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

FORM 10-K

For the fiscal year ended December 31, 2001

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 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

        The aggregate market value of common stock of Protection One, Inc. held by nonaffiliates on March 15, 2002 (based on the last sale price of such shares on the New York Stock Exchange) was $29,566,175.

        As of March 15, 2002, Protection One, Inc. had 97,901,367 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 23, 2002.

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. 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 liquidity and sources of funding and our capital expenditures. 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 approximately 1.2 million customers as of December 31, 2001. 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, 2001, our customer base composition was as follows:

        Our company is divided into two business segments:

        Protection One North America ("North America") generated approximately $304.5 million, or 89.3%, of our revenues in 2001 and is comprised of Protection One Alarm Monitoring, our core alarm monitoring business, and our wholesale monitoring business, which provides alarm monitoring services to independent alarm companies.

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        Network Multifamily ("Multifamily") generated approximately $36.5 million, or 10.7%, of our revenues in 2001 and is comprised of our alarm monitoring business servicing apartments, condominiums and other multifamily dwellings.

        Our strategy is to improve returns on invested capital by realizing economies of scale from increasing customer density in the largest urban markets in North America. We plan to accomplish this goal by: (i) retaining our customers by providing superior customer service from our monitoring facilities and our branches; (ii) using our national presence, strategic alliances, and strong local operations to persuade the most desirable residential and commercial prospects to enter into long term agreements with us on terms that permit us to achieve appropriate returns on capital; and (iii) on a limited basis in 2002 or 2003, acquiring alarm companies and portfolios of alarm accounts pursuant to transactions that meet our strategic and financial requirements.

Significant Business Developments

        Management Team.    In 2001, important changes were made in our management team with the addition of four experienced executives with extensive industry experience. Richard Ginsburg joined us as President and Chief Executive Officer in April 2001. In July and August 2001, we added Mack Sands as Executive Vice President and Chief Operating Officer, Darius G. Nevin as Executive Vice President and Chief Financial Officer, and Peter J. Pefanis as Senior Vice President. Additional changes were made throughout the remainder of our management ranks to strengthen our management team. See "Item 10—Directors and Executive Officers of the Registrants."

        Operational Efficiencies.    Our management team made improvements in operational efficiencies one of our key priorities in 2001. We consolidated our monitoring facilities in Hagerstown, Maryland, Beaverton, Oregon, and Irving, Texas, into our monitoring facility in Wichita, Kansas, which currently monitors approximately 650,000 accounts. In January 2002, we completed the installation of our common technology platform for customer service, monitoring, billing and collection functions in all of our residential monitoring facilities outside Canada. In addition, we discontinued our National Accounts and Patrol divisions, sold certain accounts that were not part of our core business, and consolidated additional operational and administrative facilities. These consolidations and other cost reduction initiatives resulted in a total reduction of approximately 600 positions in our work force. See "Centralized Monitoring, Common Technology Platform and Customer Service."

        Attrition and Customer Creation.    In 2001, we had a net loss of 196,357 customers in our customer base. This decline resulted from attrition, the decision to add new customers at reasonable costs through our internal sales force and to focus on operational efficiencies, the disposition of certain accounts, and adjustments related to the conversion of our customer base to our common technology platform. Our customer acquisition strategy for our North America segment relies primarily on our internal sales force, which generated 43,742 accounts in 2001 compared to 27,259 accounts in 2000, and our marketing alliance with BellSouth Telecommunications, Inc. See "Sales and Marketing," "Attrition."

        Impairment Charge.    In the first quarter of 2002, we will record an impairment charge to write-down goodwill and customer accounts to their estimated fair values. The amount of this charge net of tax will be approximately $659.3 million, of which approximately $441.5 million will be related to goodwill and approximately $217.8 million will be related to customer accounts. For further information, see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation—Impairment Charge Pursuant to New Accounting Rules" and Note 16 of the "Notes to Consolidated Financial Statements."

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Operations

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

        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. 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 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 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.

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

(1)

In 2002, Multifamily will move their administrative headquarters and monitoring operations to the Irving, Texas facility formerly utilized by our North America segment for monitoring residential and commercial customers.

        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 on 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 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 subscriber, or taking other appropriate action, such as dispatching alarm response personnel to the customer's premises where this service is available.

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        All of our primary monitoring facilities in North America are listed by Underwriters Laboratories, Inc. ("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.

        Common Technology Platform.    In recognition of the strategic importance of serving all our customers on a common database running on an industry standard monitoring automation application, in 2000 we adopted MAS®, from Monitored Automation Systems, of Irvine, California, as the technology platform for our domestic monitoring facilities. MAS® combines customer service, monitoring, billing and collection functions into a single system and is used, to varying extents, by other large companies in the security monitoring industry including ADT Security Services and Brink's (see Competition, below).

        In 2001, our Wichita and Irving monitoring facilities completed their conversions to MAS®^. With the conversion to MAS® of the Portland, Maine facility in January 2002, we serve approximately 94% of our North America residential and commercial customer base by utilizing one common database. We plan to dedicate the Portland monitoring facility to monitoring our new commercial customers whose requirements often exceed those of typical residential customers. We also completed the installation of a new financial system which we began using in January 2001 that can be accessed in all of our locations.

        The conversion to MAS® enabled us to consolidate the number of monitoring facilities we operate, resulting in operational efficiencies and cost savings. During 2001 and early 2002, we completed a series of monitoring facility conversions to MAS and consolidations of monitoring facilities including:

        Wholesale Monitoring.    Through our monitoring facilities 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.    Customer care personnel answer non-emergency telephone calls typically regarding service, billing and alarm activation issues. Until late 2001, all customer care personnel were located exclusively in our monitoring facilities. During the last quarter of 2001, we began shifting some business-hours customer care functions to our branches, including responding to routine billing and service inquiries. In 2002, we expect to complete the shifting of most business-hours customer care functions to 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 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

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Wichita to address questions that 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 customers an array of enhanced security services, including extended service protection, expanded monitoring features, and telephone line security. 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:

•

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.



•

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 60 service branches in North America from which we provide field repair, customer care, alarm response and sales services, and 7 satellite locations from which we provide field repair services. During the last quarter of 2001, we began shifting some business-hours customer care functions to our branches, including responding to routine billing and service inquiries. In 2002, we expect to complete the shifting of most business-hours customer care functions to our branches by expanding the range of functions provided at our branches to include billing set-up and collections. Our nationwide network of branches operate in some of the largest cities in the United States and Canada and play 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 North America 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. The number of accounts being purchased through our dealer program decreased from 21,817 in 2000, to 7,501 in 2001. We also discontinued our National Accounts program in 2001.

        Our internal sales program 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 early 2002, we introduced modest base compensation. This program utilizes our existing branch infrastructure in approximately 60 markets. The internal sales program generated 43,742 accounts and 27,259 accounts in 2001 and 2000, respectively.

        In late 2001, we entered into a marketing alliance with BellSouth Telecommunications, Inc. ("BellSouth") to offer monitored security services to the residential, single family market in the nine-state BellSouth region. Under this agreement, we operate as "BellSouth Security Systems from

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Protection One" from many of our branches in the nine-state BellSouth region. BellSouth provides us with leads of new owners of single family residences in its territory and of transfers of existing BellSouth customers within its territory. We follow up on the leads and attempt to persuade them to become customers of our monitored security services. We pay BellSouth an upfront royalty for each new contract and a recurring royalty based on a percentage of recurring charges.

        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.

        We operate a dedicated telesales center ("Telesales") in Wichita to address questions that customers or potential customers have about our services, as well as to perform outbound sales and marketing activities. Outbound Telesales is extensively involved in supporting the alliance with BellSouth by calling the leads provided by BellSouth. Telesales also provides quality control follow-up calls to customers for whom we recently provided installation or maintenance services.

        Our Multifamily segment utilizes a salaried and commissioned sales force to produce new accounts. 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 a 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.

        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. We expect to re-enter the market for acquiring alarm account portfolios or alarm companies on a limited basis at some time during 2002 or 2003.

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 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. 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 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.

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        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 an 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, 2001, 2000 and 1999 is summarized below:

(a)

Does not include the Europe segment which we sold in February 2000.

        Attrition increased in our North America Segment in 2001 compared to 2000 for a variety of reasons including:

•

Deteriorating economic conditions which left some customers unable to afford our services.



•

The fourth quarter of 2001 marked the two-year anniversary of the down-sizing of our dealer program. Many customers generated by the dealer program signed two-year agreements and elected not to renew their monitoring agreements with us at the end of their initial contract term.



•

Some former dealers from whom we purchased accounts within the last three to four years entered into funding programs with other sponsors and used their knowledge of our customer base to encourage our customers to cancel service with us.



•

Efforts to identify active customers who had an accounts receivable balance greater than 120 days past due. Such customers were treated as if they were disconnected for purposes of calculating attrition.

Competition

        The security alarm industry is highly competitive. In North America, there are only four 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 total annual revenues in 2000, we believe the top four alarm companies in North America are:

•

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



•

Protection One, Inc.



•

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



•

Honeywell Inc.

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        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 our ability to offer integrated alarm system installation, monitoring, repair and enhanced services, our reputation for reliable equipment and services, our affinity alliance with BellSouth, and our prominent presence in the areas surrounding our branch offices.

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. 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.

        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

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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.

        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, 2001, we had approximately 2,800 full-time employees.

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 $86.0 million in 2001 (a net loss of $120.5 million excluding extraordinary gains of $34.5 million, net of tax), $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), and $17.8 million in 1998. These losses reflect, among other factors:

•

our customer base and revenues have declined since 1999;



•

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



•

interest incurred on indebtedness;



•

other charges required to manage operations; and



•

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

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        We will continue to incur substantial interest expense unless we significantly reduce our debt which is unlikely given our expected cash flow. We do not expect to attain profitable operations in the foreseeable future.

We will record an impairment charge in the first quarter of 2002. Additional charges may be recorded in the future.

        In the first quarter of 2002, we will record an impairment charge to write-down goodwill and customer accounts to their estimated fair values. The amount of this charge net of tax will be approximately $659.3 million, of which approximately $441.5 million will be related to goodwill and approximately $217.8 million will be related to customer accounts. For further information on the impairment charge, see Note 16 of the "Notes to Consolidated Financial Statements." After this write-down is recorded, we will still have material amounts of goodwill and customer accounts recorded on our balance sheet. The remaining amount of goodwill will be required to be tested annually for impairment. Customer accounts will be required to be tested upon certain triggering events, which include recurring operating losses, adverse business conditions, declines in market values and other matters that negatively impact value. If we fail future impairment tests for either goodwill or customer accounts, we will be required to recognize additional impairment charges on these assets in the future.

The impact of class action litigation may be material.

        We, Protection One Alarm Monitoring, Westar Industries, Inc. ("Westar Industries"), Western Resources, Inc. ("Western Resources") and certain of our present and former officers and directors 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 our shareholders. The plaintiffs are seeking unspecified compensatory damages based on allegations that various statements concerning our 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 "Item 3. Legal Proceedings".

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. We expect to re-enter the market for acquiring alarm account portfolios or alarm companies on a limited basis at some time during 2002 or 2003. We compete with major companies, some of which have greater financial resources than we do, or may be willing to offer higher prices than we might be 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.

        We expect to reenter the acquisition market on a limited basis in 2002 or 2003. An important aspect of an 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;



•

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



•

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

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•

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.

        Prior to 2000, our purchases of customer accounts and acquisitions of portfolios of customer accounts and new lines of business required cash in amounts that exceeded the net cash provided by our operating activities. In 2001, our principal focus was on improving our service, reducing attrition of current customers and integrating and building infrastructure. As a result, our cash requirements were less in 2001 than those in 2000 and 1999. In 2002, while continuing our focus on customer care to lower attrition, we intend to pursue customer account growth through our internal sales program and, eventually and on a limited basis, through acquisitions. Should we resume an acquisition program in 2002, we expect that our cash requirements will exceed cash flows from operations. Under this circumstance, funding from additional borrowings under our Senior Credit Facility or through the sale of assets would be required. As of March 25, 2002, we had $34.5 million of remaining availability under our $180 million Senior Credit Facility. 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 our ability to incur additional indebtedness that we might need in the future in order to fund acquisitions of subscriber accounts.

        Additionally, please be aware that:

•

As of December 31, 2001, we had outstanding total indebtedness of $584.8 million, of which $584.1 million was long-term indebtedness.



•

As of December 31, 2001, we had $137.5 million of debt outstanding under our $155 million Senior Credit Facility bearing interest at a weighted average floating interest rate before fees of 5.8%. As of March 15, 2002 we had $145.5 million of debt outstanding under our $180 million Senior Credit Facility bearing interest at a weighted average floating interest rate before fees of 5.6%. Our Senior Credit Facility is provided by Westar Industries, Inc., our 87% parent, and matures on January 3, 2003.



•

Our Convertible Senior Subordinated Notes, which represent $23.8 million of our long-term indebtedness, mature in September 2003.

        Our present high level of indebtedness could have negative consequences on, without limitation:

•

our ability to obtain additional financing in the future for working capital, acquisitions or creation 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.

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

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 and asset sales will be enough to meet our expenses and interest obligations through at least January 1, 2003. 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. The Kansas Corporation Commission has issued an order prohibiting Western Resources from borrowing to make loans or capital contributions to Westar Industries. This order limits the resources available to Westar Industries for funding its obligations under the Senior Credit Facility. Western Resources has filed for approval a financial plan with the Kansas Corporation Commission which provides that Westar Industries will use the funds from some of its other interests in a manner other than the funding of such obligations. The Company would face significant liquidity issues if Westar Industries was unable to fund its obligations under the Senior Credit Facility. We were unsuccessful in refinancing our Senior Credit Facility with unaffiliated third parties on satisfactory terms in 2000 and 2001. 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 4.0 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 which are not as burdensome to us as those listed above and none are based on credit ratings. 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 or created customers.

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        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.

        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 cannot 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 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.

        During 2001, attrition, our change in focus from growth to strengthening our operations, the disposition of certain accounts and adjustments related to the conversion of our customer base to our common technology platform resulted in a net loss of 196,357 customers or an 14.3% decrease in our customer base from January 1, 2001. We explain some of the reasons for the increase in attrition in 2001 in "Attrition," above. This was the primary cause of our $59.9 million decline in monitoring and related service revenues in the North America segment from 2000 to 2001. 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.

        Our customer account acquisition strategy primarily relies on our internal sales force. We have changed our acquisition strategy several times over the past few years attempting to decrease the cost of adding customers and decrease the rate of attrition. There can be no assurance that this strategy will be successful. 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 use of cash. Failure to economically replace customers lost though 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.

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.

Westar Industries is our principal stockholder and senior lender.

        Westar Industries owned approximately 87% of the outstanding common stock of Protection One as of December 31, 2001. As long as Westar Industries continues to beneficially own in excess of 50%

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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.

Western Resources is engaged in regulatory proceedings which could adversely effect us.

        Western Resources presently owns all of Westar Industries' stock. Western Resources is a public electric utility regulated by the Kansas Corporation Commission. The Kansas Corporation Commission has issued orders and is holding proceedings which directly impact on the ability of Westar Industries to fund its obligation under our Senior Credit Facility or make any other investment in us, including an order which prohibits Western Resources from borrowing to make loans or capital contribution to Westar Industries. In response to a Kansas Corporation Commission order to submit a plan to reduce its outstanding debt, Western Resources has proposed (and may be required) to sell part or all of its interest in Westar Industries. Reference is made to Western Resources Form 10-K and Forms 10-Q filed with the Securities and Exchange Commission (File No. 1-3523) for further information on these orders and proceedings, which may adversely impact on us.

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. Western Resources has proposed to separate Westar Industries (including us) from Western Resources. If a separation occurs, 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 separation of Westar Industries (including us) from Western Resources in a transaction that results in Westar Industries no longer being able to file taxes on a consolidated basis with Western Resources our net deferred tax assets of $88.4 million at December 31, 2001 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. The amount of our deferred taxes will increase by approximately $173.7 million upon our recording of an impairment charge in the first quarter of 2002 as discussed above. In addition, as a result of a separation, we would no longer receive payments from Western Resources for current tax benefits utilized by Western Resources. In 2001 and 2000, we received aggregate payments from Western Resources of $19.1 million and $48.9 million, respectively. The loss of these payments would have a material adverse effect on our cash flow.

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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 also lease office space for our approximate 60 service branch offices and 7 satellite branches in North America.

(1)

In 2002, Multifamily will move their administrative headquarters and monitoring operations to the Irving, Texas facility.

ITEM 3. LEGAL PROCEEDINGS

        Protection One, its subsidiary 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 ("Third Amended Complaint"). Plaintiffs purported 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 Third Amended Complaint asserted 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 alleged, 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 Third Amended Complaint further asserted 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 was also asserted under Section 11 of the Securities Act of 1933 against Protection One's auditor, Arthur Andersen LLP. The Third Amended Complaint sought an unspecified amount of compensatory damages and an award of fees and expenses, including attorneys' fees. On June 4, 2001, the District Court dismissed plaintiffs' claims under Sections 10(b) and 20(a) of the Securities Exchange Act. The Court granted plaintiffs leave to replead such claims. The Court also dismissed all claims brought on behalf of bondholders with prejudice. The Court also dismissed plaintiffs' claims against Arthur Andersen, and plaintiffs have appealed that dismissal. On February 22, 2002, plaintiffs filed a Fourth Consolidated Amended Class Action Complaint. The new complaint realleges claims on behalf of purchasers of common stock under Sections 11 and 15 of

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the Securities Act of 1933 and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. The defendants have until April 5, 2002 to respond to the new complaint. The Company cannot predict the impact of this litigation which could be material.

        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 plaintiffs' 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 for collective arbitration, the six former dealers filed a Motion to Compel Consolidation 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 3, 2002, one dealer (Masterguard) proceeded with arbitration. On March 8, 2002, Masterguard's claims against the Company were settled by a mutual agreement of the parties.

        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 been set for May 28, 2002. The Company cannot predict the impact of this arbitration which could be material.

        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. 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 AAA wherein Crimebusters is seeking in excess of $7.0 million in damages due to alleged defaults by the Company under an asset purchase agreement between Crimebusters, et al, and Centennial Security, Inc. On October 6, 2000, the Company 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. On May 29, 2001, the District Court dismissed the lawsuit. The Company has appealed the dismissal order, and the appeal is presently pending before the United States Court of Appeals for the Second Circuit (No. 01-7786). The Company cannot predict the impact of this arbitration and 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 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.

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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS

        No matters were submitted to Protection One's stockholders following our annual meeting in 2001.

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 indentures governing the 8¹/8% Senior Subordinated Notes due 2009, the 13⁵/8% Senior Subordinated Discount Notes due 2005, and the credit agreement relating to its Senior 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 15, 2002, there were approximately 139 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.

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SELECTED CONSOLIDATED FINANCIAL DATA