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

FORM 10-K

        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 ý    No o

        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. o

        Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes o    No ý

        The aggregate market value of common stock of Protection One, Inc. held by nonaffiliates on June 30, 2004 (based on the last sale price of such shares on the over the counter bulletin board) was $3,767,443.

        As of March 10, 2005, Protection One, Inc. had 18,198,571 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. Protection One's sole asset is Protection One Alarm Monitoring and Protection One Alarm Monitoring's wholly owned subsidiaries, as such there are no separate financial statements for Protection One Alarm Monitoring, Inc.

TABLE OF CONTENTS

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PART I



FORWARD-LOOKING STATEMENTS

        This Annual Report on Form 10-K 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," "will," "should" or other words of similar import. Similarly, statements herein that describe our objectives, plans or goals also are forward-looking statements. Such statements include those made on matters such as our earnings and financial condition, litigation, accounting matters, our business, our efforts to consolidate and reduce costs, our customer account acquisition strategy and attrition, our efforts to implement new financial software, our liquidity and sources of funding and our capital expenditures. All 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. We must repay or refinance a significant amount of our outstanding senior debt, which matures in 2005. The consummation of the sale of its ownership interests in us by Westar Industries, Inc., a wholly owned subsidiary of Westar Energy, Inc., which we refer to collectively as Westar, our former majority owner that beneficially owned approximately 88% of our common stock, to POI Acquisition, LLC and POI Acquisition I, Inc., entities formed by Quadrangle Capital Partners LP, Quadrangle Select Partners LP, Quadrangle Capital Partners-A LP and Quadrangle Master Funding Ltd, which we refer to collectively as Quadrangle, and the assignment of Westar's rights and obligations as the lender under our revolving credit facility to POI Acquisition, LLC, resulted in a $285.9 million non-cash charge against our income in the first quarter of 2004 to establish a valuation allowance for deferred tax assets that we believed were not realizable, and the sale is expected to further materially adversely affect our liquidity due to termination of the tax sharing agreement between us and Westar. Statements made in the Form 10-K regarding the possible effect on us of the sale by Westar and our debt restructuring also constitute forward-looking statements. 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.

        See also "Item 1, Business—Risk Factors," below, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources," Item 8, Note 5 "Debt," Item 8, Note 15 "Going Concern and Management's Plan" and Item 8, Note 18 "Subsequent Events" for further discussion.

INTRODUCTION

        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. and Protection One Alarm Monitoring's wholly owned subsidiaries. Protection One's sole asset is Protection One Alarm Monitoring and Protection One Alarm Monitoring's wholly owned subsidiaries, and accordingly, there are no separate financial statements for Protection One Alarm Monitoring, Inc. Each of Protection One and Protection One Alarm Monitoring is a Delaware corporation organized in September 1991.

        In February 2005, we completed a one-share-for-fifty-shares reverse stock split of our outstanding shares of common stock. All prior share and per share amounts included in this report give retroactive effect to the reverse stock split.

        Stockholders and other security holders or buyers of our securities or our other creditors should not assume that material events subsequent to the date of this Form 10-K have not occurred.

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ITEM 1. BUSINESS

Overview

        We are a leading national provider of security alarm monitoring services, providing installation, maintenance and electronic monitoring of alarm systems to single-family residential, commercial, multifamily and wholesale customers. We monitor signals originating from alarm systems designed to detect burglary, fire, medical, hold-up and environmental conditions, and from access control and closed-circuit-television (CCTV) systems. Most of our monitoring services and a large portion of our maintenance services we provide our customers are governed by multi-year contracts with automatic renewal provisions that provide us with recurring monthly revenue, or RMR. As of December 31, 2004, we had more than one million customers. Based on information provided by a leading industry publication, we are the third largest provider of electronic security monitoring services in the United States based on RMR.

        Our business consists of two primary segments, Protection One Monitoring (formerly referred to as North America) and Network Multifamily. Protection One Monitoring primarily provides residential and commercial electronic security system installations and alarm monitoring services directly to homeowners and businesses. Protection One Monitoring also provides wholesale alarm monitoring services to independent alarm companies. Network Multifamily provides electronic security system installation and alarm monitoring services to owners and managers of apartments, condominiums and other multifamily dwellings. We market our services to these customer segments through separate internal sales and installation branch networks. Our 2004 monitoring and related services revenue and customer base compositions at December 31, 2004 were as follows:

        For the year ended December 31, 2004, we generated consolidated revenue of $269.3 million. Protection One Monitoring accounted for 86.0% of consolidated revenues, or $231.5 million, while Network Multifamily accounted for the 14.0% of consolidated revenues, or $37.8 million.

        Financial information for the past three years for each of our business segments is presented in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations" and in Item 8, Note 13 "Segment Reporting," and is incorporated herein by reference.

Protection One Monitoring

        Protection One Monitoring provides installation, maintenance and monitoring of electronic security systems to single-family residential and commercial customers (our retail customers), and alarm monitoring services to independent alarm companies (our wholesale customers). Protection One Monitoring serves approximately 533,000 retail customers with no single customer comprising more than 1% of our total consolidated revenue. Protection One Monitoring serves retail customers from 64 field locations and two centralized monitoring centers.

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        Currently, our new retail customers are generated organically through our internal sales force. Our reliance on an internal sales force enables us to control the sales process from inception and to manage the level of customer care afforded.

        Our wholesale business serves approximately 860 independent alarm monitoring companies representing 167,000 customers. Typically, we act as the sole provider of monitoring services to independent monitoring companies. For the year ended December 31, 2004, our wholesale business accounted for 3.9% of consolidated revenue.

Network Multifamily

        Network Multifamily provides alarm monitoring service to apartments, condominiums and other multifamily dwellings. We believe Network Multifamily is the leading national provider of alarm monitoring services to the multifamily sector, with approximately 330,000 units in 528 cities.

Sources of Revenue

        For both Protection One Monitoring and Network Multifamily, revenue is primarily generated from providing monitoring services. For the year ended December 31, 2004, revenue generated from monitoring and related services accounted for 91.9% of our total revenue.

        Monitoring revenue is generated based on contracts that we enter into with our residential, commercial and multifamily customers. The typical initial contract term for residential and commercial customers is three to five years, and for multifamily is five to ten years, with automatic renewal provisions. We generate incremental contractual recurring revenue from a majority of our residential and commercial customers by providing additional services, such as maintenance. As of December 31, 2004, more than 70% of our retail contracts in the Protection One Monitoring segment were past the initial contract term and currently are under either an automatic renewal contract term or an additional contract term with us. We believe the rate of attrition on these aged contracts is lower than it was during the initial contract term and represents a more stable revenue base.

        For the year ended December 31, 2004, other revenues, derived principally from the sale of electronic security systems, contributed 8.1% of our total revenue. Electronic security systems typically are provided at a loss in connection with generating new contracts for recurring monitoring services.

Recent Developments

        In February 2004, Westar sold its issued and outstanding shares of the Company's common stock to affiliates of Quadrangle. As part of the sale transaction, Westar also assigned to Quadrangle its rights and obligations as the lender under an existing credit facility with us, which we now refer to as the Quadrangle credit facility. In addition, in February 2005, we completed a debt restructuring with Quadrangle, which was initiated in November 2004 upon the execution of a tax sharing settlement agreement with Westar. See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations—Sale of Company; Restructuring," which is incorporated herein by reference, for more information regarding the Westar sale transaction, the restructuring transactions and the related management incentive plan.

Industry; Competition

        According to an industry publication, the market for electronic security system sales, leasing, installation, monitoring and service totaled approximately $24.8 billion in 2004. Over the past 10 years, the industry has grown at an estimated compounded annual rate of 7.6%. Factors driving growth include heightened security awareness, demographic changes, an increase in dual income households, as well as improved capital spending dynamics for businesses. These trends are expected to continue.

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        According to the same industry publication, the industry is comprised of more than 14,000 small and mid-sized, regional players, the vast majority of which generate annual revenue of less than $500,000. We believe our primary competitors with national scope include the following:

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ADT Security Services, Inc., a subsidiary of Tyco International, Ltd;



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Brinks Home Security, a subsidiary of The Brink's Company;



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Monitronics International, Inc.; and



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Honeywell Security Monitoring Company, formerly a subsidiary of Honeywell International Inc.

        Competition in the security alarm industry is based primarily on market visibility, price, reputation for quality of services and systems, services offered and the ability to identify and to solicit prospective customers as they move into homes and businesses. We believe that we compete effectively with other national, regional and local security alarm companies due to the following strengths:

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Leading operator in a fragmented marketplace. According to a leading industry publication, we are the third largest operator in the electronic security monitoring and service industry. We believe we are the market leader in the multifamily segment. We believe that our network of 64 field locations and four centralized monitoring centers gives us the ability to benefit as one of the few providers with a broad national platform and strong brand recognition.



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Internal sales model. In 2001, we transitioned Protection One Monitoring's retail operations from a dealer account model to an organic internal sales force model to generate new customers. The transition has helped us to reduce customer acquisition costs as a multiple of the recurring revenue created, decreasing the period of time required to recover the investment in customer acquisition costs. Through our internal sales force, we can also exercise tighter control on the sales process and the quality and profile of new customers.



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Decentralized branch management. Our retail branch managers have an average industry experience of 11 years and are accountable for the profitability of their respective branches. They are incentivized to add new RMR on a prudent basis and to reduce attrition. We believe that the retail security monitoring business is highly localized and our physical presence in these markets helps us to compete with local companies in attracting new customers, to increase customer satisfaction and to reduce attrition of our existing customer base.



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Predictable cash flow and recurring nature of our revenue stream. More than 84.1% of our 2004 revenue was based on multi-year monitoring contracts that typically have an automatic renewal provision. We believe that our portfolio of retail contracts that are past the initial contract term are likely to exhibit lower attrition rates than those portfolios did during the initial contract term. As of December 31, 2004, more than 70% of our retail contracts had passed their initial term. The seasoned nature of our contract portfolio helps us to generate consistent and predictable cash flow, reduces attrition of our existing customer base and provides us with visibility into future revenue streams and cash flow.



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Operating metrics. Since 2001, we have significantly improved the key drivers of our monitoring business. Average consolidated site attrition rate has decreased to 7.8% in 2004 from 11.2% in 2002. Gross monitoring and service margin has increased to 71.9% in 2004 from 71.0% in 2002. We believe that with these operating metrics, we are well positioned to increase our monitoring business using cash generated internally from our operations, without the need to raise additional funds from external sources to fund ongoing operations. We will need to raise additional funds from external sources to refinance our indebtedness in 2005.



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Improved capital structure. As described in "Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations—Sale of Company; Restructuring," we have

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undertaken several important actions that resulted in a restructuring of our balance sheet and an improved capital structure. In February 2005, approximately one year after Quadrangle's acquisition of the Company, Quadrangle converted $120.0 million of the Quadrangle credit facility into equity. In 2004, we also received consideration of $73.0 million in a tax settlement from Westar, which was used to retire outstanding debt.

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Experienced management team and equity sponsorship. Our senior management team averages over 16 years of experience in the security services industry and is supported by an entrepreneurial group of branch managers who have an average of 11 years of experience in the security services business. Quadrangle, our majority shareholder, is an experienced private equity investor. We believe that Quadrangle's financial and operational support along with our management's ability to implement our business strategy will help us in increasing the size of our business in a sustainable way in future periods.

Operations

        Our operations consist principally of installing, servicing and monitoring premise intrusion and fire alarms.

Centralized Monitoring, Common Technology Platform and Customer Service

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. These devices are connected to a computerized control panel that communicates through wireline and/or wireless phone lines to a monitoring facility. 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 existing alarm monitoring customer contracts generally have initial terms ranging from three to ten years in duration, and, in most states, 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. Since 2002, most new single-family residential customers have entered into contracts with an initial term of three years, and most new commercial customers have entered into contracts with an initial term of five years. Typically, customers sign alarm monitoring contracts that include a bundled monthly charge for monitoring and extended service protection, which covers the normal costs of repair of the security system. Customers may elect to sign an alarm monitoring contract providing for a reduced monthly charge that excludes extended service protection. A significant percentage of new residential and commercial customers also elect to include line security based on cellular technology in their service bundle.

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Monitoring Facilities

        We provide monitoring services to our customer base from four monitoring facilities. The table below provides additional detail about our monitoring centers:

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

        All of our primary monitoring facilities are listed by Underwriters Laboratories, Inc., or UL, as protective signaling services stations. UL specifications for monitoring facilities 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.

Backup Facility

        Our backup facility is in Wichita, Kansas and is a highly secure concrete building. This fully operable resource has the ability to backup all mission critical operations normally performed at our primary retail monitoring center. The structure is equipped with diverse voice and data telecommunication paths, backup power that includes standby UPS, access control, video surveillance and data vaults. In addition, we have deployed hot redundancy for our entire complement of equipment essential in the remote monitoring of the retail security systems we offer. Furthermore, we have replicated the computer systems that are used to maintain our mission critical applications. This facility was purchased with the ability to be expanded for future internal growth and is actively used for other business-related operations.

Wholesale Monitoring

        Through our monitoring facilities in Longwood and Wichita, we provide wholesale monitoring services to independent alarm companies. Under the typical arrangement, alarm companies subcontract monitoring services to us, primarily because they cannot cost-effectively provide their own monitoring service. 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.

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Customer Care Services

        Customer care personnel answer non-emergency telephone calls typically regarding service, billing and alarm activation issues. Most business-hours customer care functions for our Protection One Monitoring retail customers are handled by our branches. During business hours, monitoring facility personnel receive inbound customer calls forwarded from branches when the latter are unable to answer within a specified number of rings. After-hours, all customer calls are forwarded to the monitoring facilities.

        Customer care personnel in our Protection One Monitoring retail branches and in our monitoring facilities at help desks assist customers in understanding and resolving minor service and operating issues related to security systems. Branch personnel schedule technician appointments. We also operate a dedicated telesales center in Wichita to address questions that retail customers or potential customers have about our services, as well as to perform outbound sales and marketing activities.

Enhanced Services

        As a means of increasing revenues and enhancing customer satisfaction, we offer retail and wholesale customers an array of enhanced security services, including extended service protection, supervised monitoring services and telephone line security based on wireless technology. These services position us as a full service provider and give our sales representatives more features to sell in their solicitation of new customers. Enhanced services include:

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Extended Service Protection, which covers the normal costs of repair of the security system during regular business hours.



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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 approximately 64 field locations in the United States from which we provide some or all of the following services: field repair, customer care, alarm response and sales services. Our nationwide network of branches operates in some of the largest cities in the United States and plays a critical role in enhancing customer satisfaction, reducing customer loss and building brand awareness. 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 will create economies of scale.

Sales and Marketing

        Our current customer acquisition strategy for our Protection One Monitoring retail segment relies primarily on internally generated sales. In June 2001, we notified most of our remaining domestic dealers that we were terminating our dealer arrangement with them and therefore would not be extending or renewing their contracts. No accounts were purchased through our dealer program in 2004 compared to 135 and 1,135 accounts in 2003 and 2002, respectively.

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        Our internal sales program for our Protection One Monitoring segment was started in February 2000 on a commission-only basis with a goal of creating accounts at a cost lower than our external programs. In 2001, we revised and enhanced our internal sales program, and in 2002, we enhanced the benefits package for our sales force. This program utilizes our existing branch infrastructure in approximately 55 markets. The internal sales program for our Protection One Monitoring segment generated 52,584 accounts and 50,731 accounts in 2004 and 2003, respectively. We operate a dedicated telesales center in Wichita from which we respond to questions that customers or potential customers have about our services, support the alliance with BellSouth and provide quality control follow-up calls to customers for whom we recently provided installation or maintenance services.

        We are a partner in a marketing alliance with BellSouth to offer monitored security services to the residential, single-family market and to businesses in 17 of the larger metropolitan markets in the nine-state BellSouth region. The marketing alliance agreement may be terminated by either party upon 180 days' notice or earlier upon occurrence of certain events.

        Under this agreement, we operate as "BellSouth Security Systems from Protection One" from our branches in the nine-state BellSouth region. BellSouth provides us with information about new owners of single-family residences and businesses in its territory and of transfers of existing BellSouth customers within its territory. We follow up on the information to create leads for our sales force. We pay BellSouth an upfront royalty for each new contract and a recurring royalty based on a percentage of recurring charges. Approximately one-fifth of our new accounts created in 2004 and 2003 were produced from this arrangement. Termination of the BellSouth agreement could have a material adverse impact on our operating results and on our ability to generate new customers in this territory.

        Our retail sales professionals are responsible for identifying new prospects and closing new sales of monitoring systems and services. The sales force also generates 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.

        Our Network Multifamily segment utilizes a salaried and commissioned sales force to produce new accounts. Network Multifamily markets its services and products primarily to developers, owners and managers of apartment complexes and other multifamily dwellings. Network Multifamily sales and marketing activities consist of national and regional advertising, nationwide professional field sales efforts, prospective acquisition marketing efforts and professional industry-related association affiliation. Services are sold directly to the property owner, and payment is based on a monthly price on a per-unit basis. Ongoing service for the duration of the lease includes providing 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 Network Multifamily or the customer elects to cancel the contract at the end of its term.

        We continually evaluate our customer creation and marketing strategy, including evaluating 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

        See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations—Attrition," which is incorporated herein by reference, for more information regarding attrition calculations, the impact of attrition on our operating results and customer attrition by business segment.

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Intellectual Property

        We own trademarks related to the name and logo for Protection One and Network Multifamily Security as well as a variety of trade and service marks related to individual services we provide. 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.

Regulatory Matters

        A number of local governmental authorities have adopted or are considering various measures aimed at reducing the number of false alarms. See "—Risk Factors" below. Such measures include:

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



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imposing fines on alarm customers or alarm monitoring companies for false alarms;



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



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



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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 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.

        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 and the obligation to provide purchasers of our alarm systems with rescission rights.

        Our alarm monitoring business utilizes wireline and wireless telephone lines, radio frequencies, and broadband data circuits 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.

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.

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        We carry insurance of various types, including general liability and professional liability 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. Some 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, 2004, we had approximately 2,300 full-time employees. Our workforce is not unionized.

Access to Company Information

        We electronically file our annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K with the Securities and Exchange Commission, or SEC. The SEC maintains an Internet site (www.sec.gov) that contains reports, proxy and information statements and other information regarding issuers that file electronically.

        We make available, free of charge, through our website at www.protectionone.com, and by responding to requests addressed to our investor relations department, our annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K. These reports are available as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC. The information contained on our website is not part of this document.

Risk Factors

        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.

We must repay or refinance a significant portion of our senior debt in 2005.

        In connection with the restructuring and as required by the indenture governing our outstanding 13⁵/8% senior subordinated discount notes, we initiated a change of control repurchase offer at 101% for our approximately $29.9 million of outstanding 13⁵/8% senior subordinated discount notes due June 2005. We completed the repurchase of all of these notes on March 11, 2005. In addition, the remaining balance of the Quadrangle credit facility and the outstanding 7³/8% senior unsecured notes are due on August 15, 2005. Failure to repay or refinance these obligations when due would have a material adverse impact on our financial position, results of operations and liquidity.

The Westar sale transaction resulted in certain financial and tax losses.

        Until Westar sold its ownership interests in us, ongoing payments made to us by Westar under a tax sharing agreement had been an important source of liquidity for us. The consummation of the sale of Westar's ownership interests in us resulted in a $285.9 million non-cash charge against our income in the first quarter of 2004 to establish a valuation allowance for deferred tax assets that we believed were not realizable. In connection with the restructuring, we entered into a tax sharing settlement with Westar and Quadrangle whereby we have received a $45.9 million cash payment, credit for interest due of $0.5 million and $26.6 million of our 7³/8% senior unsecured notes that were held by Westar.

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Quadrangle is our principal stockholder and can exercise a controlling influence over us.

        Quadrangle owns approximately 97.3% of our outstanding common stock as of March 10, 2005. Pursuant to a stockholder agreement with Quadrangle and subject to Quadrangle maintaining a certain threshold of ownership in us, Quadrangle will be able to direct the election of three of our directors and exercise a controlling influence over our business and affairs, including any determinations with respect to mergers or other business combinations involving us, appointment of our officers, our acquisition or disposition of material assets and our incurrence of indebtedness. Similarly, Quadrangle will continue to have the power to determine matters submitted to a vote of our stockholders without the consent of other stockholders and to take other actions that might be favorable to Quadrangle, whether or not these actions would be favorable to us or to our stockholders in general.

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

        We incurred net losses of $323.9 million in 2004, $34.4 million in 2003 and $880.9 million in 2002. These losses reflect the following, among other factors:

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our customer base and revenues have declined every year since 1999;



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substantial charges incurred by us for amortization of purchased customer accounts and, in 2002, an impairment charge to purchased customer accounts;



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in 2002, a loss on impairment of goodwill;



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in 2004, a write down of remaining deferred tax assets;



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interest incurred on indebtedness;



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expansion of our internal sales and installation efforts; and



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other charges required to manage operations.

        We will continue to carry a substantial amount of interest expense and we do not expect to attain profitability in the near future.

Our debt agreements impose restrictions on us.

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

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EBITDA to interest expense for the most recent quarter must be greater than 2.25 to 1.0;



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Total consolidated debt to annualized most recent quarter EBITDA must be less than 5.75 to 1.0; and



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Consolidated annualized most recent quarter EBITDA to latest four fiscal quarters interest expense must be greater than 2.10 to 1.0.

        In each case, the ratio reflects the impact of acquisitions and other capital investments for the entire period covered by the calculation. These debt instruments contain restrictions based on "EBITDA." The definition of EBITDA varies among the debt agreements. 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, additional adjustments are required.

        The agreements contain other covenants that impose restrictions on us, including with respect to the payment of dividends. 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.

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We face competition from companies that are larger than we are and have greater resources than we do.

        Some of our competitors, either alone or in conjunction with their respective parent corporate groups, are larger than we are and have greater financial resources, sales, marketing or operational capabilities or brand recognition than we do. In addition, the innovative nature of our markets may attract new entrants to the field. We may not be able to compete successfully with the services of other companies, which could result in the loss of customers and, as a result, decreased revenue and operating results.

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

        Prior to 2000, we grew very rapidly by acquiring portfolios of alarm monitoring accounts through acquisitions and dealer purchases. Our current strategy is to reduce the cost of acquiring new accounts by utilizing other customer account acquisition channels such as our internal sales force augmented by traditional marketing support. The security alarm monitoring industry is highly competitive and highly fragmented. We compete with several companies that have account acquisition and loan programs for independent dealers and some of those competitors are larger than we are and have more capital than we do. Some of the major firms we compete against include ADT Security Services, Inc.; Brinks Home Security; Honeywell Security Monitoring Company; and Monitronics International, Inc. Increased competition from other alarm monitoring companies could require us to reduce our prices for installations, decrease the monitoring fees we charge our subscribers and take other measures that could reduce our margins. These decreases and other measures could have a material adverse effect on us.

        As a result of our restructuring, our competitors may use our actions to their advantage in competing against us for residential and, in particular, commercial sales. Homeowners and businesses that might have contracted with us may be unwilling to do so as a result of our restructuring.

We lose some of our customers over time.

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

•

relocation of customers;



•

customers' inability or unwillingness to pay our charges;



•

adverse financial and economic conditions;



•

the customers' perceptions of value; and



•

competition from other alarm service companies.

        We may experience the loss of newly acquired or created 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.

        During 2004, our focus on strengthening our operations resulted in a net loss of 18,207 customers, or a 1.7% decrease in our customer base from January 1, 2004. During 2003, our change in focus from growth to strengthening our operations resulted in a net loss of 25,378 customers or a 2.4% decrease in our customer base from January 1, 2003. While our attrition rate is decreasing, we continue to lose customers at a rate faster than our rate of adding customers. The net loss of customers was the primary cause of our decline in monitoring and related service revenues in the Protection One Monitoring segment of $8.8 million in 2004 and $13.9 million in 2003. We expect losses to exceed additions until the efforts we are making to acquire new accounts and further reduce our rate of attrition become

14

more successful than they have been to date. Net losses of customer accounts materially and adversely affect our business, financial condition and results of operations.

Our customer acquisition strategies may not be successful, which would adversely affect our business.

        The customer account acquisition strategy we are now employing relies primarily on our internal sales force and making alliances such as our strategic alliance with BellSouth Corporation. We have changed our acquisition strategy several times over the past few years attempting to decrease the cost of adding customers and to decrease the rate of attrition from new accounts. While our present strategy resulted in some improvement in 2003 and 2004, there can be no assurance that this strategy will be successful in the future. If the strategy is not successful, our customer base could continue to decline. If successful, the selling costs related to this strategy will increase our expenses and uses of cash. Failure to economically replace customers lost through attrition or increased cash needs could have a material adverse effect on our business, financial condition, results of operations and ability to service debt obligations.

Increased adoption of non-response or verification-required policies by police departments may adversely affect our business.

        An increasing number of local governmental authorities have adopted, or are considering the adoption of laws, regulations or policies aimed at reducing the perceived costs to municipalities of responding to false alarm signals. Such initiatives could increase the costs of providing our services, and consequently lead to less demand for alarm monitoring services in general and increase our attrition. Additionally, we will incur greater costs in monitoring, evaluating and attempting to affect the outcome of these initiatives.

Increased adoption of statutes and governmental policies purporting to void automatic renewal provisions in our customer contracts, or purporting to characterize certain of our charges as unlawful, may adversely affect our business.

        Our customer contracts typically contain provisions automatically renewing the term of the contract at the end of the initial term, unless cancellation notice is delivered in accordance with the terms of the contract. If the customer cancels prior to the end of the contract term, other than in accordance with the contract, we may charge the customer the charges that would have been paid over the remaining term of the contract, or charge an early cancellation fee.

        Several states have adopted, or are considering the adoption of statutes, which purport to void the automatic renewal provisions of consumer service and alarm monitoring contracts. Such initiatives could compel us to increase the length of the initial term of our contracts, and increase our charges during the initial term, and consequently lead to less demand for our services and increase our attrition. Also, we will incur greater costs in monitoring, evaluating and attempting to affect the outcome of these initiatives.

        Additionally, certain state attorneys' general offices have advised us that they consider our imposition of customer charges for a customer's early termination of our contract to be an unlawful penalty, rather than lawful contractual damages or liquidated damages, or that they consider such charges to be void or unenforceable under various other legal theories. Certain customers have brought suit against us making similar contentions. While we believe that our imposition of such charges is lawful, there can be no assurance that our ability to impose or collect such charges will be upheld in any litigation or enforcement action. Should such charges be determined to be void or unenforceable, we may be compelled to impose larger initial customer charges, and to increase our charges, which may lead to less demand for our services and increase our attrition. Such adverse determinations could also cause legal exposure to customers against whom such charges have been imposed, and the risk that

15

certain of our customers may seek to recover such charges through a class action or other litigation. In addition, the costs of defending such litigation and enforcement actions could have an adverse effect on us.

Declines in rents, occupancy rates and new construction of multifamily dwellings may affect our sales in this marketplace.

        Demand for alarm monitoring services in the Network Multifamily segment is tied to the general health of the multifamily industry. This industry is dependent upon prevailing rent levels and occupancy rates as well as the demand for construction of new properties. We believe that developers and owners of multifamily dwellings view the provision of alarm monitoring services as an amenity to gain higher occupancy, increase rents, reduce turnover and enhance lease-up rates on new properties. Accordingly, we anticipate that the growth in the multifamily market will continue so long as developers and owners view the alarm monitoring service as an attractive amenity to enhance overall performance of existing as well as new properties. The real estate market in general is cyclical, however, and, in the event of a decline in the market factors described above, it is likely that demand for our alarm monitoring services to multifamily dwellings would also decline, which could negatively impact our results of operations.

We could face liability for our failure to respond adequately to alarm activations.

        The nature of the services we provide potentially exposes us to risks of liability for employee acts or omissions or system failures. In an attempt to reduce this risk, our alarm monitoring agreements and other agreements pursuant to which we sell our products and services contain provisions limiting our liability to customers and third parties. However, in the event of litigation with respect to such matters, there can be no assurance that these limitations will be enforced. In addition, the costs of such litigation could have an adverse effect on us.

        We carry insurance of various types, including general liability insurance and professional liability insurance. Our loss experience, and the loss experience of other alarm monitoring companies, may affect the availability and costs of our 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.

Future government or other regulations and standards could have an adverse effect on our operations.

        Our operations are subject to a variety of laws, regulations and licensing requirements of 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. The loss of such licenses, or the imposition of conditions to the granting or retention of such licenses, could have an adverse effect on us. We believe that we are in material compliance with applicable laws and licensing requirements. In the event that these laws, regulations and/or licensing requirements change, it could require us to modify our operations or to utilize resources to maintain compliance with such rules and regulations. There can be no assurance as to what new regulations will be enacted and what effect they may have on us.

The loss of our Underwriters Laboratories listing could negatively impact our competitive position.

        All of our alarm monitoring centers are Underwriters Laboratories listed. To obtain and maintain a UL listing, an alarm monitoring center must be located in a building meeting UL's structural requirements, have back-up and uninterruptible power supplies, have secure telephone lines and maintain redundant computer systems. UL conducts periodic reviews of alarm monitoring centers to ensure compliance with their regulations. Non-compliance could result in a suspension of our UL listing. The loss of our UL listing could negatively impact our competitive position.

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We depend on our relationships with alarm system manufacturers and suppliers. If we are not able to maintain or renew these alliances, our ability to create new customers and to service our existing account base could be negatively affected.

        We currently have agreements with certain alarm system manufacturers and suppliers of hardware for products that we install in customer locations for new systems and to repair existing systems. We may not be able to maintain or renew our existing product sourcing arrangements on terms and conditions acceptable to us. If we are unable to maintain or renew our existing relationships, we may incur additional costs creating new customer arrangements and in servicing existing customers.

We rely on subcontractors in certain markets to install, service and repair alarm systems.

        We currently have agreements with various subcontractors in order to timely and efficiently install, service and repair alarm systems. We may not be able to maintain or renew our subcontractor arrangements on terms and conditions acceptable to us. If we are unable to maintain or renew our existing subcontractor relationships, we may incur additional costs creating new customer arrangements and in servicing existing customers and customer satisfaction may suffer, leading to increased attrition. Also, our reliance on subcontractors increases our costs related to quality assurance and inspections and potentially diminishes our brand identity with customers.

We have a limited bonding capacity, which potentially limits our ability to simultaneously enter into bonded customer transactions.

        We typically must post a performance bond in connection with bidding for or performing large commercial alarm, access control or other related jobs. Currently, our maximum aggregate bonding capacity is $2.0 million. Each performance bond issued on our behalf reduces amounts available for the issuance of additional performance bonds. Accordingly, we cannot accept jobs which require that we post performance bonds in excess of our then available capacity, which could adversely affect our business.

We rely on technology that may become obsolete.

        Our monitoring services depend upon the technology (hardware and software) of security alarm systems. We may be required to upgrade or implement new technology, which could require significant capital expenditures. There can be no assurance that we will be able to successfully implement new technologies or adapt existing technologies to changing market demands. If we are unable to adapt in response to changing technologies, market conditions or customer requirements in a timely manner, such inability could adversely affect our business.

Most of our customers' alarm systems communicate with our monitoring center via Public Telephone Switched Network lines, or PTSN lines, provided by an incumbent local exchange carrier, which are losing market share to wireless and Internet-based means of communication.

        The number of PTSN lines provided by incumbent local exchange carriers decreased at about a 5% annual rate in 2004 and is projected to continue decreasing. While we offer alarm systems that can communicate signals to our central stations using various wireless and/or Internet-based communication technologies, such solutions are presently more expensive than traditional PTSN-based alarm communicators. Higher costs might reduce the market for new customers of alarm monitoring services, and the trend away from PTSN lines to alternatives may mean more existing customers will cancel service with us. In addition, such shifts to newer communications technologies may increase our costs for personnel training.

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We are dependent upon our senior management.

        The success of our business is largely dependent upon the active participation of our executive officers, who have extensive experience in the industry. As a result, we have entered into employment agreements with each of our executive officers. The loss of the services of one or more of such officers for any reason may have an adverse effect on our business.

Due to a concentration of accounts in California and Florida, we are susceptible to environmental incidents that may negatively impact our results of operations.

        Almost one-third of our recurring monthly revenue is derived from subscribers located in California and Florida. A major earthquake, hurricane or some other environmental disaster in an area of high account concentration for us could disrupt our ability to serve those customers or render those customers uninterested in continuing to retain us to provide alarm monitoring services.

The Westar sale transaction forced us to implement new financial and human resource systems.

        As a result of the sale transaction, we were forced to purchase our own accounting and human resource systems for our Protection One Monitoring segment and transition from the Westar accounting and human resource systems. This transition is ongoing, and we can give no assurances that these system conversions will be successful. If the transition is materially delayed or otherwise unsuccessful, it could have a material adverse impact on our financial condition and results of operations.

We have incurred and will continue to incur increased costs as a result of recently enacted securities laws and regulations relating to corporate governance matters and public disclosure.

        The Sarbanes-Oxley Act of 2002 and the SEC rules implementing that Act have required changes in some of our corporate governance practices and may require further changes. These new rules and regulations have increased our legal and financial compliance costs and have made some activities, including the renewal of our director and officer liability insurance, more difficult, time-consuming or costly. These new rules and regulations could also make it more difficult for us to attract and retain qualified independent members of our board of directors and qualified members of our management team.

        We are taking steps to comply with the recently enacted laws and regulations in accordance with the deadlines by which compliance is required, but we cannot predict or estimate the amount or timing of additional costs that we may incur to respond by these deadlines. Furthermore, we cannot be certain that we will be able to fully comply with the provisions of Section 404 of the Act regarding management's assessment of the effectiveness of the Company's internal control over financial reporting and the auditor's attestation to and report on both management's assessment and the effectiveness of the Company's internal control over financial reporting.

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ITEM 2. PROPERTIES

        We maintain our executive offices at 1035 N. 3^rd Street, Suite 101, Lawrence, Kansas 66044. We operate primarily from the following facilities, although we also lease office space for our approximately 64 field locations.

ITEM 3. LEGAL PROCEEDINGS

        Information on our legal proceedings is set forth in Item 8, Note 12 "Commitments and Contingencies" and Note 18 "Subsequent Events" of the Notes to Consolidated Financial Statements, which are incorporated herein by reference.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS

        No matters were submitted to Protection One's stockholders during the fourth quarter of 2004.

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PART II

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

Market Price Information

        Our common stock was listed on the New York Stock Exchange under the symbol "POI" until the fourth quarter of 2003. Because our stock was trading below $1.00 (on a pre-reverse stock split basis), we did not meet listing requirements of the New York Stock Exchange. Since December 4, 2003, our stock has traded on the OTC Bulletin Board. 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 and the OTC Bulletin Board, as applicable. The quotations reflect inter- dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions. On February 8, 2005 we effectuated a one-share-for-fifty shares reverse stock split. On February 9, 2005, our common stock symbol changed from "POIX" to "PONN."

(a)

Stock prices presented give effect to the one-share-for-fifty shares reverse stock split on February 8, 2005.

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. We did not declare or pay any dividends for the years ending December 31, 2004 or 2003.

        The indentures governing the 8¹/8% senior subordinated notes due in 2009 and the Quadrangle credit facility restrict Protection One Alarm Monitoring's ability to pay dividends or to 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 10, 2005, there were approximately 828 stockholders of record who held shares of our common stock.

Securities Authorized for Issuance Under Equity Compensation Plans

        The information called for by the item relating to "Securities Authorized for Issuance Under Equity Compensation Plans" is set forth under that heading in Item 12, "Security Ownership of Certain Beneficial Owners and Management" and is incorporated herein by reference.

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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 Operations" and the audited consolidated financial statements and notes to the financial statements of Protection One, which can be found in Item 8. All amounts are in thousands, except per share and customer data, unless otherwise noted.

(a)

Includes results of the European segment (that was acquired between May and September 1998 and sold to Westar Industries on February 29, 2000) for the period it was owned by us.

(b)

See Item 8, Note 14 "Impairment Charges" for a discussion of impairment charges taken in 2002 and Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations-Impairment Charges" for discussion of impairment charges to goodwill and customer accounts taken in 2002. See Item 8, Note 8 "Income Taxes" for a discussion of income tax treatment.

(c)

Loss per share and weighted average number of shares presented give retroactive effect to the one-share-for-fifty shares reverse stock split on February 8, 2005.

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

Introduction

        In this section we explain our general financial condition and operating results, including:

•

what factors affect our business;



•

what our earnings and costs were in 2004, 2003 and 2002;



•

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 2005 through 2006;



•

how we plan to pay for these future capital expenditures; and



•

other items that materially affect our financial condition, liquidity or earnings.

        In February 2005, we completed a one-share-for-fifty-shares reverse stock split of our outstanding shares of common stock. All prior share and per share amounts included in this report give retroactive effect to the reverse stock split.

        As you read this section, please refer to our Consolidated Statements of Operations and Comprehensive Loss and accompanying notes found in Item 8. These statements show our operating results for 2004, 2003 and 2002. In this section, we analyze and explain the significant annual changes of specific line items in the Consolidated Statements of Operations and Comprehensive Loss. We also suggest you read Item 1, "Business—Risk Factors" which will help your understanding of our financial condition, liquidity and operations.

Overview

        We are a leading national provider of security alarm monitoring services, providing installation, maintenance and electronic monitoring of alarm systems to single-family residential, commercial, multifamily and wholesale customers. We monitor signals originating from alarm systems designed to detect burglary, fire, medical, hold-up and environmental conditions, and from access control and CCTV systems. Most of our monitoring services and a large portion of our maintenance services are governed by multi-year contracts with our customers. These contracts are typically three to five years in duration for our Protection One Monitoring segment (formerly referred to as our North America segment) and five to ten years for our Network Multifamily segment, have automatic annual renewal provisions and provide us with RMR.

        Our business consists of two primary segments, Protection One Monitoring and Network Multifamily. Protection One Monitoring primarily provides residential and commercial electronic security system installations and alarm monitoring services directly to homeowners and businesses. Protection One Monitoring also provides wholesale alarm monitoring services to independent alarm companies. Network Multifamily provides electronic security system installation and alarm monitoring services to owners and managers of apartments, condominiums and other multifamily dwellings. We market our services to these customer segments through separate internal sales and installation branch networks.

        During the third quarter of 2002, we identified a new segment, Data Services, with the creation of Protection One Data Services, or PODS. As discussed in Item 8, Note 6 "Related Party Transactions," and in Item 8, Note 17 "Discontinued Operations," the operations of this segment were discontinued in the fourth quarter of 2002.

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Sale of Company; Restructuring

Sale of Stock by Westar

        On February 17, 2004, Westar Industries, Inc., a wholly owned subsidiary of Westar Energy, Inc., which we refer to collectively as Westar, sold approximately 86.8% of the issued and outstanding shares of the Company's common stock to POI Acquisition I, Inc., which is owned by POI Acquisition, LLC and Quadrangle Master Funding Ltd, affiliates of Quadrangle Group LLC, or Quadrangle. As part of the sale transaction, Westar Industries also assigned to Quadrangle its rights and obligations as the lender under an existing credit facility with us, which we now refer to as the Quadrangle credit facility. Quadrangle initially paid approximately $122.2 million to Westar as consideration for both the common stock and the Quadrangle credit facility, including accrued interest of $2.2 million, with approximately $1.7 million of the initial payment being consideration for the common stock. In addition, Westar received a right to additional consideration related to post-closing events, and on November 12, 2004, in connection with the Westar tax sharing settlement, which is described below, Quadrangle paid to Westar $32.5 million as additional consideration.

        The consummation of the sale of Westar's ownership interests in us ended our participation in the Westar consolidated tax group. We recorded a $285.9 million non-cash charge against our income in the first quarter of 2004 to establish a valuation allowance for deferred tax assets that we believed were not realizable because, except for amounts owed with respect to losses incurred prior to leaving the Westar consolidated tax group, we were no longer entitled to receive payments from Westar under the tax sharing agreement. Payments made to us by Westar under the tax sharing agreement had been an important source of liquidity for us.

Restructuring

        We have improved our capital structure through a debt-for-equity exchange with Quadrangle and a tax sharing settlement with Westar and Quadrangle and by extending the maturity of the Quadrangle credit facility to August 15, 2005. In connection with the restructuring, we have retired an aggregate of approximately $194.0 million of our indebtedness that was outstanding on September 30, 2004, of which $152.9 million was outstanding on December 31, 2004. We are currently engaged in discussions to repay or refinance senior debt that matures in August 2005, but there can be no assurance that we will successfully complete such restructuring.

        General.    On November 12, 2004, we received proceeds of $73.0 million pursuant to a tax sharing settlement agreement with Westar, which settlement was facilitated by our contemporaneous execution of an exchange agreement with Quadrangle that provided for the principal balance outstanding under the Quadrangle credit facility to be reduced by $120.0 million in exchange for the issuance to Quadrangle of 16 million shares of our common stock on a post-reverse stock split basis. Other aspects of the restructuring included a one-share-for-fifty-shares reverse stock split of our outstanding shares of common stock and the implementation of a management incentive plan. Other than the tax sharing settlement, the restructuring transactions closed in February 2005. Our December 31, 2004 balance sheet reflects the use of $14.5 million of the tax sharing settlement to reduce the Quadrangle credit facility and cancellation of $26.6 million of our 7³/8% senior unsecured notes received from Westar.

        Debt-for-Equity Exchange.    On November 12, 2004, the Company entered into an exchange agreement with Quadrangle to restructure the debt under the Quadrangle credit facility. Upon the closing of the exchange agreement on February 8, 2005, Quadrangle reduced the aggregate principal amount outstanding under the Quadrangle credit facility by $120.0 million in exchange for 16 million shares of our common stock on a post-reverse stock split basis. The newly issued shares, together with the shares currently owned by Quadrangle, resulted in Quadrangle's owning approximately 97.3% of our common stock as of the closing of the debt-for-equity exchange. In connection with the closing, we also amended our certificate of incorporation, implemented a management incentive plan and entered

23

into an amended and restated credit facility, stockholders agreement and registration rights agreement with Quadrangle.

        Amendment of Certificate of Incorporation.    In connection with the debt-for-equity exchange, following stockholder approval on February 8, 2005, we amended and restated our certificate of incorporation to provide for a one-share-for-fifty-shares reverse stock split of our outstanding shares of common stock, the elimination of our Series F and Series H preferred stock and an election not to be governed by Section 203 of the Delaware Corporation Law, which section potentially restricts transactions involving certain interested stockholders.

        Amendment of the Quadrangle Credit Facility.    Pursuant to the exchange agreement entered into in connection with the restructuring, Quadrangle agreed to extend the final maturity on the Quadrangle credit facility and to otherwise amend and restate the Quadrangle credit facility. The final maturity date under the amended and restated credit agreement is August 15, 2005, provided that the Company may elect to extend the maturity date to January 15, 2006 upon certification that no defaults or events of default then exist and payment of an extension fee of 1% of the total commitment outstanding on August 15, 2005.

        In addition, in connection with the restructuring, the Quadrangle credit facility was also amended and restated to include, among other things, the following:

•

interest rate increased to 700 basis points over the London Interbank Offered Rate (LIBOR), and a requirement, subject to certain restrictions, that all loans be in LIBOR, as opposed to base rate;



•

mandatory prepayment of 100% of net asset sale or debt proceeds or excess cash, if any, on a monthly basis, subject to our ability to maintain a minimum cash balance of $7.0 million plus (A) the aggregate amount of all accrued but unpaid interest under the Quadrangle credit facility, 8¹/8% senior subordinated notes, 13⁵/8% senior subordinated discount notes and 7³/8% senior unsecured notes as of the date of prepayment and (B) the aggregate amount of restricted cash (e.g., any cash necessary to secure letters of credit or maintain insurance);



•

assignment of loans or change of agent will not require consent of the Company, provided that any assignments must be in an amount not less than $1 million;



•

a one-time fee of $1.15 million, paid upon consummation of the debt-for-equity exchange in connection with the exchange and amendment of the Quadrangle credit facility; and



•

the removal of the letter of credit subfacility and elimination of the revolver feature, or the ability to reborrow a loan once repaid.

        Quadrangle also waived and released all defaults and events of default under the Quadrangle credit facility existing immediately prior to the consummation of the debt-for-equity exchange.

        Westar Tax Sharing Settlement.    On November 12, 2004, we entered into a tax sharing settlement with Westar and Quadrangle that, among other things, terminated the Westar tax sharing agreement, generally settled all of our claims with Westar relating to the tax sharing agreement and generally settled all claims between Quadrangle and Westar relating to the Westar sale transaction. Our execution of the exchange agreement with Quadrangle facilitated Quadrangle's and Westar's ability to agree upon the amount of, and accelerate the payment of, contingent payments that would be paid by Quadrangle to Westar under their purchase agreement and to otherwise settle claims between Quadrangle and Westar relating to the Westar sale transaction. Westar's ability to reach agreement with Quadrangle on these matters facilitated the settlement of our dispute with Westar over the tax sharing agreement and the delivery of the settlement payment from Westar to us on November 12, 2004.

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        In accordance with the Westar tax sharing settlement, Westar, among other things, paid us approximately $45.9 million in cash and transferred to us a portion of our 7³/8% senior unsecured notes, with aggregate principal and accrued interest of approximately $27.1 million, that had been held by Westar. We have cancelled the 7³/8% senior unsecured notes that we received pursuant to the Westar tax sharing settlement, resulting in an approximately $26.6 million reduction in the principal amount of our indebtedness. We used a portion of the proceeds from the Westar tax sharing settlement to make a $14.5 million principal payment and a $2.2 million interest payment on the Quadrangle credit facility, further reducing our outstanding indebtedness. Quadrangle paid $32.5 million to Westar as additional consideration relating to the Westar sale transaction.

        In addition to the $73.0 million that we received from Westar under the tax sharing settlement, we are also potentially entitled to certain contingent payments, depending on whether Westar claims and receives certain additional tax benefits in the future with respect to the February 17, 2004 sale transaction. While these potential contingent payments, if any, could be significant, we are unable to determine at this time whether Westar will claim any such benefits or, if Westar were to claim any such benefits, the amount of the benefits that Westar would claim or when or whether Westar would actually receive any such benefits. Due to this substantial uncertainty, we have not recorded any tax benefit with respect to any such potential contingent payments.

        The tax sharing settlement also provided for a mutual general release, except with respect to certain indemnification obligations pursuant to the purchase agreement between Quadrangle and Westar and certain alarm monitoring and other service agreements between the Company and Westar. In addition, Westar and POI Acquisition I, Inc. agreed to join in making Section 338(h)(10) elections under the Code. As part of the settlement, the parties mutually agreed to the purchase price allocation to be used for the election.

        Stockholders Agreement and Composition of Our Board of Directors.    In connection with the restructuring, we also entered into a stockholders agreement with Quadrangle. The stockholders agreement contains certain agreements with respect to our corporate governance following the restructuring, including, but not limited to, the composition of our board of directors. The parties to the stockholders agreement are generally required to use their reasonable best efforts to cause our board of directors to consist of five members immediately following the completion of the debt-for-equity exchange, comprised as follows:

•

three members designated by Quadrangle (two directors designated by POI Acquisition, LLC and one director designated by Quadrangle Master Funding Ltd);



•

our President and Chief Executive Officer, Richard Ginsburg; and



•

one independent director selected by a majority of the other directors.

        In connection with the closing of the debt-for-equity exchange, the size of our board of directors was increased to four directors, and David Tanner, Steven Rattner and Michael Weinstock, managing principals of Quadrangle, were appointed to the board. Ben M. Enis, a Company director since 1994, and James Q. Wilson, a Company director since 1996, resigned from the Board to accommodate these additions. Our President and Chief Executive Officer, Richard Ginsburg, continues to serve as a director. At our March 11, 2005 board meeting, Robert J. McGuire was appointed to our board as the independent director and was selected as chairman of the board's audit committee.

        In the event POI Acquisition, LLC or its permitted transferees owns less than 25% of our common shares issued and outstanding as of the restructuring, POI Acquisition, LLC shall have the right to designate one director instead of two. In the event either POI Acquisition, LLC or Quadrangle Master Funding Ltd owns less than 10% of our common shares issued and outstanding as of the restructuring, such entity will lose the ability to designate a member to our board of directors. If and for so long as POI Acquisition, LLC owns at least 40% of the outstanding shares of our common stock, it shall have

25

the right to elect to increase the size of the board by one director, which it shall be entitled to designate.

        The stockholders agreement also contemplates that we will amend our bylaws following the restructuring to prevent us from voluntarily filing for bankruptcy, merging or consolidating with another entity until February 8, 2007 or from selling all or substantially all of our assets without the written consent of Quadrangle Master Funding Ltd. The stockholders agreement also includes voting agreements, certain restrictions on the transfer of our common stock, drag-along rights in favor of POI Acquisition, LLC and tag-along rights in favor of Quadrangle Master Funding Ltd, all upon customary terms and subject to certain customary exceptions (including exceptions for certain transfers among affiliates). In addition, the stockholders agreement provides the Quadrangle parties with the right to participate on a proportional basis in any future equity issuance by the Company, except for issuances pursuant to registered public offerings, business combination transactions or officer, employee, director or consultant arrangements.

        Registration Rights Agreement.    As a condition to the consummation of the debt-for-equity exchange, we entered into a registration rights agreement with POI Acquisition, LLC and Quadrangle Master Funding Ltd. The registration rights agreement provides, among other things, that we will register, upon notice, shares of our common stock owned by such parties. Under the registration rights agreement, POI Acquisition, LLC is permitted up to four demand registrations and Quadrangle Master Funding Ltd is permitted up to two demand registrations, subject to certain conditions described in the agreement. POI Acquisition, LLC and Quadrangle Master Funding Ltd also received piggyback registration rights whereby they shall have the opportunity to register their securities pursuant to any registration statement we may file in the future, subject to certain conditions. We are also obligated to pay certain of their expenses pursuant to the registration of their securities under the registration rights agreement.

        Repurchase of Outstanding 13⁵/8% Senior Subordinated Discount Notes.    In connection with the restructuring and as required by the indenture governing our outstanding 13⁵/8% senior subordinated discount notes, we initiated a change of control repurchase offer at 101% for our approximately $29.9 million of outstanding 13⁵/8% senior subordinated discount notes due June 2005. We completed the repurchase of all of these notes on March 11, 2005.

Management Incentive Plan; Retention Bonuses

        As a condition to the completion of the debt-for-equity exchange, we implemented a management incentive plan that included an equity investment opportunity for our executive officers, stock appreciation rights (SARs) for our senior executive officers and a new stock option plan.

        Equity Investment.    As part of the management incentive plan offered in connection with the restructuring, certain members of management invested an aggregate of $1.75 million and received an aggregate of 233,334 shares of common stock on a post-reverse stock split basis. Messrs. Ginsburg, Nevin, Pefanis, Williams and Griffin invested $600,000, $500,000, $250,000, $225,000 and $50,000, respectively, and received 80,000, 66,667, 33,333, 30,000 and 6,667 shares of common stock, respectively. The shares were purchased pursuant to a management shareholders' agreement entered into among the Company, Quadrangle and the management stockholder. The agreement contains tag-along, drag-along, piggyback registration rights and other provisions.

        Stock Appreciation Rights Plan.    Pursuant to the management incentive plan, Messrs. Ginsburg, Nevin, Pefanis, and Williams received an aggregate of approximately 798,473, 532,981, 465,111 and 199,618 SARs, respectively, on a post-reverse stock split basis. The SARs vest and become payable upon the earlier of (1) a qualified sale as defined in the SAR Plan, which generally means Quadrangle's sale of at least 60% of its equity interest in us, provided that if the qualified sale is not a

26

permissible distribution event (as defined in the SAR Plan) the payment will be made, with interest, in connection with a subsequent permissible distribution event, and (2) February 8, 2011. The exercise price of the SARs is $4.50 and increases by 9% per annum, which we refer to as the fixed return, compounded annually, beginning on February 8, 2006. If Quadrangle sells less than 60% of its equity interest in us, the exercise price applicable to an equivalent percentage of management's SARs would be based on the fixed return through the date of such sale. Each SAR that vests and becomes payable in connection with a qualified sale will generally entitle the holder of a SAR to receive the difference between the exercise price and the lesser of (1) the value of the consideration paid for one share of stock in such qualified sale, or the fair market value of one share of stock if the qualified sale is not a sale to a third party and (2) $7.50, provided that if a SAR holder's right to receive stock is converted pursuant to the SAR Plan into a right to receive cash from a grantor trust that the Company may establish, the amount of cash payable will be credited with interest at 6% per annum, compounded annually, from the date such conversion is effective until the applicable payment date.

        2004 Stock Option Plan.    The 2004 Stock Option Plan became effective upon the consummation of the debt-for-equity exchange on February 8, 2005. Under the 2004 Stock Option Plan, certain executive officers and selected management employees were granted options, which are subject to vesting, exercise and delivery restriction described below, to purchase an aggregate of 1,792,947 shares of common stock, on a post-reverse stock split basis, including 621,035, 388,147, 388,147, 199,618 and 10,000 options that were granted to Messrs. Ginsburg, Nevin, Pefanis, Williams and Griffin, respectively. The options initially granted under the plan will vest ratably each month during the 48 months after the date of grant, subject to accelerated vesting, in the case of certain senior executive officers, under certain circumstances following a qualified sale. Under the option agreements applicable to the options granted, any shares of stock purchased through the exercise of options generally will be issued and delivered to the option holder, and any net payment that may be due to such holder in accordance with the plan, will be paid to such holder upon the earlier of: (1) specified dates following the occurrence of certain permissible distribution events (as defined in the SAR Plan) and (2) February 8, 2011, provided that if an option holder's right to receive stock is converted pursuant to the plan into a right to receive cash, the amount of cash payable will be credited with interest at 6% per annum, compounded annually, from the date such conversion is effective until the applicable payment date.

        Retention Bonus Program.    Pursuant to the terms of their new employment agreements, Messrs. Ginsburg, Nevin, Pefanis, Williams, and Griffin were each entitled to receive two retention bonuses. We accrued $1.9 million as general and administrative expense in 2004 and an additional $0.2 million of expense in January 2005 for these retention bonuses. The first retention bonus was paid on January 5, 2005, and the second was paid in February 2005 upon the completion of the debt-for-equity exchange. Each retention bonus payment was equal to a specified percentage of each executive officer's annual base salary at the following rates: Richard Ginsburg-75.0%, Darius G. Nevin-72.5%, Peter J. Pefanis-67.5%, Steve V. Williams-67.5%, and J. Eric Griffin-50.0%.

Revised Business Strategy

        During the period 1997-1999, like many of our peers, we pursued an aggressive growth strategy through acquisitions of alarm companies and accounts from dealers. Our strategy required access to large amounts capital and resulted in a significant increase in our indebtedness. Due to regulatory issues between Westar and the KCC and our negative cash flow after investing activities, Westar began restricting our access to new capital in late 1999. As a result, we reduced our investment for creating new accounts and began withdrawing from the dealer market. At about the same time, our attrition, the rate of loss of customers, began to increase due to service issues arising from incomplete integration of acquisitions, account quality, and poaching by several former dealers. Consequently, our revenues and profitability declined in 2001.

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        In mid-2001, a new management team was hired to turn around the business. Given our capital constrained environment, we focused on:

•

reducing direct costs of monitoring and related services and general and administrative costs;



•

reducing attrition; and



•

improving the efficiency of our customer acquisition activities.

        Our overall goal is to strengthen our leadership position in delivering security monitoring services and related installation services in principal markets across the United States in order to improve our returns on the capital we invest in creating and serving customers. Specific goals include (i) lowering attrition rates; (ii) reducing acquisition costs for each dollar of RMR created; (iii) increasing RMR additions, and (iv) increasing the efficiency of our monitoring and service activities. We plan to achieve these objectives by building upon our core strengths, including our national branch platform, our improving brand recognition, our internal sales force model and our highly skilled and experienced management team and workforce.

Other Significant Activities

Net Loss

        We incurred a net loss of $323.9 million in 2004. This net loss includes a net income tax charge of $239.6 million primarily related to establishing a valuation allowance for our deferred tax assets and an after-tax expense of $25.8 million relating to the change in control and subsequent restructuring efforts, including expense of $3.5 million related to employee retention plans. The remaining net loss of $58.4 million reflects a decline in revenue, substantial charges incurred by us for amortization of customer accounts and interest incurred on indebtedness.

Payment of Change in Control Expenses, Debt Restructuring Expenses and-Related Bonuses

        In order to retain the services of numerous employees who, as a result of Westar's interest in exploring strategic alternatives for divesting its ownership interest in us, may have felt uncertain about our future ownership, management and direction, we entered into retention and severance arrangements in 2003 with approximately 190 employees to provide incentives for these employees to remain with us through the sales process. On October 31, 2003, we paid approximately $5.1 million to those employees who fulfilled their obligation related to the retention agreement. In 2003, we also incurred approximately $1.1 million in legal fees relating to Westar's sale of its interest in us.

        Upon the change in control on February 17, 2004, an additional $11.0 million was paid to executive management. In addition, upon the change in control, fees and expenses of $3.5 million were paid to the financial advisor to our Special Committee of the Board of Directors. In addition, in February 2004, we recorded an expense of $1.6 million for director and officer insurance coverage that lapsed upon the change in control.

        Upon the change in control on February 17, 2004, we also retained Houlihan Lokey Howard & Zukin Capital as our financial advisor for discussions regarding the restructuring with Quadrangle and certain holders of our publicly-held debt. We agreed to pay financial advisory and legal fees incurred on behalf of the holders of our publicly-held debt, and in 2004, we expensed approximately $8.2 million for such fees. In February 2005, upon consummation of the restructuring, we paid an additional $6.4 million in fees to these professionals, including approximately $5.6 million in success fees.

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        In order to retain the services of senior management and selected key employees who may have felt uncertain about our future ownership and direction due to the discussions with our creditors regarding the restructuring of our indebtedness, our board of directors authorized senior management in June 2004 to implement a new key employee retention plan. The new retention plan applied to approximately 30 senior managers and selected key employees and provided incentives for such individuals to remain with the Company through the restructuring. These new retention agreements superseded and replaced previous retention agreements which provided additional severance upon a change in control. The aggregate payout under the plan was approximately $3.9 million of which approximately $3.5 million was accrued for and approximately $0.7 million was paid as of December 31, 2004. The remaining $3.2 million was paid in January and February of 2005.

Write Down of Deferred Tax Assets

        Prior to Westar's sale of its interest in us, we had a pro-rata tax sharing agreement with Westar Energy. Pursuant to this agreement, Westar Energy made payments to us for current tax benefits utilized by Westar Energy in its consolidated tax return. As a result of the February 17, 2004 sale transaction whereby Westar sold its investment in us, $285.9 million of our net deferred tax assets were not expected to be realizable, and we therefore recorded a non-cash charge against income in the first quarter of 2004 to establish a valuation allowance for these assets.

Trade Credit Availability

        In April 2004, we renegotiated credit terms with some of our security equipment vendors resulting in reduced availability of trade credit in exchange for prompt payment discounts. As a result of these changes in terms, trade payables have been reduced by about $2.8 million since December 31, 2003.

Bank Account Funding

        In June 2004, our bank notified us that, given our current financial condition, they would no longer be able to provide controlled disbursement services due to operational risks. The bank amended certain terms and conditions to segregate our disbursement accounts from the existing zero balance account structure, requiring us to fund the controlled disbursement accounts manually.

New Software Implemented

        During 2003, we began the process of replacing our accounting, human resources, inventory management, fixed asset and accounts payable software for our Protection One Monitoring segment. Implementation of new software is required as a result of Westar's disposition of its investment in us. The human resources software was placed in service on August 17, 2004 and the accounting, inventory management, fixed asset and accounts payable software was placed in service on January 1, 2005. We have invested approximately $2.6 million for the implementation of the new software as of December 31, 2004 with an expected total investment of approximately $2.7 million.

Push-Down Accounting

        We are currently evaluating whether we will be required to adopt a new basis of accounting as a result of Quadrangle's increased ownership following the debt-for-equity exchange. In accordance with SEC Staff Accounting Bulletin Topic 5J, we may be required to "push-down" Quadrangle's cost of acquiring its 97.3% interest in us to our assets and liabilities. If adopted, the "push-down" accounting adjustments will not impact our cash flows. The primary impact of the adjustments will be to the carrying values of certain long-term assets and liabilities as well as to shareholders' equity.

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Securities and Exchange Commission Inquiry

        The Staff of the Securities and Exchange Commission has inquired into the practices of Westar with respect to the restatement of its first and second quarter 2002 financial statements, announced in November 2002, and the related announcement that the 2000 and 2001 financial statements of Protection One and Westar would be re-audited. Since that time, we have received no further communications from the SEC regarding this matter and have no information that would indicate that the SEC Staff is actively pursuing its inquiry at this time. We have cooperated and intend to cooperate further with the Staff in connection with any additional information it may request.

Industry Metrics

Recurring Monthly Revenue

        At various times during each 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. Our computation of recurring monthly revenue, or RMR, may not be comparable to other similarly titled measures of other companies, and recurring monthly revenue should not be viewed by investors as an alternative to actual monthly revenue, as determined in accordance with generally accepted accounting principles.

        We had approximately $19.9 million, $20.1 million and $21.0 million of RMR revenue as of December 31, 2004, 2003, and 2002 respectively. The slowing rate of RMR decrease is a result of a reduction in the rate of decline of our customer base. Our customer base reflected a net loss of 18,207 customers during 2004 compared to a net loss of 25,378 customers during 2003 and a net loss of 59,625 customers during 2002. We expect we will continue to lose more accounts than we add until the efforts we are making to acquire new accounts and to reduce our rate of attrition become more successful than they have been to date. Net losses of customer accounts materially and adversely affect our business, financial condition and results of operations.

        We believe the presentation of RMR is useful to investors because the measure is used by investors and lenders to value companies such as ours with recurring revenue streams. Management monitors RMR, among other things, to evaluate our ongoing performance. The table below reconciles our RMR to revenues reflected on our consolidated statements of operations.

(a)

Revenues that are not pursuant to monthly contractual billings.

        Our RMR includes amounts billable to customers with past due balances that we believe are collectible. 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

30

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.

        The following table identifies RMR by segment and in total for the years indicated.

(a)

Beginning RMR balance includes $850, $806 and $786 wholesale customer RMR for 2004, 2003 and 2002, respectively, in both the Protection One Monitoring segment and in total. Our Network Multifamily segment RMR does not contain wholesale customers.

        The table below reconciles our recurring monthly revenue by segment to revenues reflected in our segment results of operations.

(a)

Revenues that are not pursuant to monthly contractual billings.

Monitoring and Related Services Margin

        In each of the last three years, monitoring and related service revenues comprised over 92% of our total revenues. As a result of our declining customer base, these revenues have been decreasing, as have the associated cost of monitoring and related services revenues. The rate of revenue decline has slowed, however, while the gross margin as a percentage of revenues has been increasing. The table

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below identifies the monitoring and related services gross margin and gross margin percent for the presented periods.

Attrition

        Customer 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 the adjustments described below, 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. Adjustments to lost accounts for purchase holdbacks have been decreasing because we have not been purchasing accounts in the types of transactions that create holdbacks, and in 2004, no adjustments for holdbacks were necessary. We do not reduce the gross accounts lost during a period by "move in" accounts, which are accounts where a new customer moves into the premises equipped with the Company's security system and vacated by a prior customer, or "competitive takeover" accounts, which are accounts where the owner of a premise 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 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.

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        Customer attrition by business segment for the years ended December 31, 2004, 2003 and 2002 is summarized below:

(a)

Does not include the Canguard operation, which we sold in July 2002.

        Attrition decreased in our Protection One Monitoring segment in 2004 compared to 2003 for a variety of reasons, including:

•

a focus by our sales force on obtaining high quality customers;



•

an increase in the investment required by customers to purchase our systems;



•

an emphasis on customer service and attrition reduction by branch and monitoring center personnel;



•

the passage of time from the end of the dealer program; and



•

legal action taken against competitors who illegally solicit our customers.

        Attrition increased slightly in the Network Multifamily segment primarily due to the cancellation for nonpayment of one large developer's properties.

        The table below shows the change in our total company customer base including customer additions and attritions from 2004 to 2002.

(1)

Excludes customer base from our Canadian operations which were sold in June 2002.

Sources of Revenue

        For both Protection One Monitoring and Network Multifamily, revenue is primarily generated from providing monitoring services. Monitoring revenue for residential, commercial and multifamily segments is generated based on contracts that we enter into with our customers. The typical initial contract term is three to five years for Protection One Monitoring customers and five to ten years for Network Multifamily customers, with automatic renewal provisions (the renewal terms are longer in the case of Network Multifamily). Many of our residential and commercial contracts require us to provide additional services, such as maintenance services, generating incremental revenue for us. Other revenue

33

consists primarily of sales of burglar alarms, closed circuit television systems, fire alarms and card access control systems to commercial customers.

Costs of Revenue; Expenses

        Monitoring and related services costs generally relate to the cost of providing monitoring service and include the costs of monitoring, billing, customer service and field operations. Other costs of revenues consist primarily of equipment and labor charges to install alarm systems, closed circuit television systems, fire alarms and card access control systems sold to our customers.

        Selling expenses include employee compensation, benefits and recruiting for our internal sales force, advertising, customer signage, marketing materials, trade show expense, and amortization of previously deferred selling costs. General and administrative expenses include lease expenses on office space, computers and other office equipment, telecommunications, costs of debt collection efforts, advertising, employee compensation and benefits, professional service fees and other miscellaneous expenses. Amortization of intangibles and depreciation includes amortization of purchased customer accounts as well as depreciation on property and equipment.

Critical Accounting Policies

        Our discussion and analysis of results of operations and financial condition are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We evaluate our estimates on an on-going basis, including those related to bad debts, inventories, investments, customer accounts, goodwill, intangible assets, income taxes and contingencies and litigation. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Revenue and Expense Recognition

        Revenues are recognized when security services are provided. System installation revenues, sales revenues on equipment upgrades and direct and incremental costs of installations and sales are deferred for residential customers with monitoring service contracts. For commercial customers and our national account customers, revenue recognition is dependent upon each specific customer contract. In instances when we pass title to a system unaccompanied by a service agreement or we pass title at a price that we believe is unaffected by an accompanying but undelivered service, we recognize revenues and costs in the period incurred. In cases where we retain title to the system or we price the system lower than we otherwise would because of an accompanying service agreement, we defer and amortize revenues and direct costs.

        Deferred system installation revenues for monitoring systems and upgrades to existing monitored systems are recognized over the estimated life of the customer utilizing an accelerated method for our residential and commercial customers and a straight-line method for our Network Multifamily customers. Deferred costs in excess of deferred revenues are recognized utilizing a straight-line method over the initial contract term, typically two to three years for Protection One Monitoring and five to ten years for Network Multifamily systems. To the extent deferred costs are less than deferred revenues, such costs are recognized over the estimated life of the customer. Therefore, a change in the estimated life of a customer pool would result in a change in the amount of previously deferred revenue that would be amortized to income but would also result in a similar change in the amount of previously

34

deferred costs that are amortized to expense. For example, if we had determined as of January 1, 2004 that the estimated life of each pool should be shortened by one year, the amount of previously deferred revenue amortized to revenue in 2004 would have increased by approximately $0.7 million. Similarly, the amount of previously deferred cost of revenues would have increased by $0.7 million resulting in no net impact to gross profit.

        The table below reflects the impact of our accounting policy on the respective line items of the Statement of Operations for the years ended December 31, 2004, 2003 and 2002. The "Total amount incurred" line represents the current amount of billings that were made and the current costs that were incurred for the period. We then subtract the deferral amount and add back the amortization of previous deferral amounts to determine the amount we report in the Statement of Operations.

Valuation of Customer Accounts and Goodwill

        Customer accounts are stated at cost, net of accumulated amortization. Goodwill represents the excess of the purchase price over the fair value of net assets acquired by us. Goodwill is tested for impairment on at least an annual basis or as circumstances warrant. Customer accounts are tested on a periodic basis or as circumstances warrant. For purposes of this impairment testing, goodwill is considered to be directly related to the acquired customer accounts. Factors we consider important that could trigger an impairment review include the following:

•

high levels of customer attrition;



•

continuing recurring losses above our expectations; and



•

adverse regulatory rulings.

        An impairment test of customer accounts would have to be performed when the undiscounted expected future operating cash flows by asset group, which consists primarily of capitalized customer accounts and related goodwill, is less than the carrying value of that asset group. An impairment would

35

be recognized if the fair value of the customer accounts is less than the net book value of the customer accounts.

        We have $41.8 million of goodwill at December 31, 2004 associated with our Network Multifamily reporting unit. We established July 1 as our annual impairment testing date for goodwill and completed our annual impairment testing during the third quarter of 2004. We determined that no additional impairment of goodwill was required as of July 1, 2004. Our Protection One Monitoring segment has no goodwill and, therefore, did not require testing as of July 1, 2004. See "—Impairment Charges" below for a discussion of the impairment recorded on these assets in the first quarter of 2002 pursuant to the adoption of new accounting standards. No impairment charge was recorded in 2003 or 2004.

Customer Account Amortization

        The choice of an amortization life and method is based on our estimates and judgments about the amounts and timing of expected future revenues from customer accounts and average customer account life. Amortization methods and selected periods were determined because, in our opinion, they would adequately match amortization cost with anticipated revenue. We periodically use an independent appraisal firm to perform lifing studies on our customer accounts to assist us in determining appropriate lives of our customer accounts. These reviews are performed specifically to evaluate our historic amortization policy in light of the inherent declining revenue curve over the life of a pool of customer accounts, and our historical attrition experience. We have identified the following three distinct pools of customer accounts, each of which has distinct attributes that effect differing attrition characteristics. For the Protection One Monitoring pool, the results of the lifing studies indicated to us that we can expect attrition to be greatest in years one through five of asset life and that a declining balance (accelerated) method would therefore best match the future amortization cost with the estimate revenue stream from these customer pools. We switch from the declining balance method to the straight-line method in the year the straight-line method results in greater amortization expense.

        Our amortization rates consider the average estimated remaining life and historical and projected attrition rates. The amortization method for each customer pool is as follows:

(a)

The Westinghouse customer pool is fully amortized as of December 31, 2004.

        The results of a lifing study performed by a third party appraisal firm in the first quarter of 2002 showed a deterioration in the average remaining life of customer accounts. The report showed our Protection One Monitoring customer pool can expect a declining revenue stream over the next 30 years with an estimated average remaining life of nine years. Our Network Multifamily pool can expect a declining revenue stream over the next 30 years with an estimated average remaining life of ten years. Taking into account the results of the lifing study and the inherent expected declining revenue streams for Protection One Monitoring and Network Multifamily, in particular during the first five years, we adjusted the amortization of customer accounts for our Protection One Monitoring and Network Multifamily customer pools to better match the rate and period of amortization expense with the expected decline in revenues.

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        In the first quarter of 2002, we changed the amortization rate for our Protection One Monitoring pool to a 10-year 135% declining balance method from a 10-year 130% declining balance method. The change to this 10 year 135% accelerated method provides for a better matching to the declining revenue stream, in particular during the first five years, when the year over year decline is greatest and a significant portion of the revenue stream is expected to be received. For the Network Multifamily pool we will continue to amortize on a straight-line basis, utilizing a shorter nine year life. The change to the nine year life straight-line method provides for a better matching to the declining revenue stream, in particular during the first five years, when the decline is greatest and a significant portion of the revenue stream is expected to be received. We accounted for these amortization changes prospectively beginning January 1, 2002, as a change in estimate. These changes in estimates increased amortization expense for the year ended December 31, 2002 on a pre-tax basis by approximately $1.3 million and on an after tax basis by approximately $0.8 million. The change in estimate had no significant impact on reported earnings per share.

        We recorded approximately $68.6 million of customer account amortization in each of the years 2004 and 2003 and $68.9 million in 2002. This amount would change if we changed the estimated life or amortization rate for customer accounts. For example, if we had determined that the estimated remaining life as of January 1, 2004 of each customer pool should be reduced by one year, the amortization expense would have been approximately $84.6 million in 2004.

Income Taxes

        As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. Significant management judgment is required in determining our provision for income taxes and our deferred tax assets and liabilities. This process involves us estimating our actual current tax exposure together with assessing temporary differences resulting from differing treatment of items, such as depreciation and amortization, for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheet. We must then assess the likelihood that our deferred tax assets will be recovered. To the extent we believe that recovery is not likely, we must establish a valuation allowance.

        We previously had a tax sharing agreement with Westar, pursuant to which Westar made payments to us for current tax benefits utilized by Westar in its consolidated tax return irrespective of whether we would realize these current benefits on a separate return basis. As of December 31, 2003, other than for net operating loss carryforwards, no valuation allowance had been established because the tax sharing agreement utilized a parent company down approach in the allocation of income tax expense among members of the consolidated tax group and, consistent with that approach, no valuation allowance had been allocated to us.

        Due to Westar's sale of its interest in us in the first quarter of 2004, except for amounts owed with respect to losses we incurred prior to leaving the Westar consolidated tax group, we are no longer entitled to receive tax sharing payments from Westar. We determined that most of our deferred tax assets would not be realizable, and we recorded a non-cash charge to income in the first quarter of 2004 in the approximate amount of $285.9 million to establish a valuation allowance equal to the amount of net deferred tax assets determined not to be realizable. See "—Liquidity and Capital Resources—Tax Matters" and "—Sale of Company; Restructuring—Westar Tax Sharing Settlement."

Impairment Charges

        Effective January 1, 2002, we adopted SFAS No. 142, "Accounting for Goodwill and Other Intangible Assets," and SFAS No. 144, "Accounting for the Impairment and Disposal of Long-Lived Assets." SFAS No. 142 established new standards for accounting for goodwill. To implement the

37

standards, we engaged an independent appraisal firm to help us estimate the fair values of goodwill and customer accounts. Based on this analysis, we recorded a net charge of approximately $765.2 million in the first quarter of 2002. The charge is detailed as follows:

        Another impairment test was completed by us as of July 1, 2002 (the date selected for our annual impairment test), with the independent appraisal firm providing the valuation of the estimated fair value of our reporting units, and no impairment was indicated. After regulatory actions (see Item 8, Note 6 "Related Party Transactions"), including Kansas Corporation Commission Order No. 55, which prompted Westar to advise us that it intended to dispose of its investment in us, we retained the independent appraisal firm to perform an additional valuation of our reporting units, so we could perform an impairment test as of December 31, 2002. The order limited the amount of capital Westar Energy could provide to us which increased our risk profile. Therefore, we reevaluated our corporate forecast, reducing the amount of capital invested over our forecast horizon and lowered our base monthly recurring revenue to incorporate actual 2002 results, which resulted in a lower valuation than our July 1, 2002 valuation. In December 2002, we recorded an additional $90.7 million impairment charge, net of $13.3 million tax, to reflect the impairment of all remaining goodwill of our Protection One Monitoring segment.

        The first quarter of 2002 impairment charge for goodwill is reflected in the consolidated statements of operations as a cumulative effect of a change in accounting principle. The impairment charge for customer accounts and the subsequent impairment charge for goodwill are reflected in the consolidated statements of operations as an operating cost. These impairment charges reduced the recorded value of these assets to their estimated fair values at January 1, 2002 and December 31, 2002.

        A deferred tax asset in the amount of $190.7 million was recorded in the first quarter of 2002 for the tax benefit estimated above and an additional deferred tax benefit of $13.3 million was recorded with the fourth quarter impairment charge. However, as a result of the February 17, 2004 sale transaction whereby Westar sold its investment in us, $285.9 million of our net deferred tax assets were not expected to be realizable, and we therefore recorded a non-cash charge against income in the first quarter of 2004 to establish a valuation allowance for these assets.

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Results of Operations

Protection One Consolidated

        For the years ended December 31, 2004, 2003 and 2002, we incurred consolidated net losses of $323.9 million, $34.4 million and $880.9 million, respectively, or losses per share of common stock (on a post-reverse split basis) of $164.78, $17.53 and $449.09, respectively. The loss in 2004 includes net income tax expense of $239.6 million primarily due to a valuation allowance established on our deferred tax assets and also includes $24.4 million in change in control and debt restructuring transaction-related costs and $3.5 million in retention bonuses.

        Revenues have declined since 1999 primarily due to a decreasing customer base. However, the rate of decline has decreased from 12.7% in 2002 to 4.6% in 2003 to only 2.8% in 2004, and our monitoring and related services margin as a percentage of related revenues has improved from 71.0% in 2002 to 71.4% in 2003 to 71.9% in 2004. Selling costs increased $2.0 million in 2004 due to our continued focus on improving our ability to generate new customers through our internal sales force, while general and administrative expenses decreased $6.4 million primarily due to decreased insurance premiums and a reduction in retention bonus expense, which was $5.0 million in 2003 compared to $3.5 million in 2004. Interest expense in 2004 increased $4.3 million primarily due to increasing interest rates of certain market indices that are used to determine the interest rate on the Quadrangle credit facility.

Protection One Monitoring

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