One to Western; provided, however, that
Protection One shall not be entitled to terminate this Agreement pursuant to
this Section 8.4(a) if such breach, individually or in the aggregate with any
other such breaches, has not had, or is not reasonably likely to have, a
Transferred Subsidiary Material Adverse Effect, and is not reasonably likely to
prevent or materially burden or impair the ability of Western or Protection One
to consummate the transactions contemplated by this Agreement or the Stock
Option Agreement.
(b) if the Board of Directors of Protection One shall have withdrawn or
adversely modified its approval or recommendation of this Agreement.
5.5. Effect of Termination and Abandonment. (a) In the event of termination
of this Agreement and the abandonment of the Share Issuance pursuant to this
Article V, this Agreement (other than as set forth in Section 6.1) shall become
void and of no effect with no liability on the part of any party hereto (or of
any of its directors, officers, employees, agents, legal and financial advisors
or other representatives); provided, however, except as otherwise provided
herein, no such termination shall relieve any party hereto of any liability or
damages resulting solely from any wilful breach of this Agreement.
(b) In the event that this Agreement is terminated (i) by Western
pursuant to Section 5.3(b) or (ii) by Protection One pursuant to Section 5.4(a),
then the non-terminating party shall promptly, but in no event later than two
days after being notified of such by the terminating party, pay all of the
charges and expenses incurred by the terminating party in connection with this
Agreement, the Stock Option Agreement and the Option and Voting Agreement and
the transactions contemplated hereby and thereby up to a maximum amount of
$5,000,000, in each case payable by wire transfer of same day funds.
ARTICLE VI
MISCELLANEOUS AND GENERAL
6.1. Survival. This Article VI and the agreements of Western and Protection
One contained in Sections 3.3 (Information Supplied), 3.6 (Taxation), 3.8 (Stock
Exchange Listing), 3.10 (Election to Protection One's Board of Directors), 3.13
(Indemnification; Directors' and Officers' Insurance), 3.14 (Headquarters), 3.15
(Post-Closing Actions; Security Systems Business), 3.16 (Indemnification), 3.17
(Dividend), 3.18 (Standstill), 3.19 (Certain Employee Benefit Obligations) and
3.20 (Closing Schedule) shall survive the consummation of the Share Issuance.
This Article VI, the agreements of Western and Protection One contained in
Section 3.11 (Expenses) and Section 5.5 (Effect of Termination and Abandonment)
shall survive the termination of this Agreement. All other representations,
warranties, covenants and agreements in this Agreement shall not survive the
consummation of the Share Issuance or the termination of this Agreement.
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6.2. Modification or Amendment. Subject to the provisions of the applicable
law, at any time prior to the Closing, the parties hereto may modify or amend
this Agreement, by written agreement executed and delivered by duly authorized
officers of the respective parties. From and after the Closing, neither this
Agreement nor any other agreement entered into by Protection One in connection
herewith may be amended, supplemented or otherwise modified and Protection One
may not waive any provision hereof, unless such amendment, supplement,
modification, or waiver shall have been approved by the affirmative vote of a
majority of the Continuing Directors. For purposes of the foregoing, "Continuing
Directors" shall mean James M. MacKenzie, Jr., Dr. Ben Enis and James Q. Wilson
and their respective successors as Continuing Directors, each of whom shall be
chosen by the then existing Continuing Directors from among the Independent
Directors who at such time are not Continuing Directors.
6.3. Waiver of Conditions. The conditions to each of the parties'
obligations to consummate the Share Issuance are for the sole benefit of such
party and may be waived by such party in whole or in part to the extent
permitted by applicable law.
6.4. Counterparts. This Agreement may be executed in any number of
counterparts, each such counter part being deemed to be an original instrument,
and all such counterparts shall together constitute the same agreement.
6.5. GOVERNING LAW AND VENUE; WAIVER OF JURY TRIAL. (a) THIS AGREEMENT
SHALL BE DEEMED TO BE MADE IN AND IN ALL RESPECTS SHALL BE INTERPRETED,
CONSTRUED AND GOVERNED BY AND IN ACCORDANCE WITH THE LAW OF THE STATE OF
DELAWARE WITHOUT REGARD TO THE CONFLICT OF LAW PRINCIPLES THEREOF. The parties
hereby irrevocably submit to the jurisdiction of the courts of the State of
Delaware and the Federal courts of the United States of America located in the
State of Delaware solely in respect of the interpretation and enforcement of the
provisions of this Agreement and of the documents referred to in this Agreement,
and in respect of the transactions contemplated hereby, and hereby waive, and
agree not to assert, as a defense in any action, suit or proceeding for the
interpretation or enforcement hereof or of any such document, that it is not
subject thereto or that such action, suit or proceeding may not be brought or is
not maintainable in said courts or that the venue thereof may not be appropriate
or that this Agreement or any such document may not be enforced in or by such
courts, and the parties hereto irrevocably agree that all claims with respect to
such action or proceeding shall be heard and determined in such a Delaware State
or Federal court. The parties hereby consent to and grant any such court
jurisdiction over the person of such parties and over the subject matter of such
dispute and agree that mailing of process or other papers in connection with any
such action or proceeding in the manner provided in Section 6.6 or in such other
manner as may be permitted by law shall be valid and sufficient service thereof.
(b) EACH PARTY ACKNOWLEDGES AND AGREES THAT ANY CONTROVERSY WHICH MAY
ARISE UNDER THIS AGREEMENT IS LIKELY TO INVOLVE COMPLICATED AND DIFFICULT
ISSUES, AND THEREFORE EACH SUCH PARTY HEREBY IRREVOCABLY AND UNCONDITIONALLY
WAIVES ANY RIGHT SUCH PARTY MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY
LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS AGREEMENT,
OR THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT. EACH PARTY CERTIFIES AND
ACKNOWLEDGES THAT (i) NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY
HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE
EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER, (ii) EACH PARTY
UNDERSTANDS AND HAS CONSIDERED THE IMPLICATIONS OF THIS WAIVER, (iii) EACH PARTY
MAKES THIS WAIVER VOLUNTARILY, AND (iv) EACH PARTY HAS BEEN INDUCED TO ENTER
INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND
CERTIFICATIONS IN THIS SECTION 6.5.
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6.6. Notices. Any notice, request, instruction or other document to be
given hereunder by any party to the others shall be in writing and delivered
personally or sent by registered or certified mail, postage prepaid, or by
facsimile:
if to Western
Western Resources, Inc.
Topeka, Kansas 66602
Attention: John Rosenberg
Fax: (913) 575-1788
(with a copy to:
Neil T. Anderson, Esq., and
Francis J. Aquila, Esq.,
Sullivan & Cromwell,
125 Broad Street, New York, NY 10004
fax: (212) 558-3588.)
if to Protection One
Protection One, Inc.
6011 Bristol Parkway
Culver City, California 90230
Attention: James M. Mackenzie, Jr.
Fax: (310) 649-3855
and
Protection One, Inc.
3900 S.W. Murray Boulevard
Portland, Oregon 97005
Attention: John W. Hesse
Fax: (503) 520-6099
(with copies to:
Lessing E. Gold, Esq.
Laura A. Loftin, Esq.
Mitchell, Silberberg & Knupp LLP
11377 West Olympic Boulevard
Los Angeles, California 90064
Fax: (310) 312-3100
and
Christopher D. Dillon, Esq.
David W. Heleniak, Esq.
Shearman & Sterling
555 California Street
San Francisco, California 94104-1512
Fax: (415) 616-1199
or to such other persons or addresses as may be designated in writing by the
party to receive such notice as provided above.
6.7. Entire Agreement; No Other Representations. This Agreement (including
any exhibits hereto), the Western Disclosure Letter, the Protection One
Disclosure Letter, the Stock Option Agreement and the
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Option and Voting Agreement constitute the entire agreement, and supersede all
other prior agreements, understandings, representations and warranties both
written and oral, among the parties, with respect to the subject matter hereof.
EACH PARTY HERETO AGREES THAT, EXCEPT FOR THE REPRESENTATIONS AND WARRANTIES
CONTAINED IN THIS AGREEMENT, NEITHER PROTECTION ONE NOR WESTERN MAKES ANY OTHER
REPRESENTATIONS OR WARRANTIES, AND EACH HEREBY DISCLAIMS ANY OTHER
REPRESENTATIONS OR WARRANTIES MADE BY ITSELF OR ANY OF ITS OFFICERS, DIRECTORS,
EMPLOYEES, AGENTS, FINANCIAL AND LEGAL ADVISORS OR OTHER REPRESENTATIVES, WITH
RESPECT TO THE EXECUTION AND DELIVERY OF THIS AGREEMENT OR THE TRANSACTIONS
CONTEMPLATED HEREBY, NOTWITHSTANDING THE DELIVERY OR DISCLOSURE TO THE OTHER OR
THE OTHER'S REPRESENTATIVES OF ANY DOCUMENTATION OR OTHER INFORMATION WITH
RESPECT TO ANY ONE OR MORE OF THE FOREGOING.
6.8. No Third Party Beneficiaries. Except as provided in Section 3.13
(Indemnification; Directors' and Officers' Insurance), this Agreement is not
intended to confer upon any Person other than the parties hereto any rights or
remedies hereunder.
6.9. Obligations of Protection One and of Western. Whenever this Agreement
requires a Subsidiary of Protection One to take any action, such requirement
shall be deemed to include an undertaking on the part of Protection One to cause
such Subsidiary to take such action. Whenever this Agreement requires a
Subsidiary of Western to take any action, such requirement shall be deemed to
include an undertaking on the part of Western.
6.10. Severability. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability or the other provisions hereof. If any
provision of this Agreement, or the application thereof to any Person or any
circumstance, is invalid or unenforceable, (a) a suitable and equitable
provision shall be substituted therefor in order to carry out, so far as may be
valid and enforceable, the intent and purpose of such invalid or unenforceable
provision and (b) the remainder of this Agreement and the application of such
provision to other Persons or circumstances shall not be affected by such
invalidity or unenforceability, nor shall such invalidity or unenforceability
affect the validity or enforceability of such provision, or the application
thereof, in any other jurisdiction.
6.11. Interpretation. The table of contents and headings herein are for
convenience of reference only, do not constitute part of this Agreement and
shall not be deemed to limit or otherwise affect any of the provisions hereof.
Where a reference in this Agreement is made to a Section or Exhibit, such
reference shall be to a Section of or Exhibit to this Agreement unless otherwise
indicated. Whenever the words "include," "includes" or "including" are used in
this Agreement, they shall be deemed to be followed by the words "without
limitation."
6.12. Assignment. This Agreement shall not be assignable by operation of
law or otherwise; provided, however, that Western may assign all or any portion
of its rights and obligations hereunder to a Subsidiary provided Western remains
liable for any such assigned obligations.
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IN WITNESS WHEREOF, this Agreement has been duly executed and delivered by
the duly authorized officers of the parties hereto as of the date first written
above.
WESTERN RESOURCES, INC.
By: /s/ JOHN E. HAYES, JR.
------------------------------------
Name: John E. Hayes, Jr.
Title: Chairman of the Board and
Chief Executive Officer
PROTECTION ONE, INC.
By: /s/ JAMES M. MACKENZIE, JR.
------------------------------------
Name: James M. Mackenzie, Jr.
Title: President and Chief Executive
Officer
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AMENDMENT NO. 1 TO
CONTRIBUTION AGREEMENT
Amendment No. 1, dated as of October 2, 1997 (hereinafter called this
"Amendment"), to the Contribution Agreement, dated as of July 30, 1997 (the
"Original Amendment" and, as amended by this Amendment, the "Agreement"),
between Western Resources, Inc., a Kansas corporation ("Western"), and
Protection One, Inc., a Delaware corporation ("Protection One").
Capitalized terms used but not defined in this Amendment shall have the
meanings given such terms in the Original Agreement.
WHEREAS, the respective boards of directors of each of Protection One and
Western have each approved, and Protection One and Western have each executed
and delivered, the Original Agreement pursuant to which Western will contribute
the Subsidiary Shares and the Cash Amount to Protection One in exchange for the
Acquired Shares; and
WHEREAS, Western and Protection One have agreed to amend the terms of the
Original Agreement to provide for the possible acquisition by Western of one or
more entities engaged in the business; and
WHEREAS, Western and Protection One have agreed to amend the terms of the
Original Agreement to increase the amount of authorized shares of Common Stock
for which approval will be sought in the Charter Amendment from 100,000,000 to
150,000,000.
NOW, THEREFORE, in consideration of the premises and of the
representations, warranties, covenants and agreements contained herein, the
parties hereto agree as follows.
1. Section 3.15 of the Original Agreement is hereby redesignated as
Section 3.15(a) and a new Section 3.15(b) is hereby inserted as follows:
(b) Notwithstanding anything to the contrary contained in Section
3.15(a) hereof, and subject to the limitations contained in this Section
3.15(b), Western, or any Subsidiary of Western other than a Transferred
Subsidiary, shall be permitted, after the date of this Agreement and
prior to the Closing, to enter into any agreement to acquire (i) all of
the equity securities of Centennial Security Holdings, Inc.
("Centennial"), (ii) all of the equity securities of Network Holdings,
Inc. ("Network") and (iii) all or a portion of the equity securities of
Guardian International, Inc. ("Guardian") not previously purchased by
Western and to consummate any or all of such acquisitions. Prior to
entering into any acquisition agreement with Centennial, Network or
Guardian, as the case may be, Western shall (A) ensure that Protection
One is entitled to enter into a confidentiality agreement with such
party in the same form as the confidentiality agreement entered into
between Western and such party, and that Protection One and its
representatives are afforded a period of no less than five (5) days to
review all of the same financial and other information made available to
or generated by Western or any of its representatives or advisors in
connection with its review of such party; (B) provide Protection One
with a substantially final draft of the acquisition agreement with
respect to such party at least five (5) days prior to execution thereof;
and (C) not enter into such acquisition agreement unless Protection One
consents in writing to Western entering into such agreement. Immediately
or as soon as practicable following the Closing, Western shall transfer,
without recourse to Western or any of its Subsidiaries or affiliates,
all of Western's right, title and interest, if any, in all of the equity
securities of Centennial and Guardian, as the case may be, owned by
Western, as well as all rights and obligations of Western under the
acquisition agreements entered into with respect to Centennial and
Guardian, as the case may be, to Protection One. For a period of one
hundred eighty (180) days following the Closing Date, Protection One
shall have the right, exercisable by the vote of a majority of the
Protection One Board of Directors, to require Western to transfer,
without recourse to Western or any of its Subsidiaries or affiliates,
all of Western's right, title and interest in the equity securities of
Network, as well as all rights and obligations of Western under the
acquisition agreement entered into with respect to Network, to
Protection One. In consideration of the transfer of all of Western's
right, title and interest, if any, in each of Centennial, Network and
Guardian, as the case may be, and the respective acquisition agreements
with respect thereto,
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Protection One shall pay in cash to Western an amount equal to the sum
of (x) the purchase price paid by Western to acquire Centennial, Network
or Guardian, as the case may be (the "Purchase Price"), (y) any fees and
expenses incurred by Western to third parties (including, without
limitation, investment bankers, attorneys and accountants) in connection
with its acquisition of Centennial, Network or Guardian, as the case may
be, and (z) a carrying charge equal to the product of (A) the Purchase
Price, (B) 0.1 and (C) the number of days from and including the date of
the consummation of the acquisition of Centennial, Network or Guardian,
as the case may be, by Western up to but not including the date of
transfer from Western to Protection One of Centennial, divided by 365,
and (ii) Protection One shall pay to Western the higher of (x) the
amount determined by the foregoing formula and (y) the closing sales
price of the securities of Guardian purchased by Western on a national
securities exchange or interdealer quotation system two (2) business
days prior to the consummation of the transfer of such securities to
Protection One. The aggregate amount paid by Protection One to Western
for such of Centennial, Network and Guardian as are transferred to
Protection One in accordance with the terms hereof shall be referred to
herein as the "Aggregate Amount." Notwithstanding anything to the
contrary contained herein, in the event that the Aggregate Amount
exceeds the Base Amount (as defined below), then Protection One shall
pay to Western cash in an aggregate amount equal to the Base Amount and
Protection One will issue to Western (or any Subsidiary thereof
designated by Western) an unsecured note or notes in any aggregate
principal amount equal to the difference between the Aggregate Amount
and the Base Amount. Such note or notes shall bear interest at an annual
rate of ten percent (10%), and the principal amount thereof and all
accrued interest thereon shall be payable in full on the first
anniversary of the date of issuance of each such note or notes.
Protection One's obligations under such note or notes shall be
subordinated to any other outstanding debt obligations of Protection One
to the extent that such subordination is required by the instruments
governing such debt obligations. For purposes of this Section 3.15(b),
"Base Amount" shall mean an amount equal to the Cash Amount minus the
sum of (i) the aggregate principal amount and accrued interest
outstanding under Protection One's Amended and Restated Credit Agreement
as of the Closing Date and (ii) the aggregate amount of the cash
dividends and distributions payable to holders of Common Stock, Options
and Warrants following the Closing Date as contemplated by this
Agreement. None of Centennial, Network or Guardian shall be deemed to be
a Transferred Subsidiary for any purposes under this Agreement. Any
securities of Centennial, Network or Guardian transferred by Western to
Protection One as contemplated by this Section 3.15(b) shall not be
deemed to constitute Investment Shares (as such term is defined in
Section 1.1 hereof) for any purposes under this Agreement.
2. The Original Agreement is hereby amended by deleting the number
"100,000,000" in the nineteenth line of the sixth paragraph of the recitals
and replacing it with the number "150,000,000."
3. This Amendment may be executed in one or more counterparts, each
such counterpart being deemed to be an original instrument, and all such
counterparts shall together constitute the same agreement.
4. This Amendment shall be deemed to be made in, and in all respects
shall be governed by and in accordance with, the laws of the State of
Delaware without regard to the conflict of law principles thereof.
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IN WITNESS WHEREOF, this Amendment has been duly executed and delivered by
the duly authorized officers of the parties hereto as of the date first written
above.
Western Resources, Inc.
By: /s/ DAVID C. WITTIG
------------------------------------
David C. Wittig
President
Protection One, Inc.
By: /s/ JAMES M. MACKENZIE, JR.
------------------------------------
James M. Mackenzie, Jr.
President
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APPENDIX B
STOCK OPTION AGREEMENT
BETWEEN
WESTERN RESOURCES, INC.
AND
PROTECTION ONE, INC.
DATED AS OF JULY 30, 1997
<PAGE> 270
STOCK OPTION AGREEMENT, dated as of July 30, 1997 (the "Stock Option
Agreement"), between Western Resources, Inc., a Kansas corporation (the
"Purchaser"), and Protection One, Inc., a Delaware corporation (the "Company").
WHEREAS, the Purchaser and the Company are entering into a Contribution
Agreement, dated as of the date hereof (the "Contribution Agreement"), which
provides, among other things, that the Purchaser, on the terms and subject to
the conditions thereof, will acquire approximately 80.1% of the shares of Common
Stock, par value $0.01 per share, of the Company (the "Common Stock") on a
fully-diluted basis;
WHEREAS, as a condition to its willingness to enter into the Contribution
Agreement, the Purchaser has requested that the Company grant to the Purchaser
an option to purchase 2,750,238 shares of Common Stock, upon the terms and
subject to the conditions hereof; and
WHEREAS, in order to induce the Purchaser to enter into the Contribution
Agreement, the Company is willing to grant the Purchaser the requested option.
NOW, THEREFORE, in consideration of the premises and the mutual covenants
and agreements set forth herein, the parties hereto agree as follows:
1. The Option; Exercise; Adjustments. (a) Contemporaneously herewith the
Purchaser and the Company are entering into the Contribution Agreement. Subject
to the other terms and conditions set forth herein, the Company hereby grants to
the Purchaser an irrevocable option (the "Option") to purchase 2,750,238 shares
of Common Stock (the "Shares"). The purchase price per Share (the "Purchase
Price") shall be $13.50 per Share for each Share purchased prior to the Closing
(as defined in the Contribution Agreement) and $15.50 per Share for each Share
purchased after the Closing (as provided in Section 19 hereof).
(b) Subject to the provisions of Section 1(c), the Option may be
exercised by Purchaser, in whole or in part, at any time or from time to time
following the occurrence of an Exercise Event (as defined below) and prior to
the termination of the Option in accordance with Section 18 hereof; provided
that any purchase of Shares upon exercise of the Option shall be subject to
compliance with applicable law. Notwithstanding the termination of the Option,
Purchaser shall be entitled to purchase the Shares with respect to which it has
exercised the Option in accordance with the terms hereof prior to the
termination of the Option. As used herein, an "Exercise Event" shall have
occurred in the event that (i) any person (other than Western Resources or any
of its Subsidiaries) shall have commenced (as such term is defined in Rule 14d-2
under the Exchange Act), or shall have filed a registration statement under the
Securities Act with respect to, a tender offer or exchange offer to purchase any
shares of Common Stock such that, upon consummation of such offer, such person
or a "group" (as such term is defined under the Exchange Act) of which such
person is a member shall have acquired beneficial ownership (as such term is
defined in rule 13d-3 of the Exchange Act), or the right to acquire beneficial
ownership, of 20 percent or more of the then outstanding Common Stock; (ii) the
Company or any of its Subsidiaries shall have authorized, recommended, proposed
or publicly announced an intention to authorize, recommend or propose, or
entered into, an agreement with any person (other than Purchaser or any of its
Subsidiaries) to (A) effect a merger, consolidation or other business
combination involving the Company or any of its subsidiaries, (B) sell, lease or
otherwise dispose of assets of the company or any of its Subsidiaries
aggregating 20 percent or more of the consolidated assets of the Company and its
Subsidiaries, taken as a whole, or (C) issue, sell or otherwise dispose of
(including by way of merger, consolidation, share exchange or any similar
transaction) securities representing 20 percent or more of the voting power of
the Company or any of its Subsidiaries (any of the foregoing, an "Acquisition
Transaction"); (iii) any person (other than Purchaser or any of its
Subsidiaries) shall have acquired beneficial ownership (as such term is defined
in Rule 13d-3 under the Exchange Act) or the right to acquire beneficial
ownership of, or any "group" (as such term is defined under the Exchange Act)
shall have been formed which beneficially owns or has the right to acquire
beneficial ownership of, shares of Common Stock (other than trust account
shares) aggregating 20 percent or more of the then outstanding Common Stock; or
(iv) the holders of Common Stock shall not have approved the Charter Amendment
and the Share Issuance (each as
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defined in the Contribution Agreement) at the meeting of such
shareholder held for the purpose of voting on the Charter Amendment and the
Share Issuance, such meeting shall not have been held or shall have been
cancelled prior to termination of the Contribution Agreement or the board of
directors of the Company shall have withdrawn or modified in a manner adverse to
Purchaser or to Purchaser's ability to consummate the transactions contemplated
by the Contribution Agreement the recommendation of the board of directors of
the Company with respect to the Charter Amendment and the Share Issuance, in
each case after any person (other than Purchaser or any of its Subsidiaries)
shall have publicly announced or delivered to the Company a proposal, or
disclosed publicly or to the Company an intention to make a proposal, to engage
in an Acquisition Transaction. As used in this Agreement, "person" shall have
the meaning specified in Sections 3(a)(9) and 13(d)(3) of the Exchange Act.
(c) In the event the Purchaser wishes to exercise the Option, the
Purchaser shall send a written notice to the Company (the "Stock Exercise
Notice") specifying a date (subject to the HSR Act (as defined below) not later
than 20 business days and not earlier than three business days following the
date such notice is given) for the closing of such purchase. In the event of any
change in the number of issued and outstanding shares of Common Stock by reason
of any stock dividend, stock split, split-up, recapitalization, merger or other
change in the corporate or capital structure of the Company, the number of
Shares subject to this Option and the purchase price per Share shall be
appropriately adjusted to restore the Purchaser to its rights hereunder,
including its right to purchase Shares representing approximately 19.9% of the
capital stock of the Company entitled to vote generally for the election of the
directors of the Company which is issued and outstanding immediately prior to
the exercise of the Option at an aggregate purchase price equal to the Purchase
Price multiplied by 2,750,238; provided, however, that in no event shall any
adjustment be made under this Section 1(c) with respect to any transaction
contemplated or permitted by the Contribution Agreement.
(d) If at any time the Option is then exercisable pursuant to the
terms of Section 1(a) hereof, the Purchaser may elect, in lieu of exercising the
Option to purchase Shares provided in Section 1(a) hereof, to send a written
notice to the Company (the "Cash Exercise Notice") specifying a date not later
than 20 business days and not earlier than 10 business days following the date
such notice is given on which date the Company shall pay to the Purchaser an
amount in cash equal to the Spread (as hereinafter defined) multiplied by all or
such portion of the Shares subject to the Option as Purchaser shall specify. As
used herein "Spread" shall mean the excess, if any, over the Purchase Price of
the higher of (x) if applicable, the highest price per share of Common Stock
(including any brokerage commissions, transfer taxes and soliciting dealers'
fees) paid by any person pursuant to an Acquisition Proposal (as defined in the
Contribution Agreement) (the "Alternative Purchase Price") or (y) the closing
price of the shares of Common Stock on the Nasdaq on the last trading day
immediately prior to the date of the Cash Exercise Notice (the "Closing Price").
If the Alternative Purchase Price includes any property other than cash, the
Alternative Purchase Price shall be the sum of (i) the fixed cash amount, if
any, included in the Alternative Purchase Price plus (ii) the fair market value
of such other property. If such other property consists of securities with an
existing public trading market, the average of the closing prices (or the
average of the closing bid and asked prices if closing prices are unavailable)
for such securities in their principal public trading market on the five trading
days ending two trading days prior to the date of the Cash Exercise Notice shall
be deemed to equal the fair market value of such property. If such other
property consists of something other than cash or securities with an existing
public trading market and, as of the payment date for the Spread, agreement on
the value of such other property has not been reached, the Alternative Purchase
Price shall be deemed to equal the Closing Price. Upon exercise of its right to
receive cash pursuant to this Section 1(c), the obligations of the Company to
deliver Shares pursuant to Section 3 shall be terminated with respect to such
number of Shares for which the Purchaser shall have elected to be paid the
Spread.
2. Conditions to Delivery of Shares. The Company's obligation to deliver
Shares upon exercise of the Option is subject only to the conditions that:
(i) No preliminary or permanent injunction or other order issued
by any federal or state court of competent jurisdiction in the United
States prohibiting the delivery of the Shares shall be in effect; and
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(ii) Any applicable waiting periods under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976 (the "HSR Act") shall have expired or
been terminated.
3. The Closing. (a) Any closing hereunder shall take place on the date
specified by the Purchaser in its Stock Exercise Notice or Cash Exercise Notice,
as the case may be, at 9:00 A.M., local time, at the offices of Sullivan &
Cromwell, 125 Broad Street, New York, New York, or, if the conditions set forth
in Section 2(i) or 2(ii) have not then been satisfied, on the second business
day following the satisfaction of such conditions, or at such other time and
place as the parties hereto may agree (the "Closing Date"). On the Closing Date,
(i) in the event of a closing pursuant to Section 1(b) hereof, the Company will
deliver to the Purchaser a certificate or certificates, duly endorsed (or
accompanied by duly executed stock powers), representing the Shares in the
denominations designated by the Purchaser in its Stock Exercise Notice and the
Purchaser will purchase such Shares from the Company at the price per Share
equal to the Purchase Price or (ii) in the event of a closing pursuant to
Section 1(c) hereof, the Company will deliver to the Purchaser cash in an amount
determined pursuant to Section 1(c) hereof. Any payment made by the Purchaser to
the Company, or by the Company to the Purchaser, pursuant to this Stock Option
Agreement shall be made by wire transfer of federal funds to a bank designated
by the party receiving such funds.
(b) The certificates representing the Shares may bear an appropriate
legend relating to the fact that such Shares have not been registered under the
Securities Act of 1933, as amended (the "Securities Act").
4. Representations and Warranties of the Company. The Company represents
and warrants to the Purchaser that (a) the Company is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware and has the requisite corporate power and authority to enter into and
perform this Stock Option Agreement; (b) the execution and delivery of this
Stock Option Agreement by the Company and the consummation by it of the
transactions contemplated hereby have been duly authorized by the Board of
Directors of the Company and this Stock Option Agreement has been duly executed
and delivered by a duly authorized officer of the Company and will constitute a
valid and binding obligation of the Company; (c) the Company has taken all
necessary corporate action to authorize and reserve the Shares issuable upon
exercise of the Option and the Shares, when issued and delivered by the Company
upon exercise of the Option, will be duly authorized, validly issued, fully paid
and non-assessable and free of preemptive rights; and (d) except as otherwise
required by the HSR Act, the execution and delivery of this Stock Option
Agreement by the Company and the consummation by it of the transactions
contemplated hereby do not require the consent, waiver, approval or
authorization of or any filing with any person or public authority and will not
violate, result in a breach of or the acceleration of any obligation under, or
constitute a default under, any provision of any charter or by-law, indenture,
mortgage, lien, lease, agreement, contract, instrument, order, law, rule,
regulation, judgment, ordinance, or decree, or restriction by which the Company
or any of its subsidiaries or any of their respective properties or assets is
bound, except for any breach, violation, default, acceleration, creation or
change that, individually or in the aggregate, is not reasonably likely to have
a Protection One Material Adverse Effect (as defined in the Contribution
Agreement) or prevent, materially delay or materially impair the ability of the
Company to consummate the transactions contemplated by this Agreement; and (e)
no "fair price", "moratorium", "control share acquisition" or other form of
antitakeover statute or regulation (including, without limitation, the
prohibitions of Section 203 of the Delaware General Corporation Law) is
applicable to the acquisition of Shares pursuant to this Stock Option Agreement.
5. Representations and Warranties of the Purchaser. The Purchaser
represents and warrants to the Company that (a) the execution and delivery of
this Stock Option Agreement by the Purchaser and the consummation by it of the
transactions contemplated hereby have been duly authorized by all necessary
corporate action on the part of the Purchaser and this Stock Option Agreement
has been duly executed and delivered by a duly authorized officer of the
Purchaser and will constitute a valid and binding obligation of Purchaser; and
(b) the Purchaser is acquiring the Option and, if and when it exercises the
Option, will be acquiring the Shares issuable upon the exercise thereof for its
own account and not with a view to distribution or resale in any manner which
would be in violation of the Securities Act.
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6. Quotation of Shares; HSR Act Filings; Governmental Consents. The
Company will promptly file an application to have the Shares quoted on the
Nasdaq and will use all reasonable efforts to obtain approval of such quotation
and to effect all necessary filings by the Company under the HSR Act; provided,
however, that if the Company is unable to effect such quotation on the Nasdaq by
the Closing Date, the Company will nevertheless be obligated to deliver the
Shares upon the Closing Date. Each of the parties hereto will use all reasonable
efforts to obtain consents of all third parties and governmental authorities, if
any, necessary to the consummation of the transactions contemplated hereby.
7. Registration Rights. (a) In the event that the Purchaser shall desire
to sell any of the Shares within three years after the purchase of such Shares
pursuant hereto, and such sale requires, in the opinion of counsel to the
Purchaser, registration of such Shares under the Securities Act, the Company
will cooperate with the Purchaser and any underwriters in registering such
Shares for resale, including, without limitation, promptly filing a registration
statement which complies with the requirements of applicable federal and state
securities laws, entering into an underwriting agreement with such underwriters
upon such terms and conditions as are customarily contained in underwriting
agreements with respect to secondary distributions; provided that the Company
shall not be required to have declared effective more than two registration
statements hereunder and shall be entitled to delay the filing or effectiveness
of any registration statement for up to 120 days if the offering would, in the
judgment of the Board of Directors of the Company, require premature disclosure
of any material corporate development or otherwise interfere with or adversely
affect any pending or proposed offering of securities of the Company or any
other material transaction involving the Company.
(b) If the Common Stock is registered pursuant to the provisions of
this Section 7, the Company agrees (i) to furnish copies of the registration
statement and the prospectus relating to the Shares covered thereby in such
numbers as the Purchaser may from time to time reasonably request and (ii) if
any event shall occur as a result of which it becomes necessary to amend or
supplement any registration statement or prospectus, to prepare and file under
the applicable securities laws such amendments and supplements as may be
necessary to keep available for at least 90 days a prospectus covering the
Common Stock meeting the requirements of such securities laws, and to furnish
the Purchaser such numbers of copies of the registration statement and
prospectus as amended or supplemented as may reasonably be requested. The
Company shall bear the cost of the registration, including, but not limited to,
all registration and filing fees, printing expenses, and fees and disbursements
of counsel and accountants for the Company, except that the Purchaser shall pay
the fees and disbursements of its counsel, the underwriting fees and selling
commissions applicable to the shares of Common Stock sold by the Purchaser. The
Company shall indemnify and hold harmless Purchaser, its affiliates and its
officers and directors from and against any and all losses, claims, damages,
liabilities and expenses arising out of or based upon any statements contained
in, omissions or alleged omissions from, each registration statement filed
pursuant to this paragraph; provided, however, that this provision does not
apply to any loss, liability, claim, damage or expense to the extent it arises
out of any untrue statement or omission made in reliance upon and in conformity
with written information furnished to the Company by the Purchaser, its
affiliates, officers or other representatives expressly for use in any
registration statement (or any amendment thereto) or any preliminary prospectus
filed pursuant to this paragraph. The Company shall also indemnify and hold
harmless each underwriter and each person who controls any underwriter within
the meaning of either the Securities Act or the Securities Exchange Act of 1934
against any and all losses, claims, damages, liabilities and expenses arising
out of or based upon any statements contained in, omissions or alleged omissions
from, each registration statement filed pursuant to this paragraph; provided,
however, that this provision does not apply to any loss, liability, claim,
damage or expense to the extent it arises out of any untrue statement or
omission made in reliance upon and in conformity with written information
furnished to the Company by or on behalf of the underwriters expressly for use
in any registration statement (or any amendment thereto) or any preliminary
prospectus filed pursuant to this paragraph.
8. Expenses. Each party hereto shall pay its own expenses incurred in
connection with this Stock Option Agreement.
9. Specific Performance. The Company acknowledges that if the Company
fails to perform any of its obligations under this Stock Option Agreement
immediate and irreparable harm or injury would be caused
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to the Purchaser for which money damages would not be an adequate remedy. In
such event, the Company agrees that the Purchaser shall have the right, in
addition to any other rights it may have, to specific performance of this Stock
Option Agreement. Accordingly, if the Purchaser should institute an action or
proceeding seeking specific enforcement of the provisions hereof, the Company
hereby waives the claim or defense that the Purchaser has an adequate remedy at
law and hereby agrees not to assert in any such action proceeding the claim or
defense that such a remedy at law exists. The Company further agrees to waive
any requirements for the securing or posting of any bond in connection with
obtaining any such equitable relief.
10. Profit Limitation. Notwithstanding any other provision of this
Agreement, in no event shall the Purchaser's Total Profit (as hereinafter
defined) exceed $25 million and, if it otherwise would exceed such amount, the
Purchaser, at its sole election, shall either (a) deliver to the Company for
cancellation Shares previously purchased by Purchaser, (b) pay cash or other
consideration to the Company or (c) undertake any combination thereof, so that
Purchaser's Total Profit shall not exceed $25 million after taking into account
the foregoing actions.
(b) Notwithstanding any other provision of this Agreement, this
Option may not be exercised for a number of Shares as would, as of the date of
the Stock Exercise Notice, result in a Notional Total Profit (as defined below)
of more than $25 million and, if exercise of the Option otherwise would exceed
such amount, the Purchaser, at its discretion, may increase the Purchase Price
for that number of Shares set forth in the Stock Exercise Notice so that the
Notional Total Profit shall not exceed $25 million; provided, that nothing in
this sentence shall restrict any exercise of the Option permitted hereby on any
subsequent date at the Purchase Price set forth in Section 1(a) hereof.
(c) As used herein, the term "Total Profit" shall mean the aggregate
amount (before taxes) of the following: (i) the amount of cash received by
Purchaser pursuant to Section 1(d) and (ii) (x) the net cash amounts received by
Purchaser pursuant to the sale of Shares (or any other securities into which
such Shares are converted or exchanged) to any unaffiliated party, less (y) the
Purchaser's Purchase Price for such Shares.
(d) As used herein, the term "Notional Total Profit" with respect to
any number of Shares as to which Purchaser may propose to exercise this Option
shall be the Total Profit determined as of the date of the Stock Exercise Notice
assuming that this Option were exercised on such date for such number of Shares
and assuming that such Shares, together with all other Shares held by Purchaser
and its affiliates as of such date, were sold for cash at the closing market
price for the Common Stock as of the close of business on the preceding trading
day (less customary brokerage commissions).
(e) This Section 10 shall not be applicable with respect to Shares
purchased pursuant to this Stock Option Agreement following the Closing (as
defined in the Contribution Agreement).
11. Notice. All notices, requests, demands and other communications
hereunder shall be deemed to have been duly given and made if in writing and if
served by personal delivery upon the party for whom it is intended or delivered
by registered or certified mail, return receipt requested, or if sent by
telecopier or rapifax, upon receipt of oral confirmation that such transmission
has been received, to the person at the address set forth below, or such other
address as may be designated in writing hereafter, in the same manner, by such
person:
If to the Purchaser:
Western Resources, Inc.
818 South Kansas Avenue
Topeka, Kansas 66602
Attention: John Rosenberg
Fax: (913) 575-1788
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With a copy to:
Sullivan & Cromwell
125 Broad Street
New York, New York 10004
Attention: Neil T. Anderson, Esq.
Francis J. Aquila, Esq.
Fax: (212) 558-3588
If to the Company:
Protection One, Inc.
6011 Bristol Parkway
Culver City, California 90230
Attention: James M. Mackenzie, Jr.
Fax: (310) 649-3855
and
Protection One, Inc.
3900 S.W. Murray Boulevard
Portland, Oregon 97005
Attention: John W. Hesse
Fax: (503) 520-6099
With copies to:
Laura A. Loftin
Mitchell, Silberberg & Knupp LLP
11377 West Olympic Boulevard
Los Angeles, California 90064
Fax: (310) 312-3100
and
Christopher D. Dillon, Esq.
David W. Heleniak, Esq.
Shearman & Sterling
555 California Street
San Francisco, California 94104-1512
Fax: (415) 616-1199
12. Parties in Interest. This Stock Option Agreement shall inure to the
benefit of and be binding upon the parties named herein and their respective
successors and permitted assigns; provided, however, that such successor in
interest or permitted assigns shall agree to be bound by the provisions of this
Stock Option Agreement. Nothing in this Stock Option Agreement, express or
implied, is intended to confer upon any Person other than the Company or the
Purchaser, or their successors or assigns, any rights or remedies under or by
reason of this Stock Option Agreement.
13. Entire Agreement; Amendments. This Stock Option Agreement, together
with the Contribution Agreement and the other documents referred to therein,
contains the entire agreement between the parties hereto with respect to the
subject matter hereof and supersedes all prior and contemporaneous agreements
and understandings, oral or written, with respect to such transactions. This
Stock Option Agreement may not be changed, amended or modified orally, but may
be changed only by an agreement in writing signed by the party against whom any
waiver, change, amendment, modification or discharge may be sought.
14. Assignment. No party to this Stock Option Agreement may assign any
of its rights or obligations under this Stock Option Agreement without the prior
written consent of the other party hereto, except that the Purchaser may assign
its rights and obligations hereunder to any of its direct or indirect wholly
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owned subsidiaries, but no such transfer shall relieve the Purchaser of
its obligations hereunder if such transferee does not perform such obligations.
15. Headings. The section headings herein are for convenience only and
shall not affect the construction of this Stock Option Agreement.
16. Counterparts. This Stock Option Agreement may be executed in any
number of counterparts, each of which, when executed, shall be deemed to be an
original and all of which together shall constitute one and the same document.
17. Governing Law. This Stock Option Agreement shall be governed by and
construed in accordance with the laws of the State of Delaware (regardless of
the laws that might otherwise govern under applicable Delaware principles of
conflicts of law).
18. Termination. The right to exercise the Option granted pursuant to
this Stock Option Agreement shall terminate upon the earliest of (i) in the
event that the Contribution Agreement shall have been terminated prior to any
Exercise Event having occurred, the termination date of the Contribution
Agreement; (ii) in the event that the Closing (as defined in the Contribution
Agreement) shall not have occurred and an Exercise Event shall have occurred, 12
months after the first occurrence of the Exercise Event; and (iii) in the event
that the Closing (as defined in the Contribution Agreement) shall have occurred,
the earlier of (A) 45 days following the last date on which any Protection One
Convertible Notes (as defined in the Contribution Agreement) shall remain
outstanding and (B) October 31, 1999; provided that, if the Option cannot be
exercised or the Shares cannot be delivered to Purchaser upon such exercise by
reason of any applicable judgment, decree or order or because the condition set
forth in Section 2(ii) has not yet been satisfied, the expiration date of the
Option shall be extended until thirty days after such impediment to exercise has
been removed.
19. Limitation on Exercise. Notwithstanding any other provision of this
Stock Option Agreement, following the Closing (as defined in the Contribution
Agreement) and prior to the termination of the Option in accordance with Section
18 hereof, Purchaser shall be entitled to exercise the Option at any time
notwithstanding that no Exercise Event has occurred; provided, that (i) the
Purchase Price for any Share purchased after the Closing shall be $15.50 per
Share, (ii) in no event shall Purchaser be entitled following the Closing to
deliver a Cash Exercise Notice as contemplated by Section 1(c) hereof and (iii)
in no event shall Purchaser be entitled following the Closing to deliver a Stock
Exercise Notice as contemplated in Section 1(b) hereof with respect to any
Shares if, upon issuance of such Shares by the Company, Watchman would be in
violation of Section 3.18 of the Contribution Agreement.
20. Severability. If any term, provision, covenant or restriction of
this Stock Option Agreement is held by a court of competent jurisdiction to be
invalid, void or unenforceable, the remainder of the terms, provisions,
covenants and restrictions of this Stock Option Agreement shall remain in full
force and effect and shall in no way be affected, impaired or invalidated.
21. Public Announcement. The Purchaser will consult with the
representative of the Company and the representative of the Company will consult
with the Purchaser before issuing any press release with respect to the initial
announcement of this Stock Option Agreement, the Option or the transactions
contemplated hereby and neither party shall issue any such press release prior
to such consultation except as may be required by law; provided, however, that
neither Purchaser nor the Company shall be required to consult with the other
prior to filing a current report on Form 8-K with the SEC attaching a copy of
this Stock Option Agreement and the initial press release with respect hereto.
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IN WITNESS WHEREOF, the Purchaser and the Company have caused this Stock
Option Agreement to be duly executed and delivered on the day and year first
above written.
WESTERN RESOURCES, INC.
By: /s/ JOHN E. HAYES, JR.
------------------------------------
Title: Chairman of the Board and
Chief Executive Officer
PROTECTION ONE, INC.
By: /s/ JAMES M. MACKENZIE, JR.
------------------------------------
Title: President and Chief Executive
Officer
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APPENDIX C
OPTION AND VOTING AGREEMENT
AMONG
CERTAIN STOCKHOLDERS OF PROTECTION ONE
AND
WESTERN RESOURCES, INC.
DATED AS OF JULY 30, 1997
<PAGE> 279
OPTION AND VOTING AGREEMENT
OPTION AND VOTING AGREEMENT (the "Agreement"), dated as of July 30, 1997,
among the undersigned stockholders (the "Stockholders") of Protection One, Inc.,
a Delaware corporation (the "Company"), and Western Resources, Inc., a Kansas
corporation ("Western").
WHEREAS, concurrently with the execution of this Contribution Agreement,
the Company and Western have entered into a Contribution Agreement (as the same
may be amended from time to time, the "Contribution Agreement"), providing for,
inter alia, the issuance by the Company and purchase by Western (the "Share
Issuance") of approximately 80.1% of the shares of Common Stock, par value $0.01
per share, of the Company (the "Company Common Stock") on a fully-diluted basis
pursuant to the terms and conditions of the Contribution Agreement, and setting
forth certain representations, warranties, covenants and agreements of the
parties thereto in connection therewith; and
WHEREAS, in order to induce Western to enter into the Contribution
Agreement, the Stockholders wish to agree (i) to grant Western an option to buy
the Shares (as defined below) at the Option Price (as defined below), (ii) to
vote the Shares and any other such shares of Company Common Stock so as to
facilitate consummation of the Share Issuance, (iii) not to transfer or
otherwise dispose of any of the Shares, or any other shares of Company Common
Stock acquired hereafter and prior to the Expiration Date (as defined below) and
(iv) to deliver an irrevocable proxy to vote the Shares to Western.
NOW, THEREFORE, for good and valuable consideration, the receipt,
sufficiency and adequacy of which is hereby acknowledged, the parties hereto
agree as follows:
1. Representations of Stockholders. Each of the Stockholders represents
and warrants to Western that now and at all times during the term of this
Agreement (a) such Stockholder lawfully owns beneficially (as such term is
defined in the Securities Exchange Act of 1934, as amended (the "1934 Act")) and
of record each of the shares of Company Common Stock set forth opposite such
Stockholder's name on Exhibit A (such Stockholder's "Shares") free and clear of
all liens, pledges, claims, charges, security interests or other encumbrances of
any kind and, except for this Agreement, there are no options, warrants or other
rights, agreements, arrangements or commitments of any character to which such
Stockholder is a party relating to the pledge, disposition or voting of any
shares of Company Common Stock and there are no voting trusts or voting
agreements with respect to such Shares, (b) such Stockholder does not
beneficially own any shares of Company Common Stock other than such Shares and
does not have any options, warrants or other rights to acquire any additional
shares of Company Common Stock or any security exercisable for or convertible
into shares of Company Common Stock, except for options, warrants and/or other
rights granted, awarded or issued pursuant to Protection One Compensation and
Benefit Plans, (c) it has full right, power and authority to enter into, execute
and deliver this Agreement and to perform fully its obligations hereunder, and
(d) the execution, delivery and performance of this Agreement do not, and the
consummation of the transactions contemplated hereby will not, constitute or
result in (i) if applicable, a breach or violation of, or a default under, its
certificate or by-laws or the comparable governing instruments, (ii) a breach or
violation of, or a default under, the acceleration of any obligations or the
creation of a lien on its assets (with or without notice, lapse of time or both)
pursuant to any agreement, lease, contract, note, mortgage, indenture,
arrangement or other obligation binding upon it or any of its assets or any laws
or governmental or non-governmental permit or license to which it is subject or
(iii) any change in the rights or obligations of any party under any such
agreement, lease, contract, note, mortgage, indenture, arrangement or other
obligation, including, without limitation, any change in rights of
reimbursement, termination, cancellation or modification except, with respect to
clauses (ii) and (iii), for any breach, violation, default, acceleration,
creation or change that, individually or in the aggregate, is not reasonably
likely to prevent, materially delay or materially impair the ability of such
Stockholder to consummate the transactions contemplated by this Agreement. This
Agreement has been duly executed and delivered and constitutes the legal, valid
and binding obligation of such Stockholder in accordance with its terms.
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2. The Option.
(a) Each Stockholder hereby grants to Western or its designee (the
"Holder") an unconditional, irrevocable option (the "Option") to purchase,
subject to the terms hereof, all but not fewer than all of the Shares and New
Shares (as defined in Section 7 hereof) at any time on or prior to the
Expiration Date if after the date of this Agreement a Takeover Proposal (as
hereinafter defined) has been made. "Takeover Proposal" means, with respect to
the Company, any proposal or offer, other than by Western or any Affiliate
thereof, for, (i) any tender or exchange offer for 20% or more of the equity of
the Company, (ii) any merger, consolidation or other business combination
involving the Company or any of its Significant Subsidiaries, (iii) any
acquisition in any manner of 20% or more of the equity of, or 20% or more of the
assets of the Company or any of its Significant Subsidiaries, or (iv) any
solicitation of proxies or consents from the Company's stockholders relating to
directors or an acquisition of control of the Company. "Significant Subsidiary"
shall have the meaning specified in Rule 1-02 of Regulation S-X of the
Securities and Exchange Commission. Following the occurrence of a Takeover
Proposal of the type contemplated by clauses (i) or (ii) above, Holder may
purchase the Shares and New Shares at a purchase price per Share and New Share
equal to the purchase price per share of Company Common Stock proposed or
offered pursuant to the Takeover Proposal. Following the occurrence of a
Takeover Proposal of the type contemplated by clauses (iii) or (iv) above,
Holder may purchase the Shares and New Shares at a purchase price per share of
Company Common Stock equal to the closing price of a share of Company Common
Stock on the Nasdaq on the last trading day immediately prior to the Notice Date
(as defined below). The purchase price per share of Company Common Stock as
determined pursuant to the two preceding sentences is hereinafter referred to as
the "Option Price." If the Holder wishes to exercise the Option, it shall send
to the Stockholder a written notice (the date of which is referred to herein as
the "Notice Date") specifying (i) the total number of shares that the Holder
will purchase from such Stockholder pursuant to such exercise, which must be all
of the shares of Common Stock held thereby, and (ii) a place and date (a
"Closing Date") not earlier than three business days nor later than 10 business
days from the Notice Date for the closing of such purchase (a "Closing"). At
each Closing, the Holder shall pay to such Stockholder the aggregate purchase
price for the Shares or New Shares purchased pursuant to the exercise of the
Option in immediately available funds by a wire transfer to a bank account
designated by such Stockholder; provided that failure or refusal of such
Stockholder to designate such a bank account shall not preclude the Holder from
exercising the Option, as a whole or in part. At such Closing, simultaneously
with the payment of the aggregate Option Price by the Holder, such Stockholder
shall deliver to the Holder a certificate or certificates representing the
number of Shares or New Shares purchased by the Holder accompanied by duly
executed stock powers and, if the Option shall be exercised in part only, a new
Option evidencing the rights of the Holder to purchase the balance of the shares
purchasable hereunder.
(b) Notwithstanding anything to the contrary contained in this
Agreement, in the event that the Holder shall exercise, in whole or in part, the
Option granted hereunder, and within 12 months after the Closing the Company
shall have entered into a definitive agreement with any person or entity,
including the Purchaser or any Subsidiary thereof, providing for implementation
of a Takeover Proposal (a "Takeover Transaction") which Takeover Transaction is
thereafter consummated, the Holder shall deliver to each Stockholder by wire
transfer in immediately available funds within three business days of the
consummation of such Takeover Transaction an amount equal to the product of (i)
the number of shares of Company Common Stock the Holder acquired from such
Stockholder upon exercise of the Option multiplied by (ii) the excess, if any,
of the Takeover Transaction Price (as defined below) over the Option Price. For
purposes of this Agreement "Takeover Transaction Price" shall mean the price per
share or the consideration per share received, directly or indirectly, by the
Holder in any Takeover Transaction in exchange for, or as holder of, any shares
of Company Common Stock beneficially owned by such Holder; provided that (A) if
the consideration received by the Holder in any such Takeover Transaction shall
be securities listed on a national securities exchange or automated quotation
system, the per share value of such consideration shall be equal to the closing
price per share reported by such exchange or automated quotation system on the
date such transaction is consummated or (B) if the consideration received by the
Holder in any such transaction shall be other than cash or the form specified in
clause (A), the per share value of such consideration shall be determined in
good faith as of the date such transaction is consummated by a nationally
recognized independent investment
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banking firm selected by such Stockholder and reasonably acceptable to the
Holder, which determination shall be conclusive for all purposes of this Section
2(b).
(c) If at any time the Company shall (i) pay a dividend other than
the dividend permitted by the Contribution Agreement or otherwise make a
distribution to the holders of Company Common Stock, (ii) subdivide its out
standing shares of Common Stock into a larger number of shares of common stock
or combine its outstanding shares of Company Common Stock into a smaller number
of shares of Company Common Stock, (iii) reorganize its capital, reclassify its
capital stock, consolidate or merge with or into another entity or sell,
transfer or otherwise dispose of all or substantially all of its property,
assets or business to another entity or (iv) engage in any similar dilutive
transaction, the parties agree to adjust the number of Shares or New Shares or
other securities or property subject to the Option as necessary and equitable in
order to ensure that Western shall receive, upon exercise of the Option, the
number of Shares or New Shares or other securities or property which Western
would have received in connection with or as a result of such dividend,
distribution or other transaction, after giving effect to any taxes incurred by
any Holder as a result of such transaction, if it had exercised the Option
immediately prior to (i) the record date for any such dividend or other
distribution or (ii) the effective time of any such other transaction.
3. Agreement to Vote Shares; Grant of Irrevocable Proxy; Agreement to
Grant Further Proxies. During the term of this Agreement each of the
Stockholders shall vote such Stockholder's Shares and any New Shares, and cause
any holder of record of such Shares or New Shares to vote, (a) in favor of
adoption and approval of the Contribution Agreement and the Share Issuance at
every meeting of the stockholders of the Company at which such matters are
considered and at every adjournment or postponement thereof, (b) against any
action or agreement that could reasonably be expected to impede, interfere with
or otherwise materially adversely affect the Share Issuance or inhibit the
timely consummation of the Share Issuance, (c) against any action or agreement
that could reasonably be expected to result in a breach of any covenant,
representation or warranty or any other obligation of the Company under the
Contribution Agreement and (d) except for the Share Issuance and the
Contribution Agreement, against any merger, consolidation, business combination,
reorganization, recapitalization, liquidation or sale or transfer of any
material assets of the Company or its subsidiaries.
The undersigned, for consideration received, hereby appoints John K.
Rosenberg and Richard D. Terrill and each of them its proxies, with power of
substitution and resubstitution, to vote all Shares and New Shares of the
Company owned by the undersigned at any meeting of stock holders of the Company,
and at any adjournment or postponement thereof or to give consent with respect
to such Shares or New Shares (i) FOR approval and adoption of the Contribution
Agreement and the Share Issuance and (ii) AGAINST (x) any action or agreement
that could reasonably be expected to impede, interfere with or otherwise
materially adversely affect the Share Issuance or inhibit the timely
consummation of the Share Issuance, (y) any action or agreement that could
reasonably be expected to result in a breach of any covenant, representation or
warranty or any other obligation of the Company under the Contribution Agreement
and (z) except for the Share Issuance and the Contribution Agreement, any
merger, consolidation, business combination, reorganization, recapitalization,
liquidation or sale or transfer of any material assets of the Company or its
subsidiaries. This proxy is coupled with an interest, revokes all prior proxies
granted by the undersigned and is irrevocable until such time as this Agreement
terminates in accordance with its terms.
Each Stockholder further agrees to deliver to Western upon request one
or more additional proxies substantially in the form attached hereto as Exhibit
B, which proxy shall be irrevocable during the term of this Agreement to the
extent permitted under Delaware law.
4. No Voting Trusts. Each of the Stockholders shall not, and shall not
permit any entity under its control to, deposit any of their Shares or New
Shares in a voting trust or subject any of their Shares or New Shares to any
arrangement with respect to the voting of such Shares or New Shares (including,
without limitation, the granting of proxies) other than agreements entered into
with Western.
5. No Proxy Solicitations. Each of the Stockholders shall not, and shall
not permit any entity under such Stockholder's control to, (a) solicit proxies
or become a "participant" in a "solicitation" (as such terms are defined in
Regulation 14A under the 1934 Act) in opposition to or competition with the
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consummation of the Share Issuance or otherwise encourage or assist any party in
taking or planning any action which could reasonably be expected to impede,
interfere with or otherwise materially adversely affect the Share Issuance or
inhibit the timely consummation of the Share Issuance in accordance with the
terms of the Contribution Agreement, (b) directly or indirectly initiate or
cooperate in a stockholders' vote or action by consent of the Company's
stockholders in opposition to or in competition with the consummation of the
Share Issuance, or (c) become a member of a "group" (as such term is used in
Section 13(d) of the 1934 Act) with respect to any voting securities of the
Company for the purpose of opposing or competing with the consummation of the
Share Issuance; provided that the foregoing shall not restrict any director or
officer of the Company from taking any action such director or officer
reasonably believes after consultation with outside counsel is necessary to
satisfy such director's or officer's fiduciary duty as a director or officer to
the Company or its stockholders.
6. Transfer and Encumbrance. On or after the date hereof and during the
term of this Agreement, each of the Stockholders shall not transfer, sell,
offer, assign, exchange, pledge or otherwise dispose of or encumber any of such
Stockholder's Shares or New Shares or enter into any contract, option or other
arrangement with respect to any of the foregoing except that a Stockholder may
transfer Shares or New Shares held thereby to any partner of such Stockholder so
long as the transferee shall agree to be bound by this Agreement.
7. Additional Purchases. Each of the Stockholders shall not purchase or
otherwise acquire beneficial ownership of any shares of Company Common Stock
after the execution of this Agreement ("New Shares"), nor will any Stockholder
voluntarily acquire the right to vote or share in the voting of any shares of
Company Common Stock other than the Shares, unless such Stockholder agrees to
deliver to Western immediately after such purchase or acquisition an irrevocable
proxy substantially in the form attached hereto as Exhibit B with respect to
such New Shares. Each of the Stockholders also severally agrees that any New
Shares acquired or purchased by him or her shall be subject to the terms of this
Agreement to the same extent as if they constituted Shares.
8. Specific Performance. Each party hereto acknowledges that it will be
impossible to measure in money the damage to the other party if a party hereto
fails to comply with any of the obligations imposed by this Agreement, that
every such obligation is material and that, in the event of any such failure,
the other party will not have an adequate remedy at law or damages. Accordingly,
each party hereto agrees that injunctive relief or other equitable remedy, in
addition to remedies at law or damages, is the appropriate remedy for any such
failure and will not oppose the granting of such relief on the basis that the
other party has an adequate remedy at law. Each party hereto agrees that it will
not seek, and agrees to waive any requirement for, the securing or posting of a
bond in connection with any other party's seeking or obtaining such equitable
relief.
9. Publicity. Each Stockholder, in its capacity as such, and not as a
director or officer of the Company, hereby agrees that it shall, when acting in
its capacity as a Stockholder of the Company and not as a director or officer
thereof, obtain the written permission of Western prior to issuing any press
release or otherwise making public announcements with respect to the
transactions contemplated by this Agreement and prior to making any filings with
any third party and/or any governmental entity (including any national
securities exchange or interdealer quotation service) with respect thereto,
except as may be required by law.
10. Expenses. Each party shall bear its own expenses with respect to the
review, execution, delivery and performance of this Agreement.
11. Entire Agreement. This Agreement supersedes all prior agreements,
written or oral, among the parties hereto with respect to the subject matter
hereof and, together with the Contribution Agreement, contains the entire
agreement among the parties with respect to the subject matter hereof. This
Agreement may not be amended, supplemented or modified, and no provisions hereof
may be modified or waived, except by an instrument in writing signed by all the
parties hereto. No waiver of any provisions hereof by any party shall be deemed
a waiver of any other provisions hereof by any such party, nor shall any such
waiver be deemed a continuing waiver of any provision hereof by such party.
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12. Notices. All notices, requests, claims, demands or other
communications hereunder shall be in writing and shall be deemed given when
delivered personally, upon receipt of a transmission confirmation if sent by
facsimile or like transmission and on the next business day when sent by Federal
Express, Express Mail or other reputable overnight courier service to the
parties at the following addresses (or at such other address for a party as
shall be specified by like notice):
If to Western:
Western Resources, Inc.
818 South Kansas Avenue
Topeka, Kansas 66602
Attention: General Counsel
Facsimile: (913) 575-1788
With a copy to:
Sullivan & Cromwell
125 Broad Street
New York, New York 10004
Attention: Neil T. Anderson, Esq.
and Francis J. Aquila, Esq.
Facsimile: (212) 558-3588
If to a Stockholder, to the address or facsimile number set forth for
such Stockholder on the signature page hereof.
13. Miscellaneous.
(a) THIS AGREEMENT SHALL BE DEEMED TO BE MADE IN AND IN ALL RESPECTS
SHALL BE INTERPRETED, CONSTRUED AND GOVERNED BY AND IN ACCORDANCE WITH THE LAWS
OF THE STATE OF DELAWARE WITHOUT REGARD TO THE CONFLICT OF LAW PRINCIPLES
THEREOF. The parties hereby irrevocably submit to the jurisdiction of the courts
of the State of Delaware and the Federal courts of the United States of America
located in the State of Delaware solely in respect of the interpretation and
enforcement of the provisions of this Agreement and in respect of the
transactions contemplated hereby, and hereby waive, and agree not to assert, as
a defense in any action, suit or proceeding for the interpretation or
enforcement hereof or of any such document, that it is not subject thereto or
that such action, suit or proceeding may not be brought or is not maintainable
in said courts or that the venue thereof may not be appropriate or that this
Agreement may not be enforced in or by such courts, and the parties hereto
irrevocably agree that all claims with respect to such action or proceeding
shall be heard and determined in such a Delaware State or Federal court. The
parties hereby consent to and grant any such court jurisdiction over the person
of such parties and over the subject matter of such dispute and agree that
mailing of process or other papers in connection with any such action or
proceeding in the manner provided in Section 13 or in such other manner as may
be permitted by law shall be valid and sufficient service thereof.
EACH PARTY ACKNOWLEDGES AND AGREES THAT ANY CONTROVERSY WHICH MAY ARISE
UNDER THIS AGREEMENT IS LIKELY TO INVOLVE COMPLICATED AND DIFFICULT ISSUES, AND
THEREFORE EACH SUCH PARTY HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES ANY
RIGHT SUCH PARTY MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION
DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE
TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT. EACH PARTY CERTIFIES AND
ACKNOWLEDGES THAT (i) NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY
HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE
EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER, (ii) EACH PARTY
UNDERSTANDS AND HAS CONSIDERED THE IMPLICATIONS OF THIS WAIVER, (iii) EACH PARTY
MAKES THIS WAIVER VOLUNTARILY, AND (iv) EACH PARTY HAS BEEN INDUCED TO ENTER
INTO
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THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN
THIS SECTION 13(a).
(b) The provisions of this Agreement shall be deemed severable and
the invalidity or unenforceability of any provision shall not affect the
validity or enforce ability or the other provisions hereof. If any provision of
this Agreement, or the application thereof to any person or any circumstance, is
invalid or unenforceable, (a) a suit able and equitable provision shall be
substituted therefor in order to carry out, so far as may be valid and enforce
able, the intent and purpose of such invalid or unenforce able provision and (b)
the remainder of this Agreement and the application of such provision to other
persons or circumstances shall not be affected by such invalidity or
unenforceability, nor shall such invalidity or unenforce ability affect the
validity or enforceability of such provision, or the application thereof, in any
other jurisdiction.
(c) This Agreement may be executed in one or more counterparts, each
of which shall be deemed to be an original but all of which together shall
constitute one and the same instrument.
(d) This Agreement shall terminate upon the earliest to occur of (i)
the Closing Date (as defined in the Contribution Agreement), (ii) in the event
that the Contribution Agreement shall have been terminated prior to any Takeover
Proposal having been made, the termination date of the Contribution Agreement;
(iii) in the event that the Closing (as defined in the Contribution Agreement)
shall not have occurred and a Takeover Proposal shall have been made, fifteen
(15)days after the first notice to Western or publication of a Takeover
Proposal; and (iv) the date specified in a written agreement duly executed and
delivered by Western and each of the Stockholders (the earliest such date, the
"Expiration Date").
(e) Each party hereto shall execute and deliver such additional
documents as may be necessary or desirable to effect the transactions
contemplated by this Contribution Agreement.
(f) All Section headings herein are for convenience of reference only
and are not part of this Agreement, and no construction or reference shall be
derived therefrom.
(g) The obligations of the Stockholders set forth in this Agreement
shall not be effective or binding upon any Stockholder until after such time as
the Contribution Agreement is executed and delivered by Western, and the parties
agree that there is not and has not been any other agreement, arrangement or
understanding between the parties hereto with respect to the matters set forth
herein.
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IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the date first written above.
WESTERN RESOURCES, INC.
By: /s/ JOHN E. HAYES, JR.
--------------------------------------
THE STOCKHOLDERS:
/s/ JAMES M. MACKENZIE, JR.
--------------------------------------
Name: James M. Mackenzie, Jr.
Address: 6011 Bristol Parkway
Culver City, CA 90230
Facsimile: (310) 649-3855
/s/ JOHN W. HESSE
--------------------------------------
Name: John W. Hesse
Address: 3900 S.W. Murray Blvd.
Portland, Oregon 97005
Facsimile: (503) 557-1637
/s/ JOHN E. MACK, III
--------------------------------------
Name: John E. Mack, III
Address: 6011 Bristol Parkway
Culver City, CA 90230
Facsimile: (310) 649-3855
/s/ THOMAS K. RANKIN
--------------------------------------
Name: Thomas K. Rankin
Address: 6011 Bristol Parkway
Culver City, CA 90230
Facsimile: (310) 342-6393
/s/ BEN ENIS
--------------------------------------
Name: Ben Enis, Ph.D.
Address: 4097 Robin Hill Rd.
La Canada, CA 91011
Facsimile: (818) 952-6405
Facsimile: (818) 952-9216
/s/ JAMES Q. WILSON
--------------------------------------
Name: James Q. Wilson
Address: 32910 Camino Buena Ventura
Malibu, CA 20265
Facsimile: (310) 457-1351
PATRICOF & CO. VENTURES, INC.
By: /s/ ROBERT M. CHEFITZ
--------------------------------------
Name: Robert M. Chefitz
Address: 445 Park Avenue
New York, New York 10022
Facsimile: (212) 319-6155
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(EXHIBIT A)
LIST OF STOCKHOLDERS OF THE COMPANY
<TABLE>
<CAPTION>
NAME # SHARES OF COMMON STOCK
---------------------------------------------- ------------------------
<S> <C>
James M. Mackenzie, Jr........................ 149,821
John W. Hesse................................. 55,763
John E. Mack, III............................. 78,462
Thomas K. Rankin.............................. 15,359
Ben Enis...................................... 0
James Q. Wilson............................... 100
Patricof & Co. Ventures, Inc.................. 2,515,444
</TABLE>
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(EXHIBIT B)
FORM OF PROXY
The undersigned, for consideration received, hereby appoints John K.
Rosenberg and Richard D. Terrill and each of them his or her proxies, with power
of substitution and resubstitution, to vote all shares of Common Stock, par
value $0.01 per share (the "Common Stock"), of Protection One, Inc., a Delaware
corporation (the "Company"), owned by the undersigned at any meeting of
stockholders of the Company, and at any adjournment or postponement thereof or
to give consent with respect to such shares (i) FOR approval and adoption of the
Contribution Agreement, dated as of July 30, 1997 (the "Contribution
Agreement"), by and among the Company and Western Resources, Inc., a Kansas
corporation ("Western") providing for, inter alia, the issuance by the Company
and purchase by Western of shares of approximately 80.1% of the Common Stock on
a fully-diluted basis (the "Share Issuance"), and (ii) AGAINST (x) any action or
agreement that could reasonably be expected to impede, interfere with or
otherwise materially adversely affect the Share Issuance or inhibit the timely
consummation of the Share Issuance, (y) any action or agreement that could
reasonably be expected to result in a breach of any covenant, representation or
warranty or any other obligation of the Company under the Contribution Agreement
and (z) except for the Share Issuance and the Contribution Agreement, any
merger, consolidation, business combination, reorganization, recapitalization,
liquidation or sale or transfer of any material assets of the Company or its
subsidiaries. This proxy is coupled with an interest, revokes all prior proxies
granted by the undersigned and is irrevocable until such time as the Option and
Voting Agreement, dated as of July 30, 1997 among certain stockholders of the
Company, including the undersigned, and Western terminates in accordance with
its terms.
Dated _______________________, 1997
____________________________________
(Name of Stockholder)
_____________________________________
(Signature of Stockholder)
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APPENDIX D
July 30, 1997
BOARD OF DIRECTORS
PROTECTION ONE, INC.
6011 BRISTOL PARKWAY
CULVER CITY, CALIFORNIA 90230
MEMBERS OF THE BOARD:
We understand that Western Resources, Inc. ("Western Resources") and Protection
One, Inc. ("Protection One") have entered into an agreement dated as of July 30,
1997 (the "Contribution Agreement"), which provides, among other things, for (a)
the issuance by Protection One to Western Resources of the number of shares of
common stock, par value $0.01 per share, of Protection One (the "Protection One
Common Stock") equal to the product of (i) .801 and (ii) the sum of (x) the
issued and outstanding shares of Protection One Common Stock and (y) the
aggregate number of shares of Protection One Common Stock issuable upon exercise
of certain options and warrants, in each case as of the closing (the "Closing")
of the transactions contemplated by the Contribution Agreement (the "Share
Issuance") and after giving effect to the adjustments required as a result of
the payment of the Special Dividend and the Option/Warrant Payments (each as
defined below), (b) the declaration and payment by Protection One at or after
the Closing of a dividend of $7.00 on each share of Protection One Common Stock
(the "Special Dividend") and the payment by Protection One, with respect to each
share of Protection One Common Stock issuable upon exercise of certain options
and warrants, of $7.00 on each share issuable on exercise of such options or
warrants (the "Option/Warrant Payments"), and (c) the contribution by Western
Resources to Protection One at the Closing of (i) all the issued and outstanding
shares of common stock, each no par value, of WestSec, Inc. and Westar Security,
Inc. (collectively, the "Western Resources Security Subsidiaries") and (ii) $250
million in cash and certain publicly traded securities plus an additional
contribution in cash equal to $7.00 multiplied by the aggregate number of shares
of Protection One Common Stock outstanding or issuable upon exercise of certain
options and warrants outstanding as of the Closing and after giving effect to
the adjustments described above (collectively, the "Cash and Stock Payment" and
together with the Share Issuance, and the Special Dividend, taking into account
the Option/Warrant Payments and the related amendment to Protection One's
charter to increase the authorized shares of Protection One Common Stock, the
"Transaction"). The terms and conditions of the Transaction are more fully set
forth in the Contribution Agreement.
You have asked for our opinion as to whether the Transaction pursuant to the
Contribution Agreement is fair from a financial point of view to the holders of
shares of Protection One Common Stock.
For purposes of the opinion set forth herein, we have:
(i) reviewed certain publicly available financial statements and other
information of Western Resources and Protection One, respectively;
(ii) reviewed certain internal financial statements and other financial
and operating data concerning the Western Resources Security
Subsidiaries and Protection One prepared by the managements of
Western Resources and Protection One, respectively;
(iii) analyzed certain financial projections relating to the Western
Resources Security Subsidiaries prepared by the managements of
Western Resources and Protection One;
(iv) analyzed certain financial projections relating to Protection One
prepared by the management of Protection One;
(v) discussed the past and current operations and financial condition and
the prospects of Protection One and the Western Resources Security
Subsidiaries, including information relating to certain strategic,
financial and other operational benefits anticipated from the
Transaction, with senior executives of Protection One and Western
Resources;
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(vi) reviewed the reported prices and trading activity for the Protection
One Common Stock;
(vii) compared the financial performance of Protection One and the prices
and trading activity of the Protection One Common Stock with that of
certain other comparable publicly-traded companies and their
securities;
(viii) reviewed the financial terms, to the extent publicly available, of
certain comparable merger and acquisition transactions;
(ix) reviewed and discussed with the senior managements of Protection One
and Western Resources the strategic rationale for the Transaction and
certain alternatives to the Transaction;
(x) participated in discussions and negotiations among representatives of
Western Resources and Protection One and their financial and legal
advisors;
(xi) reviewed the Contribution Agreement and certain related agreements;
and
(xii) considered such other factors and performed such other analyses as we
have deemed appropriate.
We have assumed and relied upon, without independent verification, the accuracy
and completeness of the information reviewed by us for the purposes of this
opinion. With respect to the internal financial statements for the Western
Resources Security Subsidiaries reviewed by us in connection with the
preparation of this opinion, we have assumed that they have been reasonably
prepared and will not differ materially from the audited financial statements
conforming to U.S. Generally Accepted Accounting Principles that are ultimately
prepared for purposes of the consummation of the Transaction. With respect to
the financial projections, we have assumed that they have been reasonably
prepared on bases reflecting the best currently available estimates and
judgments of the future financial performance of Protection One and the Western
Resources Security Subsidiaries. We have also relied upon, without independent
verification, the assessment by the managements of Protection One and Western
Resources of the strategic, financial and other operational benefits expected to
result from the Transaction and the timing and risks associated with the
integration of the Western Resources Security Subsidiaries and Protection One,
including the conversion of the Western Resources Security Subsidiaries to a
business model consistent with that of Protection One. We have also assumed that
the Transaction will be consummated on the terms set forth in the Contribution
Agreement and have relied upon, without independent verification, the assessment
by the management of Protection One and its advisors of the tax treatment of the
Special Dividend to be paid to Protection One shareholders in connection with
the Transaction. We have not made any independent valuation or appraisal of the
assets or liabilities of Protection One or the Western Resources Security
Subsidiaries, nor have we been furnished with any such appraisals. Our opinion
is necessarily based on economic, market and other conditions as in effect on,
and the information made available to us as of, the date hereof.
In arriving at our opinion, we had certain limited discussions with certain
other parties but were not authorized to solicit interest generally from other
parties with respect to an acquisition or other transaction involving Protection
One, other than Western Resources.
We have acted as financial advisor to the Board of Directors of Protection One
in connection with this transaction and will receive a fee for our services. In
the past, Morgan Stanley & Co. Incorporated and its affiliates have provided
financial advisory and financing services for Protection One and have received
fees for the rendering of these services. In addition, in the ordinary course of
our business we may actively trade the securities of Protection One or Western
Resources for our own account and for the accounts of our customers and,
accordingly, may at any time hold a long or short position in such securities.
It is understood that this letter is for the information of the Board of
Directors of Protection One and may not be used for any other purpose without
our prior written consent, except that this opinion may be included in its
entirety in any filing made by Western Resources or Protection One with the
Securities and Exchange Commission with respect to the Transaction. In addition,
this opinion does not in any manner address the prices at which the Protection
One Common Stock may actually trade at any time and we express no recommendation
or opinion as to how holders of Protection One Common Stock should vote at the
shareholders' meeting held in connection with the Transaction.
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Based upon and subject to the foregoing, we are of the opinion on the date
hereof that the Transaction is fair from a financial point of view to holders of
shares of Protection One Common Stock.
Very truly yours,
MORGAN STANLEY & CO.
INCORPORATED
By: /s/ CHARLES R. CORY
-----------------------------------
Charles R. Cory
Managing Director
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<PAGE> 291
APPENDIX E
FORM OF ARTICLE FOUR OF THE
FIFTH RESTATED CERTIFICATE OF INCORPORATION
OF
PROTECTION ONE, INC.
AS PROPOSED TO BE AMENDED
The total number of shares of all classes of stock that the Corporation
shall have the authority to issue is 155,000,000, of which 150,000,000 shall be
voting common stock, par value One Cent ($0.01) per share ("Common Stock"), and
5,000,000 shall be preferred stock, par value Ten Cents ($.10) per share
("Preferred Stock").
<PAGE> 292
APPENDIX F
PROTECTION ONE, INC.
1997 LONG-TERM INCENTIVE PLAN
1. Purposes. The purposes of this 1997 Long-Term Incentive Plan (as from
time to time amended, the "Plan") are (i) to align the interests of the
Company's stockholders and the recipients of awards under this Plan by
increasing the proprietary interest of such recipients in the Company's growth
and success, (ii) to advance the interests of the Company by attracting and
retaining for the Company and its Subsidiaries the services of directors,
officers and other key employees, consultants and agents, and (iii) to motivate
such persons to act in the long-term best interests of the Company's
stockholders.
2. Definitions. For purposes of the Plan, the following terms shall have
the meanings set forth below unless a different meaning is plainly required by
the context:
(a) "Affiliate" means any entity other than the Company and its
Subsidiaries (i) of which the Company directly or indirectly owns stock
having at least 50% of the combined voting power of all classes of stock of
such entity or, if such entity does not have shares of stock outstanding,
at least 50% of the ownership interests in such entity, and (ii) that is
designated by the Board or the Committee as a participating employer under
the Plan.
(b) "Award" means any Option, SAR, Restricted Share, Restricted Share
Unit, Performance Award, Dividend Equivalent or Other Share-Based Award
granted to an Eligible Employee or other eligible person under the Plan, or
any combination of the foregoing.
(c) "Award Agreement" means the written agreement or evidencing an
Award between the Company and the recipient of such Award.
(d) "Beneficiary" means as to any Participant the individual or
individuals, or the trust or trusts, that have been designated by such
Participant in his or her most recent written beneficiary designation filed
with the Company as to receive the benefits specified under the Plan upon
the death of such Participant or, if there is no such designated individual
or trust or surviving designated individual or trust, then the individual
or individuals, or the trust or trusts, entitled by will or the laws of
descent and distribution to receive such benefits.
(e) "Board" means the Board of Directors of the Company.
(f) "Code" means the Internal Revenue Code of 1986, as amended from
time to time. References to any provision of the Code shall be deemed to
include successor provisions thereto and regulations thereunder.
(g) "Committee" means the Compensation Committee of the Board or such
other Board committee as may be designated by the Board to administer the
Plan; provided, however, that the Committee shall consist of two or more
directors of the Company, each of whom is a "disinterested person" within
the meaning of Rule 16b-3 under the Exchange Act and an "outside director"
within the meaning of Section 162(m) of the Code.
(h) "Common Stock" means the common stock, par value $.01 per share,
of the Company.
(i) "Company" means Protection One, Inc., a Delaware corporation. (j)
"Director" means a member of the Board.
(j) "Director" means a member of the Board.
(k) "Dividend Equivalent" means a right granted to a Participant under
Section 5(g) to receive cash, shares of Common Stock or other property
equal in value to dividends paid with respect to a specified number of
shares of Common Stock. Dividend Equivalents may be awarded on a
free-standing basis or in connection with another Award, and may be paid
currently or on a deferred basis.
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(l) "Eligible Employee" means an employee of the Company or any of its
Subsidiaries or Affiliates, including any Director who is an employee.
(m) "Exchange Act" means the Securities Exchange Act of 1934, as
amended from time to time. References to any provision of the Exchange Act
shall be deemed to include successor provisions thereto and regulations
thereunder.
(n) "Fair Market Value" means, with respect to shares of Common Stock
or other property, the fair market value of such shares or other property
determined by such methods or procedures as shall be established from time
to time by the Committee. If the shares of Common Stock are quoted on the
Nasdaq National Market System or any other national market system, unless
otherwise determined by the Committee in good faith, the Fair Market Value
of the Common Stock on any date shall be the mean between the high and low
selling prices of the Common Stock on such date (or, if the Common Stock
was not traded on that day, the next preceding day that shares of Common
Stock were traded) through such national market system, as such prices are
officially quoted by such system.
(o) "ISO" means any Option intended to be and designated by the
Committee as an "incentive stock option" within the meaning of Section 422
of the Code.
(p) "Non-Employee Director" means a director of the Company that is
not an officers or employee of the Company or any of its Subsidiaries.
(q) "NQSO" means any Option that is not an ISO.
(r) "Option" means a right granted under Section 5(b) to purchase
shares of Common Stock.
(s) "Other Share-Based Award" means a right granted under Section
5(h) that relates to or is valued by reference to shares of Common Stock.
(t) "Participant" means an Eligible Employee, a Non-Employee Director
or a consultant or agent of the Company who has been granted an Award.
(u) "Performance Award" means a right, granted under Section 5(f) and
contingent upon the attainment of specified performance criteria during a
specified performance period, to receive one share of Common Stock (which
may be a Restricted Share) or, in lieu thereof, the Fair Market Value of
such Performance Share in cash.
(v) "Performance Criteria" means the criteria, established by the
Committee, which shall be satisfied or met (i) as a condition to the
exercisability of all or a portion of an Option or SAR or (ii) during the
applicable Restriction Period or Performance Period as a condition to the
holder's receipt, in the case of an Award of Restricted Shares, of the
shares of Common Stock subject to such award, or, in the case of an Award
of Restricted Share Units or a Performance Award, of payment with respect
to such Award. Such criteria may include, but are not limited to, revenues,
EBITDA, cash flow, earnings per share, return on equity, market shares,
customer satisfaction goals or performance against budget (whether
applicable to the Company or any relevant Subsidiary or business unit),
comparisons with competitor companies or groups and with stock market
indices, the attainment by a share of Common Stock or a specified Fair
Market Value for a specified period of time, or any combination thereof.
Performance criteria may vary from Participant to Participant and between
groups of Participants.
(w) "Restricted Shares" means a grant under Section 5(d) of shares of
Common Stock the rights of ownership of which are subject to restrictions
and/or to a risk of forfeiture prescribed by the Committee.
(x) "Restricted Share Unit" means a grant under Section 5(e) of shares
of Common Stock or cash at the end of a specified deferral period.
(y) "Rule 16b-3" means Rule 16b-3 adopted by the Securities and
Exchange Commission under Section 16 of the Exchange Act, as from time to
time in effect and applicable to the Plan and Participants.
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(z) "SAR" or "Share Appreciation Right" means a right granted under
Section 5(c) that entitles the recipient to receive, upon exercise, the
excess of (1) the Fair Market value of one share of Common Stock on the
date of exercise (or if the Committee shall so determine in the case of any
such right, the Fair Market Value of one share of Common Stock at any time
during a specified period before or after the date of exercise) over (2)
the exercise price of the SAR as determined by the Committee (which, in the
case of an SAR granted in tandem with an Option, shall be equal to the
exercise price of the underlying option).
(aa) "Subsidiary" means any corporation of which the Company owns,
directly or indirectly, shares possessing at least 80% or more of the total
combined voting power of all classes of stock of such corporation.
3. Administration.
(a) Authority of the Committee. The Plan shall be administered by the
Committee, and the Committee shall have full and final authority to take the
following actions, in each case subject to and consistent with the provisions of
the Plan:
(i) to designate Affiliates;
(ii) to select Eligible Employees, Non-Employee Directors, consultants
and agents to whom Awards may be granted;
(iii) to determine the type or types of Awards to be granted;
(iv) to determine as to each Participant the form, amount and timing
of each Award granted to such person and, if applicable, the number of
shares of Common Stock, the number of SARs and/or the number of Restricted
Shares, Performance Shares and Dividend Equivalents subject to such Award,
the applicable exercise price, grant price or purchase price and any basis
for adjusting the same, the time and conditions of exercise or settlement
of the Award (including, if applicable, performance criteria, the
restrictions or conditions, if any (and any schedule for lapse of such
restrictions or conditions) relating to exercisability, transferability or
forfeiture of such Award, and the circumstance under which such
restrictions, conditions or schedules may be accelerated or waived), all
other terms and conditions of such Award and all other matters to be
determined in connection with an Award, based in each case on such
considerations as the Committee shall determine;
(v) to determine whether, to what extent and under what circumstances
an Award may be settled, or the exercise price of an Award may be paid, in
cash, shares of Common Stock, other Awards or other property;
(vi) to prescribe the form of each Award Agreement, which need not be
identical for each Participant;
(vii) to adopt, amend, waive, suspend and rescind such rules and
regulations, and appoint such agents, as the Committee may deem necessary
or advisable to administer the Plan;
(viii) to correct any defect or supply any omission or reconcile any
inconsistency in the Plan and to construe and interpret the Plan and any
Award, Award Agreement or other instrument or document hereunder,
(ix) to accelerate the exercisability or vesting of all or any portion
of any Award or to extend the period during which an Award is exercisable;
and
(x) to make all other decisions and determinations as may be required
under the terms of the Plan or as the Committee may deem necessary or
advisable for the administration of the Plan.
(b) Manner of Exercise of Committee Authority. The Committee shall have
sole discretion in exercising its authority under the Plan. Action of the
Committee with respect to the Plan shall be final, conclusive and binding on all
persons, including the Company, its Subsidiaries and Affiliates, Eligible
Employees and other
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persons eligible to participate in the Plan, Participants, any person claiming
any rights under the Plan from or through a Participant and stockholders of the
Company. The express grant of any specific power to the Committee, and the
taking of any action by the Committee, shall not be construed as limiting such
or any other power or authority of the Committee.
The Committee may delegate to officers or managers of the Company or any
Subsidiary or Affiliate, subject to such terms as the Committee shall determine,
the performance of the administrative functions of the Committee hereunder. In
addition, the Committee may delegate some or all of its power and authority
hereunder to the Chief Executive Officer and President and/or such other
executive officer or officers of the Company as the Committee deems appropriate;
provided, however, that the Committee may not delegate its power and authority
with regard to (i) the selection for participation in the Plan of (A) the Chief
Executive Officer of the Company (or any employee who is acting in such
capacity), one of the four most highly compensated officers of the Company other
than the Chief Executive Officer, or another person deemed to be a "covered
employee" within the meaning of Section 162(m) of the Code or who, in the
Committee's judgment, is likely to be a covered employee at any time during the
period an Award to such employee would be outstanding or (B) an officer or other
person subject to Section 16 of the Exchange Act, or (ii) decisions concerning
the type, form, amount, pricing or timing of an Award to such an officer,
employee or other person who is, or who in the Committee's judgment is likely to
be, a covered employee.
(c) Limitation of Liability. Each member of the Committee and each other
person to whom the Committee delegates any of its power and authority hereunder
shall be entitled to rely or act, in good faith, upon any report or other
information furnished to him or her by any officer or other employee of the
Company or any Subsidiary or Affiliate, the Company's independent certified
public accountants or legal counsel, or other professional retained by the
Company to assist in the administration of the Plan. No member of the Committee,
and no person acting on behalf of the Committee, shall be personally liable for
any action, determination or interpretation taken or made in good faith with
respect to the Plan, and all members of the Committee and any person acting on
behalf of the Committee shall, to the maximum extent permitted by law, be fully
indemnified, reimbursed and otherwise protected by the Company with respect to
any such action, determination or interpretation or any claim, loss, damage or
expense (including, but not limited to, attorneys' fees) arising therefrom.
4. Shares Subject to the Plan.
(a) Subject to adjustment as provided in Section 4(c) hereof and to the
limitations set forth below, the total number of shares of Common Stock as to
which Awards may be granted shall be 4,200,000. Such number of shares shall be
reduced by the sum of (i) the aggregate number of shares of Common Stock that
are issued as Restricted Shares or as "bonus stock" under Section 5(h), and (ii)
the aggregate number of shares of Common Stock that become subject to
outstanding Options, outstanding SARs not granted in tandem with an Option, and
outstanding Performance Awards. If and to the extent that shares of Common Stock
subject to an outstanding Award are not issued or delivered by reason of the
expiration, surrender, cancellation, forfeiture or other termination of that
Award, the settlement of such Award in cash or the delivery or withholding of
shares of Common Stock to pay all or a portion of the exercise price of an Award
or to satisfy all or a portion of the tax withholding obligations relating to an
Award, then such shares of Common Stock shall again be available for Awards
under the Plan.
(b) Shares of Common Stock to be issued or delivered under this Plan shall
be authorized and unissued shares, treasury shares or shares acquired by
purchase in the open market or in one or more private transactions.
(c) If and to the extent that the Committee shall determine that any share
dividend, share split or reverse split, recapitalization, reorganization,
merger, consolidation, combination, separation (including a spin-off or other
distribution of stock or property), repurchase or share exchange or other
corporate transaction or event affects the outstanding shares of Common Stock
such that an adjustment in outstanding Awards is appropriate to reflect such
change and to prevent dilution or enlargement of the rights of Participants
under the Plan, then the Committee shall make such equitable changes or
adjustments in the Plan and outstanding Awards as the Committee deems
appropriate, including, but not limited to, by adjusting any or all of (i) the
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number and kind of shares that may thereafter be issued under the Plan, (ii) the
number and kind of shares, other securities, cash or other consideration issued
or issuable in respect of outstanding Awards, and (iii) the exercise price,
grant price or purchase price relating to any Award; provided, however, that,
with respect to ISOs, such adjustment shall be made in accordance with Section
424(h) of the Code unless the Committee determines otherwise. In addition, the
Committee is authorized to make adjustments in the terms and conditions of
(including, but not limited to, the performance objectives included in) Awards
in recognition of unusual or non-recurring events (including, without
limitation, events described in the immediately preceding sentence) affecting
the Company or any Subsidiary or Affiliate or the financial statements of the
Company or any Subsidiary or Affiliate, or in response to changes in applicable
laws, rules, regulations or accounting principles; provided, further, that if an
Award Agreement specifically so provides, the Committee shall not have
discretion to increase the amount of compensation payable under the Award to the
extent such an increase would cause the Award to lose its qualification as
performance-based compensation for purposes of Section 162(m) of the Code.
5. Specific Terms of Awards.
(a) General. Awards may be granted on the terms and conditions set forth in
this Section 5. In addition, the Committee may impose on any Award or the
exercise or settlement thereof, at the date of grant or thereafter (subject to
Section 9(d)), such additional terms and conditions not inconsistent with the
provisions of the Plan as the Committee shall determine, including terms
regarding forfeiture of Awards or continued exercisability of Awards in the
event of termination of employment by the Participant.
(b) Options. The Committee is authorized to grant Options, which may be
NQSOs or ISOs, to Participants on the following terms and conditions:
(i) Number of Shares and Exercise Price. The number of shares of
Common Stock subject to an Option and the exercise price per share of
Common Stock purchasable upon exercise of such Option shall be determined
by the Committee, and the Committee may, without limitation, set an
exercise price that is based upon achievement of performance criteria if
deemed appropriate by the Committee.
(ii) Time and Method of Exercise; Other Terms. The Committee shall
determine the time or times at which an Option may be exercised in whole or
in part (including, without limitation, upon achievement of performance
criteria if deemed appropriate by the Committee), the method or methods by
which such exercise price may be paid or deemed to be paid (including,
without limitation, broker-assisted exercise arrangements), the form of
such payment (including, without limitation, cash, shares of Common Stock,
notes or other property), and the methods by which shares of Common Stock
will be delivered or deemed to be delivered to holders of Options.
(iii) ISOs. The terms and conditions of any ISO granted under the Plan
shall comply in all respects with the provisions of Section 422 of the
Code, including but not limited to the requirements that (A) ISOs be
granted only to Eligible Employees; (B) the exercise price of each ISO not
be less than 100% of the Fair Market Value of the Common Stock on the date
the ISO is granted; provided further, that if an ISO shall be granted to
any person who, at the time such option is granted, owns capital stock
possessing more than ten percent of the total combined voting power of all
classes of capital stock of the Company (or of any parent or Subsidiary) (a
"Ten Percent Holder"), the purchase price per share of Common Stock shall
be the price (currently 110% of Fair Market Value) required by the Code in
order to constitute an ISO; (C) if an ISO shall be granted to a Ten Percent
Holder, such Option shall not be exercised later than five years after its
date of grant; and (D) to the extent that the aggregate Fair Market Value
(determined as of the grant date) of the shares of Common Stock with
respect to which ISOs granted to any Participant are exercisable for the
first time during any calendar year (under the Plan and all other stock
option plans of the Company) exceeds $100,000, such excess portion shall be
treated as a NQSO.
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(c) SARs. The Committee is authorized to grant SARs to Participants on the
following terms and conditions:
(i) Number of Shares, Exercise Price and Nature. The Committee shall
determine at the time an Award of SARs is granted, (A) the number of SARs
subject to the Award, (B) the exercise price of such SARs, (C) whether each
such SAR entitles the holder thereof to receive, upon exercise, the excess
of (1) the Fair Market value of one share of Common Stock on the date of
exercise or the Fair Market Value of one share of Common Stock at any time
during a specified period before or after the date of exercise over (2) the
exercise price of the SAR, and (D) whether such SAR is free-standing or in
tandem with an Option or other Award.
(ii) Other Terms. The Committee shall determine, at the time of grant
of an SAR or thereafter, the time or times at which the SAR may be
exercised in whole or in part (provided, however, that no SAR granted in
tandem with an Option my be exercised later than the expiration,
cancellation, forfeiture or other termination of such Option), the method
of exercise, the method of settlement, the form of consideration to be paid
upon exercise (which may consist of cash, shares of Common Stock (which
may, but need not be, Restricted Shares) or other property), the method by
which shares of Common Stock or other consideration will be delivered or
deemed to be delivered to the holder the SAR, and all other terms and
conditions of the SAR. Unless the Committee determines otherwise, a SAR (a)
granted in tandem with an NQSO may be granted at the time of grant of the
related NQSO or at any time thereafter, and (b) granted in tandem with an
ISO may only be granted at the time of grant of the related ISO.
(d) Restricted Shares. The Committee is authorized to grant Restricted
Shares to Participants on the following terms and conditions:
(i) Issuance and Restrictions. Restricted Shares shall be issued to a
Participant upon payment of consideration by the Participant if any, as the
Committee shall determine at the date of grant, and during the restriction
period established by the Committee (the "Restriction Period") shall be
subject to such restrictions on transferability and other restrictions, if
any, as the Committee may impose, which restrictions may lapse separately
or in combination at such times, under such circumstances (including,
without limitation, upon achievement of performance criteria if deemed
appropriate by the Committee), in such installments or otherwise, as the
Committee may determine. The performance criteria may be of various types,
may differ as to various Participants or classes or categories of
Participants, and may include the attainment of certain performance
criteria by the individual Participants, the Company, a department or
division of the Company and/or a group or class of Participants.
(ii) Forfeiture. Except as otherwise determined by the Committee at
the date of grant or thereafter, in the event a Participant ceases
employment during the Restriction Period or in the event performance
criteria attributable to an Award of Restricted Shares, if any, are not
achieved, Restricted Shares on such shares shall be forfeited.
(iii) Certificates for Shares. Restricted Shares granted under the
Plan may be evidenced in such manner as the Committee shall determine.
Except to the extent otherwise set forth in the applicable Award Agreement,
if certificates representing Restricted Shares are registered in the name
of the Participant, such certificates shall bear an appropriate legend
referring to the restrictions and other terms and conditions applicable to
such Restricted Shares, and the Company shall retain physical possession of
the certificate, together with a stock power or other instrument of
assignment endorsed in blank, until the completion of the Restriction
Period and the satisfaction of all performance criteria, if any.
(iv) Stockholder Rights. Except to the extent otherwise set forth in
the applicable Award Agreement, a Participant granted Restricted Shares
shall have all of the rights of a stockholder of the Company, including,
without limitation, the right to vote the Restricted Shares and the right
to receive dividends thereon. Not without the foregoing, dividends or
Dividend Equivalents paid on Restricted Shares shall be either paid at the
dividend payment date or deferred for payment to such date as determined by
the Committee, in cash or in shares of Common Stock having a Fair Market
Value equal
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to the amount of such dividend or Dividend Equivalents. Shares of Common
Stock distributed in connection with a stock split or stock dividend, and
all other property distributed as a dividend or Dividend Equivalents, if
any, shall, to the extent distributed with respect to Restricted Shares, be
subject to restrictions and risk of forfeiture to the same extent as the
Restricted Shares with respect to which such Shares or other property has
been distributed.
(e) Restricted Share Units. The Committee is authorized to grant Restricted
Share Units to Participants, subject to the following terms and conditions:
(i) Award and Restrictions. Delivery of shares of Common Stock or
cash, as the case may be, will occur upon expiration of the deferral period
specified for Restricted Share Units by the Committee (or, if permitted by
the Committee, as elected by the Participant). In addition, Restricted
Share Units shall be subject during such deferral period to such
restrictions on transfer and other restrictions as the Committee may
impose, if any (including, without limitation, the achievement of
performance criteria if deemed appropriate by the Committee), which
restrictions may lapse at such time, separately or in combination, in
installments or otherwise, as the Committee may determine.
(ii) Forfeiture. Except as otherwise determined by the Committee at
the date of grant or thereafter, upon termination of employment (as
determined under criteria established by the Committee) during the
applicable Restriction Period, or upon failure to satisfy any other
condition precedent to the delivery of shares of Common Stock or cash to
which such Restricted Share Units relate, all Restricted Share Units that
are at that time subject to restriction shall be forfeited.
(f) Performance Awards. The Committee is authorized to grant Performance
Awards to Participants on the following terms and conditions:
(i) Number of Performance Shares, Performance Period and Performance
Criteria. Upon grant of a Performance Award, the Committee shall determine
(a) the nature, length and starting date of the performance period for such
Performance Award ("Performance Period"), (b) the performance criteria to
be used in valuing the Performance Award and determining the extent to
which such Performance Award has been earned, and (c) the number of shares
of Common Stock (which may, but need not, be Restricted Shares), the range
of dollar values or a combination thereof, to be received by the
Participant at the end of the Performance Period if and to the extent that
the relevant performance criteria for such Performance Award are achieved.
Performance Periods may overlap and Participants may participate
simultaneously with respect to Performance Awards for which different
Performance Periods are prescribed.
(ii) Payment. The earned portion of a Performance Award may be paid
currently or on a deferred basis with such interest or earning equivalents
as may determined by Committee.
(iii) Significant Events. If during the course of a Performance Period
there shall occur significant events as determined by the Committee that
the Committee expects to have a substantial effect on a performance
objective during such period, the Committee may revise such objective;
provided, however, that, if an Award Agreement so provides, the Committee
shall not have any discretion to increase the amount of compensation
payable under the Award to the extent such an increase would cause the
Award to lose its qualification as performance-based compensation for
purposes of Section 162(m)(4)(C) of the Code and the regulations
thereunder.
(iv) Forfeiture. Except as otherwise determined by the Committee at
the date of grant or thereafter, upon termination of employment during the
applicable Performance Period, a Performance Award shall be forfeited.
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(g) Dividend Equivalents. The Committee is authorized to grant Dividend
Equivalents to Participants on the following terms and conditions:
(i) The Committee shall determine, at the time of the Award, the
number of shares of Common Stock to which such Award relates. Dividend
Equivalents may be awarded on a free-standing basis or in connection with
another Award, and may be paid currently or on a deferred basis.
(ii) The Committee may provide, at the date of grant or thereafter,
that Dividend Equivalents shall be paid or distributed when accrued or
shall be deemed to have been reinvested in additional shares of Common
Stock, or other investment vehicles as the Committee may specify, provided
that Dividend Equivalents (other than freestanding Dividend Equivalents)
shall be subject to all conditions and restrictions of the underlying
Awards to which such Dividend Equivalents relate.
(h) Other Share-Based Awards. The Committee is authorized, subject to
limitations under applicable law, to grant to Participants such other Awards as
may be denominated or payable in, valued in whole or in part by reference to, or
otherwise based on, or related to, shares of Common Stock as deemed by the
Committee to be consistent with the purposes of the Plan, including, without
limitation, shares of Common Stock awarded purely as a "bonus" that are not
subject to any restriction period or performance criteria, other rights
convertible or exchangeable into shares of Common Stock, purchase rights for
shares of Common Stock, Awards with a value and payment of which is contingent
upon performance of the Company or any other factor or factors designated by the
Committee, and Awards valued by reference to the performance of specified
Subsidiaries or Affiliates. The Committee shall determine the terms and
conditions of such Awards at date of grant or thereafter. Shares of Common Stock
delivered pursuant to an Award in the nature of a purchase right granted under
this Section 5(h) shall be purchased for such consideration, paid for at such
times, by such methods, and in such forms, including, without limitation, cash,
shares of Common Stock, notes or other property, as the Committee shall
determine. Cash awards, as an element of or supplement to any other Award under
the Plan, shall also be authorized pursuant to this Section 5(h).
6. Certain Provisions Applicable to Awards.
(a) Stand-Alone, Additional, Tandem and Substitute Awards. Awards granted
under the Plan may, in the discretion of the Committee, be granted to
Participants either alone or in addition to, in tandem with, or in exchange or
substitution for, any other Award granted under the Plan or any award granted
under any other plan or agreement of the Company, any Subsidiary or Affiliate,
or any business entity to be acquired by the Company or a Subsidiary or
Affiliate, or any other right of a Participant to receive payment from the
Company or any Subsidiary or Affiliate. The per Share exercise price of any
Option, the grant price of any SAR, or the purchase or settlement price of any
other Award conferring a right to purchase shares of Common Stock that is
granted in connection with the substitution of one or more awards granted under
any other plan or agreement of the Company or any Subsidiary or Affiliate or any
business entity to be acquired by the Company or any Subsidiary or Affiliate
shall be determined by the Committee, in its discretion. Upon the exercise of
any Award granted in tandem with any other Award, such related Award shall be
canceled to the extent of the number of shares of Common Stock as to which the
Award is exercised.
(b) Form of Payment Under Awards. Subject to the terms of the Plan and any
applicable Award Agreement, payments to be made by the Company or a Subsidiary
or Affiliate upon the grant, exercise or settlement of an Award may be made in
such forms as the Committee shall determine at the date of grant or thereafter,
including, without limitation, cash, shares of Common Stock, or other property,
and may be made in a single payment or transfer, in installments, or on a
deferred basis. The Committee may make rules relating to installment or deferred
payments with respect to Awards, including the rate of interest to be credited
with respect to such payments.
(c) Non-transferability. Unless otherwise set forth by the Committee in an
Award Agreement, Awards shall not be transferable by a Participant except by
will or the laws of descent and distribution (except pursuant to a Beneficiary
designation) and shall be exercisable during the lifetime of a Participant only
by such Participant or his or her guardian or legal representative. A
Participant's rights under an Award and the
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<PAGE> 300
Plan may not be pledged, mortgaged or otherwise encumbered, and shall not be
subject to claims of the Participant's creditors.
(d) Agreement. Each award under this Plan shall be evidenced by an
Agreement setting forth the terms and conditions applicable to such award. No
award shall be valid until an Agreement is executed by the Company and the
recipient of such award and, upon execution by each party and delivery of the
Agreement to the Company, such award shall be effective as of the effective date
set forth in the Agreement.
7. Change of Control Provisions.
(a) Acceleration of Exercisability and Lapse of Restrictions; Cash-Out of
Awards. In the event of a Change of Control, the following acceleration and
cash-out provisions shall apply unless otherwise provided by the Committee at
the time of the Award grant:
(i) All outstanding Awards pursuant to which the Participant may have
rights the exercise of which is restricted or limited, shall become fully
exercisable; unless the right to lapse of restrictions or other limitations
is waived or deferred by a Participant prior to such lapse, all
restrictions and other limitations (including risks of forfeiture and
deferrals) on outstanding Awards subject to restrictions or other
limitations under the Plan shall lapse; and all performance criteria and
other conditions to payment of Awards under which payments of cash, shares
of Common Stock or other property are subject to conditions shall be deemed
to be achieved or fulfilled and shall be waived by the Company.
(ii) For a period of up to 60 days following a Change in Control, the
Participant may elect to surrender any outstanding Award and to receive, in
full satisfaction therefor, a cash payment equal to the value of such Award
calculated on the basis of the Change of Control Price of any shares of
Common Stock or the Fair Market Value of any property other than shares of
Common Stock relating to such Award; provided, however, that in the case of
an ISO, or a Stock Appreciation Right granted in tandem therewith, the cash
payment shall be based upon the Fair Market Value of shares of Common Stock
on the date of exercise. In the event that an Award is granted in tandem
with another Award such that the Participant's right to payment for such
Award is an alternative to payment of another Award, the Participant
electing to surrender any such tandem Award shall surrender all alternative
Awards related thereto and shall receive that payment for the Award that
produces the highest payment to the Participant. Except as provided in
Section 8(a)(iii), in no event will an Award be surrendered or a
Participant have the right to receive cash under this Section 7(a)(ii) with
respect to an Award if the Participant is subject to Section 16 of the
Exchange Act and at least six months shall not have elapsed from the date
on which the Participant was granted the Award before the date of the
Change of Control (unless this restriction is not at such time required to
cause the receipt of such cash to be exempt from the provision of Rule
16b-3).
(iii) In the event that any Award is subject to limitations under
Section 8(a)(ii) at the time of a Change of Control, then solely for the
purpose of determining the rights of the Participant with respect to such
Award, a Change of Control shall be deemed to occur at the close of
business on the first business
day following the date on which the Award could be sold without liability
under Section 16 of the Exchange Act.
(b) Definitions of Certain Terms. For purposes of this Section 7, the
following definitions, in addition to those set forth in Section 2, shall apply:
(i) "Change of Control" means, and a Change of Control shall be deemed
to have occurred, if (i) there occurs any transaction or other event or
circumstance that results in less than 50% of the total Voting Securities
of the Company outstanding immediately after such transaction being
beneficially owned by Western Resources, Inc., a Kansas corporation
("Western Resources"), or an affiliate of Western Resources, or (ii) all or
substantially all of the assets of the Company are sold and less than 50%
of the total assets owned by the Company immediately prior to such
transaction are owned by a person other than Western Resources and its
affiliates.
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<PAGE> 301
(ii) "Change of Control Price" means, with respect to a Share, the
higher of (A) the highest reported sales price of shares of Common Stock on
the Nasdaq National Market during the 30 calendar days preceding a Change
of Control, or (B) the highest price paid or offered in a transaction that
either (1) results in a Change of Control, or (2) would be consummated but
for another transaction which results in a Change of Control and, if it
were consummated, would result in a Change of Control. With respect to
clause (B) of the immediately preceding sentence, the "price paid or
offered" will be equal to the sum of (i) the face amount of any portion of
the consideration consisting of cash or cash equivalents and (ii) the Fair
Market Value of any portion of the consideration consisting of real or
personal property other than cash or cash equivalents, as established by an
independent appraiser selected by the Committee.
(iii) "Voting Securities or Security" means any securities of the
Company that carry the right to vote generally in the election of
directors.
8. General Provisions.
(a) Compliance with Legal and Trading Requirements. The Plan, the grant,
exercise and settlement of Awards thereunder, and the other obligations of the
Company under the Plan and any Award Agreement shall be subject to all
applicable federal and state laws, rules and regulations, and to such approvals
by any regulatory or governmental agency as may be required by applicable law.
The Company, in its discretion, may postpone the issuance or delivery of shares
of Common Stock under any Award until completion of such stock exchange or
market system listing or registration or qualification of such shares of Common
Stock under applicable securities laws or other required action under any state
or federal law, rule or regulation as the Company may consider appropriate, and
may require any Participant to make such representations and furnish such
information as the Committee may consider appropriate in connection with the
issuance or delivery of shares of Common Stock in compliance with applicable
laws, rules and regulations. No provisions of the Plan shall be interpreted or
construed to obligate the Company to register any shares of Common Stock under
federal or state securities laws.
(b) No Right to Continued Employment or Service. Neither the Plan nor any
action taken thereunder shall be construed as giving any employee, officer,
director or other person the right to be retained in the employ or service of
the Company or any of its Subsidiaries or Affiliates, nor shall it interfere in
any way with the right of the Company or any of its Subsidiaries or Affiliates
to terminate any such employment or service at any time.
(c) Taxes. The Company or any Subsidiary or Affiliate is authorized to
withhold from any Award granted, any payment relating to an Award under the
Plan, including from a distribution of shares of Common Stock, or any payroll or
other payment to a Participant, amounts of withholding and other taxes due in
connection with any transaction involving an Award, and to take such other
action as the Committee may deem advisable to enable the Company and
Participants to satisfy obligations for the payment of withholding taxes and
other tax obligations relating to any Award. This authority shall include
authority to withhold or receive shares of Common Stock or other property and to
make cash payments in respect thereof in satisfaction of a Participant's tax
obligations.
(d) Changes to the Plan and Awards. The Board may amend or otherwise alter,
suspend, discontinue or terminate the Plan or the Committee's authority to grant
Awards under the Plan as the Board deems advisable without the consent of
stockholders of the Company or Participants except as may be otherwise required
by applicable law, rule or regulation, including Rule 16b-3 under the Exchange
Act and Section 162(m)(4)(c) of the Code; provided, however, no such amendment
or other alteration, suspension, discontinuation or termination of the Plan may
impair the rights of the holder of an outstanding Award without the consent of
such holder.
(e) No Rights to Awards; No Shareholder Rights. No person shall have any
right or claim to be granted any Award under the Plan, and there is no
obligation for uniformity of treatment of eligible persons and Participants. No
Award shall confer on any Participant any of the rights of a stockholder of the
Company.
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(f) Unfunded Status of Awards. The Plan is intended to constitute an
"unfunded" plan for incentive compensation. With respect to any payment not yet
made to a Participant pursuant to an Award, nothing contained in the Plan or any
Award shall give any such Participant any rights that are greater than those of
a general creditor of the Company; provided, however, that the Committee may
authorize the creation of trusts or make other arrangements to meet the
Company's obligations under the Plan to deliver cash, shares of Common Stock,
other Awards or other property pursuant to any Award, which trusts or other
arrangements shall be consistent with the "unfunded" status of the Plan unless
the Committee otherwise determines with the consent of each affected
Participant.
(g) Non-exclusivity of the Plan. Neither the adoption of the Plan by the
Board nor its submission to the stockholders of the Company for approval shall
be construed as creating any limitations on the power of the Board to adopt such
other incentive arrangements as the Board may deem desirable, including, without
limitation, the granting of options and other awards otherwise than under the
Plan, and such arrangements may be either applicable generally or only in
specific cases.
(h) Not Compensation for Benefit Plans. No Award payable under this Plan
shall be deemed salary or compensation for the purpose of computing benefits
under any benefit plan or other arrangement of the Company for the benefit of
its employees or directors unless the Company shall determine otherwise.
(i) No Fractional Shares of Common Stock. No fractional shares of Common
Stock shall be issued or delivered pursuant to the Plan or any Award. Cash shall
be paid in lieu of such fractional shares.
(j) Governing Law. The validity, construction, and effect of the Plan any
rules and regulations relating to the Plan, and any Award Agreement shall be
determined in accordance with the laws of Delaware without giving effect to
principles of conflict of laws.
(k) Effective Date; Time Limitation on Future Grants, Plan Termination. The
Plan shall become effective as of October 24, 1997 (the "Effective Date"), the
date on which the Plan was adopted by the Board subject to approval of the Plan
by the Company's stockholders. No Award shall be granted under the Plan after
the 10th anniversary of the Effective Date. In the event that this Plan is not
approved by the stockholders of the Company, this Plan and any awards hereunder
shall be void and of no force or effect.
(l) Titles and Headings. The titles and headings of the Sections and
subsections in the Plan are for convenience of reference only. In the event of
any conflict, the text of the Plan, rather than such titles or headings, shall
control.
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PROXY
PROTECTION ONE, INC.
1997 SPECIAL MEETING OF STOCKHOLDERS
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned stockholder of Protection One, Inc., a Delaware
corporation ("Protection One"), hereby appoints John E. Mack, III, Thomas K.
Rankin 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 Protection
One that the undersigned would be entitled to vote at the 1997 Special Meeting
of Stockholders of Protection One to be held on November 24, 1997 (the
"Meeting") and at any and all postponements or 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 Stock Acquisition Proposal (as defined in the Proxy Statement
referred to below) (Item 1) and FOR the approval of the 1997 Long-Term
Incentive Plan (Item 2).
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 Special Meeting
of Stockholders and Proxy Statement each dated November 7, 1997.
<PAGE> 304
<TABLE>
<CAPTION>
Please mark ___
your votes as
indicated in [X]
this example. ___
<S> <C>
THE BOARD OF DIRECTORS RECOMMENDS
A VOTE FOR ITEMS 1 AND 2. FOR AGAINST ABSTAIN FOR AGAINST ABSTAIN
1. APPROVAL OF THE STOCK 2. APPROVAL OF THE 1997
ACQUISITION PROPOSAL. [ ] [ ] [ ] LONG-TERM INCENTIVE PLAN. [ ] [ ] [ ]
Approval of the Stock Acquisition Proposal will result
in an issuance of shares of Protection One common stock
that will transfer control of Protection One to
Western Resources, Inc.
Signature(s)__________________________________________________________________________ Date ________________
NOTE: Please sign as name appears hereon. Joint owners should each sign. When signing as attorney, executor,
administrator, trustee or guardian, please give full title as such.
</TABLE>
