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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

For the fiscal year ended December 31, 2000

For the transition period from                to                

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:

(None)
(Title of Class)

   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 registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes /x/ No / /

   Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of each registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. / /

   The aggregate market value of common stock of Protection One, Inc. held by nonaffiliates on March 27, 2001 (based on the last sale price of such shares on the New York Stock Exchange) was $19,675,229.

   As of March 27, 2001, Protection One, Inc. had 106,640,806 shares of Common Stock outstanding, 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 I (1)(a) and (b) for Form 10-K and is therefore filing this form with the reduced disclosure format set forth therein.

DOCUMENTS INCORPORATED BY REFERENCE:

   Portions of Protection One, Inc.'s proxy statement on Schedule 14A to be furnished to stockholders in connection with its Annual Meeting of Stockholders are incorporated by reference in Part III of the Form 10-K. Such proxy statement is expected to be filed with the Commission by April 30, 2001.

TABLE OF CONTENTS

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PART I

FORWARD-LOOKING STATEMENTS

    This Annual Report on Form 10-K (this "Report") and the materials incorporated by reference herein include "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 we "believe," "expect," "anticipate" or other words of similar import. Similarly, statements herein that describe our objectives, plans or goals also 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. Important factors that could cause actual results to differ materially from our expectations include, among others, the factors discussed in the section entitled "Risk Factors." The forward-looking statements included herein are made only as of the date of this Report and we undertake no obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances.

ITEM 1. BUSINESS

    Unless the context otherwise indicates, all references in this Report to the "Company", "Protection One," "we," "us" or "our" or similar words are to Protection One, Inc., its direct wholly owned subsidiary, Protection One Alarm Monitoring, Inc. ("Protection One Alarm Monitoring") and Protection One Alarm Monitoring's other wholly owned subsidiaries. Protection One's sole asset is, and Protection One operates solely through, Protection One Alarm Monitoring and Protection One Alarm Monitoring's other wholly owned subsidiaries. Each of Protection One and Protection One Alarm Monitoring is a Delaware corporation organized in September 1991.

Overview

    Protection One is a leading provider of property monitoring services, providing electronic monitoring and maintenance of alarm systems to over 1.3 million customers in North America as of December 31, 2000. Our revenues are generated primarily from recurring monthly payments for monitoring and maintaining the alarm systems that are installed in our customers' homes and businesses. We provide our services to residential (both single family and multifamily residences), commercial and wholesale customers. At December 31, 2000, our customer base composition was as follows:

    Our company is divided into two business segments:

    Protection One North America ("North America") generated approximately $364.5 million, or 84.4%, of our revenues in 2000 and is comprised of Protection One Alarm Monitoring, our core alarm monitoring business.

    Network Multifamily ("Multifamily") generated approximately $39.4 million, or 9.1%, of our revenues in 2000 and is comprised of our alarm monitoring business servicing apartments, condominiums and other multifamily dwellings.

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Operations

    Our operations consist principally of alarm monitoring, customer service functions and branch operations.

Centralized Monitoring, Customer Service and Customer Solicitation

    Customer Security Alarm Systems.  Security alarm systems include many different types of devices installed at customers' premises designed to detect or react to various occurrences or conditions, such as intrusion or the presence of fire or smoke. In general, systems for multi-family and residential applications tend to be smaller in size than those used by commercial customers, and also tend to generate a lower level of alarm signals than in commercial applications. These devices are connected to a computerized control panel that communicates through the phone lines to a service center. In most systems, control panels can identify the nature of the alarm and the areas within a building where the sensor was activated, and can transmit that information to a central monitoring station.

    Customer Contracts.  Our alarm monitoring customer contracts generally have initial terms ranging from two to ten years in duration, and provide for automatic renewals for a fixed period (typically one year) unless we or the customer elect to cancel the contract at the end of its term. Typically, customers sign alarm monitoring contracts that include a bundled monthly charge for monitoring, extended service protection and a rebate against the homeowners' insurance deductibles in the event of a loss. Extended service protection covers the normal costs of repair of the security system after the expiration of the security system's initial warranty period. Customers may elect to sign an alarm monitoring contract that excludes extended service protection.

    Service Centers.  In 2000, nine major service centers provided monitoring services to most our customer base. The table below provides additional detail about our monitoring centers:

(1)

The Hagerstown service center was closed in March 2001. These customers are now monitored at the Wichita service center.

    Our service centers operate 24 hours per day, seven days a week, including all holidays. Each service center incorporates the use of communications and computer systems that route incoming alarm signals and telephone calls to operators. Each operator within a service center monitors a computer screen that presents information concerning the nature of the alarm signal, the customer whose alarm has been activated, and the premises on which such alarm is located. Other non-emergency administrative signals are generated by low battery status, deactivation and reactivation of the alarm monitoring system, and test signals, and are processed automatically by computer. Depending upon the type of service for which the customer has contracted, service center personnel respond to alarms by relaying information to the local fire or police departments, notifying the subscriber, or taking other appropriate action, such as dispatching alarm response personnel to the customer's premises where this

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service is available. We also provide customers with remote audio verification capability that enables the central monitoring station to listen and speak directly into the customer's premises in the event of an alarm activation. This feature allows our personnel to verify that an emergency exists, to reassure the subscriber, and to expedite emergency response, even if the customer is unable to reach a telephone. Remote audio verification capability also assists us in quickly determining if the alarm was activated inadvertently, and thus whether a response is required.

    All of our primary service centers in North America are listed by Underwriters Laboratories, Inc. ("UL") as protective signaling services stations. UL specifications for service centers include building integrity, back-up computer and power systems, staffing and standard operating procedures. In many jurisdictions, applicable law requires that security alarms for certain buildings be monitored by UL listed facilities. In addition, such listing is required by certain commercial customers' insurance companies as a condition to insurance coverage.

    Common Technology Platform.  During 2000, North America began installing a technology platform, referred to as MAS®, or Monitored Automation Systems, that combines the customer service, monitoring, billing and collection functions into a single system. The Wichita service center was converted in January 2001, the Hagerstown service center was merged into the Wichita service center in March 2001, and the Beaverton and Irving centers are scheduled for conversion in 2001. We also completed the installation of a new financial system in all of our locations that we began using in January 2001. The MAS system will permit our service centers to operate on a capacity basis rather than a geographic basis which should provide additional operational efficiencies.

    Wholesale Monitoring.  Through our service centers in Orlando, Wichita and Vancouver, we provide wholesale monitoring services to independent alarm companies. Under the typical arrangement, alarm companies subcontract monitoring services to us, primarily because they do not have their own monitoring capabilities. We may also provide billing and other services. These independent alarm companies retain ownership of monitoring contracts and are responsible for every other aspect of the relationship with customers, including field repair service.

    Customer Care Services.  Our customer care centers are located in our service centers and process non-emergency communications. Operators receive inbound customer calls and the customer service group addresses customer questions and concerns about billing, service, credit and alarm activation issues. A help desk staff assists customers in understanding and resolving mechanical and operating issues related to security systems. A field repair scheduling function sets up technician appointments. We also operate a dedicated customer service call center in Wichita to address questions that customers or potential customers have about our services, as well as outbound sales and marketing activities and collections.

    Enhanced Services.  As a means to increase revenues and to enhance customer satisfaction, we offer customers an array of enhanced security services, including extended service protection and several different types of alarm verification. These services position us as a full service provider and give dealers more features to sell in their solicitation of new customers. Enhanced services include:

•

Extended Service Protection, which covers the normal costs of repairing the system during normal business hours, after the expiration of the initial warranty period.



•

Supervised Monitoring Service, which allows the alarm system to send various types of signals containing information on the use of the system, such as which users armed or disarmed the system and at what time of the day. This information is supplied to customers for use in connection with the management of their households or businesses. Supervised monitoring service can also include a daily automatic test feature.

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•

Wireless Back-Up, which permits the alarm system to send signals over a cellular telephone or dedicated radio system in the event that regular telephone service is interrupted.

Branch Operations

    We maintain 69 service branches in North America from which we provide field repair, customer care, alarm response and sales services, and 11 satellite locations from which we provide field repair services. Our branch infrastructure plays an important role in enhancing customer satisfaction, reducing customer loss and building brand awareness.

    We train our field repair personnel to provide repair services for the various types of security systems utilized by our customers. Field personnel also provide quality and related compliance inspections for new installations performed by our dealers.

    Repair services generate revenues primarily through billable field service calls and recurring payments under our extended service protection program. By focusing growth in targeted areas we hope to increase the density of our customer base which will permit more effective scheduling and routing of field service technicians and result in economies of scale.

Sales and Marketing

    Our customer acquisition strategy relies on a mix of internal sales efforts, "tuck in" acquisitions, direct marketing and a dealer program. Our residential and commercial marketing activities are now centralized in our Topeka, Kansas office. Marketing and advertising initiatives include radio, television, newspaper, periodicals, billboards and direct mail. We continually evaluate our customer creation and marketing strategy, including each respective channel for economic returns, volume and other factors and may shift our strategy or focus, including the elimination of a particular channel.

    Internal Sales.  In February 2000, we initiated a commission only sales team, now operating in all Protection One markets, with a goal of producing accounts at a cost lower than our external sales efforts. We currently have a commissioned sales force of over 300 persons. In 2001, we plan to continue adding to our sales force in our branch offices in an effort to create more internally generated customers.

    Telesales.  Our telesales department is located at our Wichita, Kansas service center. Along with sales professionals at most of our branch offices, the telesales department also tracks previous customers' homes to sign up new owners when they move into such homes. The sales professionals also generate revenue from selling equipment upgrades and add-ons to existing customers and by competing for those customers who are terminating their relationships with our competitors.

    Dealer Program.  We generate accounts through a dealer program comprised of direct dealers which are typically independent alarm companies with residential and small commercial sales, marketing and installation skills. Our dealers enter into contracts with us to generate new monitoring customers that we purchase from them on an ongoing basis. The dealers install specified alarm systems, arrange for customers to enter into Protection One alarm monitoring agreements, and install Protection One yard signs and window decals. In addition, dealers qualify prospective customers by meeting a minimum credit standard. Our dealer marketing program provides support services to dealers as they grow their independent businesses. On behalf of dealer program participants, we obtain purchase discounts on security systems, coordinate cooperative dealer advertising and provide assistance in marketing and employee training support services.

    Commercial Sales.  In May 2000, we formed a national account and commercial business team. Since that time, we have been concentrating on building our commercial sales division and have also implemented a national accounts program to capture new business. Our commercial products range

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from basic intrusion and fire detection equipment to fully integrated systems with card access, closed circuit television and voice/video monitoring. We have also assembled an engineered systems group to support our commercial efforts with the primary function of ensuring that our projects are bid and installed profitably.

    Multifamily Marketing.  Multifamily markets its services and products primarily to developers, owners and managers of apartment complexes and other multifamily dwellings. Multifamily sales and marketing activities consist of national and regional advertising, nationwide professional field sales efforts, centralized inbound and outbound sales functions, prospective acquisition marketing efforts and professional industry-related association affiliation. Services are sold directly to the property owner, and payment is based on monthly price on a per-unit basis. Ongoing service for the duration of the lease includes equipment, maintenance, 24-hour monitoring from our central monitoring station, customer service and individual market support. Property owner contracts generally have initial terms ranging from five to ten years in duration, and provide for automatic renewal for a fixed period (typically five years) unless Multifamily or the subscriber elects to cancel the contract at the end of its term.

Acquisition Opportunities

    Despite the amount of significant consolidation activity that has occurred in the alarm industry over the last several years, the industry in North America and Europe remains highly fragmented. SDM Magazine (formerly Security Distribution Magazine) estimates that there are over 15,000 alarm companies in North America alone. The top 100 companies in the North American industry represent only 28% of the total revenue in the industry. The remaining 72% of the revenues are represented by small, local alarm companies with annual revenues typically less than $2 million.

    We regularly evaluate acquisition opportunities, although we do not intend to grow rapidly through acquisitions as we have in the past. We actively seek to identify prospective "tuck-in" acquisitions of companies and dealers with targeted direct mail, trade magazine advertising, trade show participation, telemarketing, and contacts through various prominent vendors and other industry participants.

Attrition

    Subscriber attrition has a direct impact on our results of operations since it affects our revenues, amortization expense and cash flow. We define attrition as a ratio, the numerator of which is the gross number of lost customer accounts for a given period, net of certain adjustments, and the denominator of which is the average number of accounts for a given period. In some instances, we use estimates to derive attrition data. We make adjustments to lost accounts primarily for the net change, either positive or negative, in our wholesale base and for accounts which are covered under a purchase price holdback and are "put" back to the seller. We reduce the gross accounts lost during a period by the amount of the guarantee provided for in the purchase agreements with sellers. In some cases, the amount of the purchase holdback may be less than actual attrition experience. We expect adjustments to lost accounts for purchase holdbacks will be lower in the future because we are purchasing fewer accounts in the types of transactions that create holdbacks and we have extinguished a substantial portion of our purchase holdback reserve. We do not reduce the gross accounts lost during a period by "move in" accounts, which are accounts where a new customer moves into a home installed with the Company's security system and vacated by a prior customer, or "competitive takeover" accounts, which are accounts where the owner of a residence monitored by a competitor requests that we provide monitoring services.

    Our actual attrition experience shows that the relationship period with any individual customer can vary significantly. Customers discontinue service with us for a variety of reasons, including relocation, service issues and cost. A portion of the acquired customer base can be expected to discontinue service

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every year. Any significant change in the pattern of our historical attrition experience would have a material effect on our results of operations.

    We monitor attrition each quarter based on a quarterly annualized and trailing twelve-month basis. This method utilizes each segment's average customer account base for the applicable period in measuring attrition. Therefore, in periods of customer account growth, customer attrition may be understated and in periods of customer account decline, customer attrition may be overstated.

    Customer attrition by business segment for the years ended December 31, 2000, 1999 and 1998 is summarized below:

*

Does not include Europe segment.

Competition

    The security alarm industry is highly competitive. In North America, there are only five alarm companies that offer services across the U.S. and Canada with the remainder being either large regional or small, privately held alarm companies. Based on number of residential customers, we believe the top five alarm companies in North America are:

•

ADT Security Services, a subsidiary of Tyco International, Inc. ("ADT");



•

SecurityLink from Cambridge Securities (previously from Ameritech, Inc., a subsidiary of Ameritech Corporation);



•

Protection One;



•

Brinks Home Security Inc., a subsidiary of The Pittston Services Group of North America; and



•

Honeywell Inc.

    Competition in the security alarm industry is based primarily on reliability of equipment, market visibility, services offered, reputation for quality of service, price and the ability to identify and to solicit prospective customers as they move into homes. We believe that we compete effectively with other national, regional and local security alarm companies due to our reputation for reliable equipment and services, our prominent presence in the areas surrounding our branch offices and dealers, our ability to offer combined monitoring, repair and enhanced services.

Intellectual Property

    We own trademarks related to the name and logo for each of Protection One, Network Multifamily Security, PowerCall as well as a variety of trade and service marks related to individual services we provide. We own certain proprietary software applications, which we use to provide services to our customers. While we believe our trademarks and service marks and proprietary information are important to our business, other than the trademarks we own in our name and logo, we do not believe our inability to use any one of them would have a material adverse effect on our business as a whole.

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Regulatory Matters

    A number of local governmental authorities have adopted or are considering various measures aimed at reducing the number of false alarms. Such measures include:

•

permitting of individual alarm systems and the revocation of such permits following a specified number of false alarms;



•

imposing fines on alarm customers for false alarms;



•

imposing limitations on the number of times the police will respond to alarms at a particular location after a specified number of false alarms;



•

requiring further verification of an alarm signal before the police will respond; and



•

subjecting alarm monitoring companies to fines or penalties for transmitting false alarms.

    Our operations are subject to a variety of other laws, regulations and licensing requirements of both domestic and foreign federal, state, and local authorities. In certain jurisdictions, we are required to obtain licenses or permits, to comply with standards governing employee selection and training, and to meet certain standards in the conduct of our business. Many jurisdictions also require certain of our employees to obtain licenses or permits. Those employees who serve as patrol officers are often subject to additional licensing requirements, including firearm licensing and training requirements in jurisdictions in which they carry firearms.

    The alarm industry is also subject to requirements imposed by various insurance, approval, listing, and standards organizations. Depending upon the type of customer served, the type of security service provided, and the requirements of the applicable local governmental jurisdiction, adherence to the requirements and standards of such organizations is mandatory in some instances and voluntary in others.

    Our advertising and sales practices are regulated in the United States by both the Federal Trade Commission and state consumer protection laws. In addition, certain administrative requirements and laws of the jurisdictions in which we operate also regulate such practices. Such laws and regulations include restrictions on the manner in which we promote the sale of our security alarm systems, the obligation to provide purchasers of our alarm systems with certain rescission rights and certain foreign jurisdictions' restrictions on a company's freedom to contract.

    Our alarm monitoring business utilizes telephone lines and radio frequencies to transmit alarm signals. The cost of telephone lines, and the type of equipment, which may be used in telephone line transmission, are currently regulated by both federal and state governments. The Federal Communications Commission and state public utilities commissions regulate the operation and utilization of radio frequencies. In addition, the laws of certain of the foreign jurisdictions in which we operate regulate the telephone communications with the local authorities.

Risk Management

    The nature of the services provided by Protection One potentially exposes us to greater risks of liability for employee acts or omissions, or system failure, than may be inherent in other businesses. Substantially all of our alarm monitoring agreements, and other agreements, pursuant to which we sell our products and services contain provisions limiting liability to customers in an attempt to reduce this risk.

    Our alarm response and patrol services require our employees to respond to emergencies that may entail risk of harm to such employees and to others. We employ over 100 patrol and alarm response employees who are subject to pre-employment screening and training. Patrol employees are subject to local and federal background checks and drug screening before being hired, and are required to have

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gun and baton permits and state and city guard licenses. Patrol employees also must be licensed by states to carry firearms and to provide patrol services. Although we conduct extensive screening and training of our employees, the nature of patrol and alarm response service subjects us to greater risks related to accidents or employee behavior than other types of businesses.

    We carry insurance of various types, including general liability and errors and omissions insurance in amounts management considers adequate and customary for our industry and business. Our loss experience, and the loss experiences at other security service companies, may affect the availability and cost of such insurance. Certain of our insurance policies, and the laws of some states, may limit or prohibit insurance coverage for punitive or certain other types of damages, or liability arising from gross negligence.

Employees

    At December 31, 2000, we employed approximately 3,400 individuals on a full-time basis.

RISK FACTORS

Cautionary Statements Regarding Future Results of Operations

    You should read the following risk factors in conjunction with discussions of factors discussed elsewhere in this and other of our filings with the SEC. These cautionary statements are intended to highlight certain factors that may affect our financial condition and results of operations and are not meant to be an exhaustive discussion of risks that apply to public companies with broad operations, such as us. Like other businesses, we are susceptible to macroeconomic downturns in the United States or abroad that may affect the general economic climate and our performance or that of our customers. Similarly, the price of our securities is subject to volatility due to fluctuations in general market conditions, differences in our results of operations from estimates and projections generated by the investment community and other factors beyond our control.

We have had a history of losses which are likely to continue.

    We incurred net losses of $57.2 million in 2000 (a net loss of $106.4 million excluding extraordinary gains of $49.3 million, net of tax), $80.7 million in 1999 (a net loss of $91.9 million excluding the effect of the Mobile Services Group gain, net of tax), $17.8 million in 1998, and $42.3 million in 1997. These losses reflect, among other factors:

•

lower revenues and increased costs per customer due to a smaller customer base;



•

substantial charges incurred by us for amortization of purchased customer accounts;



•

interest incurred on indebtedness;



•

other charges required to manage operations; and



•

costs associated with the integration of the acquisitions we have made.

    Substantial charges for amortization of purchased customer accounts will continue on our existing customer base and customer accounts we acquire in the future. We will also continue to incur substantial interest expense because we have substantial debt. We do not expect to attain profitable operations in the forseeable future.

The impact of recently proposed accounting changes relating to goodwill could be significant.

    The Financial Accounting Standards Board issued an exposure draft on February 14, 2001 which, if adopted as proposed, would establish a new accounting standard for the treatment of goodwill in a business combination. The new standard would continue to require recognition of goodwill as an asset

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in a business combination but would not permit amortization as currently required by APB Opinion No. 17, "Intangible Assets." The new standard would require that goodwill be separately tested for impairment using a fair-value based approach as opposed to an undiscounted cash flow approach used under current accounting standards. If goodwill is found to be impaired the Company would be required to record a non-cash charge against income. The impairment charge would be equal to the amount by which the carrying amount of the goodwill exceeds the fair value. Goodwill would no longer be amortized on a current basis as is required under current accounting standards. The exposure draft contemplates this standard to become effective on July 1, 2001, although this effective date is not certain. Furthermore, the proposed standard could be modified prior to its adoption.

    If the new standard is adopted, any subsequent impairment test on our customer accounts would be performed on the customer accounts alone rather than in conjunction with goodwill utilizing an undiscounted cash flow test pursuant to SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of".

    At December 31, 2000, we had $829.1 million in goodwill assets attributable to our acquisitions of businesses and $900.3 million in customer accounts. These intangible assets together represented 89.6% of the book value of our total assets. We recorded $52.4 million in goodwill amortization expense in 2000. If the new standard becomes effective July 1, 2001 as proposed, it is probable that we would be required to record a non-cash impairment charge. We cannot determine the amount at this time, but we believe the amount would be material and could be a substantial portion of our intangible assets. We would no longer record goodwill amortization expense. This impairment charge would have a material adverse effect on our results of operation and could have a material adverse effect on our business and financial condition.

The impact of class action litigation may be material.

    We, our subsidiary Protection One Alarm Monitoring, Inc., Westar Industries, and certain present and former officers and directors of the Company are defendants in a purported class action litigation pending in the United States District Court for the Central District of California brought on behalf of shareholders of Protection One. The plaintiffs are seeking unspecified compensatory damages based on allegations that various statements concerning Protection One's financial results and operations for 1997, 1998, 1999 and the first three quarters of 2000 were false and misleading. We cannot currently predict the impact of this litigation which could be material. See "Legal Proceedings".

The competitive market for the acquisition and creation of accounts may affect our future profitability.

    In the past, we have grown very rapidly by acquiring portfolios of alarm monitoring accounts through acquisitions and dealer purchases. Our current strategy is to reduce the cost of acquiring such accounts and to utilize other customer account acquisition channels such as an internal sales force and direct marketing to complement our existing channels of acquiring customer accounts. We compete with major companies, some of whom have greater financial resources than we do, or may be willing to offer higher prices than we are prepared to offer to purchase subscriber accounts. The effect of competition may be to reduce the purchase opportunities available to us, or to increase the price we pay for subscriber accounts, which could have a material adverse effect on our return on investment in such accounts, and on our results of operations, financial condition, and ability to service debt.

We may experience difficulty integrating businesses we acquire.

    An important aspect of our acquisition program is the integration of customer accounts into our operations after purchase. Risks typically associated with acquisitions include, without limitation, the following:

•

the possibility of unanticipated problems not discovered prior to the acquisition;

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•

additional expenses required to integrate the acquired company's systems;



•

higher than expected account customer losses resulting in lower than expected revenues;



•

the significant demands placed on management to resolve issues arising from acquisitions; and



•

for acquisitions that are structured as stock purchases of other companies, the assumption of unexpected liabilities and losses from the disposition of unnecessary or undesirable assets of the acquired companies.

We will need additional funding to finance our future growth.

    Our purchases of customer accounts and acquisitions of portfolios of customer accounts and new lines of business have historically generated cash needs that exceed the net cash provided by our operating activities. We intend to continue to pursue customer account growth through our various customer acquisition channels, even though our principal focus has shifted from growth to improving our service, reducing attrition of current customers and integrating and building infrastructure. As a result, our cash requirements were less in 2000 than those in 1999 and 1998, but nonetheless our cash requirements in 2001 are expected to exceed cash flows from operations. As a result, additional funding from additional borrowings under our Senior Credit Facility or through the sale of assets is expected to be required in the future. Our credit ratings were downgraded in March 2000 and again in March 2001 which will make obtaining additional funding more difficult and costly.

    Any inability to obtain funding through external financing could adversely affect our ability to increase our customers, revenues and cash flows from operations. There can be no assurance that we will be able to obtain external funding on favorable terms or at all.

We have a substantial amount of debt, which could constrain our growth.

    We have, and will likely continue to have, a large amount of consolidated indebtedness. The terms of various indentures and credit agreements governing our indebtedness, limit the incurrence of additional indebtedness. We may incur additional indebtedness in the future in order to fund future acquisitions of subscriber accounts.

    Additionally, please be aware that:

•

As of December 31, 2000, we had outstanding total indebtedness of $637.7 million, of which $637.2 million was long-term indebtedness.



•

As of December 31, 2000, we had $44.0 million of debt outstanding under our Senior Credit Facility bearing interest at a weighted average floating interest rate of 9.0%. As of March 30, 2001, we had $135 million of debt outstanding under our Senior Credit Facility bearing interest at a weighted average floating interest rate of 9.2%. Our Senior Credit Facility is provided by Westar Industries, Inc., our 85% parent, and matures on January 2, 2002.

    A large amount of indebtedness could have negative consequences, including, without limitation:

•

our ability to obtain additional financing in the future for working capital, acquisitions of subscriber accounts, capital expenditures, general corporate purposes or other purposes;



•

our ability to withstand a downturn in our business or the economy generally; and



•

our ability to compete against other less leveraged companies.

    The indentures governing all of our debt securities require that we offer to repurchase the securities in certain circumstances following a change of control.

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We will need to refinance our Senior Credit Facility.

    Our ability to refinance our Senior Credit Facility and satisfy any payment obligations will depend, in large part, on our performance, which will ultimately be affected by general economic and business factors, many of which will be outside management's control. We believe that our cash flow from operations combined with borrowings under the Senior Credit Facility will be enough to meet our expenses and interest obligations through at least January 1, 2002. In the event our parent, Westar Industries, does not extend our Senior Credit Facility beyond that date on its present terms and we are required to seek such financing from unaffiliated third parties, we may not be able to do so on terms as economically favorable as those under our present Senior Credit Facility or at all. We were unsuccessful in refinancing our Senior Credit Facility with unaffiliated third parties on satisfactory terms in 2000. If payment obligations cannot be satisfied, we will be forced to find alternative sources of funds by selling assets, restructuring, refinancing debt or seeking additional equity capital. There can be no assurance that any of these alternative sources would be available on satisfactory terms or at all.

Our debt agreements impose operational restrictions on us.

    The indentures governing our public indebtedness require us to satisfy certain financial covenants in order to borrow additional funds. The most restrictive of these covenants are set forth below:

•

Total debt to annualized EBITDA for the most recent quarter must be less than 6.0 to 1;



•

EBITDA to interest expense for the most recent quarter must be greater than 2.25 to 1; and



•

Senior debt to annualized EBITDA for the most recent quarter must be less than 4 to 1.

    In each case, the ratio reflects the impact of acquisitions and other capital investments for the entire period covered by the calculation.

    The indentures contain other covenants that impose operational restrictions on us. A violation of these restrictions would result in an event of default which would allow the lenders to declare all amounts outstanding immediately due and payable.

We lose some of our customers over time.

    We experience the loss of accounts as a result of, among other factors:

•

relocation of customers;



•

adverse financial and economic conditions;



•

competition from other alarm service companies; and



•

customer service and operational difficulties with integration of acquired customers.

    We may experience the loss of newly acquired accounts to the extent we do not integrate or adequately service those accounts. Because some acquired accounts are prepaid on an annual, semiannual or quarterly basis, customer loss may not become evident for some time after an acquisition is consummated. An increase in the rate of customer loss could have a material adverse effect on our results of operations and financial condition.

    When acquiring accounts, we seek under terms of the purchase agreement to withhold a portion of the purchase price as a partial reserve against a greater than expected loss of customers. If the actual rate of customer loss for the accounts acquired is greater than the assumed rate at the time of the acquisition, and damages can not be recouped from the portion of the purchase price held back from the seller, the loss of customers could have a material adverse effect on our results of operations and financial condition. Moreover, we may not be able to obtain purchase price holdbacks in future acquisitions, particularly acquisitions of large portfolios and rates of customer losses for acquired

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accounts may be greater than the rate we have assumed or historically incurred. Moreover, we cannot predict the impact acquired accounts will have on the overall rate of attrition.

    As of December 31, 2000, the book value of intangible assets, net of accumulated amortization, was approximately $1.7 billion of which $829.1 million is goodwill, which constituted approximately 89.6% and 43.0% of the book value of our total assets, respectively. If we are required to write off a significant portion of these assets as a result of an impairment analysis our results of operations would be materially and adversely affected.

    During 2000 we continued to experience high levels of attrition in our North America segment which coupled with our change in focus from growth to strengthening our operations, resulted in a net loss of 141,527 customers or an 11.7% decrease in our customer base from January 1, 2000. This was the primary cause of our $33.1 million decline in monitoring and related service revenues in the North America segment from 1999 to 2000. We expect this trend will continue until the efforts we are making to acquire new accounts and reduce our rate of attrition become more successful than they have been to date. Until we are able to reverse this trend, net losses of customer accounts will materially and adversely affect our business, financial condition and results of operations.

Our customer acquisition strategies may not be successful.

    We have diversified our customer account acquisition strategy to include greater reliance on an internal sales force. There can be no assurance that this strategy will be successful. If the strategy is not successful, our customer base could continue to decline. The selling costs related to this strategy will increase our expenses and use of cash. A lower growth rate or increased cash needs could have a material adverse effect on our business, financial condition, results of operations, and ability to service debt obligations.

    Our dealer program competes with other major alarm monitoring firms that also acquire accounts through these independent dealers. Some of these firms with competitive dealer programs have substantial financial resources, including ADT and the security subsidiaries of Cambridge Securities. We are also aware of other national firms with competitive dealer programs including Monitronics International, Inc., DMAC, as well as several large regional dealer programs. There can be no assurance that we will be able to retain our current dealer base or that competitive offers to dealers will not require us to pay higher prices to dealers for subscriber accounts than have previously been paid. These strategies could reduce our growth rate and increase our use of cash to fund growth. A lower growth rate or higher use of cash could have a material adverse effect on our business, financial condition, results of operations, and ability to service debt obligations.

Declines in new construction of multi-family dwellings may affect our sales in this marketplace.

    Demand for alarm monitoring services in the multi-family alarm monitoring market is tied to the construction of new multi-family structures. We believe that developers of multi-family dwellings view the provision of alarm monitoring services as an added feature that can be used in marketing newly developed condominiums, apartments and other multi-family structures. Accordingly, we anticipate that the growth in the multi-family alarm monitoring market will continue so long as there is a demand for new multi-family dwellings. However, the real estate market in general is cyclical and, in the event of a decline in the market for new multi-family dwellings, it is likely that demand for our alarm monitoring services to multi-family dwellings would also decline, which could negatively impact our results of operations.

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Westar Industries is our principal stockholder and senior lender.

    Westar Industries owned approximately 85% of the outstanding common stock of Protection One as of December 31, 2000. As long as Westar Industries continues to beneficially own in excess of 50% of the shares of Protection One common stock outstanding, Westar Industries will be able to direct the election of all directors of Protection One and exercise a controlling influence over our business and affairs, including any determinations with respect to mergers or other business combinations involving Protection One, our acquisition or disposition of material assets and our incurrence of indebtedness. Similarly, Westar Industries will continue to have the power to determine matters submitted to a vote of Protection One's stockholders without the consent of other stockholders, to prevent or cause a change in control of Protection One and to take other actions that might be favorable to Western Resources and Westar Industries, whether or not these actions would be favorable to Protection One or its stockholders generally. In addition, Westar Industries is also our senior lender under our Senior Credit Facility as discussed above.

We obtain administrative services from Western Resources.

    Western Resources provides us certain administrative services pursuant to a services agreement including accounting, human resources, legal, facilities and technology services. If Western Resources completes its proposed merger with Public Service Company of New Mexico, Westar Industries (including us) will be separated from Western Resources. Westar Industries will enter into a services agreement with Western Resources pursuant to which Western Resources will continue to provide Westar Industries (including us) the services currently provided to us, but Western Resources will have the right to terminate this agreement beginning two years after the closing subject to providing one years' advance notice of termination. If the services agreement is terminated, our cost of obtaining such services from either a third party or by hiring sufficient staff to perform those services internally, may increase.

We have deferred tax assets we may not utilize.

    Western Resources makes payments to us for current tax benefits utilized by Western Resources in its consolidated tax return pursuant to a tax sharing agreement. If Western Resources completes its proposed transaction with Public Service Company of New Mexico, including the split-off of Westar Industries, we would no longer be able to file taxes on a consolidated basis with Western Resources. As a result, our net deferred tax assets of $85.6 million at December 31, 2000 might not be realizable and we might not be in a position to record a tax benefit for losses incurred. We would be required to record a non-cash charge against income for the portion of our net deferred tax assets we determine not to be realizable. This charge could be material and could have a material adverse effect on our business, financial condition and results of operations.

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ITEM 2: PROPERTIES

    We maintain our executive offices at 818 S. Kansas Avenue, Topeka, Kansas 66612. We operate primarily from the following facilities, although we lease office space for our 69 service branch offices and 11 satellite branches in North America.

(1)

In March 2001, this facility was closed.

ITEM 3: LEGAL PROCEEDINGS

    The Company, Protection One Alarm Monitoring, and certain present and former officers and directors of Protection One are defendants in a purported class action litigation pending in the United States District Court for the Central District of California, Alec Garbini, et al v. Protection One, Inc., et al., No CV 99-3755 DT (RCx). Pursuant to an Order dated August 2, 1999, four pending purported class actions were consolidated into a single action. On February 27, 2001, plaintiffs filed a Third Consolidated Amended Class Action Complaint ("Amended Complaint"). Plaintiffs purport to bring the action on behalf of a class consisting of all purchasers of publicly traded securities of Protection One, including common stock and notes, during the period of February 10, 1998 through February 2, 2001. The Amended Complaint asserts claims under Section 11 of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 against Protection One, Protection One Alarm Monitoring, and certain present and former officers and directors of Protection One based on allegations that various statements concerning Protection One's financial results and operations for 1997, 1998, 1999 and the first three quarters of 2000 were false and misleading and not in compliance with generally accepted accounting principles. Plaintiffs allege, among other things, that former employees of Protection One have reported that Protection One lacked adequate internal accounting controls and that certain accounting information was unsupported or manipulated by management in order to avoid disclosure of accurate information. The Amended Complaint further asserts claims against Western Resources and Westar Industries as controlling persons under Sections 11 and 15 of the Securities Act of 1933 and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. A claim is also asserted under Section 11 of the Securities Act of 1933 against Protection One's auditor, Arthur Andersen LLP. The Amended Complaint seeks an unspecified amount of compensatory damages and an award of fees and expenses, including attorneys' fees. Defendants have until April 9, 2001 to respond to the Amended Complaint. The Company intends to vigorously defend against all the claims asserted in the Amended Complaint. The Company cannot predict the impact of this litigation which could be material.

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    An arbitration was commenced against Protection One and Protection One Alarm Monitoring by Ronald Cats in March 2000 alleging common law fraud, negligent misrepresentation and Oregon Blue Sky law claims based on the allegedly inflated stock price of the shares of Protection One stock received in connection with Protection One's acquisition of his alarm monitoring business. Mr. Cats also alleges breach of contract, conversion and breach of implied covenant of good faith and fair dealing allegedly arising in connection with the same acquisition. The statement of claim seeks undisclosed damages, injunctive and equitable relief. The arbitration is scheduled to begin in April 2001.

    Six former Protection One dealers have filed a class action lawsuit in the U. S. District Court for the Western District of Kentucky alleging breach of contract because of the Company's interpretation of their dealer contracts. The action is styled Total Security Solutions, Inc., et al. v. Protection One Alarm Monitoring, Inc., Civil Action No. 3:99CV-326-H (filed May 21, 1999). In September 1999, the Court granted Protection One's motion to stay the proceeding pending the individual plaintiff's pursuit of arbitration as required by the terms of their agreements. On June 23, 2000, the Court denied plaintiffs' motion to have collective arbitration. On or about October 4, 2000, notwithstanding the Court's denial of plaintiffs' motion to have collective arbitration, the six former dealers filed a Motion to Compel Consolidated Arbitration with the American Arbitration Association ("AAA"). On November 21, 2000, the AAA denied the dealers' motion and advised they would proceed on only one matter at a time. As of March 19, 2001, no dealer has proceeded with arbitration.

    An arbitration was commenced against Protection One and Protection One Alarm Monitoring by Ralph Apa in December, 2000 alleging common law fraud, negligent misrepresentation and Oregon Blue Sky law claims based on the allegedly inflated stock price of the shares of Protection One stock received in connection with Protection One's acquisition of his alarm monitoring business on October 1, 1998. Mr. Apa also alleges breach of contract, breach of the covenant of good faith and fair dealing and conversion arising from the transaction. The statement of claim seeks undisclosed compensatory and punitive damages, interest and attorneys fees and costs. An arbitration date has not yet been set.

    Other Protection One dealers have filed or threatened litigation or arbitration based upon a variety of theories surrounding calculations of holdback and other payments. The Company believes it has complied with the terms of these contracts and although the Company believes that no individual such claim will have a material adverse effect, the Company cannot predict the aggregate impact of these disputes with dealers which could be material.

    On October 2, 2000, the Company, as successor-in-interest to Centennial Security, Inc., was served with a demand for arbitration by Crimebusters, Inc., before the American Arbitration Association wherein Crimebusters is seeking $7 million in damages due to alleged defaults by the Company under an asset purchase agreement between Crimebusters, et al and Centennial Security, Inc. The Company has filed claims alleging fraud, willful misconduct and breach of contract against Crimebusters, et al in the United States District Court for the District of Connecticut, Protection One Alarm Monitoring, Inc. v Crimebusters, Inc., First Federal Security Systems, Inc. and Anthony Perrotti, Jr., Civil Action No. 300CV-1932DJS, and in addition has demanded that Crimebusters withdraw the demand for arbitration, and requested of the American Arbitration Association that the arbitration action be dismissed or indefinitely stayed pending the resolution of the District Court litigation. The ultimate outcome cannot presently be determined and the Company cannot currently predict the impact of this litigation which could be material.

    The Company is a party to claims and matters of litigation incidental to the normal course of its business. Additionally, the Company receives notices of consumer complaints filed with various state agencies. The Company has developed a dispute resolution process for addressing these administrative complaints. The ultimate outcome of such matters cannot presently be determined; however, in the

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opinion of management of the Company, the resolution of such matters will not have a material adverse effect upon the Company's consolidated financial position or results of operations.

ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS

    No matters were submitted to Protection One's stockholders following our annual meeting in 2000.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Market Price Information

    Our common stock is listed on the New York Stock Exchange under the symbol "POI". The table below sets forth for each of the calendar quarters indicated, the high and low sales prices per share of our common stock, as reported by the New York Stock Exchange. All prices are as reported by the National Quotation Bureau, Incorporated.

Dividend Information

    Holders of Protection One common stock are entitled to receive only dividends declared by the board of directors from funds legally available for dividends to stockholders.

    Other than a $7.00 cash distribution paid to holders of record of Protection One common stock as of November 24, 1997, to holders of outstanding options to purchase Protection One common stock and to holders of warrants exercisable for Protection One common stock, all in connection with the combination of the Protection One and Western Resources security businesses in November 1997, Protection One has never paid any cash dividends on its common stock and does not intend to pay any cash dividends in the foreseeable future. The indenture governing the 8¹/8% Senior Subordinated Notes due 2009, the 13⁵/8% Senior Subordinated Discount Notes due 2005 of Protection One Alarm Monitoring, and the credit agreement relating to its Senior Credit Facility restrict Protection One Alarm Monitoring's ability to pay dividends or make other distributions to its corporate parent. Consequently, these agreements restrict our ability to declare or pay any dividend on, or make any other distribution in respect of, our capital stock.

Number of Stockholders

    As of March 13, 2001, there were approximately 135 stockholders of record who held shares of our common stock.

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ITEM 6. SELECTED FINANCIAL DATA

    The selected consolidated financial data set forth below should be read in conjunction with "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation" and the audited consolidated financial statements and notes to the financial statements of Protection One. All amounts are in thousands, except per share and customer data, unless otherwise noted. Prior to November 24, 1997, Protection One was a stand-alone security business. On November 24, 1997, pursuant to a contribution agreement dated July 30, 1997, between Protection One and Western Resources, Protection One acquired WestSec, Inc. and Westar Security, Inc., which together were the Western Resources security businesses ("WRSB"), and Centennial Security Holdings, Inc. ("Centennial"). As a result of the November 1997 business combination, Western Resources, through its wholly owned subsidiary Westar Industries owned approximately 85% of Protection One at December 31, 1997.

    The November 1997 business combination was accounted for as a reverse purchase acquisition which treats WRSB as the accounting acquiror. Accordingly, the results of operations of Protection One and Centennial have been included in the consolidated financial data only since November 24, 1997.

    The 1996 historical financial data of Protection One are those of WRSB, the accounting acquiror. On December 30, 1996, Western Resources, through its indirect wholly owned subsidiary, WestSec, purchased the assets and assumed certain liabilities comprising the security business of Westinghouse Security Systems from Westinghouse Electric Corporation. Westinghouse Security Systems is deemed to be a predecessor of Protection One.

    Selected financial data for 1996 was derived from the financial statements of Westinghouse Security Systems. Per share data is omitted because Westinghouse Security Systems was wholly owned by Westinghouse Electric Corporation.

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SELECTED CONSOLIDATED FINANCIAL DATA

(a)

Earnings before interest, taxes, depreciation and amortization (EBITDA) is derived by adding to income (loss) before income taxes, the sum of:

•

interest expense, net;

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•

other charges;



•

depreciation and amortization expense; and



•

other non-recurring (income) expense items.

    EBITDA does not represent cash flow from operations as defined by generally accepted accounting principles, should not be construed as an alternative to operating income and is indicative neither of operating performance nor cash flows available to fund the cash needs of Protection One. Items excluded from EBITDA are significant components in understanding and assessing the financial performance of Protection One. Protection One believes presentation of EBITDA enhances an understanding of financial condition, results of operations and cash flows because EBITDA is used by Protection One to satisfy its debt service obligations and its capital expenditure and other operational needs, as well as to provide funds for growth. In addition, EBITDA is used by senior lenders and subordinated creditors and the investment community to determine the current borrowing capacity and to estimate the long-term value of companies with recurring cash flows from operations. Protection One's computation of EBITDA may not be comparable to other similarly titled measures of other companies.

    The following table provides a calculation of EBITDA for each of the periods presented above:

    Other charges in 2000 represents severance charges of $1.5 million, charges incurred relating to the sale of our European business of $1.6 million and transition costs of $1.3 million for the closure of our Culver City and Chatsworth facilities. Other charges in 1999 represents severance charges of $3.2 million and transition costs of $2.6 million relating to the move of the finance and accounting offices from Irving, Texas to Topeka, Kansas. Other charges in 1998 represents severance and relocation payments of $3.4 million related to our 1998 reorganization and costs of $5.3 million incurred to replace signage for WRSB after the merger of WRSB with Protection One in 1998. Other charges in 1997 represent merger costs.

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

Introduction

    In Management's Discussion and Analysis we explain our general financial condition and operating results, including:

•

What factors impact our business



•

What our earnings and costs were in 2000, 1999 and 1998



•

Why these earnings and costs differed from year to year



•

How our earnings and costs affect our overall financial condition



•

What we expect our capital expenditures to be for the years 2001 through 2003



•

How we plan to pay for these future capital expenditures



•

Other items we believe may materially affect our financial condition or earnings

    As you read Management's Discussion and Analysis, please refer to our Consolidated Statements of Operations and Comprehensive Loss. These statements show our operating results for 2000, 1999 and 1998. In Management's Discussion and Analysis, we analyze and explain the significant annual changes of specific line items in the Consolidated Statements of Operations and Comprehensive Loss.

Summary of Significant Activities

    Net Loss.  We incurred a net loss of $57.2 million in 2000 (a net loss of $106.4 million excluding extraordinary gains of $49.3 million, net of tax). This net loss reflects a decline in revenues and substantial charges incurred by us for amortization of customer accounts and goodwill and interest incurred on indebtedness. We do not expect to have earnings in the foreseeable future.

    Related Party Transactions.  On February 29, 2000, the Company sold its European operations and certain investments to Westar Industries. The consideration received was approximately $244 million, comprised of approximately $183 million in cash and certain of the Company's outstanding debt securities Westar Industries had acquired in open market purchases for approximately $61 million. As part of the agreement, Westar Industries agreed to pay Protection One a portion of the net gain, if any, on a subsequent sale of the business on a declining basis over the four years following the closing. The cash proceeds of the sale were used to reduce the $240 million outstanding balance under the $250 million Senior Credit Facility between the Company and Westar Industries.

    Since Westar Industries is a related party, no gain or loss was recorded on the sale of our European operations and investments. We increased Additional Paid-In Capital $25.6 million to reflect the excess of the transaction price over carrying value on the sale of the European operations. We reduced Additional Paid-In Capital $16.7 million to reflect the excess of the carrying amount of the investments over the transaction price.

    Amendment to Credit Agreement with Westar Industries.  In December 2000, our Senior Credit Facility was amended to extend the maturity date to March 2, 2001 and to increase the interest rate to reflect current market conditions. On February 28, 2001, the Senior Credit Facility was further amended to, among other things, further extend the maturity date to January 2, 2002.

    Extinguishment of Debt and Extraordinary Gain.  During 2000 we reduced our debt by $474.9 million primarily through the sale of our European operations and purchases of debt securities from Westar Industries. We reduced outstanding borrowings under our Senior Credit Facility by

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$181.0 million. We reduced $224.8 million in carrying value of our public debt by acquiring $190.8 million face value of our bonds from Westar Industries and $30.5 million face value of our bonds in open market purchases, all of which were retired. An extraordinary gain of $49.3 million, net of tax of $26.5 million, was recorded on these retirements.

    Change in Estimate of Useful Life of Goodwill.  In January 2000, we re-evaluated the original assumptions and rationale utilized in the establishment of the carrying value and estimated useful life of goodwill. Management concluded that due to continued losses, levels of attrition experienced in 1999 and other factors, the estimated useful life of goodwill should be reduced from 40 years to 20 years as of January 1, 2000. After that date, remaining goodwill, net of accumulated amortization is being amortized over its remaining useful life based on a 20-year life. The change in estimate resulted in additional goodwill amortization for the year ended December 31, 2000 of $28.5 million. The resulting reduction to net income for the year was $25.4 million, or a decrease in earnings per share of $0.20.

    Impairment Test.  During the fourth quarter of 2000, we performed an impairment test of our customer accounts and related goodwill under the guidance of Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of (SFAS 121). Paragraph 6 of SFAS 121 indicates that an impairment loss should be recognized only if the sum of the expected future cash flows (undiscounted and without interest charges) is less than the carrying amount of the assets grouped at the lowest level of identifiable cash flows. After performing the test, we determined that there was not an impairment.

    Monthly recurring revenue.  At various times during the year, we measure all of the monthly revenue we are entitled to receive under contracts with customers in effect at the end of the period. We had approximately $29.6 million and $39.7 million ($32.6 million excluding European operations) of monthly recurring revenue as of December 31, 2000 and 1999, respectively. The decrease is a result of our net loss of 128,530 customers during 2000. In 2000, we experienced a steady decline in our customer base.

    We are unable to predict the amount of acquired monthly recurring revenue that will be realized in future periods or the impact of the losses of acquired accounts on our overall rate of customer loss. Our computation of monthly recurring revenue may not be comparable to other similarly titled measures of other companies and monthly recurring revenue should not be viewed by investors as an alternative to actual monthly revenue, as determined in accordance with generally accepted accounting principles.

    Our monthly recurring revenue includes amounts billable to customers with past due balances. We seek to preserve the revenue stream associated with each customer contract, primarily to maximize our return on the investment we made to generate each contract. As a result, we actively work to collect amounts owed to us and to retain the customer at the same time. In some instances, we may allow up to six months to collect past due amounts, while evaluating the ongoing customer relationship. After we have made every reasonable effort to collect past due balances, we will disconnect the customer and include the loss in attrition calculations.

    Customer Creation and Marketing.  For the year ended December 31, 2000, our North America segment added 67,160 accounts, although our net number of customers decreased by 141,527 accounts (net of 17,342 accounts acquired in the PowerCall acquisition). The Multifamily segment added 39,855 accounts, with its net number of customers increasing by 12,997 accounts. While our previous customer acquisition strategy for North America relied primarily on our dealer program, our new customer acquisition strategy relies on a mix of internal sales, "tuck-in" acquisitions, direct marketing and dealers. The number of accounts being purchased through our dealer program decreased significantly from 198,798 for the year ended December 31, 1999 to 21,817 for the year ended December 31, 2000. For the three months ended December 31, 2000, our dealer program produced 3,435 accounts, or

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approximately 12% of the total number of North America accounts acquired during such period (28% excluding the PowerCall acquisition of 17,342 accounts). In February 2000, we started a commission only internal sales program, with a goal of acquiring accounts at a cost lower than our external programs. We currently have a commissioned sales force of over 300 persons which we plan to expand in 2001. This program utilizes our existing branch infrastructure in approximately 70 markets. The internal sales program generated 27,259 accounts in 2000. We expect the number of accounts produced by this program to increase as it becomes more established. We continually evaluate our customer creation and marketing strategy, including each respective channel for economic returns, volume and other factors and may shift our strategy or focus, including the elimination of a particular channel.

    Attrition.  Like most monitored security companies, we invest significant amounts to generate new customers, and we seek to maintain long-term relationships with our customers by providing excellent service. We measure the loss of our customers to verify that our investment in new customers is generating a satisfactory rate of return and that our amortization policy is reasonable.

    We define attrition as a ratio, the numerator of which is the number of lost customer accounts for a primarily given period, net of certain adjustments, and the denominator of which is the average number of accounts for a given period. In some instances the company uses estimates to derive attrition data. We make adjustments to lost accounts primarily for the net change, either positive or negative, in our wholesale base and for accounts which are covered under a purchase price holdback and are "put" back to the seller. We reduce the gross accounts lost during a period by the amount of the guarantee provided for in the purchase agreements with sellers. In some cases, the amount of the purchase holdback may be less than actual attrition experience We expect adjustments to lost accounts for purchase holdbacks will be lower in the future because we are purchasing fewer accounts in the types of transactions that create holdbacks and we have extinguished a substantial portion of our purchase holdback reserve.

    Our actual attrition experience shows that the relationship period with any individual customer can vary significantly. Customers discontinue service for a variety of reasons, including relocation, service issues and cost. A portion of the acquired customer base can be expected to discontinue service every year. Any significant change in the pattern of our historical attrition experience would have a material effect on our results of operations.

    We monitor attrition each quarter based on a quarterly annualized and trailing twelve-month basis. This method utilizes each segment's average customer account base for the applicable period in measuring attrition. Therefore, in periods of customer account growth, customer attrition may be understated and in periods of customer account decline, customer attrition may be overstated.

    For the period ended December 31, 2000, our total company quarterly annualized and trailing twelve month attrition rates were 15.0% and 14.0%, respectively. The table below shows the change in our total company customer base (excluding the European segment) including customer additions and attrited customers from 2000 to 1998:

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Results of Operation

    We separate our business into two reportable segments: North America and Multifamily. North America provides security alarm monitoring services, which include sales, installation and related servicing of security alarm systems in the United States and Canada. Multifamily provides security alarm services to apartments, condominiums and other multi-family dwellings.

North America Segment

    We present the table below to show how the North America operating results have changed over the past three years. Next to each year's results of operation, we provide the relevant percentage of total revenues so that you can make comparisons about the relative change in revenues and expenses.

(1)

Includes $6.5 million and $7.8 million of corporate expenses for 2000 and 1999, respectively. In 1998, such expenses were not separately identified.

(2)

Includes $4.2 million of corporate expenses relating to a failed merger attempt in 1999.

    2000 Compared to 1999.  We had a net decrease of 141,527 customers (net of 17,342 customers acquired in the acquisition of PowerCall) in 2000 as compared to a net increase of 8,595 customers in 1999. The average customer base was 1,133,879 for 2000 compared to 1,200,345 for 1999. The number of customers decreased primarily because our customer acquisition strategies were not able to generate accounts in a sufficient volume at acceptable cost to replace accounts lost through attrition. We expect that this trend will continue until the efforts we are making to acquire new accounts and reduce attrition become more successful than they have been to date. Until we are able to reverse this trend, net losses of customer accounts will materially and adversely affect our business, financial condition and results of operations. Our focus remains on the completion of our current infrastructure projects, the development of cost effective marketing programs, development of our commercial business and the generation of positive cash flow.

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    Further analysis between the two years is discussed below.

    Monitoring and related service revenues for 2000 decreased by $33.1 million, or 8.7%, to $348.8 million from $381.9 million for 1999. The decrease is primarily due to the decline in our customer base. These revenues consist primarily of contractual revenue derived from providing monitoring and maintenance service.

    Other revenues increased by 2.8% to $15.7 million in 2000, compared to $15.3 million in 1999. These revenues consist primarily of outright sales of burglar alarms, closed circuit television, fire alarms and card access control systems.

    Cost of monitoring and related services revenues for 2000 increased by $12.2 million, or 11.7%, to $116.4 million from $104.2 million for 1999. Cost of monitoring and related services revenues as a percentage of the related revenues increased from 27.3% in 1999 to 33.4% in 2000. Compensation costs for the monitoring stations increased by approximately $4.9 million due primarily to an increase in personnel. In addition, parts and materials costs increased by $5.5 million and vehicle costs increased $1.7 million. These costs generally relate to the cost of providing monitoring service and include the costs of monitoring, billing, customer service and field operations.

    Cost of other revenues for 2000 decreased by $1.1 million, or 8.6%, to $11.5 million from $12.6 million in 1999. Parts and materials decreased by $2.8 million and labor costs increased by $1.7 million. These costs consist primarily of equipment and labor charges to install alarm systems, closed circuit televisions, fire alarms and card access control systems sold outright to our customers.

    Selling, general and administrative expenses for 2000 decreased by $1.2 million, or 1.1%, to $104.0 million from $105.2 million in 1999, but increased as a percentage of total revenues from 26.4% in 1999 to 28.5% in 2000. Selling expense increased $3.1 million to $8.7 million in 2000 from $5.6 million in 1999. This increase is primarily due to an increase in sales commissions stemming from our increased emphasis on internal account growth which we believe will further increase as we continue to grow our internal sales force. Bad debt and collection expenses decreased approximately $7.9 million primarily due to increased collection efforts in 2000. Subcontract expense for outside information technology support increased approximately $4.3 million due primarily to work performed in connection with the implementation of our new billing, collection and monitoring software.

    Acquisition expenses for 2000 decreased by $14.9 million, or 56.3%, to $11.5 million from $26.4 million in 1999. Third party monitoring costs decreased by $4.8 million, signs and decals expense decreased by $1.9 million, printing expense decreased by $1.7 million and compensation expense decreased by $1.0 million. These decreases are a direct result of the significant decline in the number of new accounts acquired from 223,093 in 1999 to 67,160 accounts acquired in 2000. This decline is primarily due to the restructuring of our dealer program. The decrease in third party monitoring expense and associated increase in reprogramming expense are a result of our concentrated effort in late 1999 to move such accounts to our own monitoring stations. Additionally, in the third quarter of 1999, $3.7 million of costs relating to the termination of the Lifeline merger were expensed.

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    Amortization of intangibles and depreciation expense for 2000 increased by $7.0 million, or 3.6%, to $202.0 million from $194.9 million in 1999. Subscriber amortization for 2000 and 1999 was $139.0 million and $159.8 million respectively, a decrease of $20.8 million. We changed the amortization method on most of our customer base from a 10-year straight line method to a 10-year declining balance method as of the third quarter in 1999. The cumulative effect of this change in accounting principle was approximately $28.6 million including approximately $20.2 million of additional amortization from the effect of the change on amortization in years prior to 1999. This change does not include our Westinghouse customer pool for which we adopted an 8-year accelerated amortization method from the date of the WSS acquisition.

    As discussed above, we also changed our estimate of the useful life of goodwill from 40 years to 20 years. As a result, our goodwill amortization expense increased $21.0 million from $20.3 million in 1999 to $41.3 million in 2000. Additionally, in 2000, depreciation expense increased $6.9 million from $14.7 million in 1999 to $21.6 million. This increase is due to accelerated depreciation of the general ledger and accounts receivable systems installed in 1999. In 2000, we moved to another general ledger and accounts receivable system better suited to meet our needs.

    Other charges for 1999 consisted of officers' severance costs of $3.2 million and $2.6 million in non recurring costs incurred to transition certain back office functions from Irving, Texas to Topeka, Kansas. For 2000 these charges consist of $1.5 million for officers' severance, $1.6 million for expenses relating to the sale of the European operations, and $1.3 million in costs relating to the closing of our Chatsworth, California and Culver City, California offices.

    Interest expense, net for 2000 and 1999 was $59.0 million and $76.1 million, respectively. This decrease is primarily a result of the reduction of approximately $475 million in outstanding debt during 2000.

    1999 Compared to 1998.  We had a net increase of 8,595 customers in 1999 as compared to a net increase of 445,156 customers in 1998. Accordingly, results for 1999 include a full year of operations with the customers added throughout 1998. We believe this to be the primary reason for our increase in revenues and associated cost of revenues in 1999 as compared to 1998. Further analysis between the two years is discussed below.

    Monitoring and related service revenues for 1999 increased by $60.8 million, or 18.9%, to $381.9 million from $321.1 million for 1998. The primary reason for the increase in 1999 revenues is because we had a full year of revenues from the additional customers added throughout 1998. An increase in our base monitoring and service fees also increased revenue in 1999.

    Other revenues which consist primarily of revenues generated from our internal installations of new alarm systems, decreased by 33.2% to $15.3 million in 1999, compared to $22.9 million in 1998. This decrease in revenues is due primarily to the reduction of our internal sales and installation activities that resulted from our reliance on the dealer program for residential customers in 1999. We continued our internal sales program and recorded installation revenues through the first half of 1998, but then relied almost entirely on the dealer program to acquire new customers for the balance of 1998 and all of 1999.

    Cost of monitoring and related services revenues for 1999 increased by $10.6 million, or 11.4%, to $104.2 million from $93.6 million for 1998. Cost of monitoring and related services revenues as a percentage of the related revenues decreased from 29.1% during 1998 to 28.0% during 1999. Monitoring and related services expense for 1999 increased primarily due to a full year of operations of our three major service centers and three smaller satellite monitoring facilities acquired in 1998. We also incurred additional expense in 1999 relating to the addition of customer service representatives in the second quarter.

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    Cost of other revenues for 1999 decreased by $1.4 million, or 10.5%, to $12.6 million from $14.0 million in 1998. This decrease corresponds with the decrease in the internal installations in 1999. Other cost of revenues as a percentage of other revenues increased to 82.6% in 1999 from 61.4% in 1998.

    Gross profit for 1999 increased by $44.1 million, or 18.7%, to $280.4 million from $236.4 million in 1998. Contribution of new customers through our dealer program and acquisitions produced the increase in gross profit. As a percentage of total revenues, gross profit was 70.6% for 1999 compared to 68.7% for 1998. The increase in gross profit as a percentage of total revenues reflects cost savings from the consolidation of some of our monitoring operations, offset by a partial year of expense associated with additional customer service representatives.

    Selling, general and administrative expenses for 1999 increased by $18.3 million, or 21.1%, to $105.2 million from $86.8 million in 1998. The increase is attributable to costs associated with the overall increase in the average number of customers billed, additional bad debt expense of approximately $10.5 million resulting from higher attrition, costs associated with Year 2000 compliance, professional fees and salary increases.

    Acquisition expenses for 1999 increased by $6.1 million, or 30.3% to $26.4 million from $20.3 million in 1998. We aggregate expenses incurred in the acquisition and integration of customers in this line item. These expenses include yard signs, the cost of monitoring acquired accounts by a third party, and the reprogramming of alarm panels for new customers. The increase in 1999 is primarily attributable to costs of $4.0 million associated with the restructuring of our dealer program and $3.7 million of costs related to the unsuccessful merger with Lifeline, offset by reduced transition expenses associated with acquisitions. In 1998 we incurred $5.3 million in additional customer transition expenses, primarily yard signs for WRSB customers related to the merger of WRSB and Protection One. We incurred expenses to develop and manage our dealer program, as well as to contact, assimilate and solicit acquired and new customers for new services.

    Amortization of intangibles and depreciation expense for 1999 increased by $79.9 million, or 69.5%, to $194.9 million from $115.0 million in 1998. In 1999, we changed our amortization method for most of our North American customers from a 10-year straight line method to a 10-year declining balance method which substantially increased amortization expense. Another primary factor resulting in the increase is the full year of amortization expense on subscribers acquired during 1998. These increases were partially offset by a $1.9 million decrease in the amortization of the Westinghouse customers under the 8-year accelerated amortization method.

    Other charges for 1999 increased by $2.4 million, to $5.8 million from $3.4 million in 1998. We incurred $5.8 million for severance and relocation expenses associated with a reorganization of our operations in 1999 and $3.4 million for such expenses in late 1998.

    Interest expense, net for 1999 increased by $23.7 million, or 45.2%, to $76.1 million from $52.4 million in 1998, reflecting our use of debt to finance a substantial portion of our customer account growth.

    Other non-recurring (income) expense in 1999 totaled $12.7 million of income compared to $5.7 million of income in 1998. In 1999, other income consisted primarily of a gain on the sale of our Mobile Services Group of $17.2 million and dividend income reduced by losses on sales of marketable securities of $7.7 million. In 1998, we recognized a non-recurring gain on the repurchase of customer contracts covered by a financing arrangement with New York Life Secured Asset Management Company, Ltd. (SAMCO), a third party, of approximately $1.5 million. Also during 1998, we restructured our investment in a security monitoring company and recognized a non-recurring gain of approximately $3.0 million.

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Multifamily Segment

    The following table provides information for comparison of the Multifamily operating results for the periods presented. Next to each period's results of operations, we provide the relevant percentage of total revenues so that comparisons about the relative change in revenues and expenses can be made.

    2000 Compared to 1999.  We had a net increase of 12,997 customers in 2000 as compared to a net increase of 9,006 customers in 1999. The average customer base was 301,459 for 2000 compared to 290,457 for 1999. The change in Multifamily's customer base for the period is shown below.

    The increase in the attrition rate for Multifamily in 2000 is due to nonpayment of approximately 7,000 subscribers related to one developer. Had these accounts not attrited, the annualized attrition would have been approximately 6.5%. We are pursuing contractual remedies for nonpayment of these accounts.

    Monitoring and related services revenues for 2000 increased by $0.9 million, or 2.7%, to $35.2 million from $34.3 million for 1999. Multifamily's additional revenues in 2000 were primarily attributable to the increase in the subscriber base. These revenues consist primarily of contractual revenue derived from providing monitoring and maintenance service.

    Other revenues decreased by $.5 million or 10.4% to $4.1 million in 2000 from $4.6 million in 1999 primarily due to a decrease in the number of outright sales installations.

    Cost of monitoring and related service revenues for 2000 increased by $.6 million, or 8.7%, to $8.2 million from $7.6 million for 1999. Monitoring and related service expenses, as a percentage of monitoring and related service revenues, increased to 23.3% for 2000 from 22% for 1999. This increase

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is primarily related to increased employment costs caused by the current competitive labor market and an increase in claims experience on a self-funded medical insurance plan.

    Cost of other revenues decreased by $.6 million or 13.1% to $3.6 million from $4.2 million in 1999. Other cost of revenues, as a percentage of other revenues, decreased to 88.2% in 2000 from 90.9% in 1999. This decline is principally due to an increase in sales of access control contracts with greater installation margins than the standard alarm sale and the access control sales installed in 1999.

    Selling, general and administrative expenses decreased $.7 million or 6.7% to $9.9 million in 2000 from $10.6 million in 1999 primarily due to a temporary decline in the sales force.

    Acquisition expenses for 2000 were zero and $.3 million in 1999. We aggregate expenses incurred in the acquisition and integration of customers in this line item. These expenses principally relate to the conversion of customer account data into Multifamily's monitoring database from acquisitions made in 1998.

    Amortization of intangibles and depreciation expense for 2000 increased by $6.1 million, or 64.0% to $15.6 million from $9.5 million in 1999. This increase is primarily due to the change in estimate of goodwill life from 40 years to 20 years resulting in an increase in goodwill amortization expense of $5.0 million. Subscriber amortization increased by $1.0 million due to the larger customer base being amortized.

    1999 Compared to 1998.  During 1998 over 80,000 accounts were acquired in two acquisitions that increased monthly recurring revenues by approximately $550,000, or $6.6 million per year. About 39,000 of these accounts were acquired in May with the balance acquired in September. The 1999 results reflect a full year of operations with these acquired accounts which is the primary reason that revenues and associated expenses are higher in 1999.

    Monitoring and related services revenues for 1999 increased by $5.0 million, or 16.9%, to $34.3 million from $29.4 million for 1998. Multifamily's additional revenues in 1999 were primarily attributable to the 1998 acquisitions.

    Cost of monitoring and related revenues for 1999 increased by $1.7 million, or 29.3%, to $7.6 million from $5.9 million for 1998. Monitoring and related services expenses as a percentage of monitoring and related services revenues increased to 22.0% in 1999 from 19.9% during 1998. The percentage increase is due primarily to the lower contracted recurring revenues on the accounts acquired in 1998.

    Selling, general and administrative expenses for 1999 increased by $0.8 million, or 8.7%, to $10.6 million from $9.8 million in 1998. The increase resulted primarily from increased selling expense attributable to a 20% increase in contract sales and increased general and administrative expenses principally associated with the 1998 acquisitions.

    Acquisition expenses for 1999 was $0.3 million and zero in 1998. We aggregate expenses incurred in the acquisition and integration of customers in this line item. These expenses principally relate to the conversion of customer account data into Multifamily's monitoring database from the 1998 acquisitions.

    Amortization of intangibles and depreciation expense for 1999 increased by $1.8 million, or 23.1%, to $9.5 million from $7.7 million in 1998. We amortize customer accounts over 10 years using a straight-line method and goodwill over 40 years using a straight-line method.

Liquidity and Capital Resources

    We believe we will have sufficient cash to fund future operations of our business through January 1, 2002 from a combination of revenue from our security monitoring customer base which generated $138.7 million of positive EBITDA, excluding our European operations, in 2000 and from borrowings under our existing Senior Credit Facility, which had approximately $20 million of availability at March 30, 2001. We will need to extend the maturity date of our Senior Credit Facility with Westar

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Industries or refinance the facility with an unaffiliated lender to have sufficient cash to fund operations after January 1, 2002. See "Risk Factors—We will need to refinance our Senior Credit Facility."

    EBITDA does not represent cash flow from operations as defined by generally accepted accounting principles, should not be construed as an alternative to operating income and is indicative neither of operating performance nor cash flows available to fund our cash needs. Items excluded from EBITDA are significant components in understanding and assessing our financial performance. We believe that presentation of EBITDA enhances an understanding of our financial condition, results of operations and cash flows because EBITDA is used to satisfy our debt service obligations and our capital expenditures and other operational needs as well as to provide funds for growth. In addition, EBITDA is used by senior lenders and subordinated creditors and the investment community to determine the current borrowing capacity and to estimate the long-term value of companies with recurring cash flows from operations. Our computation of EBITDA may not be comparable to other similarly titled measures of other companies.

    Operating Cash Flows for the Year Ended December 31, 2000.  Our operating activities provided net cash flows of $101.5 million, an increase of $8.1 million from 1999. This increase was primarily due to receipt of the 1998 and 1999 tax benefit payments from Westar Industries under our tax sharing agreement, offset by a decrease in deferred revenues. The decline in deferred revenues was the result of a decline in our account base in 2000 as compared to an increase in our account base in 1999. We expect the tax benefit payments we will receive from Western Resources in 2001 will be smaller than the payments received in 2000 because of the extraordinary gains recognized in 2000 from the retirement of bonds which reduced the amount of our losses available to be utilized by Western Resources in its consolidated tax return.

    Investing Cash Flows During 2000.  Investing cash flows provided $117.2 million of cash flow. This was comprised of $183.0 million of cash proceeds received from Westar Industries from the sale of our European operations and other investments, reduced by $18.6 million used to acquire fixed assets, $35.5 million used to acquire new customers and $11.7 million related to the PowerCall acquisition.

    Financing Cash Flows During 2000.  We used a net $223.8 million in financing activities. Borrowings under our Senior Credit Facility decreased by $181.0 million. We used the $183.0 million in cash received from the sale of our European operations and other investments to reduce borrowings under our Senior Credit Facility. We paid an additional $46.9 million to retire $69.1 million carrying amount of other outstanding debt. We also purchased $5.3 million in treasury stock during the year. Borrowings under our Senior Credit Facility in 2000 were at interest rates based on either the Prime Rate or a Eurodollar Rate. At December 31, 2000 the facility had a weighted average interest rate of 9.0% and an outstanding balance of $44.0 million.

    Debt and Equity Repurchase Plans.  We may from time to time purchase our debt and equity securities in the open market or through negotiated transactions. The timing and terms of purchases, and the amount of debt or equity actually purchased, will be determined based on market conditions and other factors. As of March 27, 2001, we had authority to purchase an additional 7,460,483 shares of our common stock.

    Material Commitments.  We have future, material, long-term commitments made in the past several years in connection with our growth. We believe these commitments will be met through a combination

31

of borrowings under our Senior Credit Facility, refinancings and positive operating cash flows. The following reflects these commitments as of December 31, 2000 (in thousands):

(a)

These notes are convertible into Protection One common stock at a price of $11.19 per share, which is currently above the price at which our shares are traded in the public stock markets.

(b)

Does not include premium of $3.1 million at December 31, 2000.

(c)

Reflects amendments to the Senior Credit Facility extending the maturity date to January 2, 2002.

    Most of these debt instruments contain restrictions based on "EBITDA". The definition of EBITDA varies among the various indentures and the Senior Credit Facility. EBITDA is generally derived by adding to income (loss) before income taxes, the sum of interest expense and depreciation and amortization expense. However, under the varying definitions of the indentures, various and numerous additional adjustments are sometimes required.

    Our Senior Credit Facility and the indentures relating to our public notes contain the financial covenants summarized below:

(a)

This covenant is reduced to 5.50 to 1.0 effective in the first quarter of 2001.

(b)

This covenant is increased to 2.25 to 1.0 effective in the first quarter of 2001.

    At December 31, 2000, we were in compliance with the covenants under the Senior Credit Facility and the indentures relating to our public debt.

    These debt instruments also restrict our ability to pay dividends to stockholders, but do not otherwise restrict our ability to fund cash obligations.

    Credit Ratings.  On March 24, 2000 Moody's downgraded their ratings on our outstanding securities and on March 9, 2001, Moody's further downgraded these ratings citing concerns regarding

32

our operations, leverage and liquidity over the intermediate term, with outlook remaining negative. S & P and Fitch currently have our ratings on negative watch. As of March 15, 2001 the ratings were as follows:

    Capital Expenditures.  We anticipate making capital expenditures of approximately $85 million in 2001. Of such amount, we plan to invest approximately $65 million to acquire customer accounts and $20 million for fixed assets. Capital expenditures for 2002 and 2003 are expected to be approximately $100 million and $130 million, respectively. Of these amounts approximately $80 and $100 million would be to acquire accounts with the balance for fixed assets. These estimates are prepared for planning purposes and are revised from time to time. Actual expenditures for these and possibly other items not presently anticipated may vary from these estimates during the course of the years presented. We believe that these capital requirements will be met in 2001 through the use of internally generated funds and drawings under our Senior Credit Facility. In subsequent years, we anticipate that these capital requirements will be met through the use of internally generated funds and external financings. See "Risk Factors"—We will need to refinance our Senior Credit Facility.

Subsequent Events

    Increase in Senior Credit Facility.  In the first quarter of 2001, pursuant to the terms of our Senior Credit Facility, we requested and Westar Industries approved a $40 million increase in the commitment under the facility.

    Retirement of Additional Debt.  In the first quarter of 2001, we purchased from Westar Industries $66.1 million face value of our bonds for $45.2 million. As a result of this transaction, an extraordinary gain of $13.4 million, net of tax will be recognized in the first quarter of 2001. The debt securities purchased are shown below:

(1)

Adjustments to Paid-In Capital represent the difference in fair value of the bonds from the date Westar Industries made the open market purchases to the date we acquired them.

    Additionally, through March 27, 2001, we purchased $17.5 million face value of Senior Subordinated Notes in the open market for $9.6 million which will result in an extraordinary gain of $7.6 million in the first quarter of 2001.

    Share Repurchases.  From January 1, 2001 through March 27, 2001, we purchased 13,712,704 shares of our common stock for $15.0 million of which 11,532,104 shares were purchased from Westar

33

Industries for $12.6 million. The purchases from Westar Industries maintained its proportionate ownership of our outstanding common stock. These shares are held as treasury stock.

ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK

    We are exposed to market risk, including changes in the market price, foreign currency exchange rates, equity instrument investment prices, as well as interest rates.

    Foreign currency exchange rates.  During 1998, we acquired Canadian operations with a functional currency other than the US dollar. As of December 31, 2000, the unrealized loss on currency translation, presented as a separate component of stockholders' equity and reported within other comprehensive income was approximately $0.6 million net of tax. A 10% change in the currency exchange rates would have an immaterial effect on other comprehensive loss.

    Interest Rate Exposure.  We have approximately $44.0 million of long-term variable rate debt as of December 31, 2000. A 100 basis point change in the debt benchmark rate would impact net income by approximately $0.3 million.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

    Our consolidated financial statements and supplementary data, together with the reports of Arthur Andersen LLP, independent public accountants, are included elsewhere herein. See "Index to Financial Statements" on page F-1.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

    None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTS

    Information relating to our directors, nominees for directors and executive officers is set forth under the heading "Election of Directors" in the Proxy Statement relating to the Annual Meeting of Stockholders to be held May 24, 2001, which will be filed with the Securities and Exchange Commission by April 30, 2001, and which is incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION

    Information relating to our executive officers and executive compensation is set forth under the heading "Executive Officers; Executive Compensation and Related Information" in the Proxy Statement relating to the Annual Meeting of Stockholders to be held May 24, 2001, which will be filed with the Securities and Exchange Commission by April 30, 2001, and which is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

    Information relating to the security ownership of certain beneficial owners and management is set forth under the headings "Security Ownership of Certain Beneficial Owners" and "Security Ownership of Management and Director" in the Proxy Statement relating to the Annual Meeting of Stockholders to be held May 24, 2001 which will be filed with the Securities and Exchange Commission by April 30, 2001, and which is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

    Information relating to certain relationships and related transactions concerning directors and executive officers is set forth under the heading "Certain Relationships and Related Transactions" in the Proxy Statement relating to the Annual Meeting of Stockholders to be held May 24, 2001, which will be filed with the Securities and Exchange Commission by April 30, 2001, and which is incorporated herein by reference.

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PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a)

The following documents are filed as a part of this report:



1.

The financial statements and financial statement schedules listed on the accompanying Index to Financial Statements.



2.

The following Exhibits:

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36

*

Each Exhibit marked with an asterisk constitutes a management contract or compensatory plan or arrangement required to be filed or incorporated by reference as an Exhibit to this report pursuant to Item 14(c) of Form 10-K.

†

Filed herewith.

(b)

During the last quarter of the fiscal year covered by this Report, POI and Monitoring filed one Report on Form 8-K. A Current Report on Form 8-K dated December 21, 2000 reported the amendment to the Senior Credit Facility which extended the maturity date to March 2, 2001 and increased the interest rate to current market rates.

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PROTECTION ONE, INC. AND SUBSIDIARIES

INDEX TO FINANCIAL STATEMENTS

F-1

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

     To the Shareholders of Protection One, Inc.:

    We have audited the accompanying consolidated balance sheets of Protection One, Inc. and subsidiaries as of December 31, 2000 and 1999 and the related consolidated statements of operations and comprehensive loss, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2000. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

    We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

    In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Protection One, Inc. and subsidiaries as of December 31, 2000 and 1999 and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States.

    As explained in Note 2(f) to the financial statements, effective September 1, 1999, the Company changed its method of amortization for most customer accounts from the straight-line method to a declining balance (accelerated) method.

    Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. Schedule II—Valuation and Qualifying Accounts is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.

Arthur Andersen LLP

Kansas City, Missouri

March 9, 2001

F-2

PROTECTION ONE, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollar amounts in thousands, except for per share amounts)