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

FORM 10-K

For the fiscal year ended December 31, 2000

For the transition period from                to                

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

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

(None)
(Title of Class)

   Indicate by check mark whether each of the registrants (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that such registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes /x/ No / /

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

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

   As of March 27, 2001, Protection One, Inc. had 106,640,806 shares of Common Stock outstanding, par value $0.01 per share. As of such date, Protection One Alarm Monitoring, Inc. had outstanding 110 shares of Common Stock, par value $0.10 per share, all of which shares were owned by Protection One, Inc. Protection One Alarm Monitoring, Inc. meets the conditions set forth in General Instructions I (1)(a) and (b) for Form 10-K and is therefore filing this form with the reduced disclosure format set forth therein.

DOCUMENTS INCORPORATED BY REFERENCE:

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

TABLE OF CONTENTS

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PART I

FORWARD-LOOKING STATEMENTS

    This Annual Report on Form 10-K (this "Report") and the materials incorporated by reference herein include "forward-looking statements" intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. These forward-looking statements generally can be identified as such because the context of the statement includes words such as we "believe," "expect," "anticipate" or other words of similar import. Similarly, statements herein that describe our objectives, plans or goals also are forward-looking statements. All such forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. Important factors that could cause actual results to differ materially from our expectations include, among others, the factors discussed in the section entitled "Risk Factors." The forward-looking statements included herein are made only as of the date of this Report and we undertake no obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances.

ITEM 1. BUSINESS

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

Overview

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

    Our company is divided into two business segments:

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

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

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Operations

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

Centralized Monitoring, Customer Service and Customer Solicitation

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

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

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

(1)

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

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

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

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

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

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

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

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

•

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



•

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

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•

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

Branch Operations

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

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

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

Sales and Marketing

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

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

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

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

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

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

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

Acquisition Opportunities

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

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

Attrition

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

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

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

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

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

*

Does not include Europe segment.

Competition

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

•

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



•

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



•

Protection One;



•

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



•

Honeywell Inc.

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

Intellectual Property

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

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Regulatory Matters

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

•

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



•

imposing fines on alarm customers for false alarms;



•

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



•

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



•

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

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

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

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

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

Risk Management

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

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

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

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

Employees

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

RISK FACTORS

Cautionary Statements Regarding Future Results of Operations

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

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

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

•

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



•

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



•

interest incurred on indebtedness;



•

other charges required to manage operations; and



•

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

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

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

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

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

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

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

The impact of class action litigation may be material.

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

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

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

We may experience difficulty integrating businesses we acquire.

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

•

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

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•

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



•

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



•

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



•

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

We will need additional funding to finance our future growth.

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

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

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

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

    Additionally, please be aware that:

•

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



•

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

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

•

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



•

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



•

our ability to compete against other less leveraged companies.

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

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We will need to refinance our Senior Credit Facility.

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

Our debt agreements impose operational restrictions on us.

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

•

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



•

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



•

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

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

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

We lose some of our customers over time.

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

•

relocation of customers;



•

adverse financial and economic conditions;



•

competition from other alarm service companies; and



•

customer service and operational difficulties with integration of acquired customers.

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

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

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

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

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

Our customer acquisition strategies may not be successful.

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

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

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

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

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Westar Industries is our principal stockholder and senior lender.

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

We obtain administrative services from Western Resources.

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

We have deferred tax assets we may not utilize.

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

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ITEM 2: PROPERTIES

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

(1)

In March 2001, this facility was closed.

ITEM 3: LEGAL PROCEEDINGS

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

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

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

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

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

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

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

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

ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS

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

PART II

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

Market Price Information

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

Dividend Information

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

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

Number of Stockholders

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

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ITEM 6. SELECTED FINANCIAL DATA

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

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

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

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

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SELECTED CONSOLIDATED FINANCIAL DATA