<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1996
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to _________
<TABLE>
<CAPTION>
<S> <C>
0-24780 33-73002-01
------- -----------
(Commission File Number) (Commission File Number)
PROTECTION ONE, INC. PROTECTION ONE ALARM MONITORING, INC.
-------------------- -------------------------------------
(EXACT NAME OF REGISTRANT (EXACT NAME OF REGISTRANT
AS SPECIFIED IN CHARTER) AS SPECIFIED IN CHARTER)
Delaware Delaware
-------- --------
(State or Other Jurisdiction (State or Other Jurisdiction
of Incorporation or Organization) of Incorporation or Organization)
93-1063818 93-1065479
---------- ----------
(I.R.S. Employer Identification No.) (I.R.S. Employer Identification No.)
6011 Bristol Parkway, 6011 Bristol Parkway,
Culver City, California 90230 Culver City, California 90230
----------------------------- -----------------------------
(Address of Principal Executive Offices, (Address of Principal Executive Offices,
Including Zip Code) Including Zip Code)
(310) 338-6930 (310) 338-6930
-------------- --------------
(Registrant's Telephone Number, (Registrant's Telephone Number,
Including Area Code) Including Area Code)
</TABLE>
Indicate by check mark whether each of the registrants (1) has filed
all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that such registrants were required to file such reports) and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
As of February 10, 1997, Protection One, Inc. had outstanding
13,715,079 shares of Common Stock, par value $0.01 per share. As of such date,
Protection One Alarm Monitoring, Inc. had outstanding 110 shares of Common
Stock, par value $0.10 per share, all of which shares were owned by Protection
One, Inc.. Protection One Alarm Monitoring, Inc. meets the conditions set
forth in General Instructions H(1)(a) and (b) for Form 10-Q and is therefore
filing this form with the reduced disclosure format set forth therein.
<PAGE> 2
PART I
ITEM 1. FINANCIAL STATEMENTS
PROTECTION ONE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
<TABLE>
<CAPTION>
September 30, December 31,
1996 1996
------------ ------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . $ 1,782 $ 598
Restricted cash . . . . . . . . . . . . . . . . . . . . 3,680 3,595
Receivables, net . . . . . . . . . . . . . . . . . . . 12,743 14,914
Inventories . . . . . . . . . . . . . . . . . . . . . . 1,920 1,833
Prepaid expenses . . . . . . . . . . . . . . . . . . . 1,221 1,839
Deferred tax asset . . . . . . . . . . . . . . . . . . -- 841
------------ ----------
Total current assets . . . . . . . . . . . . . . . 21,346 23,620
Property and equipment, net . . . . . . . . . . . . . . . . . 9,952 10,535
Subscriber accounts and intangibles, net . . . . . . . . . . 257,354 275,746
Assets held for sale . . . . . . . . . . . . . . . . . . . . 775 -
Deposits............... . . . . . . . . . . . . . . . . . . . 648 576
------------ ----------
$ 290,075 $ 310,477
============ ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . $ 2,278 $ 1,963
Accrued salaries, wages and benefits . . . . . . . . . 1,495 1,611
Other accruals . . . . . . . . . . . . . . . . . . . . 1,048 2,018
Purchase holdbacks . . . . . . . . . . . . . . . . . . 9,942 11,490
Acquisition transition costs . . . . . . . . . . . . . 4,326 5,214
Other current liabilities . . . . . . . . . . . . . . . 1,623 897
Deferred revenue . . . . . . . . . . . . . . . . . . . 13,827 15,178
------------ ----------
Total current liabilities . . . . . . . . . . . . 34,539 38,371
Long-term debt, net of current portion . . . . . . . . . . . 225,650 238,539
Other liabilities . . . . . . . . . . . . . . . . . . . . . . 1,059 599
------------ ----------
Total liabilities . . . . . . . . . . . . . . . . 261,248 277,509
------------ ----------
Commitments and contingencies (Note 8)
Stockholders' equity:
Common Stock, $.01 par value, 24,000,000 shares authorized,
12,914,783 and 13,494,893 shares issued and outstanding,
at September 30, 1996 and December 31, 1996, respectively 129 135
Additional paid-in capital . . . . . . . . . . . . . . . . . 79,767 87,078
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . (51,069) (54,245)
----------- ----------
Total stockholders' equity . . . . . . . . . . . . 28,827 32,968
------------ ----------
$ 290,075 $ 310,477
============ ==========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
1
<PAGE> 3
PROTECTION ONE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three months ended December 31,
------------------------------------
1995 1996
------------ ----------
(unaudited)
<S> <C> <C>
Revenues:
Monitoring and related services . . . . . . . . . . . . $ 14,534 $ 21,916
Other......... . . . . . . . . . . . . . . . . . . . . 977 745
------------ ----------
Total revenues . . . . . . . . . . . . . . . . . . 15,511 22,661
Cost of revenues:
Monitoring and related services . . . . . . . . . . . . 4,176 6,071
Other......... . . . . . . . . . . . . . . . . . . . . 665 623
------------ ----------
Total cost of revenues . . . . . . . . . . . . . . 4,841 6,694
------------ ----------
Gross profit . . . . . . . . . . . . . . . . . . . 10,670 15,967
Selling, general and administrative expenses . . . . . . . . 3,313 4,499
Acquisition and transition expenses . . . . . . . . . . . . . 755 1,254
Amortization of intangibles and depreciation expense . . . . 5,160 8,318
------------ ----------
Operating income . . . . . . . . . . . . . . . . . 1,442 1,896
Other expenses:
Interest expense, net . . . . . . . . . . . . . . . . . 934 1,887
Amortization of OID and debt issuance costs . . . . . . 4,247 4,919
Loss on assets held for sale . . . . . . . . . . . . . -- 123
------------ ----------
Loss before income taxes . . . . . . . . . . . . . (3,739) (5,033)
Income tax benefit . . . . . . . . . . . . . . . . . . . . . -- 1,857
------------ ----------
Net loss................... . . . . . . . . . . . . . . (3,739) (3,176)
Preferred stock dividends . . . . . . . . . . . . . . . . . . 168 --
------------ ----------
Loss attributable to common stock . . . . . . . . . . . $ (3,907) $ (3,176)
============ ==========
Net loss per common share . . . . . . . . . . . . . . . $ (0.43) $ (0.24)
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
2
<PAGE> 4
PROTECTION ONE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
Three months ended December 31,
------------------------------------
1995 1996
------------ ----------
(unaudited)
<S> <C>
Cash flow from operating activities:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . $ (3,739) $ (3,176)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation . . . . . . . . . . . . . . . . . . . . . 382 578
Amortization of intangibles . . . . . . . . . . . . . 4,778 7,740
Amortization of OID and debt issuance costs . . . . . . 4,247 4,919
Deferred tax benefit . . . . . . . . . . . . . . . . . -- (2,009)
Provision for doubtful accounts . . . . . . . . . . . . 414 826
Changes in assets and liabilities, net of effects of
acquisitions:
Receivables . . . . . . . . . . . . . . . . . . . . . . (2,243) (2,548)
Inventories . . . . . . . . . . . . . . . . . . . . . . 156 116
Prepaid expenses and deposits . . . . . . . . . . . . . (516) (522)
Accounts payable . . . . . . . . . . . . . . . . . . . (54) (315)
Accrued liabilities . . . . . . . . . . . . . . . . . . 114 874
Deferred revenue . . . . . . . . . . . . . . . . . . . 367 621
------------ ----------
Net cash provided by operating activities . . . . 3,906 7,104
------------ ----------
Cash flows from investing activities:
Purchases of property and equipment . . . . . . . . . . (830) (1,143)
Sales of assets previously held for sale . . . . . . . -- 187
Acquisitions, net of cash received . . . . . . . . . . (16,508) (13,295)
Payments on purchase holdbacks . . . . . . . . . . . . (50) (75)
Deferred acquisition payments . . . . . . . . . . . . . (134) (936)
Acquisition transition costs . . . . . . . . . . . . . (587) (736)
Payment of other liabilities . . . . . . . . . . . . . -- --
------------ ----------
Net cash used in investing activities . . . . . . (18,109) (15,998)
------------ ----------
Cash flows from financing activities:
Payments on long-term debt . . . . . . . . . . . . . . (6) (7,500)
Proceeds from long-term debt . . . . . . . . . . . . . 14,254 15,873
Debt and equity issuance costs . . . . . . . . . . . . (173) (753)
Issuance of preferred and common stock and warrants . . 23 5
------------ ----------
Net cash provided by financing activities . . . . 14,098 7,625
------------ ----------
Net decrease in cash and cash equivalents . . . . (105) (1,269)
Cash and cash equivalents:
Beginning of period . . . . . . . . . . . . . . . . . . 1,256 5,462
------------ ----------
End of period . . . . . . . . . . . . . . . . . . . . . $ 1,151 $ 4,193
============ ==========
Interest paid during the period . . . . . . . . . . . . . . $ 814 $ 361
============ ==========
Taxes paid during current year (see Note 7) . . . . . . . . $ -- $ 362
============ ==========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
3
<PAGE> 5
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"), its wholly owned subsidiary
Protection One Alarm Monitoring, Inc. ("Monitoring"), and Monitoring's wholly
owned subsidiary, Security Holdings, Inc. ("SHI" and together with POI and
Monitoring, the "Company"). The assets, results of operations and stockholders'
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 and
SHI have not been provided because the Company does not believe such separate
financial statements are material to investors. Summarized consolidated
financial information of Monitoring and its subsidiary, SHI, 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
mandates 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 the Company's Annual Report on Form 10-K filed
with the Securities and Exchange Commission on December 31, 1996. 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 month period ending December
31, 1996 are not necessarily indicative of the results to be expected for the
full year.
2. RECEIVABLES:
Receivables, which consist primarily of trade accounts receivable of
$22,054 at December 31, 1996 and $18,284 at September 30, 1996 have been
reduced by allowances for doubtful accounts of $7,140 and $5,541, respectively.
Included in receivables and deferred revenue at December 31, 1996 and September
30, 1996 are invoices billed in advance of the periods in which services are
provided totaling $8,742 and $7,309, respectively. The provisions for doubtful
accounts for the three months ended December 31, 1996 and December 31, 1995
were $0.8 million and $0.4 million, respectively.
3. SUBSCRIBER ACCOUNTS AND INTANGIBLES:
Subscriber accounts and intangibles (at cost) consist of the
following:
<TABLE>
<CAPTION>
September 30, December 31,
1996 1996
------------- ------------
<S> <C> <C>
Acquired subscriber accounts . . . . . . . . . . . $ 298,767 $ 323,348
Debt issuance costs . . . . . . . . . . . . . . . 11,847 12,600
Goodwill and other . . . . . . . . . . . . . . . . 2,497 3,697
----------- ---------
313,111 339,645
Less accumulated amortization . . . . . . . . . . (55,757) (63,899)
----------- ---------
$ 257,354 $ 275,746
=========== =========
</TABLE>
4
<PAGE> 6
PROTECTION ONE, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONT.)
(Dollar amounts in thousands)
3. SUBSCRIBER ACCOUNTS AND INTANGIBLES (CONT.):
Reconciliation of acquired subscriber accounts:
<TABLE>
<CAPTION>
Three Months
Year Ended Ended
September 30, December 31,
1996 1996
------------- ------------
<S> <C> <C>
Balance, beginning of period . . . . . . . . . . . $ 184,463 $ 298,767
Acquisition of subscriber accounts . . . . . . . . 119,629 25,478
Charges against acquisition holdbacks . . . . . . (5,325) (897)
----------- ---------
Balance, end of period . . . . . . . . . . . . . . $ 298,767 $ 323,348
=========== =========
</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.
Reconciliation of purchase holdbacks:
<TABLE>
<CAPTION>
Three Months
Year Ended Ended
September 30, December 31,
1996 1996
------------- ------------
<S> <C> <C>
Balance, beginning of period . . . . . . . . . . . $ 4,949 $ 9,942
Purchase holdback additions . . . . . . . . . . . 13,850 2,520
Charges against subscriber accounts . . . . . . . (5,325) (897)
Cash paid to sellers . . . . . . . . . . . . . . . (3,532) (75)
----------- ---------
Balance, end of period . . . . . . . . . . . . . . $ 9,942 $ 11,490
=========== =========
</TABLE>
4. LOSS PER COMMON SHARE:
The computation of fully diluted net loss per share for the three months
ended December 31, 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 the net loss attributable to common shares are as follows:
<TABLE>
<CAPTION>
Three Months Ended
December 31,
-----------------------------------
1995 1996
----------- -----------
<S> <C> <C>
Common Stock . . . . . . . . . . . . . . . . . . . 9,100,892 13,448,981
</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, Monitoring's and SHI's ability to make dividend payments, distributions
and other asset transfers in respect of such company's capital stock. At
December 31, 1996, 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.
5
<PAGE> 7
PROTECTION ONE, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONT.)
(Dollar amounts in thousands)
6. INCOME TAXES:
For the three months ended December 31, 1996, the Company experienced a
net increase in its net deferred tax asset valuation allowance of $1.2 million.
At December 31, 1996, the Company had $30.1 million in NOL carryforwards for
regular tax purposes and $24.4 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 $2.0 million in net operating loss carryforwards for the
three months ended December 31, 1996 which results in the effective tax rate
being lower than the expected statutory rate.
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, December 31,
1996 1996
------------ ------------
<S> <C> <C>
Deferred tax assets:
Allowances for doubtful accounts . . . . . . . . . $ 2,214 $ 2,807
Acquisition transition costs and purchase holdbacks 5,701 6,675
Performance warrants . . . . . . . . . . . . . . . 1,662 1,736
Net operating loss carryforwards . . . . . . . . . 12,814 12,029
OID amortization . . . . . . . . . . . . . . . . . 8,634 10,392
Other . . . . . . . . . . . . . . . . . . . . . . 139 62
Less valuation allowance . . . . . . . . . . . . . (1,907) (3,187)
----------- ---------
Total deferred tax assets . . . . . . . . . . 29,257 30,514
Deferred tax liabilities:
Differences in depreciation and amortization . (29,257) (29,673)
----------- ---------
Net deferred tax assets . . . . . . . . . . . $ -- $ 841
=========== =========
</TABLE>
The valuation allowance at September 30, 1996 and December 31, 1996
reflect current estimates of limitations on utilization of NOL carryforwards
for Federal and state income tax purposes.
In October, 1996, the Company acquired all of the outstanding shares
of Security Holdings, Inc. 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 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 quarter
ended December 31, 1996, 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.
Due to uncertainties regarding the future utilization of the excess deferred
tax assets (i.e., the portion exceeding the deferred tax liability), a
valuation allowance was recorded.
6
<PAGE> 8
PROTECTION ONE, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONT.)
(Dollar amounts in thousands)
7. SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Acquisitions:
<TABLE>
<CAPTION>
Three months ended December 31,
----------------------------------
1995 1996
----------- ---------
<S> <C> <C>
Subscriber accounts acquired . . . . . . . . . . . . . $ 22,459 $ 24,659
Goodwill . . . . . . . . . . . . . . . . . . . . . . . -- 1,168
Inventories . . . . . . . . . . . . . . . . . . . . . . -- 29
Accounts receivable, net . . . . . . . . . . . . . . . -- 212
Property and equipment . . . . . . . . . . . . . . . . -- 18
Other assets acquired . . . . . . . . . . . . . . . . . 156 25
----------- ---------
Total assets acquired . . . . . . . . . . . . . . 22,615 26,111
----------- ---------
Cash paid to seller . . . . . . . . . . . . . . . . . . 16,326 12,983
Stock issued to seller . . . . . . . . . . . . . . . . -- 7,313
Acquisition expenses . . . . . . . . . . . . . . . . . 172 261
Purchase holdbacks . . . . . . . . . . . . . . . . . . 2,018 1,549
Acquisition transition reserves . . . . . . . . . . . . 1,024 1,624
Deferred revenue acquired . . . . . . . . . . . . . . . 1,205 730
Other liabilities assumed . . . . . . . . . . . . . . . 1,870 1,651
----------- ---------
Purchase price and assumed liabilities . . . . . . $ 22,615 $ 26,111
=========== =========
</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 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 increases in
liabilities and capital stock resulting from non-cash investing and financing
activities which occurred in the three months ended December 31, 1995:
<TABLE>
<CAPTION>
Purchase
Intangibles Holdbacks
----------------- ------------------
<S> <C> <C>
Charge off of holdbacks..... $ (830) $ 830
----------------- ------------------
$ (830) $ 830
================= ==================
</TABLE>
The following reflects increase (decreases) in assets and increases in
liabilities and capital stock resulting from non-cash investing and financing
activities which occurred in three months ended December 31, 1996:
<TABLE>
<CAPTION>
Assets Additional
Other Held Purchase Common Paid-In
Receivables For Sale Intangibles Holdbacks Stock Capital
----------- -------- ----------- --------- ----- -----------
<S> <C> <C> <C> <C> <C> <C>
Chargeoff of purchase
holdbacks..................... ($897) $897
Common shares issued for
Security Holdings............... 7,313 ($6) ($7,307)
Sale of guard and patrol
operations.................... $ 588 $(588)
----- ----- ------ ---- --- -------
$(588) $(588) $6,416 $897 ($6) ($7,307)
===== ===== ====== ==== === =======
</TABLE>
7
<PAGE> 9
PROTECTION ONE, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONT.)
(Dollar amounts in thousands)
8. COMMITMENTS AND CONTINGENCIES:
The Company is a party to claims and 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 and SHI have fully and unconditionally guaranteed the Discount
Notes and the $103.5 million principal amount of 6 3/4% Convertible Senior
Subordinated Notes due 2003 (the "Convertible Notes") on a joint and several
basis. 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, and
Monitoring has determined to merge SHI into Monitoring in the near future. All
significant intercompany balances and transactions have been eliminated in
consolidation. Separate audited financial statements for Monitoring and separate
summarized financial information for SHI have not been provided because the
Company does not believe such separate financial statements and separate
summarized financial information are material to investors. Summarized
consolidated financial information of Monitoring, and its subsidiary, SHI, is
presented below.
<TABLE>
<CAPTION>
September 30, December 31,
1996 1996
------------ ------------
(unaudited) (unaudited)
<S> <C> <C>
Summarized Balance Sheet
Assets
Current assets........................... $ 21,345 $ 23,619
Subscriber accounts and intangibles,
net.................................... $ 257,354 $ 257,746
Other non-current assets................. $ 11,375 $ 11,111
Liabilities and Stockholders' Equity
Deferred revenue.......................... $ 13,827 $ 15,178
Other current liabilities................. $ 20,712 $ 23,193
Long-term debt, net of current portion.... $ 225,650 $ 238,539
Other long-term liabilities............... $ 1,059 $ 599
Stockholders' equity...................... $ 28,826 $ 32,967
</TABLE>
<TABLE>
<CAPTION>
Three Months
Year Ended Ended
September 30, December 31,
1996 1996
------------ -------------
<S> <C> <C>
Summarized Statements of Operations
Revenue......................................... $ 73,457 $ 22,661
G ross Profit................................... $ 49,364 $ 15,967
Net Income (Loss)............................... $ (15,497) $ (3,176)
</TABLE>
10. SUBSEQUENT EVENT - PHILLIPS ELECTRONICS ACQUISITION:
On January 3, 1997, Protection One acquired substantially all the assets
of Phillips Electronics, Inc. for an aggregate purchase price of approximately
$14.5 million. The Company issued to Phillips Electronics 203,562 shares of
Common Stock as a portion of the purchase price (approximately $2.0 million).
Phillips Electronics has approximately 12,000 subscribers (representing in
excess of $275,000 of MRR), substantially all of whom are located in the
greater Portland metropolitan area.
8
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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. These forward-looking
statements generally can be identified as such because the context of the
statement includes words such as the Company or its management "believes,"
"expects," "anticipates" or other words of similar import. Similarly,
statements herein that describe the Company's objectives, plans or goals are
forward-looking statements. All such forward- looking statements are subject
to certain risks and uncertainties that could cause actual results to differ
materially from those in the forward-looking statements. Information with
respect to these risks and uncertainties is included in Item 5(d) on the
Current Report on Form 8-K filed by Protection One, Inc. and Protection One
Alarm Monitoring, Inc. dated September 20, 1996, which information is
incorporated herein by reference. POI's sole asset is, and all of POI's
operations are conducted through, POI's investment in Monitoring; in addition,
all of Monitoring's long-term debt has been guaranteed on a full and
unconditional basis by POI. Accordingly, no separate analysis of results of
operations of Monitoring has been included herein.
OVERVIEW
For an overview of the Company's accounting policies and specific
discussions of, among other things, a change in the method of accounting for
certain acquisition and transition expenses and the impact of SFAS 121 on the
Company's financial statements, see the Company's Annual Report on Form 10-K
for the fiscal year ended September 30, 1996.
Acquisition and Dealer Program Activity. A significant portion of the
Company's growth has been generated by the purchase of subscriber accounts
through the Company's Dealer Program and through the acquisition of portfolios
of subscriber accounts from other alarm companies. The Company's Dealer
Program consists of exclusive purchase agreements 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.
All of these subscribers are contacted individually by Company personnel, at
the time of purchase of the accounts from the dealer, to facilitate customer
satisfaction and quality control. In addition, the Company requires dealers to
evaluate the credit history of prospective new subscribers.
The Company also purchases portfolios of subscriber accounts. Because
the Company typically acquires only the subscriber accounts (and not the
accounts receivable or other assets) of the sellers, the Company 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, the Company then applies its monitoring costs to such MRR
as a basis for determining the purchase price to be paid by the Company. To
protect the Company against the loss of acquired accounts, the Company
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. The Company obtains a similar purchase price holdback in its purchases
through the Dealer Program.
During the three months ended December 31, 1996 (the "first quarter of
fiscal 1997"), the Company added (through its Dealer Program and acquisitions
of four portfolios of subscriber accounts) an aggregate of approximately 21,500
subscriber accounts for a total purchase price of approximately $25.5 million
(including assumed liabilities of approximately $2.4 million). The MRR of the
acquired accounts ranged from approximately $15 to $60, with an average of
$28.50. Of the four acquisitions completed during the first quarter of fiscal
1997 by the Company, all included purchase price holdbacks in amounts that
ranged from 10% to 20% of the initial purchase price (and averaged 14.4% of the
initial purchase price) and attrition guarantees for periods that ranged from 4
months to 12 months (and averaged 8.5 months).
Subscriber Attrition. Subscriber attrition has a direct impact on the
Company's results of operations, since it affects both the Company's revenues
and its amortization expense. Attrition can be measured in terms of canceled
9
<PAGE> 11
subscriber accounts and in terms of decreased MRR resulting from canceled
subscriber accounts. Gross subscriber attrition is defined by the Company 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 the Company 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 the
Company'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 the Company reduces the gross MRR lost
during a period by the amount of guaranteed accounts provided for in purchase
agreements with sellers, in some cases the Company may not collect all or any
of the reimbursement due it from the sellers.
The following table sets forth the Company's gross subscriber
attrition and net MRR attrition for the periods indicated:
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED
--------------------------------------------------------------
12/31/95 3/31/96 6/30/96 9/30/96 12/31/96
---------- --------- --------- -------- -----------
<S> <C> <C> <C> <C> <C>
Gross subscriber
attrition . . . . . . 20.3% 20.5% 19.9% 18.3% 16.6%
Net MRR attrition . . 6.6 7.9 7.1 7.0 6.5
</TABLE>
MRR represents the monthly recurring revenue the Company 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 past
due balances. It is the policy and practice of the Company that every effort
be made to preserve the revenue stream associated with these contractual
obligations. To this end, the Company actively works to both collect amounts
owed and to retain the customer. In certain instances, the collection and
evaluation period may exceed six months in length. When, in the judgment of
the Company's collection personnel, all reasonable efforts have been made to
collect balances due, subscribers are disconnected from the Company's
monitoring center and are included in the calculation of gross subscriber and
net MRR attrition.
Because the Company 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, the Company reduces gross MRR lost during a period by the
amount of guaranteed accounts provided for in purchase agreements with sellers.
However, in some cases, the Company has not retained the full amount of such
holdback to which the Company is contractually entitled. If guaranteed
accounts for which the Company 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 the Company defines as canceled subscriber accounts net of
reconnects, conversions and guaranteed accounts. Estimated net account
attrition is the basis upon which the Company determines the period over which
it amortizes its investment in subscriber accounts. The Company amortizes such
investment over 10 years based on current estimates. If actual subscriber
account attrition were to exceed such estimated attrition, the Company 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 the Company.
10
<PAGE> 12
The table below sets forth the change in the Company's subscriber base over
the periods indicated below:
<TABLE>
<CAPTION>
TWELVE MONTHS
ENDED DECEMBER 31,
----------------------------
1995 1996
------- -------
<S> <C> <C>
Number of subscribers:
Beginning of period . . . . . . . . . . . . . . 98,804 141,633
Additions through portfolio acquisitions and
Dealer Program, net of sales of subscriber
accounts. . . . . . . . . . . . . . . . . . . 62,943 94,299
Installations by Company personnel . . . . . . 1,356 686
Reconnects and conversions . . . . . . . . . . 3,658 4,768
Gross subscriber attrition . . . . . . . . . . (25,128) (30,129)
------- -------
End of period . . . . . . . . . . . . . . . 141,633 211,257
======= =======
</TABLE>
Change in Presentation Format. The Company has recently made changes
to its presentation of income statement information. First, the Company 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 the Company's
installation, lock and other operations. The Company 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, the Company 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." The Company made this
change to allow readers to more easily calculate the aggregate amount of
non-cash charges in the income statement. Finally, the Company has reclassified
customer service expense from monitoring and service cost of revenues to
selling, general and administrative expenses. This change reflects the
Company'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 will now be
responsible for the Company's entire customer service efforts. Results for the
three months ended December 31, 1995 have been modified to reflect these
changes and make such period comparable to the three months ended December 31,
1996.
The table below displays selected income statement data for fiscal years
1994-1996 after giving effect to the changes described above:
<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 4,680
-------- -------- --------
Total revenues.............................. 34,480 55,882 73,457
Cost of revenues:
Monitoring and related services................ 8,355 13,627 19,065
Other.......................................... 3,225 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 termination.................... 26 208 --
Performance warrants compensation expense.......... 4,504 -- --
Acquisition and transition expense................. -- 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
======== ======== ========
</TABLE>
11
<PAGE> 13
RESULTS OF OPERATIONS
The following table sets forth certain operating data as a percentage
of total revenues for the periods indicated.
<TABLE>
<CAPTION>
Three Months Ended
December 31,
1995 1996
------ ------
<S> <C> <C>
Revenues:
Monitoring and related services . . . . . . . 93.7% 96.7%
Other . . . . . . . . . . . . . . . . . . . . 6.3 3.3
------ ------
Total revenues . . . . . . . . . . . 100.0% 100.0%
------ ------
Cost of revenues:
Monitoring and related services . . . . . . 26.9% 26.8%
Other . . . . . . . . . . . . . . . . . . . 4.3 2.7
------ ------
Total cost of revenues . . . . . . . 31.2 29.5
------ ------
Gross profit . . . . . . . . . . . . 68.8 70.5
Selling, general and administrative expense . . 21.4 19.9
Acquisition and transition expenses . . . . . . 4.9 5.5
Amortization of intangibles and depreciation
expense . . . . . . . . . . . . . . . . . . 33.2 36.7
------ ------
Operating income (loss) . . . . . . . 9.3% 8.4%
====== ======
</TABLE>
THREE MONTHS ENDED DECEMBER 31, 1996 COMPARED TO THREE MONTHS ENDED DECEMBER
31, 1995
Revenues for the three months ended December 31, 1996 increased by
approximately $7.2 million, or 46.1%, to $22.7 million from $15.5 million in
the comparable period in 1995. Monitoring and related services revenues
increased by approximately $7.4 million, or 50.8%, a substantial majority of
which increase resulted from the addition of subscribers through the Dealer
Program and the acquisition of portfolios of subscriber accounts. The
Company's subscriber base increased by 49.2% to approximately 211,200
subscribers at the end of the first quarter of fiscal 1997 as compared to
141,600 subscribers at the end of the first quarter of fiscal 1996. The sale
of enhanced services and new subscribers generated by Company personnel
comprised the remainder of revenue growth. Other revenues, consisting primarily
of revenues generated by the Company's installation and lock businesses,
decreased by $0.2 million, or 23.8%, to $0.7 million. Such decrease was caused
by a decline in installation revenues of 38.6%, or approximately $0.2 million.
The decline in installation revenues resulted from the Company's increased
emphasis on growth through the Dealer Program and acquisitions, rather than
through the sale of new alarm systems by Company personnel.
Cost of revenues for the first quarter of fiscal 1997 increased by
approximately $1.9 million, or 38.3%, to $6.7 million. Cost of revenues as a
percentage of total revenues declined to 29.5% for the first quarter of fiscal
1997 from 31.2% for the comparable period in fiscal 1996. Monitoring and
related services expenses increased by approximately $1.9 million, or 45.4%,
primarily due to increased activity at the Company'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 27.7% for the first quarter of fiscal
1997 from 28.7% 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
$0.04 million, or 6.3%, to approximately $0.6 million for the first quarter in
fiscal 1997 from $0.7 million for the first quarter of fiscal 1996. The
decrease primarily was caused by a 7.5% decrease ($0.03 million) in
installation expense.
Gross profit for the first quarter of fiscal 1997 was approximately
$16.0 million, representing an increase of approximately $5.3 million, or
49.6%, over the $10.7 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
the Company's subscriber base noted above. Gross profit as a percentage of
total revenues was 70.5% for the first quarter of fiscal 1997 compared to 68.8%
for the comparable period in fiscal 1996. This increase was caused primarily by
an increase in monitoring and related services revenues as a percentage of
total revenues (approximately 96.7% for the first quarter of fiscal 1997
compared to 93.7% for the first quarter of fiscal 1996.). Gross profit from
other revenues declined to approximately $0.1 million for the first quarter of
fiscal 1997 from $0.3 million for the comparable period in fiscal 1995. Such
decline was caused primarily by a decrease in the gross profit from reduced
installation activities.
12
<PAGE> 14
Selling, general and administrative expenses rose to approximately
$4.5 million in the first quarter of fiscal 1997, which represents an increase
of approximately $1.2 million, or 35.8%, 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 the Company's growth, including the addition of two branch offices. Such
figure as a percentage of total revenues declined from 21.4% in the first
quarter of fiscal 1996 to 19.9% in the first quarter of fiscal 1997.
Advertising and marketing expenses are expensed as incurred and comprised less
than 1% of revenues in each of the quarters ending December 31, 1995 and 1996.
The provision for doubtful accounts increased to approximately $0.8 million for
the first quarter of fiscal 1997 from $0.4 million for the comparable period in
fiscal 1996.
Acquisition and transition expenses for the first quarter of fiscal
1997 totaled $1.3 million compared to $0.8 million for the comparable period in
fiscal 1996. Such expenses will fluctuate from quarter to quarter based
primarily on the amount of the Company'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 first
quarter of fiscal 1997 increased by approximately $3.2 million, or 61.2%, to
$8.3 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.
Operating income for the first quarter of fiscal 1997 was
approximately $1.9 million, compared to approximately $1.4 million in the
comparable period in fiscal 1996. Operating income as a percentage of total
revenues was 8.4% in the first quarter of fiscal 1997, compared to 9.3% 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 expense, offset by improvement in the Company's gross
profit and higher revenues.
Interest expense, net and amortization of debt issuance costs and OID.
These amounts increased by $1.6 million, or 31.4%, to $6.8 million in the first
quarter of fiscal 1997, reflecting the Company's use of debt to finance a
substantial portion of its subscriber account growth.
Balance sheet data. At December 31, 1996, the Company's working
capital deficit was $14.8 million, as compared to a working capital deficit of
$13.2 million at September 30, 1996. The increase in the working capital
deficit was caused primarily by increases in deferred revenues and other
liabilities of $3.7 million offset by increases in accounts receivable.
Subscriber accounts and intangibles, net increased to $275.8 million at
December 31, 1996 from $257.4 million at September 30, 1996. This increase of
$18.4 million, or 7.1%, was caused by the addition of new subscribers, net of
amortization expense. Total stockholders' equity increased to approximately
$33.0 million at December 31, 1996 from $28.8 million at September 30, 1996.
The increase in such figure reflects the issuance of shares of the Company's
Common Stock as a portion of the purchase price of Security Holdings, Inc.
(approximately $7.3 million), offset by the Company's $3.2 million loss for the
first quarter of fiscal 1997.
LIQUIDITY AND CAPITAL RESOURCES
General. Since its formation in September 1991, the Company 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, the Company completed three long-term debt
offerings, including the proceeds of the $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 the Convertible Notes issued in September
and October of 1996; the Company also has utilized borrowings under its
Revolving Credit Facility to fund acquisitions and the Dealer Program. In
September 1994, the Company raised $18.3 million in net proceeds from its
initial public offering of Common Stock and in February 1996, the Company raised
$23.1 million in net proceeds from another public offering of the Common Stock.
The Company 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 the Company anticipates that it
will continue to acquire portfolios of subscriber accounts, the Company cannot
estimate the number, the size, or timing of such acquisitions. Depending on
such factors, additional funds beyond those currently available to the Company
may be required to continue the acquisition program and to finance the Dealer
Program, and there can be no assurance that the Company will be able to obtain
such financing on acceptable terms or at all.
13
<PAGE> 15
On a long-term basis, the Company has several material commitments.
Borrowings under the Revolving Credit Facility were approximately $0.2 million
at December 31, 1996 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 the Company 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 the Company will be able to do
so. The Convertible Notes require the Company to make semi-annual cash
interest payments of $3.5 million. The Discount Notes require the Company 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 the Company's cash flows from operations will
be required to make interest payments on the Convertible Notes and the
Discount Notes, and there can be no assurance that the Company's cash flow from
operations will be sufficient to meet such obligation, or that there will be
sufficient funds available to the Company after such interest payments to meet
other debt, capital expenditure and operational obligations. The $103.5
principal amount of the Convertible Notes matures on September 15, 2003,
although they may be converted into Common Stock at any time prior to such
date. The $166.0 million principal amount of Discount Notes matures on June
30, 2005. There can be no assurance that the Company 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. The Company 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 1999.
The Company has had, and expects to continue to have, a working
capital deficit. At December 31, 1996, the Company had a working capital
deficit of $14.8 million. There are two principal categories of current
liabilities that cause the Company to have a working capital deficit: (i)
"purchase holdbacks," which represent the portion of the aggregate acquisition
cost of subscriber accounts retained by the Company to offset lost MRR arising
from the cancellation of acquired accounts; and (ii) "deferred revenue," which
represents billings and cash collections received by the Company from its
subscriber base in advance of performance of services. Both purchase holdbacks
and deferred revenues are recorded as a current liability on the Company's
balance sheet.
For the first three months ended December 31, 1996, the Company's net
cash provided by operating activities was $7.1 million, compared to $3.9
million net cash provided by operating activities for the three months ended
December 31, 1995.
For the three months ended December 31, 1996, the Company's net cash
used in investing activities was $16.0 million, compared to $18.1 million
during the three months ended December 31, 1995. Investing activities during
the first quarter of fiscal 1997 included purchases through the Dealer Program,
as well as the acquisition of portfolios of subscriber accounts, including the
purchase of Security Holdings, Inc.
During the three months ended December 31, 1996, the Company's net
cash provided by financing activities was $7.6 million, compared to $14.1
million in the three months ended December 31, 1995. The Company's primary
financing activity during the three months ended December 31, 1996 was the
issuance of $13.5 million of Convertible Notes pursuant to the underwriters'
exercise of an over-allotment option.
The Discount Note Indenture, the Convertible Note Indenture and the
Revolving Credit Facility agreements contain certain restrictions on transfers
of funds, such as dividends, loans and advances, by the Company. The Company
believes that such restrictions have not had and will not have a significant
impact on the Company's ability to meet its cash obligations. The Company does
not anticipate payment of dividends on Common Stock, and such dividends are
currently prohibited by the Company's Credit Agreement and Discount Note
indenture.
14
<PAGE> 16
Capital Expenditures. The Company anticipates making capital
expenditures in the remainder of fiscal 1997 of approximately $3.0 million for
routine replacement and upgrading of vehicles, computers and other capital
items. In addition, the Company anticipates making capital expenditures of
approximately $1.5 million to complete a project to upgrade its monitoring and
administrative hardware and software. The Company believes the installation of
the new computer software will create efficiencies Company-wide, and
particularly in the customer service, data entry and field maintenance and
repair functions. The Company believes the complete implementation of the new
software will not occur until the end of fiscal 1997. The Company believes
cash flows from operations, together with borrowing under the Revolving Credit
Facility, will be sufficient to fund the Company's capital expenditures in
fiscal 1997.
15
<PAGE> 17
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
Amendment of Certificate of Incorporation. The Fifth Restated
Certificate of Incorporation, as amended (the "Certificate of Incorporation"),
of Protection One, Inc. ("POI") was further amended effective upon the filing
of a Certificate of Amendment of Certificate of Incorporation with the
Secretary of State of Delaware on February 6, 1997, to increase the number of
authorized shares of Common Stock from 24,000,000 shares to 40,000,000 shares.
The aggregate number of shares of all classes of stock that POI now has the
authority to issue is 45,000,000 consisting of 40,000,000 authorized shares of
Common Stock and 5,000,000 authorized shares of a class designated Preferred
Stock, par value $.10 per share. The amendment to the Certificate of
Incorporation was approved by the stockholders of POI at the annual meeting of
stockholders held on January 29, 1997. The Certificate of Incorporation of POI
as so amended is filed as Exhibit 3.1 hereto.
The information set forth under the caption "Approval of Proposed
Amendment to Certificate of Incorporation" on pages 17-18 of POI's definitive
Proxy Statement dated December 30, 1996 for the annual meeting of stockholders
held on January 29, 1997 is incorporated herein by this reference. A copy of
the pertinent pages of such Proxy Statement is filed as Exhibit 99.1 hereto.
Issuances of Securities. POI and Protection One Alarm Monitoring,
Inc. ("Monitoring") reported in their Annual Report on Form 10-K for the year
ended September 30, 1996 (the "1996 Form 10-K") that on October 4, 1996, POI
issued 482,903 shares of Common Stock to the four former stockholders of
Security Holdings, Inc., a Washington corporation ("Security Holdings"), and
deposited an additional 68,895 shares of Common Stock into an escrow account,
in exchange for such stockholders' delivery to Monitoring of all the
outstanding capital stock of Security Holdings, in a transaction exempt from
the registration requirements of the Securities Act of 1933, as amended (the
"Securities Act"), pursuant to Section 4(2) thereof. For addition information
with respect to this transaction and the subsequent registration for resale of
such shares, reference is made to the 1996 Form 10-K.
Pursuant to an Asset Purchase Agreement dated as of December 17, 1996
(the "Purchase Agreement"), on January 3, 1997, Monitoring purchased the
security alarm accounts, equipment, telephone line and certain other assets of
Phillips Electronics, Inc., a Washington corporation ("Phillips"). In
consideration of the acquisition, Monitoring (i) assumed certain operating
obligations of Phillips, (ii) paid to Phillips approximately $12.5 million in
cash, 11.6% of which was deposited in escrow for 90 days pending certain
purchase price adjustments, (iii) delivered to Phillips 203,562 shares of
Common Stock (the "Shares") newly issued by POI, which number was derived by
dividing $2,000,000 by an average of the closing price of the Common Stock on
the NASDAQ National Market during the period of the 10 most recent trading days
ending on the second trading day prior to the acquisition. As provided for in
the Purchase Agreement, POI filed a registration statement on Form S-3
(Registration No. 333-181159) under the Securities Act to afford Phillips the
opportunity to resell the Shares in a public transaction. On January 2, 1997,
the Registration Statement was declared effective by the Securities and
Exchange Commission (the "Commission").
16
<PAGE> 18
PART II
OTHER INFORMATION
The offer and sale of the Shares was not registered under the
Securities Act in reliance on Section 4(2) thereof and Rule 506 thereunder.
Phillips certified to POI that Phillips was an "accredited investor" as such
term is defined in Rule 501 under the Securities Act and was otherwise able to
bear the economic risk of the investment, and was provided with registration
statements and reports of, and access to other information concerning POI and
its subsidiaries. No underwriter participated in the offer or sale of any of
these securities and no underwriter's fees or commissions were paid.
On October 3, 1996, POI issued 2,200 shares of Common Stock, valued at
the date of contribution at $27,500, to the Protection One Employee Savings
Plan as an employer matching contribution to such 401(k) plan. As the
contribution did not constitute a "sale" as defined by Section 2(3) of the
Securities Act, registration of the transaction under such statute was not
required.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits. The following exhibits are filed with this Current Report
on Form 10-Q:
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
- ------- -------
<S> <C>
2.1 Asset Purchase Agreement dated as of December 17, 1996,
among Protection One Alarm Monitoring, Inc. and, inter
alia, Phillips Electronics, Inc. (incorporated by reference
to Exhibit 2.1 to the Registration Statement on Form S-3
(Registration No. 333-18159) originally filed by POI
with the Commission on December 18, 1996).
3.1 Fifth Restated Certificate of Incorporation of Protection
One, Inc., as amended.
10.1 1994 Stock Option Plan of Protection One, Inc., as
amended.
27.1 Financial Data Schedule.
99.1 Information included under the caption "approval of
Proposed Amendment to Certificate of Incorporation" on
pages 17-18 of Protection One, Inc.'s definitive Proxy
Statement dated December 30, 1996 for the annual meeting
of stockholders held January 29, 1997 (incorporated by
reference from said Proxy Statement (Commission File No.
0- 24780)).
99.2 Information included as Item 5(d) of the Current Report on
Form 8-K dated September 20, 1996, filed by POI and
Monitoring.
</TABLE>
17
<PAGE> 19
Reports on Form 8-K. During the quarter for which this Current Report
on Form 10-Q is filed, a Current Report on Form 8-K dated October 30, 1996 was
filed by POI and Monitoring with the Commission, reporting the issuance of
press release concerning alarm accounts and subscribers added during the
quarter ended September 30, 1996.
18
<PAGE> 20
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrants have duly caused this report to be signed on their behalf by the
undersigned thereunto duly authorized.
February 10, 1997
PROTECTION ONE, INC.
PROTECTION ONE ALARM MONITORING, INC.
By: /s/ JOHN W. HESSE
-----------------------------------
John W. Hesse
Executive Vice President
and Chief Financial Officer
19
<PAGE> 1
Exhibit 3.1
RESTATED CERTIFICATE OF INCORPORATION
OF
PROTECTION ONE, INC.
-------------------------------------------
Pursuant to Section 245 of the General
Corporation Law of the State of Delaware
-------------------------------------------
Protection One, Inc., a corporation organized and existing
under the General Corporation Law of the State of Delaware (the "Corporation"),
hereby certifies as follows:
1. The name of the Corporation is Protection One, Inc.
The name under which the Corporation originally was incorporated was P1
Acquisition Corporation.
2. The original Certificate of Incorporation of the
Corporation was filed with the Secretary of State of the State of Delaware on
June 21, 1991. The Certificate of Incorporation was amended and a Restated
Certificate of Incorporation was filed with the Secretary of State of the State
of Delaware on September 13, 1991. Such Restated Certificate of Incorporation
was amended and a second Restated Certificate of Incorporation was filed with
the Secretary of State of the State of Delaware on December 31, 1992. Such
Restated Certificate of Incorporation was amended and a third Restated
Certificate of Incorporation was filed with the Secretary of State of the State
of Delaware on October 20, 1993. Such Restated Certificate of Incorporation
was amended on November 18, 1992, and such Restated Certificate of
Incorporation as so amended was further amended and a fourth Restated
Certificate of Incorporation was filed with the Secretary of State of the State
of Delaware on November 1, 1993. Such Restated Certificate of Incorporation
was amended pursuant to (i) an Amendment to Restated Certificate of
Incorporation filed with the Secretary of State of the State of Delaware on
June 30, 1994; and (ii) an Amendment to Restated Certificate of Incorporation
filed with the Secretary of State of the State of Delaware on August 23, 1994.
3. The text of the Restated Certificate of Incorporation
of the Corporation is hereby further restated and amended to read in full as
set forth in the Fifth Restated Certificate of Incorporation that is attached
hereto as Attachment A and made a part hereof (the "Fifth Restated Certificate
of Incorporation").
4. The Fifth Restated Certificate of Incorporation was
proposed by the Board of Directors of the Corporation and was duly adopted by
its stockholders in the manner and by the vote prescribed by Section 242 of the
General Corporation Law of the State of Delaware.
5. The Fifth Restated Certificate of Incorporation was
duly adopted in accordance with the provisions of Section 245 of the General
Corporation Law of the State of Delaware.
<PAGE> 2
IN WITNESS WHEREOF, the Corporation has caused its corporate
seal to be affixed hereto and this certificate to be signed by James M.
Mackenzie, Jr., its President and Chief Executive Officer and attested to by
John W. Hesse, its Secretary on this 23rd day of September, 1994.
PROTECTION ONE, INC.
By: JAMES M. MACKENZIE, JR.
-----------------------------------------
James M. Mackenzie, Jr., President
and Chief Executive Officer
Attest:
By: JOHN W. HESSE
------------------------------------
John W. Hesse, Secretary
<PAGE> 3
ATTACHMENT A
------------
FIFTH RESTATED CERTIFICATE OF INCORPORATION
OF
PROTECTION ONE, INC.
-------------------------------------------
Pursuant to Section 245 of the General
Corporation Law of the State of Delaware
-------------------------------------------
FIRST: The name of the corporation is Protection One, Inc. (the
"Corporation").
SECOND: The address, including street, number, city and
county, of the registered office of the Corporation in the State of Delaware is
1209 Orange Street, City of Wilmington, County of New Castle 19801. The name
of the registered agent of the Corporation in the State of Delaware at such
address is The Corporation Trust Company.
THIRD: The purpose for which the Corporation is formed is to
engage in any lawful act or activity for which a corporation may be organized
under the General Corporation Law of the State of Delaware.
FOURTH: The total number of shares of all classes of stock
that the Corporation shall have the authority to issue is 29,000,000, of which
24,000,000 shall be voting common stock, par value One Cent ($0.01) per share
("Common Stock"), and 5,000,0000 shall be preferred stock, par value Ten Cents
($.10) per share ("Preferred Stock").
The shares of Preferred Stock may be issued from time to time
in one or more series. The Board of Directors of the Corporation is hereby
authorized from time to time to designate each series, to establish the number
of shares to be included in such series, and to determine the rights,
preferences and privileges of the shares of each such series and the
qualifications, limitations or restrictions thereof, including but not limited
to the determination or alteration of the dividend rights, dividend rate,
conversion rights, voting powers and rights, rights and terms of redemption,
redemption price or prices, and the liquidation preference of any wholly
unissued series of shares of Preferred Stock, or any of them; and to increase
or decrease the number of shares of any series either prior to or subsequent to
the issue of the shares of such series, but not below the number of shares of
such series then outstanding. In case the number of shares of any series
should be so decreased, the shares constituting such decrease shall resume the
status which they had prior to the adoption of the resolution originally fixing
the number of shares of such series.
Section 1. Designation of Series F Stock.
There is hereby authorized and created a series of the
Preferred Stock, which shall be designated as the Series F Non-Voting
Cumulative Preferred Stock (the "Series F Stock")
<PAGE> 4
and which shall consist of 9,670 shares and shall have the rights, preferences,
privileges and restrictions set forth in this Article FOURTH.
Section 2. Definitions.
For the purposes of the provisions hereof setting forth the
rights, preferences and privileges of the Series F Stock and the
qualifications, limitations or restrictions thereof, the following terms shall
have the respective meanings indicated below or as set forth in the indicated
section:
Accumulated Dividends - As to a particular date, all unpaid
dividends for all previous fiscal years of the Corporation, at the annual
amount set forth in Subsection 3(a), plus an amount equal to such annual
dividend amount multiplied by a fraction, the numerator of which is the number
of days elapsed in the Corporation's fiscal year to the particular date and the
denominator of which is 365.
Approved Transferee - Subsection 8(e).
Credit Agreement - shall mean that certain Credit Agreement
dated as of November 3, 1993 among the Corporation, Protection One Alarm
Monitoring, Inc., Protection One Alarm Services, Inc., the Lenders named
therein and Heller Financial, Inc., as Agent, as amended by that certain First
Amendment to Credit Agreement among the Corporation, Protection One Alarm
Monitoring, Inc., Protection One Alarm Services, Inc., Heller Financial, Inc.,
Continental Bank and Kansallis-Osake-Pankki, dated as of June 30, 1994, and as
further amended from time to time; and any credit agreement with respect to a
renewal, refunding or replacement thereof.
Current Series F Holder - shall mean PacifiCorp Financial
Services, Inc., or PacifiCorp Holdings, Inc. (or any successor to such
corporation by merger or any wholly owned first-tier subsidiary of such
corporation).
Direct or Indirect Significant Subsidiaries - shall mean any
direct or indirect subsidiary having 15% or more of the assets, sales or
earnings of the Corporation on a consolidated basis.
Independent Directors - Subsection 8(e)
Issue Date - The earliest date on which shares of Series F
Stock were issued.
Issue Price - For Series F Stock, $1,000 per share.
Junior Stock - Common Stock and shares of any other class or
series of capital stock ranking junior to the applicable series of Preferred
Stock with respect to both the payment of dividends and the distribution of
assets upon the liquidation, dissolution or winding up of the Corporation.
Mandatory Redemption Date - Subsection 5(b)
Mandatory Redemption Notice - Subsection 5(b)
2
<PAGE> 5
Mandatory Redemption Price - Subsection 5(a)
Optional Redemption Date - Subsection 6(c)
Optional Redemption Notice - Subsection 6(c)
Optional Redemption Price - Subsection 6(a)
Parity Preferred Stock - Subsection 8(b)
Series F Default - Subsection 8(e)
Set Apart For Payment - The Corporation shall have deposited
with a bank or trust company located within the United States and having
capital and surplus of at least $200 million, in trust for the exclusive
benefit of the holders of Series F Stock, funds sufficient to pay the
Corporation's obligation as of the applicable time.
Special Redemption Date - Subsection 5(c)
Triggering Event - Subsection 4(g)
Section 3. Dividends and Distributions.
(a) Series F Stock Dividends. The holders of the then
outstanding shares of Series F Stock shall be entitled to receive on each
January 1, April 1, July 1, and October 1 commencing on April 1, 1993 (each, a
"Dividend Payment Date"), out of any funds legally available therefor, cash
dividends at the annual rate of $90 per share; provided, however, that (i) if
at any time the Corporation fails to pay a quarterly dividend on the applicable
Dividend Payment Date therefor, the annual dividend rate shall increase to $110
per share and dividends shall begin to accumulate on each share of Series F
Stock at such increased rate from the first day of the calendar quarter after
the Dividend Payment Date on which the failure to make such dividend payment
occurred until the date all unpaid dividend payments are paid in full, (ii) if
at any time the Corporation has a total of five unpaid quarterly dividend
payments outstanding, whether or not consecutive, the annual dividend rate
shall increase to $130 per share and dividends shall begin to accumulate on
each share of Series F Stock at such increased rate from the first day of the
calendar quarter after the Dividend Payment Date on which the fifth dividend is
missed until the Corporation has reduced the total number of past due quarterly
dividends below five, at which point the annual dividend rate will be reduced
to $110 or until the Corporation has paid all past due quarterly dividend
payments, at which point the annual dividend rate will be reduced to $90; (iii)
if at any time the Corporation has a total of seven unpaid quarterly dividends
outstanding, whether consecutive or not, the annual dividend rate shall
increase to $160 per share and dividends shall begin to accumulate on each such
share of Series F Stock at such increased rate from the first day of the
calendar quarter after the Dividend Payment Date on which the seventh dividend
is missed until the Corporation has reduced the total number of past due
quarterly dividend payments below seven, at which point the annual dividend
rate will be reduced to $130, or until the Corporation has reduced the total
number of past due quarterly dividend payments below five, at which point the
annual dividend rate will be reduced to $110, or until the Corporation has paid
all past due quarterly dividend payments, at which point the annual dividend
rate will be reduced to $90. Notwithstanding the foregoing, if the Corporation
3
<PAGE> 6
fails to pay a quarterly dividend for any reason other than that the funds are
not legally available or that the payment would violate a restrictive covenant
or result in a default under the Credit Agreement, then the annual dividend
rate shall increase to $160 per share and dividends shall begin to accumulate
on each share of Series F Stock on the first day of the calendar quarter after
the Dividend Payment Date on which the failure to make such dividend payment
occurred and shall continue until all unpaid dividends are paid in full, at
which point the annual dividend rate shall be reduced to $90. If the
Corporation fails to redeem any shares of Series F Stock on any Mandatory
Redemption Date pursuant to Subsection 5(a) and (b) hereof or Special
Redemption Date pursuant to Subsection 5(d) hereof, then the annual dividend
rate shall increase to $160 per share and dividends shall begin to accumulate
on each share of Series F Stock at such increased rate from the 22nd calendar
day after such failure to redeem until the redemption payment is made in full.
Dividends on Series F Stock shall be cumulative and shall begin to accumulate
beginning on the Issue Date for Series F Stock whether or not earned or paid.
No dividends or other distributions (other than pro rata dividends or
distributions payable solely in Common Stock) shall be paid with respect to
shares of Junior Stock during any fiscal year of the Corporation until the full
amount of all Accumulated Dividends on all outstanding shares of Series F Stock
shall have been declared and Set Apart For Payment during that fiscal year.
(b) Restrictions on Distributions. No dividends or other
distributions (other than pro rata dividends or distributions payable solely in
Common Stock) shall be paid with respect to Junior Stock until all shares of
Series F Stock are fully redeemed pursuant to Sections 5 or 6 unless (i) an
amount equal to the Mandatory Redemption Price for all outstanding shares of
Series F Stock is first Set Apart For Payment, or (ii) the Corporation receives
the written consent of the holders of at least a majority of the then
outstanding shares of Series F Stock.
(c) Exclusions from Restrictions. The restrictions in
this Section 3 on distributions to Junior Stock shall not apply to repurchases
of up to 2,000,000 shares of Common Stock issued to the Corporation's officers,
provided that such repurchases are made upon termination of employment pursuant
to and at prices provided in agreements approved by the Corporation's Board of
Directors and entered into with such officers.
(d) Junior Stock. Subject to the limitations in
Subsections 3(a), 3(b), and 3(c) above, when and as dividends are declared
thereon, whether payable in cash, property or securities, the holders of Common
Stock will be entitled to share, ratably according to the number of shares of
Common Stock held by them, in such dividends.
(e) Notices of Record Date. In the event of any taking
by the Corporation of a record of the holders of any class of securities for
the purpose of determining the holders thereof who are entitled to receive any
dividend or other distribution, any right to subscribe for, purchase or
otherwise acquire any shares of stock of any class or any other securities or
property, or to receive any other right, the Corporation shall give to each
holder of Series F Stock, at least 20 days prior to the date specified therein,
a notice specifying the date on which any such record is to be taken for the
purpose of such dividend, distribution or right, and the amount and character
of such dividend, distribution or right. In no event shall the notice period
specified in this Subsection 3(e) be deemed to apply in the event of a taking
by the Corporation of a record of the holders of any class of securities for
the purposes of determining the holders thereof who are entitled to vote on any
matter.
4
<PAGE> 7
Section 4. Liquidation Preference.
(a) Series F Stock. In the event of any liquidation,
dissolution or winding up of the Corporation, either voluntary or involuntary,
the holders of each share of Series F Stock shall be entitled to be paid out of
the assets of the Corporation available for distribution to its shareholders,
before any declaration and payment or Setting Apart For Payment of any amount
shall be made in respect of Junior Stock, an amount equal to the Issue Price
for each share of Series F Stock plus an amount equal to any Accumulated
Dividends on each such share of Series F Stock, whether or not declared. If,
upon liquidation, dissolution or winding up of the Corporation, the assets of
the Corporation available for distribution to its shareholders shall be
insufficient to pay the holders of Series F Stock the full preference to which
they are entitled as set forth above, then the holders of Series F Stock shall
share ratably in any distribution of assets.
(b) Junior Stock. After the payments or distributions
described in Subsection 4(a) above have been made, the remaining assets of the
Corporation available for distribution to its shareholders shall be distributed
among the holders of Junior Stock pro rata based upon the number of shares then
held by each of them.
(c) Merger, Etc., Not a Liquidation. A consolidation or
merger of the Corporation or any of its Direct or Indirect Significant
Subsidiaries with or into any other corporation (other than a wholly owned
subsidiary of the Corporation) or other entity or person in which the
Corporation or such subsidiary shall not survive, or a sale, conveyance or
disposition of all or substantially all of the assets of the Corporation or any
of its Direct or Indirect Significant Subsidiaries (other than such a sale to a
wholly owned subsidiary of the Corporation) or the effectuation of any
reorganization or any other transaction or series of related transactions in
which 50 percent or more of the voting power of the Corporation or any of its
Direct or Indirect Significant Subsidiaries is disposed of (each such event, a
"Triggering Event") shall not be deemed to be a liquidation, dissolution or
winding up within the meaning of this Section 4 and no such Triggering Event
shall impair the rights and preferences of the shares of Series F Stock.
Section 5. Mandatory Redemption.
(a) General Right. At any time after February 29, 2004,
any holder of shares of Series F Stock may require the Corporation to redeem
all of the outstanding shares of Series F Stock held by such holder. The
redemption price shall be 100% of the Issue Price plus Accumulated Dividends
for such series, whether or not earned or declared (the "Mandatory Redemption
Price").
(b) Notice and Procedure. At least 30 but not more than
60 days prior to the requested redemption date (the "Mandatory Redemption
Date"), written notice (the "Mandatory Redemption Notice") shall be given by
the holders of Series F Stock requesting redemption to the Corporation,
specifying the number of shares to be redeemed and the Mandatory Redemption
Date. If the funds of the Corporation legally available for redemption of
shares of Series F Stock on any Mandatory Redemption Date are insufficient to
redeem the total number of outstanding shares of such series of Series F Stock
requested to be redeemed, the holders of Series F Stock shall share ratably in
any funds legally available for redemption of such shares. At any time
thereafter when additional funds of the Corporation are legally available for
the
5
<PAGE> 8
redemption of Series F Stock requested to be redeemed, such funds will be used,
at the end of the next succeeding fiscal quarter, to redeem the balance of such
shares, or such portion thereof for which funds are then legally available, on
the basis set forth above.
(c) Special Right. In addition to the redemption right
specified in Subsection 5(a) hereof, (i) if a Triggering Event occurs at any
time, any holder of shares of Series F Stock may require the Corporation to
redeem all of the outstanding shares of Series F Stock held by such holder at
the Mandatory Redemption Price provided, that if the holders of at least 75% of
the shares of Series F Stock then outstanding consent in writing, the
Corporation shall not be required to give written notice of any Triggering
Event required in Subsection 5(d) below and no holder of shares of Series F
stock shall have the right to require the Corporation to redeem his shares
pursuant to this subsection.
(d) Notice of Triggering Event and Procedure. The
Corporation shall not, directly or indirectly, consummate any Triggering Event
unless the Corporation shall have given not less than 20 nor more than 40 days'
written notice, prior to the date fixed for such Triggering Event, to each
holder of any shares of Series F Stock entitled to be redeemed pursuant to
Subsection 5(c) hereof, which notice shall set forth the terms and conditions
of such Triggering Event, the rights of such holder to require the Corporation
to redeem Series F Stock, and the applicable redemption date (the "Special
Redemption Date"), which shall be a date established by the Corporation and
shall be not less than 20 nor more than 40 days after the date of giving such
notice and, in any event, shall be on or prior to the date fixed for such
Triggering Event. During the 15-day period following the giving of such
notice, each holder of Series F Stock who wishes to have redeemed by the
Corporation all of the Series F Stock then held by such holder shall give
written notice to the Corporation setting forth the number of shares of Series
F Stock to be redeemed on the Special Redemption Date. The Corporation shall
redeem on the Special Redemption Date the shares of Series F Stock of each
holder electing such redemption in the number so elected at the Mandatory
Redemption Price.
(e) Limitations. In the event the Corporation does not
have funds legally available to effect fully any redemption required to be made
on the Special Redemption Date (or to deposit funds as contemplated by
Subsection 5(f) below with respect to any such redemption), the Corporation
shall not effect such Triggering Event without the advance written consent of
the holders of at least 75% of the then outstanding shares of Series F Stock.
(f) Deposit of Funds. On or prior to any Mandatory
Redemption Date or Special Redemption Date, the Corporation shall irrevocably
deposit with any bank or trust company with capital and surplus of at least
$200,000,000 and located in the United States the aggregate Mandatory
Redemption Price (or portion thereof not already paid), payable to the order of
the holders of Series F Stock to be redeemed, on surrender of their
certificates.
Section 6. Optional Redemption.
(a) Series F Stock. The Corporation, at the option of
the Board of Directors, may redeem all of the outstanding shares of Series F
Stock, or any portion thereof having an aggregate Issue Price of at least
$500,000 or any increment thereof, at any time when it may lawfully do so, by
paying in cash for each redeemed share the amount of 100% of the Issue Price
for each share of Series F Stock then outstanding plus Accumulated Dividends on
each such share, whether or not earned or declared (the "Optional Redemption
Price").
6
<PAGE> 9
(b) Notice and Procedure. Notice of redemption pursuant
to this Section 6 shall be given to the holders of record of the shares of
Series F Stock to be redeemed at their respective addresses appearing on the
books of the Corporation. Such notice (the "Optional Redemption Notice") shall
be given not less than 15 nor more than 30 days in advance of the date fixed
for redemption (the "Optional Redemption Date") and shall specify the Optional
Redemption Price and the place at which payment may be obtained as to such
shares and calling upon such holder to surrender to the Corporation, in the
manner and at the place designated, his certificate(s) representing the shares
to be redeemed. At any time on or after the Optional Redemption Date, the
holders of record of shares of Series F Stock to be redeemed shall be entitled
to receive the Optional Redemption Price, upon actual delivery to the
Corporation or its agent of the certificates representing the shares to be
redeemed.
(c) Deposit of Funds. If an Optional Redemption Notice
is duly given and if on or before the Optional Redemption Date the funds
necessary for redemption (taking into account any conversions) have been
deposited by the Corporation with a bank or trust company located in the United
States and having capital and surplus of at least $200,000,000, in trust for
the pro rata benefit of the holders of the shares of Series F Stock called for
redemption, then, notwithstanding that any certificate for shares of Series F
Stock called for redemption shall not have been surrendered for cancellation,
from and after the Optional Redemption Date (unless there shall have been a
default in payment of the Optional Redemption Price) all shares of Series F
Stock so called for redemption shall no longer be deemed to be outstanding and
all rights with respect to such shares shall forthwith cease and terminate,
except only the right of the holders thereof to receive the funds so deposited,
without interest, from such bank or trust company upon surrender of their
certificate or certificates at any time after the time of such deposit. The
balance of any funds so deposited and unclaimed at the end of two years from
the Optional Redemption Date shall be released to the Corporation, after which
the holders of the shares called for redemption shall be entitled, upon proof
of their ownership of such shares and any bond requested by the Corporation, to
receive such funds from the Corporation.
Section 7. Reacquired Shares.
Any shares of Series F Stock redeemed, purchased or otherwise
acquired by the Corporation in any manner whatsoever shall be retired and
cancelled promptly after the acquisition thereof.
Section 8. Voting Rights.
(a) General. The holders of the shares of Series F Stock
shall have no voting rights except as expressly provided herein or as may
otherwise be required by law from time to time. Except as set forth in this
Section 8 or as required under applicable law, there shall be no other special
voting or class voting requirements.
(b) No Adverse Effect. Without the affirmative vote or
consent of the holders of at least 67% of the outstanding shares of Series F
Stock, the Corporation may not amend, alter or repeal any provisions of the
Corporation's certificate of incorporation so as to affect adversely the
preferences, special rights or powers of the shares of Series F Stock. Any
increase in the authorized number of shares of Series F Stock or of any class
or series of capital stock ranking on a parity with (but not prior to) such
Series F Stock with respect to the payment of
7
<PAGE> 10
dividends or the distribution of assets, redemption rights or conversion price
adjustments ("Parity Preferred Stock"), or any creation, authorization or
issuance of any securities convertible into, or warrants, options or similar
rights to purchase, acquire or receive, or any reclassification of any
authorized capital stock of the Corporation into, any shares of Parity
Preferred Stock shall be deemed to affect adversely the preferences, special
rights or powers of the shares of Series F Stock, and may not be effected
without any vote or consent of the holders of Series F Stock.
(c) No Superior Stock. Without the affirmative vote or
consent of the holders of at least 67% of the outstanding shares of Series F
Stock, the Corporation may not create, authorize or issue shares of any class
or series of capital stock ranking senior to the Series F Stock with respect to
the payment of dividends, the distribution of assets or redemption rights, or
conversion price adjustments or create, authorize or issue any securities
convertible into, or warrants, options or similar rights to purchase, acquire
or receive, or reclassify any authorized capital stock of the Corporation into,
any shares of capital stock ranking senior to the Series F Stock with respect
to the payment of dividends or the distribution of assets or redemption rights
or conversion price adjustments.
(d) Election of Directors. For so long as, and only so
long as, shares of Series F Stock are issued and outstanding, the holders
thereof shall have the right, notwithstanding anything to the contrary in this
Fifth Restated Certificate of Incorporation or the By- Laws of the Corporation,
to elect one director to the Board of Directors.
(e) Defaults Relating to Series F Stock. If at any time
(i) that the Corporation shall fail to redeem Series F Stock on any Mandatory
Redemption Date or Special Redemption Date and does not cure such failure
within 30 days; or (ii) there shall be four quarterly dividend payments unpaid
(whether or not consecutive) on Series F Stock; or (iii) the Corporation shall
have failed to pay a quarterly dividend under circumstances in which funds were
legally available and payment of the dividend would not have violated a
restrictive covenant or resulted in an event of default under the Credit
Agreement (each a "Series F Default"), then at any annual or special meeting of
stockholders (which special meeting shall be held not more than 20 days after
written request of the holders of at least 10 percent of Series F Stock), the
holders of Series F Stock shall have the right, notwithstanding anything to the
contrary in this Restated Certificate of Incorporation or the Bylaws of the
Corporation, to have the Board of Directors of the Corporation consist of seven
members elected as follows:
(A) three members designated by the Current
Series F Holder or an Approved Transferee;
(B) three members designated or elected by the
holders of the Common Stock (the "Independent Directors"); and
(C) one member designated by the Current Series F
Holder or an Approved Transferee (which member must be an executive
officer of the Corporation), unless the Current Series F Holder and a
majority of the Independent Directors agree on another designee who is
not an executive officer of the Corporation.
In addition, in the event of a Series F Default the executive committee of the
Board of Directors shall be comprised of:
8
<PAGE> 11
(1) one member designated by the Current Series F
Holder or an Approved Transferee;
(2) one member designated by a majority of the
Independent Directors; and
(3) the member designated pursuant to clause (C)
above.
Such right of the holders of Series F Stock shall continue until no Series F
Default exists, at which time such right shall terminate, except as required by
law, subject to revesting in the event of each and every subsequent Series F
Default. Upon termination of the right to elect directors as provided in this
Subsection 8(e), any of (i) the Current Series F Holder, (ii) an Approved
Transferee, or (iii) such other persons who pursuant to the Bylaws of the
Corporation are granted the right to call a special meeting of stockholders of
the Corporation shall have the right to call a special meeting of stockholders
for the purpose of electing directors. The rights upon a Series F Default set
forth in this Subsection 8(e) may be exercised only by the Current Series F
Holder; provided, however, that the rights shall be transferable to a
transferee of Series F Stock if a majority of the directors (excluding
therefrom directors who are officers or employees of the Company or its
subsidiaries and the director elected by the holder of the Series F Stock
pursuant to Subsection 8(d) consent to such transfer (an "Approved
Transferee")).
(f) Certain Voting Procedures. At any meeting at which
the holders of Series F Stock shall have the right to elect one or more
directors as provided in Subsections 8(d) and 8(e), the presence in person or
by proxy of the holders of at least two-thirds of the then outstanding shares
of Series F Stock shall be required and be sufficient to constitute a quorum,
and the favorable vote of the holders of two- thirds of the shares of Series F
Stock represented at such meeting shall be sufficient to approve any such
action. Any vacancy in the office of any director elected pursuant to
Subsection 8(d) may be filled by the person appointed by an instrument in
writing signed by the holders of Series F Stock then outstanding.
(g) Non-Exclusivity. The rights of the holders of Series
F Stock under Sections 3 and 8 with respect to any default by the Corporation
shall not be deemed to be exclusive. If any default shall exist, the holders
of shares of Series F Stock shall have all other rights which such holders
shall have been granted under any contract or agreement at any time, and all
other rights which such holders shall have under any law. Any person having
any rights under any provision in this Section 8 shall be entitled to enforce
such person's rights specifically, to recover damages by reason of any
non-compliance with any provision in this Section 8, and to exercise all other
rights granted by law.
FIFTH: The Board of Directors is authorized to adopt, amend
or repeal the By-Laws of the Corporation.
SIXTH: Meetings of stockholders shall be held at such place,
within or without the State of Delaware, as may be designated by or in the
manner provided in the By-Laws, or, if not so designated or provided, at the
registered office of the Corporation in the state of Delaware. Elections of
directors need not be by written ballot unless and to the extent that the
By-Laws so provide.
SEVENTH: No director of the Corporation shall be personally
liable to the Corporation or its stockholders for monetary damages for breach
of fiduciary duty as a director;
9
<PAGE> 12
provided, however, that the foregoing clause shall not apply to any liability
of a director to the extent provided by applicable law (i) for any breach of
the director's duty of loyalty to the Corporation or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or
a knowing violation of law, (iii) under Section 174 of the General Corporation
Law of the State of Delaware or (iv) for any transaction from which the
director derived an improper personal benefit. Neither the amendment nor
repeal of this Article SEVENTH, nor the adoption of any provision of this Fifth
Restated Certificate of Incorporation inconsistent with this Article SEVENTH,
shall be effective with respect to any cause of action, suit, claim or other
matter that, but for this Article SEVENTH, would accrue or arise prior to such
amendment, repeal or adoption of an inconsistent provision.
EIGHTH: Whenever a compromise or arrangement is proposed
between the Corporation and its creditors or any class of them and/or between
the Corporation and its stockholders or any class of them, any court of
equitable jurisdiction within the State of Delaware may, on the application in
a summary way of the Corporation or of any creditor or stockholder thereof or
on the application of any receiver or receivers appointed for the Corporation
under the provisions of Section 291 of Title 8 of the Delaware Code or on the
application of trustees in dissolution or of any receiver or receivers
appointed for the Corporation under the provisions of Section 279 of Title 8 of
the Delaware Code order a meeting of the creditors or class of creditors,
and/or of the stockholders or class of stockholders of the Corporation, as the
case may be, to be summoned in such manner as the said court directs. If a
majority in number representing three fourths in value of the creditors or
class of creditors, and/or of the stockholders or class of stockholders of the
Corporation, as the case may be, agree to any compromise or arrangement and to
any reorganization of the Corporation as a consequence of such compromise or
arrangement, the said compromise or arrangement and the said reorganization
shall, if sanctioned by the court to which the said application has been made,
be binding on all the creditors or class of creditors, and/or all the
stockholders or class of stockholders, of the Corporation, as the case may be,
and also on the Corporation.
NINTH: The Corporation reserves the right to amend, alter or
repeal any provision contained in this Fifth Restated Certificate of
Incorporation in the manner now or hereafter prescribed by statute, and all
rights of stockholders herein are subject to this reservation.
10
<PAGE> 13
CERTIFICATE OF DESIGNATION OF THE VOTING POWERS, DESIGNATIONS,
PREFERENCES AND RELATIVE, PARTICIPATING,
OPTIONAL OR OTHER SPECIAL RIGHTS, AND
QUALIFICATIONS, LIMITATIONS AND RESTRICTIONS
OF THE
11% SERIES H CUMULATIVE REDEEMABLE CONVERTIBLE PREFERRED STOCK
-------------------------------------------
Pursuant to Section 151 of the
General Corporation Law of the State of Delaware
-------------------------------------------
Protection One, Inc., a corporation organized and existing
under the General Corporation Law of the State of Delaware (the "Corporation"),
does hereby certify that, pursuant to authority conferred on the Board of
Directors of the Corporation by its Fifth Restated Certificate of
Incorporation, and pursuant to the provisions of Section 151 of the General
Corporation Law of the State of Delaware, said Board of Directors adopted the
following resolution, which resolution remains in full force and effect on the
date hereof:
RESOLVED, that pursuant to the authority conferred upon the
Board of Directors by Article FOURTH of the Fifth Restated Certificate of
Incorporation of the Corporation there is hereby established and created a
series of the authorized preferred stock of the Corporation having a par value
of Ten Cents ($.10) per share, which shall be designated as "11% Series H
Cumulative Redeemable Convertible Preferred Stock" (the "Series H Stock"), and
which shall consist of 6,127 shares having the designations, preferences,
relative, participating, optional or other special rights and qualifications,
limitations and restrictions that are set forth in this resolution, as follows:
Section 1. Definitions.
For the purposes of this resolution, the following terms shall
have the respective meanings indicated below or as set forth in the indicated
section of this resolution:
Accumulated Dividends - As to a particular date, all unpaid
dividends for all previous fiscal years of the Corporation, at the annual
amount set forth in Subsection 2(a), plus an amount equal to such annual
dividend amount multiplied by a fraction, the numerator of which is the number
of days elapsed in the Corporation's fiscal year to the particular date and the
denominator of which is 365.
Approved Transferee - Subsection 8(e)
Conversion Price - Subsection 6(a)(i)
Credit Agreement - shall mean that certain Credit Agreement
dated as of November 3, 1993 among the Corporation, Protection One Alarm
Monitoring, Inc., Protection One Alarm Services, Inc., the Lenders named
therein and Heller Financial, Inc., as Agent, as amended by that certain First
Amendment to Credit Agreement among the Corporation, Protection One Alarm
Monitoring, Inc., Protection One Alarm Services, Inc., Heller Financial, Inc.,
Continental
<PAGE> 14
Bank and Kansallis-Osake-Pankki, dated as of June 30, 1994, and as further
amended from time to time; and any credit agreement with respect to a renewal,
refunding or replacement thereof.
Current Series H Holder - shall mean PacifiCorp Financial
Services, Inc., or PacifiCorp Holdings, Inc. (or any successor to such
corporation by merger or any wholly owned first-tier subsidiary of such
corporation).
Direct or Indirect Significant Subsidiaries - shall mean any
direct or indirect subsidiary having 15% or more of the assets, sales or
earnings of the Corporation on a consolidated basis.
Independent Directors - Subsection 8(e)
Initial Conversion Price - Subsection 6(a)(i)
Issue Date - The earliest date on which shares of Series H
Stock are issued.
Issue Price - For Series H Stock, $1,000 per share.
Junior Stock - Common Stock and shares of any other class or
series of capital stock ranking junior to the applicable series of Preferred
Stock with respect to both the payment of dividends and the distribution of
assets upon the liquidation, dissolution or winding up of the Corporation.
Mandatory Redemption Date - Subsection 4(b)
Mandatory Redemption Notice - Subsection 4(b)
Mandatory Redemption Price - Subsection 4(a)
Optional Redemption Date - Subsection 5(c)
Optional Redemption Notice - Subsection 5(c)
Optional Redemption Price - Subsection 5(a)
Parity Preferred Stock - Subsection 8(b)
Redemption Date - An Optional Redemption Date, a Mandatory
Redemption Date or a Special Redemption Date, as applicable.
Redemption Notice - An Optional Redemption Notice or a
Mandatory Redemption Notice, as applicable.
Series H Default - Subsection 8(e)
Set Apart For Payment - The Corporation shall have deposited
with a bank or trust company located within the United States and having
capital and surplus of at least $200 million, in trust for the exclusive
benefit of the holders of Series H Stock, funds sufficient to pay the
Corporation's obligation as of the applicable time.
2
<PAGE> 15
Special Redemption Date - Subsection 4(c)
Triggering Event - Subsection 3(c)
Section 2. Dividends and Distributions.
(a) Series H Stock Dividends. The holders of the then
outstanding shares of Series H Stock shall be entitled to receive on each
January 1, April 1, July 1, and October 1 commencing on the first such date
after the Issue Date (each, a "Dividend Payment Date"), out of any funds
legally available therefor, cash dividends at the annual rate of $110 per
share; provided, however, that (i) if at any time the Corporation fails to pay
a quarterly dividend on the applic-able Dividend Payment Date therefor, the
annual dividend rate shall increase to $130 per share and dividends shall begin
to accumulate on each share of Series H Stock at such increased rate from the
first day of the calendar quarter after the Dividend Payment Date on which the
failure to make such dividend payment occurred until the date all unpaid
dividend payments are paid in full, (ii) if at any time the Corporation has a
total of five unpaid quarterly dividend payments outstanding, whether or not
consecutive, the annual dividend rate shall increase to $150 per share and
dividends shall begin to accumulate on each share of Series H Stock at such
increased rate from the first day of the calendar quarter after the Dividend
Payment Date on which the fifth dividend is missed until the Corporation has
reduced the total number of past due quarterly dividends below five, at which
point the annual dividend rate will be reduced to $130 or until the Corporation
has paid all past due quarterly dividend payments, at which point the annual
dividend rate will be reduced to $110; (iii) if at any time the Corporation has
a total of seven unpaid quarterly dividends outstanding, whether consecutive or
not, the annual dividend rate shall increase to $180 per share and dividends
shall begin to accumulate on each such share of Series H Stock at such
increased rate from the first day of the calendar quarter after the Dividend
Payment Date on which the seventh dividend is missed until the Corporation has
reduced the total number of past due quarterly dividend payments below seven,
at which point the annual dividend rate will be reduced to $150, or until the
Corporation has reduced the total number of past due quarterly dividend
payments below five, at which point the annual dividend rate will be reduced to
$130, or until the Corporation has paid all past due quarterly dividend
payments, at which point the annual dividend rate will be reduced to $110.
Notwithstanding the foregoing, if the Corporation fails to pay a quarterly
dividend for any reason other than that the funds are not legally available or
that the payment would violate a restrictive covenant or result in a default
under the Credit Agreement, then the annual dividend rate shall increase to
$180 per share and dividends shall begin to accumulate on each share of Series
H Stock on the first day of the calendar quarter after the Dividend Payment
Date on which the failure to make such dividend payment occurred and shall
continue until all unpaid dividends are paid in full, at which point the annual
dividend rate shall be reduced to $110. If the Corporation fails to redeem any
shares of Series H Stock on any Mandatory Redemption Date pursuant to
Subsection 4(a) and (b) hereof or Special Redemption Date pursuant to
Subsection 4(d) hereof, then the annual dividend rate shall increase to $180
per share and dividends shall begin to accumulate on each share of Series H
Stock at such increased rate from the 22nd calendar day after such failure to
redeem until the redemption payment is made in full. Dividends on Series H
Stock shall be cumulative and shall begin to accumulate beginning on the Issue
Date for Series H Stock whether or not earned or paid. No dividends or other
distributions (other than pro rata dividends or distributions payable solely in
Common Stock) shall be paid with respect to shares of Junior Stock during any
fiscal year of the Corporation until the
3
<PAGE> 16
full amount of all Accumulated Dividends on all outstanding shares of Series H
Stock shall have been declared and Set Apart For Payment during that fiscal
year.
(b) Restrictions on Distributions. No dividends or other
distributions (other than pro rata dividends or distributions payable solely in
Common Stock) shall be paid with respect to Junior Stock until all shares of
Series H Stock are fully redeemed pursuant to Sections 4 or 5 unless (i) an
amount equal to the Mandatory Redemption Price for all outstanding shares of
Series H Stock is first Set Apart For Payment, or (ii) the Corporation receives
the written consent of the holders of at least a majority of the then
outstanding shares of Series H Stock.
(c) Exclusions from Restrictions. The restrictions in
this Section 2 on distributions to Junior Stock shall not apply to repurchases
of up to 2,000,000 shares of Common Stock issued to the Corporation's officers,
provided that such repurchases are made upon termination of employment pursuant
to and at prices provided in agreements approved by the Corporation's Board of
Directors and entered into with such officers.
(d) Junior Stock. Subject to the limitations in
Subsections 2(a), 2(b), and 2(c) above, when and as dividends are declared
thereon, whether payable in cash, property or securities, the holders of Common
Stock will be entitled to share, ratably according to the number of shares of
Common Stock held by them, in such dividends.
(e) Notices of Record Date. In the event of any taking
by the Corporation of a record of the holders of any class of securities for
the purpose of determining the holders thereof who are entitled to receive any
dividend or other distribution, any right to subscribe for, purchase or
otherwise acquire any shares of stock of any class or any other securities or
property, or to receive any other right, the Corporation shall give to each
holder of Series H Stock, at least 20 days prior to the date specified therein,
a notice specifying the date on which any such record is to be taken for the
purpose of such dividend, distribution or right, and the amount and character
of such dividend, distribution or right. In no event shall the notice period
specified in this Subsection 2(e) be deemed to apply in the event of a taking
by the Corporation of a record of the holders of any class of securities for
the purposes of determining the holders thereof who are entitled to vote on any
matter.
Section 3. Liquidation Preference.
(a) Series H Stock. In the event of any liquidation,
dissolution or winding up of the Corporation, either voluntary or involuntary,
the holders of each share of Series H Stock shall be entitled to be paid out of
the assets of the Corporation available for distribution to its shareholders,
before any declaration and payment or Setting Apart For Payment of any amount
shall be made in respect of Junior Stock, an amount equal to the Issue Price
for each share of Series H Stock plus an amount equal to any Accumulated
Dividends on each such share of Series H Stock, whether or not declared. If,
upon liquidation, dissolution or winding up of the Corporation, the assets of
the Corporation available for distribution to its shareholders shall be
insufficient to pay the holders of Series H Stock the full preference to which
they are entitled as set forth above, then the holders of Series H Stock shall
share ratably in any distribution of assets.
(b) Junior Stock. After the payments or distributions
described in Subsection 3(a) above have been made, the remaining assets of the
Corporation available for distribution to
4
<PAGE> 17
its shareholders shall be distributed among the holders of Junior Stock pro
rata based upon the number of shares then held by each of them.
(c) Merger, Etc., Not a Liquidation. A consolidation or
merger of the Corporation or any of its Direct or Indirect Significant
Subsidiaries with or into any other corporation (other than a wholly owned
subsidiary of the Corporation) or other entity or person in which the
Corporation or such subsidiary shall not survive, or a sale, conveyance or
disposition of all or substantially all of the assets of the Corporation or any
of its Direct or Indirect Significant Subsidiaries (other than such a sale to a
wholly owned subsidiary of the Corporation) or the effectuation of any
reorganization or any other transaction or series of related transactions in
which 50 percent or more of the voting power of the Corporation or any of its
Direct or Indirect Significant Subsidiaries is disposed of (each such event, a
"Triggering Event") shall not be deemed to be a liquidation, dissolution or
winding up within the meaning of this Section 3 and no such Triggering Event
shall impair the rights and preferences of the shares of Series H Stock.
Section 4. Mandatory Redemption.
(a) General Right. At any time after December 31, 2005,
any holder of shares of Series H Stock may require the Corporation to redeem
all of the outstanding shares of Series H Stock held by such holder. The
redemption price shall be 100% of the Issue Price plus Accumulated Dividends
for such series, whether or not earned or declared (the "Mandatory Redemption
Price").
(b) Notice and Procedure. At least 30 but not more than
60 days prior to the requested redemption date (the "Mandatory Redemption
Date"), written notice (the "Mandatory Redemption Notice") shall be given by
the holders of Series H Stock requesting redemption to the Corporation,
specifying the number of shares to be redeemed and the Mandatory Redemption
Date. If the funds of the Corporation legally available for redemption of
shares of Series H Stock on any Mandatory Redemption Date are insufficient to
redeem the total number of outstanding shares of such series of Series H Stock
requested to be redeemed, the holders of Series H Stock shall share ratably in
any funds legally available for redemption of such shares. At any time
thereafter when additional funds of the Corporation are legally available for
the redemption of Series H Stock requested to be redeemed, such funds will be
used, at the end of the next succeeding fiscal quarter, to redeem the balance
of such shares, or such portion thereof for which funds are then legally
available, on the basis set forth above.
(c) Special Right. In addition to the redemption right
specified in Subsection 4(a) hereof, (i) if a Triggering Event occurs at any
time, any holder of shares of Series H Stock may require the Corporation to
redeem all of the outstanding shares of Series H Stock held by such holder at
the Mandatory Redemption Price provided, that if the holders of at least 75% of
the shares of Series H Stock then outstanding consent in writing, the
Corporation shall not be required to give written notice of any Triggering
Event required in Subsection 4(d) below and no holder of shares of Series H
stock shall have the right to require the Corporation to redeem his shares
pursuant to this subsection.
(d) Notice of Triggering Event and Procedure. The
Corporation shall not, directly or indirectly, consummate any Triggering Event
unless the Corporation shall have given not less than 20 nor more than 40 days'
written notice, prior to the date fixed for such Trigger-
5
<PAGE> 18
ing Event, to each holder of any shares of Series H Stock entitled to be
redeemed pursuant to Subsection 4(c) hereof, which notice shall set forth the
terms and conditions of such Triggering Event, the rights of such holder to
require the Corporation to redeem Series H Stock, and the applicable redemption
date (the "Special Redemption Date"), which shall be a date established by the
Corporation and shall be not less than 20 nor more than 40 days after the date
of giving such notice and, in any event, shall be on or prior to the date fixed
for such Triggering Event. During the 15-day period following the giving of
such notice, each holder of Series H Stock who wishes to have redeemed by the
Corporation all of the Series H Stock then held by such holder shall give
written notice to the Corporation setting forth the number of shares of Series
H Stock to be redeemed on the Special Redemption Date. The Corporation shall
redeem on the Special Redemption Date the shares of Series H Stock of each
holder electing such redemption in the number so elected at the Mandatory
Redemption Price.
(e) Limitations. In the event the Corporation does not
have funds legally available to effect fully any redemption required to be made
on the Special Redemption Date (or to deposit funds as contemplated by
Subsection 4(f) below with respect to any such redemption), the Corporation
shall not effect such Triggering Event without the advance written consent of
the holders of at least 75% of the then outstanding shares of Series H Stock.
(f) Deposit of Funds. On or prior to any Mandatory
Redemption Date or Special Redemption Date, the Corporation shall irrevocably
deposit with any bank or trust company with capital and surplus of at least
$200,000,000 and located in the United States the aggregate Mandatory
Redemption Price (or portion thereof not already paid), payable to the order of
the holders of Series H Stock to be redeemed, on surrender of their
certificates.
Section 5. Optional Redemption.
(a) Series H Stock. The Corporation, at the option of
the Board of Directors, may redeem all of the outstanding shares of Series H
Stock, or any portion thereof having an aggregate Issue Price of at least
$500,000 or any increment thereof (or such lesser amount as may then be
outstanding), at any time when it may lawfully do so, by paying in cash for
each redeemed share the amount of 100% of the Issue Price for each share of
Series H Stock then outstanding plus Accumulated Dividends on each such share,
whether or not earned or declared (the "Optional Redemption Price").
(b) Notice and Procedure. Notice of redemption pursuant
to this Section 5 shall be given to the holders of record of the shares of
Series H Stock to be redeemed at their respective addresses appearing on the
books of the Corporation. Such notice (the "Optional Redemption Notice") shall
be given not less than 15 nor more than 30 days in advance of the date fixed
for redemption (the "Optional Redemption Date") and shall specify the Optional
Redemption Price and the place at which payment may be obtained as to such
shares and calling upon such holder to surrender to the Corporation, in the
manner and at the place designated, his certificate(s) representing the shares
to be redeemed. At any time on or after the Optional Redemption Date, the
holders of record of shares of Series H Stock to be redeemed shall be entitled
to receive the Optional Redemption Price, upon actual delivery to the
Corporation or its agent of the certificates representing the shares to be
redeemed.
(c) Deposit of Funds. If an Optional Redemption Notice
is duly given and if on or before the Optional Redemption Date the funds
necessary for redemption (taking into
6
<PAGE> 19
account any conversions) have been deposited by the Corporation with a bank or
trust company located in the United States and having capital and surplus of at
least $200,000,000, in trust for the pro rata benefit of the holders of the
shares of Series H Stock called for redemption, then, notwithstanding that any
certificate for shares of Series H Stock called for redemption shall not have
been surrendered for cancellation, from and after the Optional Redemption Date
(unless there shall have been a default in payment of the Optional Redemption
Price) all shares of Series H Stock so called for redemption shall no longer be
deemed to be outstanding and all rights with respect to such shares shall
forthwith cease and terminate, except only the right of the holders thereof to
receive the funds so deposited, without interest, from such bank or trust
company upon surrender of their certificate or certificates at any time after
the time of such deposit. The balance of any funds so deposited and unclaimed
at the end of two years from the Optional Redemption Date shall be released to
the Corporation, after which the holders of the shares called for redemption
shall be entitled, upon proof of their ownership of such shares and any bond
requested by the Corporation, to receive such funds from the Corporation.
Section 6.7. Conversion Right.
(a) Conversion Right and Conversion Events.
(i) Each holder of shares of Series H Stock may,
at his option, at any time after October 1, 1995 and, if applicable, prior to
the close of business on the day before any Redemption Date as may have been
fixed in any Redemption Notice with respect to such shares, convert all or any
part of such shares from time to time held by him into the number of shares of
Common Stock as is determined by dividing the Issue Price by the Conversion
Price then in effect. The Conversion Price shall initially be $9.00 per share
(the "Initial Conversion Price"). The Initial Conversion Price shall be
subject to adjustment as set forth in Subsection 6(c). For purposes of this
Section 6, all calculations shall be carried out to four decimal places.
(ii) In the event of a call for redemption of any
shares of Series H Stock pursuant to Section 5 hereof, the conversion rights
applicable to such series of Preferred Stock shall terminate as to the shares
designated for redemption at the close of business on the day before the
Redemption Date, unless default is made in payment of the Redemption Price.
(iii) Upon conversion of the Series H Stock into
shares of Common Stock, the Common Stock so issued shall be duly and validly
issued, fully paid and nonassessable shares of the Corporation.
(b) Mechanics of Conversion. Before any holder of Series
H Stock shall be entitled to exercise his rights to convert the same into
shares of Common Stock, he shall surrender the certificate or certificates
therefor, duly endorsed, at the office of the Corporation or of any transfer
agent for the Common Stock and shall give written notice to the Corporation of
the election to convert the same and shall state therein the name or names in
which the certificate or certificates for shares of Common Stock are to be
issued. The Corporation shall, as soon as practicable thereafter, issue and
deliver at such office to such holder or to the nominee or nominees of such
holder, a certificate or certificates for the number of shares of Common Stock
to which such holder shall be entitled as aforesaid and pay to such holder in
cash all Accumulated Dividends, whether or not earned or declared, with respect
to the shares of Series H Stock so converted. Such conversion shall be deemed
to have been made immediately prior to the close of business on the date of
such surrender of the shares to be converted, and the
7
<PAGE> 20
person or persons entitled to receive the shares of Common Stock issuable upon
such conversion shall be treated for all purposes as the record holder or
holders of such shares of Common Stock as of such date. If the conversion is
in connection with an underwritten offer of securities registered pursuant to
the Securities Act of 1933, the conversion may, at the option of any holder
tendering for conversion, be conditioned upon the closing with the underwriter
of the sale of securities pursuant to such offering of Common Stock, in which
event the person(s) entitled to receive the Common Stock issuable upon such
conversion shall not be deemed to have converted such shares until immediately
prior to the closing of such sale of securities.
(c) Adjustments. The Conversion Price provided in
Section 6(a)(i) shall be subject to adjustment to the extent below provided:
In the event the Corporation shall (i) pay a dividend
of Common Stock, or of any capital stock convertible into Common Stock, on its
outstanding Common Stock, (ii) subdivide its outstanding Common Stock into a
larger number of shares of Common Stock by reclassification or otherwise, or
(iii) combine its outstanding Common Stock into a smaller number of shares of
Common Stock by reclassification or otherwise, the Conversion Price in effect
immediately prior thereto shall be proportionately adjusted so that the holder
of any Series H Stock thereafter surrendered for conversion shall be entitled
to receive the number of shares of Common Stock (and, in the case of a dividend
payable in capital stock convertible into Common Stock, the number of shares of
such capital stock) which he would have owned or have been entitled to receive
after the happening of any of the events described above had such Series H
Stock been converted immediately prior to the happening of such event. Such
adjustment shall be made whenever any of the events described above shall
occur. An adjustment made pursuant to this Section 6(c) shall in case of a
dividend be made as of the record date therefor and in the case of a
subdivision or combination be made as of the effective date thereof.
(d) Other Distributions. If the Corporation declares a
distribution payable to holders of its Common Stock in securities of other
another person, evidences of indebtedness issued by the Corporation or other
persons, assets (excluding cash dividends) or options or rights, then, in each
such case for the purpose of this Subsection 6(d), the holders of the Series H
Stock shall be entitled to a proportionate share of any such distribution as
though they were the holders of the number of shares of Common Stock of the
Corporation equal to the number of shares of Common Stock into which their
shares of Series H Stock are convertible as of the record date fixed for the
determination of the holders of Common Stock of the Corporation entitled to
receive such distribution.
(e) Recapitalizations. If at any time or from time to
time there shall be a recapitalization of the Common Stock (other than a
subdivision, combination or distribution provided for elsewhere in this Section
6), provision shall be made so that the holders of the Series H Stock shall
thereafter be entitled to receive upon conversion of the Series H Stock the
number of shares of stock or other securities or property of this Corporation
or otherwise, to which a holder of Common Stock deliverable upon conversion
would have been entitled on such recapitalization. In any such case,
appropriate adjustment shall be made in the application of the provisions of
this Section 6 with respect to the rights of the holders of the Series H Stock
after the recapitalization to the end that the provisions of this Section 6
(including adjustment of the Conversion Prices of the Series H Stock then in
effect and the number of shares into which each share of Series H Stock is then
convertible) shall be applicable after that event as nearly equivalent as may
be practicable.
8
<PAGE> 21
(f) No Impairment. The Corporation will not, by
amendment of its Certificate of Incorporation or through any reorganization,
recapitalization, transfer of assets, consolidation , merger, dissolution,
issue or sale of securities or any other voluntary action, avoid or seek to
avoid the observance or performance of any of the terms to be observed or
performed hereunder by the Corporation, but will at all times in good faith
assist in the carrying out of all the provisions of this Section 6 and in the
taking of all such action as may be necessary or appropriate in order to
protect the conversion rights set forth in this Section 6 against impairment.
(g) No Fractional Shares; Certificates as to Adjustments.
(i) No fractional shares shall be issued upon
conversion of the Series H Stock, and the number of shares of Common Stock to
be issued shall be rounded to the nearest whole share. Whether fractional
shares would otherwise be issuable upon conversion shall be determined on the
basis of the total number of shares of such series the holder is at the time
converting into Common Stock and the number of shares of Common Stock issuable
upon such aggregate conversion.
(ii) Upon the occurrence of each adjustment or
readjustment of the Conversion Prices of the Series H Stock pursuant to this
Section 6, the Corporation, at its expense, shall promptly compute such
adjustment or readjustment in accordance with the terms hereof and prepare and
give to each holder of Series H Stock written notice that includes a
certificate setting forth such adjustment or readjustment, including a
statement setting forth (A) the Conversion Price then in effect for such series
of Preferred Stock, and (B) the number of shares of Common Stock and the
amount, if any, of other property which at the time would be received upon the
conversion of shares of such series of Preferred Stock.
(h) Reservation of Stock Issuable upon Conversion. The
Corporation shall at all times reserve and keep available out of its authorized
but unissued shares of Common Stock and solely for the purpose of effecting the
conversion of the shares of Series H Stock convertible pursuant to this Section
6 into shares of Common Stock, as the case may be, such number of its shares of
Common Stock as shall from time to time be sufficient to effect the conversion
of all outstanding shares of such Preferred Stock so convertible; and if at any
time the number of authorized but unissued shares of Common Stock shall be
sufficient to effect the conversion of all then outstanding shares of such
Preferred Stock so convertible, in addition to such other remedies as shall be
available to the holders of such Preferred Stock so convertible, the
Corporation will take such corporate action as may be necessary to increase its
authorized but unissued shares of Common Stock to such number of shares as
shall be sufficient to such purposes.
(i) Taxes. The Corporation shall pay all taxes and other
governmental charges that may be imposed in respect of the issue or delivery of
shares of Common Stock upon conversion of shares of Series H Stock (other than
income taxes imposed upon the holder thereof).
9
<PAGE> 22
Section 7. Reacquired Shares.
Any shares of Series H Stock redeemed, purchased or otherwise
acquired by the Corporation in any manner whatsoever shall be retired and
cancelled promptly after the acquisition thereof.
Section 8. Voting Rights.
(a) General. The holders of the shares of Series H Stock
shall have no voting rights except as expressly provided herein or as may
otherwise be required by law from time to time. Except as set forth in this
Section 8 or as required under applicable law, there shall be no other special
voting or class voting requirements.
(b) No Adverse Effect. Without the affirmative vote or
consent of the holders of at least 67% of the outstanding shares of Series H
Stock, the Corporation may not amend, alter or repeal any provisions of the
Corporation's certificate of incorporation so as to affect adversely the
preferences, special rights or powers of the shares of Series H Stock. Any
increase in the authorized number of shares of Series H Stock or of any class
or series of capital stock ranking on a parity with (but not prior to) such
Series H Stock with respect to the payment of dividends or the distribution of
assets, redemption rights or conversion price adjustments ("Parity Preferred
Stock"), or any creation, authorization or issuance of any securities
convertible into, or warrants, options or similar rights to purchase, acquire
or receive, or any reclassification of any authorized capital stock of the
Corporation into, any shares of Parity Preferred Stock shall be deemed to
affect adversely the preferences, special rights or powers of the shares of
Series H Stock, and may not be effected without any vote or consent of the
holders of Series H Stock.
(c) No Superior Stock. Without the affirmative vote or
consent of the holders of at least 67% of the outstanding shares of Series H
Stock, the Corporation may not create, authorize or issue shares of any class
or series of capital stock ranking senior to the Series H Stock with respect to
the payment of dividends, the distribution of assets or redemption rights, or
conversion price adjustments or create, authorize or issue any securities
convertible into, or warrants, options or similar rights to purchase, acquire
or receive, or reclassify any authorized capital stock of the Corporation into,
any shares of capital stock ranking senior to the Series H Stock with respect
to the payment of dividends or the distribution of assets or redemption rights
or conversion price adjustments.
(d) Election of Directors. For so long as, and only so
long as, shares of Series H Stock are issued and outstanding, the holders
thereof shall have the right, notwithstanding anything to the contrary in this
Fifth Restated Certificate of Incorporation or the Bylaws of the Corporation,
to elect one director to the Board of Directors.
(e) Defaults Relating to Series H Stock. If at any time
(i) that the Corporation shall fail to redeem Series H Stock on any Mandatory
Redemption Date or Special Redemption Date and does not cure such failure
within 30 days; or (ii) there shall be four quarterly dividend payments unpaid
(whether or not consecutive) on Series H Stock; or (iii) the Corporation shall
have failed to pay a quarterly dividend under circumstances in which funds were
legally available and payment of the dividend would not have violated a
restrictive covenant or resulted in an event of default under the Credit
Agreement (each a "Series H Default"), then at any annual or special meeting of
stockholders (which special meeting shall be held not more than 20 days
10
<PAGE> 23
after written request of the holders of at least 10 percent of Series H Stock),
the holders of Series H Stock shall have the right, notwithstanding anything to
the contrary in this Restated Certificate of Incorporation or the Bylaws of the
Corporation, to have the Board of Directors of the Corporation consist of seven
members elected as follows:
(A) three members designated by the Current
Series H Holder or an Approved Transferee;
(B) three members designated or elected by the
holders of the Common Stock (the "Independent Directors"); and
(C) one member designated by the Current Series H
Holder or an Approved Transferee (which member must be an executive
officer of the Corporation), unless the Current Series H Holder and a
majority of the Independent Directors agree on another designee who is
not an executive officer of the Corporation.
In addition, in the event of a Series H Default the executive committee of the
Board of Directors shall be comprised of:
(1) one member designated by the Current Series H
Holder or an Approved Transferee;
(2) one member designated by a majority of the
Independent Directors; and
(3) the member designated pursuant to clause (C)
above.
Such right of the holders of Series H Stock shall continue until no Series H
Default exists, at which time such right shall terminate, except as required by
law, subject to revesting in the event of each and every subsequent Series H
Default. Upon termination of the right to elect directors as provided in this
Subsection 8(e), any of (i) the Current Series H Holder, (ii) an Approved
Transferee, or (iii) such other persons who pursuant to the Bylaws of the
Corporation are granted the right to call a special meeting of stockholders of
the Corporation shall have the right to call a special meeting of stockholders
for the purpose of electing directors. The rights upon a Series H Default set
forth in this Subsection 8(e) may be exercised only by the Current Series H
Holder; provided, however, that the rights shall be transferable to a
transferee of Series H Stock if a majority of the directors (excluding
therefrom directors who are officers or employees of the Company or its
subsidiaries and the director elected by the holder of the Series H Stock
pursuant to Subsection 8(d) consent to such transfer (an "Approved
Transferee")).
(f) Certain Voting Procedures. At any meeting at which
the holders of Series H Stock shall have the right to elect one or more
directors as provided in Subsections 8(d) and 9(e), the presence in person or
by proxy of the holders of at least two-thirds of the then outstanding shares
of Series H Stock shall be required and be sufficient to constitute a quorum,
and the favorable vote of the holders of two- thirds of the shares of Series H
Stock represented at such meeting shall be sufficient to approve any such
action. Any vacancy in the office of any director elected pursuant to
Subsection 8(d) may be filled by the person appointed by an instrument in
writing signed by the holders of Series H Stock then outstanding.
11
<PAGE> 24
(g) Non-Exclusivity. The rights of the holders of Series
H Stock under Sections 2 and 8 with respect to any default by the Corporation
shall not be deemed to be exclusive. If any default shall exist, the holders
of shares of Series H Stock shall have all other rights which such holders
shall have been granted under any contract or agreement at any time, and all
other rights which such holders shall have under any law. Any person having
any rights under any provision in this Section 8 shall be entitled to enforce
such person's rights specifically, to recover damages by reason of any
non-compliance with any provision in this Section 8, and to exercise all other
rights granted by law.
IN WITNESS WHEREOF, Protection One, Inc. has caused this
Certificate to be executed by its President and attested by its Secretary this
5th day of May, 1995.
By: JAMES M. MACKENZIE, JR.
-------------------------------------
James M. Mackenzie, Jr., President
Attest:
JOHN W. HESSE
- -------------------------------------
John W. Hesse, Secretary
12
<PAGE> 25
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
Protection One, Inc., a corporation organized and existing under and
by virtue of the General Corporation Law of the State of Delaware,
DOES HEREBY CERTIFY:
FIRST: That at a meeting of the Board of Directors of Protection One,
Inc. held on November 19, 1996, resolutions were duly adopted setting forth a
proposed amendment of the certificate of incorporation of said corporation,
declaring said amendment to be advisable and directing that said amendment be
considered at the next annual meeting of the stockholders of said corporation.
The resolution setting forth the proposed amendment is as follows:
NOW, THEREFORE, BE IT RESOLVED that the first
paragraph of Article FOURTH of the Fifth Restated Certificate of
Incorporation of Protection One, Inc. be amended and restated to read
in full as follows:
"The total number of shares of all classes of
stock that the Corporation shall have the authority to issue
is 45,000,000, of which 40,000,000 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")."
SECOND: That thereafter, pursuant to resolution of its Board of
Directors, an annual meeting of the stockholders of said corporation was duly
called and held, upon notice in accordance with Section 222 of the General
Corporation Law of the state of Delaware, at which meeting the necessary number
of shares as required by statute were voted in favor of the amendment.
THIRD: That said amendment was duly adopted in accordance with the
provisions of Section 242 of the General Corporation Law of the State of
Delaware.
IN WITNESS WHEREOF, said Protection One, Inc. has caused this
certificate to be signed by John E. Mack, III, its authorized officer, this 5th
day of February, 1997.
PROTECTION ONE, INC.
By: JOHN E. MACK, III
------------------------------------
John E. Mack, III
Executive Vice President -
Business Development
<PAGE> 1
Exhibit 10.1
PROTECTION ONE, INC.
1994 STOCK OPTION PLAN
(As amended through Janaury 29, 1997)
1. PURPOSE.
The purposes of this 1994 Stock Option Plan (THIS "PLAN") are
to provide long-term incentives and rewards to directors, officers and key
employees of Protection One, Inc., a Delaware corporation (THE "COMPANY"), and
of the Company's subsidiaries, to assist the Company and its subsidiaries in
attracting and retaining such individuals on a basis competitive with industry
practices, to align their interests with those of the Company's stockholders,
and to provide additional compensation to them.
2. EFFECTIVE DATE.
This Plan shall be effective as of the date of its adoption by
the Board of Directors of the Company (THE "ADOPTION DATE"), subject to the
approval of this Plan by the holders of a majority of the issued and
outstanding shares of the Class A Common Stock of the Company (THE "COMMON
STOCK") and the voting preferred stock of the Company, voting together as a
single class and with each share of such preferred stock entitled to the number
of votes determined in accordance with Section 9(a) of Article IV of the
Company's Restated Certificate of Incorporation (THE DATE ON WHICH THE HOLDERS
SO APPROVE THE PLAN TO BE REFERRED TO HEREIN AS THE "APPROVAL DATE"). Grants
of "Options" (as hereinafter defined) may be made under this Plan on and after
the Adoption Date, but all rights of the participants shall be subject to such
stockholder approval of this Plan. In the event such stockholder approval is
not obtained, all Options under this Plan shall be null and void ab initio.
3. ADMINISTRATION OF THIS PLAN.
3.1 This Plan shall be administered by the Board of Directors or a
committee thereof designated by the Board of Directors, which committee (THE
"COMMITTEE") may be the Compensation Committee of the Board of Directors as
shall be designated by the Board of Directors; provided, however, that with
respect to grants of Options to persons who are then subject to Section 16 of
the Securities Exchange Act of 1934, as amended (THE "1934 ACT"), the Plan
shall at all times be administered so as to permit the Plan to comply with Rule
16b-3 under the 1934 Act or any successor thereto ("RULE 16B-3") and that any
Committee shall be so constituted so as to satisfy the legal requirements
relating to the administration of incentive stock option plans, if any, of
Delaware corporate and securities laws and of the Internal Revenue Code of
1986, as from time to time amended (THE "IRC"). Once appointed, the Committee
shall continue to serve in its designated capacity until otherwise directed by
the Board. If permitted by Rule 16b-3, the Plan may be administered by
different bodies with respect to directors, non-director officers and employees
who are neither directors nor officers of the Company. If and to the extent
the Plan is then being administered by the Board, the Board shall have all
authority and each and all of the powers granted to the Committee by this Plan
(including, without limitation, Sections 3.2, 3.3, 3.4 and 6).
<PAGE> 2
3.2 The Committee shall have full power and authority in its
discretion, subject to and not inconsistent with the express provisions of this
Plan, to take any and all actions required or permitted to be taken under this
Plan. Such full power and authority shall include, without limitation, the
actions set forth in Section 6, the making of all required or appropriate
determinations under this Plan, and the adoption, amendment and recision of
such rules and regulations relating to this Plan as the Committee shall
determine in its discretion (THE "RULES"); in each case subject to the express
provisions of this Plan.
3.3 The interpretation or construction by the Committee of this
Plan, any Option or "Agreement" (as hereinafter defined) or any Rule and all
determinations by the Committee shall in each case be final, binding and
conclusive with respect to all interested parties, unless otherwise determined
by the Board of Directors. No member of the Committee shall be personally
liable for any action, failure to act, determination, interpretation or
construction made in good faith.
3.4 The Committee shall determine the "fair market value" of the
Common Stock from time to time for purposes of this Plan in accordance with
such procedures for the determination thereof as the Committee shall determine.
4. PARTICIPANTS.
Participants in this Plan shall be directors, officers and key
employees of the Company or its subsidiaries selected by the Committee.
Nothing set forth in this Plan or in any Agreement shall confer upon any
director, officer or employee any right to continue in the employ of the
Company or its subsidiaries or as an officer of the Company, nor limit in any
manner the right of the Company to terminate such office or employment for any
reason whatsoever, with or without good cause. No employee or other person
shall have any right to be granted an Option.
5. SHARES OF STOCK SUBJECT TO THIS PLAN.
The shares of Common Stock available for issuance under this
Plan pursuant to the exercise of "ISOs" or "NQSOs" (as each such term is
hereinafter defined), shall consist of 1,300,000 shares of Common Stock in the
aggregate, subject to adjustment as provided in Section 13. Such number of
shares shall be set aside out of the authorized but unissued shares of Common
Stock not reserved for any other purpose or out of Common Stock held in or
acquired for the treasury of the Company. Should an Option be terminated for
any reason without being exercised, or be cancelled in whole or in part, the
shares of Common Stock subject to such Option shall again be available for
issuance under this Plan.
6. GRANT OF OPTIONS.
The Committee may from time to time, in its sole discretion,
award to such directors, officers and key employees as the Committee designates
options to purchase shares of the Common Stock (THE "OPTIONS"). In connection
therewith, the Committee shall have full and final authority in its discretion,
subject to the express provisions of this Plan, (i) in the case of each Option,
to determine whether the Option shall be an incentive stock option (AN "ISO")
pursuant to Section 422 of the IRC, as such section may from time to time be
amended or
2
<PAGE> 3
supplemented ("SECTION 422"), or an Option that does not qualify under such
Section 422 (AN "NQSO"), (ii) to determine the time or times at which Options
will be awarded, (iii) to determine the number of shares that may be purchased
upon the exercise of each Option, (iv) to determine the amount payable by the
participant upon the exercise of such Option (THE "EXERCISE PRICE"), which
price shall not be less than the minimum specified in Section 7.1, (v) to
determine the time or times when each Option shall become exercisable, the
objectives or conditions, if any, to such exercise and the duration of the
exercise period, and (vi) to prescribe the form or forms of the agreement or
instrument reflecting the terms and conditions of each Option (THE
"AGREEMENTS").
The Committee also shall have full power and authority to
delegate to one or more of the executive officers of the Company, as the
Committee deems appropriate, (i) the selection of participants to whom Options
shall be granted; (ii) the determination of the number of shares of Common
Stock purchasable upon the exercise of each such Option and the Exercise Price
thereof; (iii) the other terms and conditions of each such Option and the
applicable Agreement, including without limitation establishing the objectives
and conditions, if any, for the earning or vesting of such Option; and (iv) the
right to interpret and construe each provision of this Plan as applicable to
such Option; provided, however, that no Option may be granted or other
determination made pursuant to this paragraph to any person who (i) is a
"covered employee" within the meaning of Section 162(m) of the IRC or who, in
the Committee's judgment, is likely to be a covered employee at any time during
the period the Option granted to such employee would be outstanding or (ii) an
officer or other person subject to Section 16 of the 1934 Act.
7. EXERCISE PRICE AND CONSIDERATION.
7.1 The Exercise Price shall be determined by the Committee at the
time of each grant of Options; provided, however, that the Exercise Price for
an ISO shall not be less than 100% of the fair market value of the Common Stock
on the date on which the ISO is granted and that the Exercise Price of any ISO
granted to a person who, at the time of such grant, owns capital stock
possessing more than 10% of the total combined voting power of all classes of
capital stock of the Company or of subsidiary of the Company (A "TEN PERCENT
HOLDER") shall be the price (currently 110% of fair market value of a share of
Common Stock) required by the IRC in order to constitute an ISO.
7.2 The Exercise Price shall be paid in cash, by check payable to
the order of the Company, by the surrender of shares of the Common Stock having
a fair market value (determined in accordance with Section 3.4 above) equal to
the Exercise Price on the date on which the Option is exercised, or any
combination of the foregoing. Notwithstanding the foregoing, the Exercise
Price may also be paid by delivery to the Company or its designated agent of an
executed irrevocable option exercise form together with irrevocable
instructions to a financial institution or broker-dealer approved by the
Company to sell or margin a sufficient portion of the shares and deliver the
sale or margin loan proceeds directly to the Company to pay the Exercise Price,
such instructions to be in such form is acceptable to the Committee; provided,
however, that a participant may pay the Exercise Price pursuant to this
sentence if and only if either (x) the Option being exercised is an NQSO, or
(y) the Option being exercised is an ISO and the Company is satisfied that the
participant understands that the effect of such arrangement will be to cause a
"disqualifying disposition" of the participant's shares and a loss to the
participant of the favorable tax treatment of such ISO provided by the IRC.
The Committee may determine to cause the Company to lend directly to a
participant some or all of
3
<PAGE> 4
the funds required to pay the Exercise Price, on such terms and subject to such
conditions as the Committee may establish.
8. MANNER OF EXERCISE.
Unless and to the extent otherwise provided in the applicable
Agreement, and subject to the limitations set forth in this Plan, each Option
may be exercised from time to time in whole or in part by the participant
delivering to the Company at its main office (to the attention of the President
and the Chief Financial Officer) written notice of the number of shares with
respect to which the Option is being exercised accompanied by full payment to
the Company of the Exercise Price of the shares being purchased; provided,
however, that in the event the consideration is other than cash, such written
notice shall include the participant's election to pay some or all of the
Exercise Price as otherwise permitted by Section 7.2, in which case the
participant shall have a reasonable time (as determined by the Committee) to
arrange for the delivery to the Company of the balance of the Exercise Price or
the agreement that will reflect the terms of such payment; and provided,
further, that if payment of the Exercise Price is to be made in shares of
Common Stock, the participant shall deliver to the Company stock certificates
evidencing such shares properly endorsed for transfer in negotiable form. If
someone other than the participant is exercising an Option, the person or
persons so exercising the Option shall be required to furnish to the Company
appropriate documentation that such person or persons have the full legal right
and power to exercise the Option on behalf of and for the participant.
9. DURATION AND PERIOD FOR EXERCISE OF OPTIONS.
9.1 Each Option shall be exercisable on such date or dates and
during such period as shall be determined by the Committee at the time of
grant; provided, however, that (i) no ISO shall be exercisable after the
expiration of 10 years after the grant date, (ii) no ISO granted to a Ten
Percent Holder shall be exercisable after the expiration of five years after
the grant date, and (iii) no Option shall be exercisable unless and until
either a registration statement under the Securities Act of 1933, as amended,
is in effect registering the shares of Common Stock to be issued upon exercise
of the Options or, in the opinion of counsel for the Company, an exemption from
registration is available. Subject to the foregoing, the Committee shall
specify at the time each Option is granted, and shall set forth in the
corresponding Agreement, the time or times at which, and in what amounts, the
Option may be exercised.
9.2 Upon the termination of the employment by the Company or its
subsidiaries of a participant, such participant's rights to exercise an Option
then held shall be as follows, subject to the authority of the Committee to
shorten or extend the exercisability of an Option in its sole discretion (with
the consent of the participant or the participant's legal representative in the
case of an ISO):
(a) Death or Permanent and Permanent and Total
Disability. If the employment is terminated by reason of the death or
"permanent and total disability" as defined in Section 22(e)(3) of the
IRC of the participant, each Option held by the participant on the
date of termination shall terminate on the fixed expiration date of
such Option; provided, however, that in the case of ISOs the date of
termination shall be the date that is 12 months after the date of
termination of employment if such date is earlier than the fixed
expiration date of the Option.
4
<PAGE> 5
(b) Other Disability. If the employment is
terminated by reason of a disability of the participant that is not a
"permanent and total disability" as defined in Section 22(e)(3) of the
IRC, each Option held by the participant on the date of termination
shall terminate on the fixed expiration date of such Option; provided,
however, that in the case of ISOs the date of termination shall be the
date that is three months after the date of termination of employment
if such date is earlier than the fixed expiration date of the Option.
(c) Other Termination. If the employment is
terminated by any reason other than death or disability, each Option
held by the participant on the date of termination shall terminate on
the earlier of (i) the date that is three months after the date of
termination of employment, or (ii) the fixed expiration date of such
Option.
9.3 If the employment of a participant is terminated by reason of
the "death or permanent and total disability" (as defined in Section 22(e)(3)
of the IRC) of the participant, all Options held by such participant shall
become immediately vested, notwithstanding any conditions to the vesting of
such Options set forth herein or in the Agreement reflecting such Options. If
the employment of a participant is terminated by any reason other than the
death or permanent and total disability of the participant, all Options not
vested as of the time of termination shall be forfeited, subject to the
authority of the Committee to authorize, in the applicable Agreement, at the
time of termination or otherwise, the immediate vesting of all or such portion
of such Options as it may determine. The Committee shall have the authority to
accelerate the vesting of all or some portion of the Options notwithstanding
any conditions to vesting of such Options set forth herein or in the Agreement
reflecting such Options.
9.4 The Options of a participant who dies shall be exercisable by
a legatee or legatees of such Options under the participant's last will, or by
such participant's executor, personal representative or distributee. However,
in the event of a participant's death after the date of termination of
employment (which termination was for a reason other than the death of the
participant), such deceased's participant's Options shall expire in accordance
with their terms as if such participant were still living.
9.5 The Committee shall have the authority to determine the reason
for and date of termination of employment of each participant (including but
not limited to determining whether a termination is by reason of disability),
which determination shall be final, binding and conclusive on all interested
parties.
10. LIMITATION ON GRANT OF ISO'S.
10.1 The aggregate fair market value (determined as of the time the
Option is granted) of the shares of Common Stock for which ISO's may first be
exercisable by an participant during any calendar year shall not exceed
$100,000 or such other amount as may be established by the Code.
10.2 No ISO may be granted under this Plan after the 10th
anniversary of the Adoption Date.
10.3 No ISO may be granted to any employee who owns stock
possessing more than 10% of the total combined voting power of all classes of
stock of the Company.
5
<PAGE> 6
11. ACCELERATION OF OPTIONS.
11.1 In the event that the Company enters into one or more
agreements to dispose of all or substantially all of its assets or the
Company's stockholders dispose of or become obligated to dispose of 50% or more
of the outstanding shares of Common Stock, other than to the Company or a
subsidiary of the Company, in either case by means of a tender offer, sale,
merger, reorganization or liquidation, in one or a series of related
transactions (AN "ACCELERATION EVENT"), then each outstanding Option shall
become exercisable during the 30 days immediately prior to the scheduled
consummation of the Acceleration Event with respect to the full number of
shares for which such Option has been granted: provided, however, that no
Acceleration Event shall be deemed to occur for purposes of this section
(unless otherwise provided in the applicable Agreement) in the event that (i)
the term of the agreements pursuant to which such transaction is occurring
require as a condition to the consummation thereof that each Option shall
either be assumed by a successor corporation or parent thereof or be replaced
with a comparable option to purchase shares of capital stock of the successor
corporation or parent thereof, and (ii) the transaction is approved by a
majority of the directors who have been in office for more than 12 months prior
to the scheduled consummation of the transaction. Any exercise of Options
during such 30-day period shall be conditioned upon the consummation of the
Acceleration Event and shall be effective only concurrently with the
consummation of the Acceleration Event, and in the event the Acceleration Event
is not consummated all exercises of Options made pursuant to this section shall
be of no further force or effect; unless, with respect to any such Option, such
Option was otherwise exercisable in accordance with its terms without regard to
this section and the participant exercising such Option indicates in writing
that such exercise is not conditioned on the consummation of the Acceleration
Event. Upon consummation of the Acceleration Event, all outstanding Options,
whether or not accelerated pursuant to this section, shall terminate and cease
to be exercisable, unless assumed by the successor corporation or a parent
thereof.
11.2 In the event of the occurrence of an Acceleration Event in
which the Company will not be the surviving entity or in which all of the
shares of Common Stock of the Company are being acquired, any participant who
is then subject to the filing requirements imposed under Section 16(a) of the
1934 Act with respect to the Company shall receive a payment of cash equal to
the difference between the aggregate fair market value of the shares of Common
Stock subject to such accelerated Option and the aggregate Exercise Price of
such shares. Payment shall be made within 10 days after the consummation of
the Acceleration Event. The foregoing payments under this section shall be
made in lieu of and in full discharge of any and all obligations of the Company
with respect to all subject Options of the participant.
11.3 The grant of Options under this Plan shall in no way affect
the right of the Company to adjust, reclassify, reorganize or otherwise change
its capital or business structure or to merge, consolidate, dissolve, liquidate
or sell or transfer all or any part of its business or assets.
12. CANCELLATION AND REPRICING OF OPTIONS.
12.1 The Committee shall have the authority to effect, at any time
and from time to time, with the consent of the affected participant, the
cancellation of any or all outstanding Options and the grant in substitution
therefor of new Options under this Plan (subject to the limitations hereof)
providing for the purchase of the same or a different number of shares of
Common Stock and, in the case of ISO's, the grant is at an Exercise Price not
less than 100% of
6
<PAGE> 7
the fair market value of the Common Stock on the new grant date. The Agreement
reflecting the terms of the new Options may, in the discretion of the
Committee, include the same terms and conditions as the Agreement reflecting
the terms of the old Options including, without limitation, the same vesting
schedule.
12.2 The Committee may, in its discretion, amend the terms of any
Agreement, with the consent of the affected participant, to provide that the
Exercise Price of the shares remaining subject to the original Option shall be
reestablished at a price not less than 100% of the fair market value of the
Common Stock on the effective date of such amendment.
13. ADJUSTMENTS AND CHANGES IN THE COMMON STOCK.
13.1 In the event that the shares of Common Stock as presently
constituted shall be changed into or exchanged for a different number or kind
of shares of stock or other securities of the Company, or if the number of such
shares of Common Stock shall be increased through the payment of a stock
dividend, then unless such change results in the termination of all outstanding
Options pursuant to the provisions of Section 11, there shall be substituted
for or added to each share of Common Stock theretofore appropriated or
thereafter subject or which may become subject to an Option, the number and
kind of shares of stock or other securities into which each outstanding share
of Common Stock shall be so changed, or for which each share shall be
exchanged, or to which each such share shall be entitled, as the case may be.
Each Agreement shall be deemed amended appropriately as to price and other
terms as may be necessary in the determination of the Committee to reflect the
foregoing events. In the event there shall be any other change in the number
or kind of the outstanding Common Stock, or of any stock or securities into
which such shares have been changed, or for which it shall have been exchanged,
then if the Committee shall, in its sole discretion, determine that such change
requires an adjustment in the terms of any Option granted or that may be
granted, such adjustment shall be made in accordance with such determination
and each Agreement reflecting such terms shall be deemed amended. Fractional
shares resulting from any adjustment in Options pursuant to this section shall
be rounded down to the nearest whole number of shares.
13.2 Notwithstanding the foregoing, any and all adjustments in the
terms of ISO's shall comply in all respects with applicable sections of the IRC
and the regulations thereunder.
13.3 Notice of any adjustment in the terms of Options shall be
given by the Company to each holder of an Option that has been so adjusted.
However, such adjustment shall be effective and binding for all purposes
whether or not such notice is given or received.
14. APPLICATION OF RULE 16B-3.
With respect to grants of Options to persons are then subject
to Section 16 of the 1934 Act, this Plan shall be governed by Rule 16b-3.
15. NO RIGHTS AS STOCKHOLDER.
No participant shall have rights as a holder of Common Stock
with respect to Options unless and until certificates for shares of such stock
are issued to the participant or the participant's legal representative.
7
<PAGE> 8
16. WITHHOLDING TAXES.
The Company shall have the right to withhold from the
participant, at the time of the issuance by the Company of any shares, any
federal, state or other taxes required by law to be withheld with respect to
such issuance or to require, through withholding from the participant's salary
or otherwise, the payment by the participant of any such taxes. An Agreement
may provide that the participant may satisfy any such obligation by any of the
following means: (i) a cash payment to the Company by the participant, (ii)
delivery to the Company of previously owned shares of Common Stock that the
participant has held for at least six months prior to the delivery of such
shares or that the participant purchased on the open market and for which the
purchaser has good and marketable title, free and clear of any security
interest, lien or encumbrance, having an aggregate fair mated value, determined
as of the date the obligation to withhold or pay taxes arises in connection
with the Option (THE "TAX DATE"), equal to the amount necessary to satisfy any
such obligation, (iii) a cash payment to the Company by a broker-dealer
acceptable to the Company to whom the purchaser has submitted an irrevocable
notice of exercise, or (iv) the withholding by the Company from the shares of
Common Stock to be issued upon exercise of the Option that number of shares
having a fair market on the Tax Date equal to the amount required to be
withheld; provided, however, that the Committee shall have sole discretion to
disapprove of an election pursuant to clauses (ii) or (iii) and that if the
participant is a person subject to Section 16 of the 1934 Act, the Company may
require that the method of satisfying any such withholding obligation be in
compliance with said Section 16 and Rule 16b-3 thereunder.
17. TRANSFERABILITY.
No Incentive Stock Option may be in any way transferred,
assigned, pledged or hypothecated by the participant to which it was granted or
awarded, other than by will or the laws of descent or distribution, and an
Incentive Stock Option may be exercised during the participant's lifetime only
by the participant or the participant's legal representative.
No NQSO may be in any way transferred, assigned, pledged or
hypothecated by the participant to which that NQSO was granted or awarded other
than by will or the laws of descent or distribution or, if and to the extent
that the Agreement governing such NQSO so provides, to a family member of such
participant, to a trust established for the benefit of such participant or
family member or to a qualified charity (as defined in the Agreement). A NQSO
may be exercised during the participant's lifetime only by the participant or
the participant's legal representative or, if applicable Agreement so provides,
by a permitted transferee or his or her legal representative. Notwithstanding
the foregoing, the Committee may upon request consent to such additional
transfers of NQSO's as the Committee may determine in its sole discretion
subject to such conditions as the Committee may require and provided such
transfer will not cause the Plan to no longer comply with Rule 16b-3 or any
other regulatory requirements.
18. AMENDMENTS AND TERMINATION.
18.1 In addition to such amendments as are provided for in Section
12, with the consent of the affected participant the Committee may amend any
outstanding Agreement in a manner not inconsistent with this Plan.
8
<PAGE> 9
18.2 Unless the holders of at least a majority of the issued
outstanding shares of Common Stock shall have approved thereof, no amendment of
this Plan shall be effective which would cause the Plan to no longer comply
with Rule 16b-3 or other regulatory requirements. In the event that the
Committee or the Board of Directors determines at any time or from time to time
that Rule 16b-3 requires that the terms of any outstanding Option be modified,
the Committee or the Board of Directors shall have the right and power to amend
any outstanding Agreement, or otherwise modify the terms of any outstanding
Option, without the consent of the affected participant(s) and irrespective of
whether such modification is (i) consistent with the terms of this Plan, or
(ii) adverse to such participant(s). For the purposes of this section, any (I)
cancellation and reissuance, or (II) repricing of any Options granted at a new
Exercise Price as provided in Section 12 shall not constitute an amendment of
this Plan.
18.3 The Board of Directors may at any time terminate or from time
to time amend this Plan in whole or in part, but no such amendment shall
adversely affect any rights or obligations with respect to any Options
theretofore granted under this Plan (except as contemplated by Section 18.2).
19. GOVERNING LAW.
The validity and construction of this Plan and the Agreements
shall be governed by the laws of the State of Delaware.
9
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000916230
<NAME> Protection One Inc.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> DEC-31-1996
<CASH> 4,193
<SECURITIES> 0
<RECEIVABLES> 22,054
<ALLOWANCES> 7,140
<INVENTORY> 1,833
<CURRENT-ASSETS> 23,620
<PP&E> 15,040
<DEPRECIATION> 4,505
<TOTAL-ASSETS> 310,477
<CURRENT-LIABILITIES> 38,371
<BONDS> 238,388
0
0
<COMMON> 135
<OTHER-SE> 32,833
<TOTAL-LIABILITY-AND-EQUITY> 310,477
<SALES> 22,661
<TOTAL-REVENUES> 22,661
<CGS> 6,694
<TOTAL-COSTS> 6,694
<OTHER-EXPENSES> 123
<LOSS-PROVISION> 826
<INTEREST-EXPENSE> 1,887
<INCOME-PRETAX> (5,033)
<INCOME-TAX> (1,857)
<INCOME-CONTINUING> (3,176)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,176)
<EPS-PRIMARY> (0.24)
<EPS-DILUTED> (0.24)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000916310
<NAME> Protection One Alarm Monitoring Inc.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> DEC-31-1996
<CASH> 4,193
<SECURITIES> 0
<RECEIVABLES> 22,054
<ALLOWANCES> 7,140
<INVENTORY> 1,833
<CURRENT-ASSETS> 23,620
<PP&E> 15,040
<DEPRECIATION> 4,505
<TOTAL-ASSETS> 310,477
<CURRENT-LIABILITIES> 38,371
<BONDS> 238,388
0
0
<COMMON> 135
<OTHER-SE> 32,833
<TOTAL-LIABILITY-AND-EQUITY> 310,477
<SALES> 22,661
<TOTAL-REVENUES> 22,661
<CGS> 6,694
<TOTAL-COSTS> 6,694
<OTHER-EXPENSES> 123
<LOSS-PROVISION> 826
<INTEREST-EXPENSE> 1,887
<INCOME-PRETAX> (5,033)
<INCOME-TAX> (1,857)
<INCOME-CONTINUING> (3,176)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,176)
<EPS-PRIMARY> (0.24)
<EPS-DILUTED> (0.24)
</TABLE>
