Exhibit 10.6

 

PROTECTION ONE, INC.
STOCK APPRECIATION RIGHTS PLAN

 

1.                                      PURPOSE

 

The Plan provides long-term incentives to key employees of the Company and its
Subsidiaries.  Its purposes are to attract, retain and motivate key employees
and to promote the long-term growth and profitability of the Company.

 

2.                                      DEFINITIONS

 

(A)                                  “BASE PRICE” MEANS, WITH RESPECT TO EACH
SAR, $0.09, REPRESENTING THE IMPLIED VALUE OF ONE SHARE OF STOCK BASED ON A
HYPOTHETICAL TOTAL ENTERPRISE VALUE OF THE COMPANY OF $440 MILLION ON THE
CLOSING DATE.

 

(B)                                 “BOARD” MEANS THE BOARD OF DIRECTORS OF THE
COMPANY.

 

(C)                                  “CAUSE” HAS THE MEANING ASCRIBED THERETO IN
A PARTICIPANT’S EMPLOYMENT AGREEMENT WITH THE COMPANY.

 

(D)                                 “CLOSING DATE” HAS THE MEANING ASCRIBED
THERETO IN THE EXCHANGE AGREEMENT.

 

(E)                                  “CODE” MEANS THE INTERNAL REVENUE CODE OF
1986, AS AMENDED.

 

(F)                                    “COMMITTEE” MEANS A COMMITTEE OF TWO OR
MORE DIRECTORS DESIGNATED BY THE BOARD TO ADMINISTER THE PLAN.

 

(G)                                 “COMPANY” MEANS PROTECTION ONE, INC., A
DELAWARE CORPORATION.

 

(H)                                 “EXCHANGE AGREEMENT” MEANS THAT CERTAIN
EXCHANGE AGREEMENT, DATED AS OF NOVEMBER 12, 2004, TO WHICH THE COMPANY IS A
PARTY.

 

(I)                                     “EXIT PRICE” MEANS (I) FOR EACH SAR THAT
VESTS AND BECOMES PAYABLE AS DESCRIBED IN CLAUSES (I) OR (II) OF SECTION 4(A),
THE LESSER OF (A) THE VALUE OF THE CONSIDERATION PAID FOR ONE SHARE OF STOCK IN
A QUALIFIED SALE (OR IF SUCH TRANSACTION DOES NOT INVOLVE A SALE, THE FAIR
MARKET VALUE (AS DEFINED IN THE COMPANY’S 2004 STOCK OPTION PLAN) OF THE STOCK
AS OF THE DATE OF THE QUALIFIED SALE), AND (B) THE PER SHARE EXERCISE PRICE OF
STOCK OPTIONS GRANTED TO PARTICIPANTS IN THE INITIAL OPTION GRANT, OR (II) FOR
EACH SAR THAT VESTS AND BECOMES PAYABLE AS DESCRIBED IN CLAUSE (III) OF
SECTION 4(A), $0.15.

 

(J)                                     “GOOD REASON” HAS THE MEANING ASCRIBED
THERETO IN A PARTICIPANT’S EMPLOYMENT AGREEMENT WITH THE COMPANY.

 

(K)                                  “GRANT AGREEMENT” MEANS AN AGREEMENT IN THE
FORM ATTACHED IN APPENDIX A HEREOF, EVIDENCING AN AWARD OF SARS UNDER THE PLAN.

 

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(L)                                     “INITIAL OPTION GRANT” MEANS THE GRANT
OF STOCK OPTIONS DESCRIBED IN SECTION 6(H) OF THE PROTECTION ONE, INC. STOCK
OPTION PLAN.

 

(M)                               “PARTICIPANT” MEANS EACH KEY EMPLOYEE OF THE
COMPANY OR ANY SUBSIDIARY WHO HAS BEEN SELECTED BY THE COMMITTEE TO PARTICIPATE
IN THE PLAN AND WHO HAS EXECUTED A GRANT AGREEMENT AGREEING TO BE BOUND BY THE
TERMS OF THE PLAN.

 

(N)                                 “PERMISSIBLE DISTRIBUTION EVENT” MEANS AN
EVENT DESCRIBED IN PARAGRAPH (I), (II), (III), OR (V) OF SECTION 409A(A)(2)(A)
OF THE CODE.

 

(O)                                 “PLAN” MEANS THE PROTECTION ONE, INC. STOCK
APPRECIATION RIGHTS PLAN.

 

(P)                                 “PREFERRED RETURN” MEANS 9% PER ANNUM,
COMPOUNDED ANNUALLY ON EACH ANNIVERSARY OF THE CLOSING DATE.

 

(Q)                                 “QUADRANGLE PARTIES” HAS THE MEANING
ASCRIBED THERETO IN THE EXCHANGE AGREEMENT.

 

(R)                                    “QUALIFIED SALE” MEANS THE FIRST
TRANSACTION THAT RESULTS IN THE QUADRANGLE PARTIES AND THEIR AFFILIATED
ENTITIES, AS A GROUP, HAVING SOLD, ASSIGNED OR OTHERWISE TRANSFERRED (INCLUDING,
WITHOUT LIMITATION, BY MERGER, CONSOLIDATION OR DISTRIBUTION), IN ONE OR MORE
TRANSACTIONS, TO ONE OR MORE PARTIES THAT ARE NOT ENTITIES AFFILIATED WITH THE
QUADRANGLE PARTIES, AN AGGREGATE OF AT LEAST 60% OF THE AGGREGATE NUMBER OF
SHARES, ADJUSTED IN ACCORDANCE WITH SECTION 3(B)(I) BELOW, OF STOCK OWNED BY THE
QUADRANGLE PARTIES, AS A GROUP, ON THE CLOSING DATE.

 

(S)                                  “QUALIFYING TERMINATION” MEANS TERMINATION
OF A PARTICIPANT’S EMPLOYMENT WITH THE COMPANY OR A SUBSIDIARY (I) BY THE
PARTICIPANT FOR GOOD REASON, (II) BY THE COMPANY WITHOUT CAUSE OR (III) BY
REASON OF A SALE OF THE SUBSIDIARY EMPLOYING THE PARTICIPANT.

 

(T)                                    “REDEMPTION PRICE” MEANS THE AMOUNT, IF
ANY, BY WHICH THE EXIT PRICE EXCEEDS THE BASE PRICE.

 

(U)                                 “SAR” MEANS A STOCK APPRECIATION RIGHT
GRANTED UNDER THE PLAN.

 

(V)                                 “STOCK” MEANS THE COMMON STOCK, PAR VALUE
$0.01 PER SHARE, OF THE COMPANY.

 

(W)                               “SUBSIDIARY” MEANS A CORPORATION THAT IS A
“SUBSIDIARY CORPORATION” OF THE COMPANY AS THAT TERM IS DEFINED IN SECTION 424
OF THE CODE.

 

3.                                      GRANT AND ADJUSTMENT OF SARS

 

(A)                                  EFFECTIVE AS OF THE CLOSING DATE, THE
COMMITTEE SHALL GRANT 99,809,187 SARS (ON A PRE-REVERSE STOCK SPLIT BASIS) TO
KEY EMPLOYEES OF THE COMPANY AND ITS SUBSIDIARIES, AS DETERMINED IN CONSULTATION
WITH THE COMPANY’S CHIEF EXECUTIVE OFFICER.  NO ADDITIONAL SARS MAY BE GRANTED
UNDER THE PLAN; PROVIDED, THAT FROM AND AFTER THE CLOSING DATE

 

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AND PRIOR TO THE VESTING AND PAYMENT OF OUTSTANDING SARS, ANY SARS FORFEITED BY
PARTICIPANTS PURSUANT TO SECTION 4(C) SHALL BE REALLOCATED TO OTHER
PARTICIPANTS, AS DETERMINED BY THE HIGHEST-RANKING EMPLOYEE PARTICIPANT AT SUCH
TIME, SUBJECT TO APPROVAL BY THE COMMITTEE, SUCH APPROVAL NOT TO BE UNREASONABLY
WITHHELD.

 

(B)                                 THE NUMBER OF SARS AWARDED TO ANY
PARTICIPANT, THE BASE PRICE AND EXIT PRICE OF SARS SO AWARDED, AND THE
PROVISIONS OF THE PLAN AFFECTING THE VALUE OF OUTSTANDING SARS (I) SHALL BE
EQUITABLY ADJUSTED OR MODIFIED AS NECESSARY TO PRESERVE THE INTENDED ECONOMIC
BENEFIT OF THE ORIGINAL GRANT IN THE EVENT THAT THERE IS A STOCK SPLIT, REVERSE
STOCK SPLIT, STOCK DIVIDEND, RECAPITALIZATION, RECLASSIFICATION, ADDITIONAL
ISSUANCE OR OTHER SIMILAR CAPITAL ADJUSTMENT OF THE STOCK EFFECTED WITHOUT THE
RECEIPT OF CONSIDERATION, AND (II) MAY BE ADJUSTED OR MODIFIED AT THE REASONABLE
GOOD FAITH DISCRETION OF THE COMMITTEE IN THE EVENT THAT THERE IS (A) A MERGER,
CONSOLIDATION, SPIN-OFF, SPLIT-UP, OR OTHER SIMILAR CORPORATE TRANSACTION WITH
RESPECT TO THE COMPANY, OR (B) ANY OTHER EVENT FOR WHICH THE COMMITTEE, IN ITS
SOLE DISCRETION, DETERMINES THAT SUCH ADJUSTMENT OR MODIFICATION IS APPROPRIATE
AND EQUITABLE TO PREVENT INAPPROPRIATE PENALTIES OR WINDFALLS WITH RESPECT TO
THE TERMS OF THE PLAN OR ITS APPLICABILITY TO ANY PARTICIPANT.

 

4.                                      VESTING AND PAYMENT.

 

(A)                                  SARS SHALL VEST AND BECOME PAYABLE ONLY
UPON (I) A QUALIFIED SALE, IF SUCH QUALIFIED SALE QUALIFIES AS A PERMISSIBLE
DISTRIBUTION EVENT, (II) IF A QUALIFIED SALE OCCURS PRIOR TO THE SIXTH
ANNIVERSARY OF THE CLOSING DATE AND DOES NOT QUALIFY AS A PERMISSIBLE
DISTRIBUTION EVENT, THE EARLIER OF (A) THE SIXTH ANNIVERSARY OF THE CLOSING DATE
AND (B) A PERMISSIBLE DISTRIBUTION EVENT, IF SUCH PERMISSIBLE DISTRIBUTION EVENT
OCCURS ON OR AFTER THE QUALIFIED SALE, OR (III) THE SIXTH ANNIVERSARY OF THE
CLOSING DATE, IF THE SARS HAVE NOT OTHERWISE VESTED AND BECOME PAYABLE UNDER
CLAUSES (I) OR (II) OF THIS SECTION 4(A) ON OR PRIOR TO SUCH SIXTH ANNIVERSARY. 
WITH RESPECT TO SARS THAT VEST AND BECOME PAYABLE PURSUANT TO CLAUSE (II)(B) OF
THIS SECTION 4(A), IF THE PERMISSIBLE DISTRIBUTION EVENT IS AN EVENT DESCRIBED
IN SECTION 409A(A)(2)(A)(I) OF THE CODE AND THE PAYEE IS A “SPECIFIED EMPLOYEE”
AS DEFINED IN SECTION 409A(A)(2)(B)(I) OF THE CODE, THEN THE SARS SHALL BECOME
PAYABLE SIX MONTHS AFTER THE PERMISSIBLE DISTRIBUTION EVENT (OR, IF EARLIER, THE
DATE OF THE DEATH OF THE EMPLOYEE).  EXCEPT AS PROVIDED IN SECTION 4(B), THE
AMOUNT PAYABLE IN RESPECT OF EACH OUTSTANDING SAR SHALL BE THE REDEMPTION PRICE.

 

(B)                                 IF SARS VEST AND BECOME PAYABLE BY REASON OF
A QUALIFIED SALE DESCRIBED IN CLAUSE (II) OF SECTION 4(A), THE AGGREGATE
REDEMPTION PRICE PAYABLE IN RESPECT OF ALL OUTSTANDING SARS SHALL BE COMPUTED
BASED ON THE PRICE PAID FOR THE STOCK IN SUCH QUALIFIED SALE, AND AN AMOUNT
EQUAL TO SUCH AGGREGATE REDEMPTION PRICE SHALL BE DEPOSITED IN AN IRREVOCABLE
“RABBI TRUST,” PURSUANT TO A TRUST AGREEMENT SUBSTANTIALLY IN THE FORM ATTACHED
HERETO AS EXHIBIT A (THE “TRUST AGREEMENT”), HAVING AN INDEPENDENT TRUSTEE WHO
WILL BE INSTRUCTED TO PAY SUCH AMOUNTS TO PARTICIPANTS, WITH INTEREST CREDITED
AT SIX PERCENT (6%) PER ANNUM AND COMPOUNDED ANNUALLY, ON THE DATES SPECIFIED IN
CLAUSE (II) OF SECTION 4(A), EXCEPT AS OTHERWISE PROVIDED BY THE TERMS OF THE
TRUST AGREEMENT.

 

(C)                                  A PARTICIPANT SHALL BE ELIGIBLE FOR PAYMENT
IN RESPECT OF HIS SARS ONLY IF SUCH PARTICIPANT (I) IS EMPLOYED BY THE COMPANY
OR A SUBSIDIARY ON THE DATE OF A QUALIFIED SALE OR, IN THE CASE OF SARS THAT
BECOME PAYABLE AS DESCRIBED IN CLAUSE (III) OF SECTION 4(A), THE SIXTH

 

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ANNIVERSARY OF THE CLOSING DATE, OR (II) TERMINATES EMPLOYMENT IN A QUALIFYING
TERMINATION WITHIN ONE YEAR PRIOR TO A QUALIFIED SALE.  A PARTICIPANT’S SARS
SHALL BE FORFEITED AS OF THE FIRST DATE UPON WHICH HE IS NO LONGER ELIGIBLE FOR
PAYMENT IN RESPECT THEREOF.

 

5.                                      ADJUSTMENT OF THE BASE PRICE

 

The Base Price of each SAR shall be increased by the Preferred Return through
and including the date of a Qualified Sale or, if SARs vest and become payable
as described in clause (iii) of Section 4(a), the sixth anniversary of the
Closing Date.  If the Quadrangle Parties or their affiliates sell Stock to an
unrelated party in a transaction that is not a Qualified Sale, the Base Price
applicable to a percentage of the outstanding SARs shall be fixed based on the
Preferred Return prorated to the date of such transaction.  The percentage so
fixed shall be equal to the percentage of the Stock sold by the Quadrangle
Parties or their affiliates, as a group, determined by reference to the number
of shares of Stock owned by the Quadrangle Parties, as a group, on the Closing
Date.

 

6.                                      PRE-CLOSING SALE OF THE COMPANY

 

In the event that a majority of the Company’s voting stock is sold to a party
other than the Quadrangle Parties or their affiliates prior to the Closing Date,
the Committee, in consultation with the Company’s Chief Executive Officer, shall
determine which employees would have been selected as Participants as of the
Closing Date, and such employees shall be paid, in connection with such sale,
the amounts which would have been payable to them under the Plan had they been
granted SARs and such sale was a Qualified Sale except that, solely for purposes
of this Section 6, the Exit Price shall be determined without regard to clause
(i)(b) of Section 2(i).  Such amounts shall be paid on the date of such sale and
shall be payable in lieu of any amounts to which such employees would otherwise
have been entitled to receive in connection with the grant of SARs and the grant
of stock options under the Protection One, Inc. Stock Option Plan.

 

7.                                      AMENDMENT AND TERMINATION

 

(a)                                  The Board may amend, suspend or terminate
the Plan at any time; provided, however, that no amendment, suspension or
termination of the Plan may materially and adversely affect the rights of a
Participant with respect to outstanding SARs without the written consent of such
Participant.

 

(b)                                 The Plan and any SARs shall be void and of
no effect if the Exchange Agreement dated November 12, 2004 among the Company
and the Quadrangle Parties (the “Exchange Agreement”) is terminated prior to the
earlier of a Qualified Sale or the consummation of the debt-for-equity exchange
contemplated by the Exchange Agreement.  In connection with the consummation of
the debt-for-equity exchange contemplated by the Exchange Agreement, the Company
will effectuate a one-share-for-fifty shares reverse stock split (the “Reverse
Stock Split”).  All references in the Plan with respect to numbers of shares of
Stock and SARs, Base Price and Exit Price, refer to such numbers on a
pre-Reverse Stock Split basis, and upon consummation of the Reverse Stock Split,
such numbers shall be adjusted as contemplated by Section 3(b).

 

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8.                                      UNFUNDED PLAN

 

The Plan shall be unfunded and no Participant shall have any right, title, or
interest whatsoever in or to any investments which the Company may make to aid
it in meeting its obligations under the Plan.  No officer, director or member of
the Board or the Committee shall have any personal liability for failure to make
payments of benefits under the Plan.  To the extent that any person acquires a
right to receive payments from the Company under the Plan, such right shall be
no greater than the right of an unsecured general creditor of the Company.  The
Plan is intended to be a “bonus plan” that is not subject to the Employee
Retirement Income Security Act of 1974, as amended.

 

9.                                      ASSIGNMENT AND ALIENATION OF BENEFITS

 

To the maximum extent permitted by law, a Participant’s rights and benefits
under this Plan shall not be subject to anticipation, alienation, sale,
assignment, pledge, encumbrance or charge, and any attempt to anticipate,
alienate, sell, assign, pledge, encumber or charge the same shall be void;
provided, however that in the event of a Participant’s death, any such rights
and benefits shall pass to such Participant’s beneficiaries or estate in
accordance with the laws of descent and distribution.  Except as prohibited by
law, payments or benefits payable to or with respect to a Participant pursuant
to this Plan may be reduced by amounts the Participant may owe to the Company.

 

10.                               SUCCESSORS

 

The Company shall require any successor (whether direct or indirect, by
purchase, merger, consolidation, or otherwise) to all or substantially all of
the business or assets of the Company to expressly assume the Plan and agree to
perform obligations hereunder in the same manner and to the same extent that the
Company would be required to perform if no such succession had occurred.

 

11.                               ADMINISTRATION

 

The Plan shall be administered by the Committee, which shall have sole
authority, in a good faith exercise of discretion, (i) to construe and interpret
the Plans; (ii) to establish, amend and revoke rules and regulations for the
Plan administration; and (iii) to exercise such powers and to perform such acts
as the Committee deems necessary or expedient to promote the best interests of
the Company which are not in conflict with the provisions of the Plan.  All
actions taken and all determinations made by the Committee in accordance with
the power and authority conferred upon the Committee under this Plan shall be
final, binding and conclusive on all parties, including the Company and all
Participants.  In the event of any litigation between the Company and any
Participant (or successor to a Participant’s interest, judicial review shall
occur on a de novo basis, without deference to any Committee determinations.

 

12.                               MISCELLANEOUS

 

(A)                                  THE ESTABLISHMENT OF THIS PLAN SHALL NOT BE
CONSTRUED AS GRANTING ANY PARTICIPANT THE RIGHT TO REMAIN IN THE EMPLOY OF THE
COMPANY, NOR SHALL THIS PLAN BE CONSTRUED AS

 

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LIMITING THE RIGHT OF THE COMPANY TO DISCHARGE A PARTICIPANT FROM EMPLOYMENT AT
ANY TIME FOR ANY REASON WHATSOEVER, WITH OR WITHOUT CAUSE.

 

(B)                                 THE PAYMENT OF ANY AMOUNTS DUE IN RESPECT OF
SARS SHALL BE SUBJECT TO WITHHOLDING BY THE COMPANY FOR ALL FEDERAL, STATE AND
LOCAL TAXES REQUIRED BY LAW TO BE WITHHELD.

 

(C)                                  THE SECTION HEADINGS IN THIS PLAN ARE FOR
CONVENIENCE ONLY, FORM NO PART OF THE PLAN AND SHALL NOT AFFECT ITS
INTERPRETATION.

 

(D)                                 THIS PLAN SHALL BE GOVERNED BY AND CONSTRUED
IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE, WITHOUT REFERENCE TO THE
PRINCIPLES OF CONFLICTS OF LAWS.

 

(E)                                  NO MEMBER OF THE COMMITTEE OR THE BOARD,
AND NO OFFICER OR OTHER EMPLOYEE OF THE COMPANY OR A SUBSIDIARY WHO HAS BEEN
DELEGATED AUTHORITY UNDER THE PLAN, SHALL BE PERSONALLY LIABLE BY REASON OF ANY
ACTION TAKEN IN GOOD FAITH IN CONNECTION WITH THE ADMINISTRATION OF THE PLAN, OR
IN CONNECTION WITH ANY CONTRACT OR OTHER INSTRUMENT EXECUTED BY SUCH INDIVIDUAL,
OR ON HIS OR HER BEHALF, IN HIS OR HER CAPACITY AS A MEMBER OF THE COMMITTEE, A
MEMBER OF THE BOARD, AN OFFICER OR AN EMPLOYEE, NOR FOR ANY MISTAKE OF JUDGMENT
MADE IN GOOD FAITH, AND THE COMPANY SHALL INDEMNIFY AND HOLD HARMLESS EACH
MEMBER OF THE COMMITTEE, EACH MEMBER OF THE BOARD AND EACH OTHER EMPLOYEE,
OFFICER OR DIRECTOR OF THE COMPANY TO WHOM ANY DUTY OR POWER RELATING TO THE
ADMINISTRATION OR INTERPRETATION OF THE PLAN MAY BE ALLOCATED OR DELEGATED,
AGAINST ANY COST OR EXPENSE (INCLUDING COUNSEL FEES) OR LIABILITY (INCLUDING ANY
SUM PAID IN SETTLEMENT OF A CLAIM) ARISING OUT OF ANY ACT OR OMISSION TO ACT IN
CONNECTION WITH THE PLAN UNLESS ARISING OUT OF SUCH PERSON’S OWN FRAUD OR BAD
FAITH; PROVIDED, HOWEVER, THAT APPROVAL OF THE BOARD SHALL BE REQUIRED FOR THE
PAYMENT OF ANY AMOUNT IN SETTLEMENT OF A CLAIM AGAINST ANY SUCH PERSON.  THE
FOREGOING RIGHT OF INDEMNIFICATION SHALL NOT BE EXCLUSIVE OF ANY OTHER RIGHTS OF
INDEMNIFICATION TO WHICH SUCH PERSONS MAY BE ENTITLED UNDER THE COMPANY’S
CERTIFICATE OF INCORPORATION OR BY-LAWS, AS A MATTER OF LAW, OR OTHERWISE, OR
ANY POWER THAT THE COMPANY MAY HAVE TO INDEMNIFY THEM OR HOLD THEM HARMLESS.

 

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Exhibit A

 

PROTECTION ONE, INC.

 

GRANTOR TRUST AGREEMENT

 

 

PREAMBLE.  This Grantor Trust Agreement (the “Trust Agreement”) made this
        day of               , 2005, by and between Protection One, Inc. and any
successor to its interest (the “Company”) as creator and grantor, and
                             as trustee (the “Trustee”).

 

WHEREAS, the Company has adopted the Protection One, Inc. Stock Appreciation
Rights Plan attached as Exhibit A (the “Plan”) under which the Company has
current or potential liability to individuals (the “Beneficiaries”) who are
either covered by the Plan, are a party to the Plan, or are the designated
beneficiary for any benefits payable under the Plan in the event of the death of
an individual who is covered by or party to the Plan;

 

WHEREAS, it is the intention of the Company to establish this trust (the
“Trust”) and to contribute assets to the Trust that shall be held therein,
subject to the claims of the Company’s general creditors in the event of the
Company’s Insolvency, as defined in Section 3(a) hereof, until paid to
Beneficiaries of this Trust in such manner and at such times as specified in the
Plan;

 

WHEREAS, it is the intention of the parties hereto that this Trust shall
constitute an unfunded arrangement and shall not affect the status of the Plan
as being unfunded for the purpose of providing deferred compensation for a
select group of highly compensated employees for purposes of Title I of the
Employee Retirement Income Security Act of 1974; and

 

WHEREAS, it is the intention of the Company to make contributions to the Trust
to enable the Trust to fully fund its liabilities under the Plan.

 

NOW, THEREFORE, the parties do hereby establish this Trust and agree that the
Trust shall be established and administered as set forth herein:

 

Section 1.  Establishment of Trust

 

(a)                                  The Company will shortly hereafter deposit
$           with the Trustee in trust, which shall constitute the initial
principal of the Trust to be held, administered and disbursed by the Trustee as
provided for in this Trust Agreement.

 

(b)                                 The Company, in its sole discretion, may at
any time, or from time to time, make additional contributions of cash or other
assets to the Trustee to augment the principal of the Trust to be held,
administered and disbursed by the Trustee as provided for in this Trust
Agreement.  Neither the Trustee nor any Beneficiary shall have any right to
compel such additional contributions.

 

(c)                                  Upon a “Qualified Sale” (as defined herein)
that is described in clause (ii) of Section 4(a) of the Plan, the Company shall,
as soon as possible but in no event later than ten business days

 

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Timmons & Company, Inc.

Grantor Trust Agreement

 

 

after the Qualified Sale, make an irrevocable contribution to this Trust in an
amount that is projected to provide the Trust with sufficient funds to pay (i)
each Beneficiary the benefits to which he or she is entitled pursuant to the
Plan as in effect on the date of the Qualified Sale, and (ii) all fees
associated with maintaining the Trust for the maximum period over which
Beneficiaries are reasonably expected to be receiving payments from the Trust. 
“Qualified Sale” shall have the meaning set forth in the Plan.  Any amendment to
the Plan’s definition shall be deemed to apply with equal force, effect, and
timing to the definition of Qualified Sale for purposes of this Trust, except
that a modification that does or may adversely affect a Beneficiary shall be
ineffectual as to the Beneficiary unless he or she consents in writing to be
bound by the modification.

 

(d)                                 Within 75 days following each December 31st
after a Qualified Sale described in clause (ii) of Section 4(a) of the Plan
occurs, the Company shall, if the Trustee deems necessary, be required to
irrevocably deposit additional cash or other property to the Trust in an amount
sufficient to pay each Participant or Beneficiary the benefits to which he or
she is or may become entitled pursuant to the Plan.  The Trustee shall have the
right to monitor, enforce and/or collect any amounts due and owing from the
Company or to give notice of any default in the payment of benefits to
Participants.

 

(e)                                  The Trust hereby established shall be
irrevocable.

 

(f)                                    The Trust is intended to be a grantor
trust, of which the Company is the grantor, within the meaning of subpart E,
part I, subchapter J, chapter 1, subtitle A of the Internal Revenue Code of
1986, as amended (the “Code”), and shall be construed accordingly.

 

(g)                                 The principal of the Trust, and any earnings
thereon, shall be held separate and apart from other funds of the Company, and
shall be used exclusively for the uses and purposes of Beneficiaries and general
creditors as herein set forth.  Beneficiaries shall have no preferred claim on,
or any beneficial ownership interest in, any Trust assets.  Any rights created
under the Plan and this Trust Agreement shall be unsecured contractual rights of
the Beneficiaries, as provided for in this Agreement.  Any assets held by the
Trust will be subject to the claims of the Company’s general creditors under
federal and state law in the event of Insolvency, as defined in Section 3(a)
herein.

 

Section 2.  Payments to Beneficiaries

 

(a)                                  Upon a Permissible Distribution Event (as
defined herein) that relates to any Beneficiary (or, if later, the sixth
anniversary of the Closing Date (as defined herein)), the Company shall deliver
to the Trustee a schedule (the “Payment Schedule”) which reflects the benefits
payable with respect to each affected Beneficiary pursuant to Sections 4(a) and
4(b) of the Plan, a formula or other instructions acceptable to the Trustee for
determining the benefits so payable, the form in which such benefits are to be
paid (as provided for or available under the Plan), and the date of commencement
for payment of such benefits.  Except as otherwise provided herein, the Trustee
shall make payments to Beneficiaries in accordance with such Payment Schedule. 
The Trustee shall make provisions for the reporting and withholding of any
federal, state or local taxes that may be required to be withheld with respect
to the payment of benefits pursuant to the terms of the Plan and shall pay
amounts withheld to the appropriate taxing authorities or determine that such
amounts

 

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have been reported, withheld, and paid by the Company.  “Permissible
Distribution Event” and “Closing Date” shall have the meanings set forth in the
Plan.

 

(b)                                 The entitlement of a Beneficiary to benefits
under the Plan shall be determined by the Company or such party as may be
designated under the Plan, and any claim for such benefits shall be considered
and reviewed under the procedures set forth in the Plan.

 

(c)                                  The Company may make payment of benefits
directly to Beneficiaries as such benefits become due under the terms of the
Plan.  The Company shall notify the Trustee of its decision to make such payment
of benefits prior to the time benefits are payable to Beneficiaries.  In
addition, if the principal of the Trust, and any earnings thereon, are not
sufficient to make payments of benefits in accordance with the terms of the
Plan, the Company shall make the balance of each such payment as due.  The
Trustee shall notify the Company when existing principal and earnings are
insufficient under the Payment Schedule.

 

(d)                                 The Trustee shall make such distributions in
a manner reasonably intended to provide each Beneficiary with all of his or her
benefits payable under the Plan.

 

Section 3.  Trustee Responsibility Regarding Payments to Trust Beneficiary When
the Company Is Insolvent

 

(a)                                  The Trustee shall cease payment of benefits
to Beneficiaries if the Company is Insolvent.  The Company shall be considered
“Insolvent” for purposes of this Trust Agreement if (i) the Company is unable to
pay its debts when the same become due, or (ii) the Company is subject to a
pending proceeding as a debtor under the United States Bankruptcy Code.

 

(b)                                 At all times during the existence of this
Trust, as provided in Section 1(d) hereof, the principal and income of the Trust
shall be subject to claims of general creditors of the Company under federal and
state law as set forth below.

 

(c)                                  The Board of Directors and the Chief
Executive Officer of the Company shall have the duty to inform the Trustee in
writing of the Company’s Insolvency.  If a person claiming to be a creditor of
the Company alleges in writing to the Trustee that the Company has become
Insolvent, the Trustee shall determine whether the Company is Insolvent and,
pending such determination, the Trustee shall discontinue payment of benefits to
Beneficiaries.

 

(1)                                  Unless the Trustee has actual knowledge of
the Company’s Insolvency, or has received notice from the Company or a person
claiming to be a creditor alleging that the Company is Insolvent, the Trustee
shall have no duty to inquire whether the Company is Insolvent.  The Trustee may
in all events rely on such evidence concerning the Company’s solvency as may be
furnished to the Trustee and that provides the Trustee with a reasonable basis
for making a determination concerning the Company’s solvency.

 

(2)                                  If at any time the Trustee has determined
that the Company is Insolvent, the Trustee shall discontinue payments to
Beneficiaries, shall liquidate the Trust’s investment, if any, in common stock
(“Common Stock”) of the Company, and shall hold the assets of the Trust for the
benefit of the Company’s general creditors.  Nothing in this Trust Agreement
shall in any way

 

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diminish any rights of Beneficiaries as general creditors of the Company with
respect to benefits due under the Plan or otherwise.

 

(3)                                  The Trustee shall resume the payment of
benefits to Beneficiaries in accordance with Section 2 of this Trust Agreement
only after the Trustee has determined that the Company is not Insolvent or is no
longer Insolvent.

 

(d)                                 If the Trustee discontinues the payment of
benefits from the Trust pursuant to Section 3(a) hereof and subsequently resumes
such payments, the first payment following such discontinuance shall include the
aggregate amount of all payments due to Beneficiaries under the terms of the
Plan for the period of such discontinuance, provided that there are sufficient
assets to make such payments.  The aggregate amount of any payments to
Beneficiaries by the Company, in lieu of the payments provided for hereunder
during any such period of discontinuance, shall be deducted from any payments
made by the Trustee hereunder.

 

Section 4.  Payments to the Company

 

After the Trust has become irrevocable, the Company shall have no right or power
to direct the Trustee to return to the Company or to divert to others any of the
Trust assets before all payment of benefits have been made to Beneficiaries
pursuant to the terms of the Plan, except as provided for in Section 3 hereof.

 

Section 5.  Investment Authority

 

(a)                                  The Trustee shall have the sole discretion
as to the investment of Trust assets, provided that the Trustee shall invest
Trust assets in a manner reasonably anticipated to provide the Trust with assets
sufficient to fund the Company’s obligations under the Plan.

 

(b)                                 All rights associated with assets of the
Trust shall be exercised by the Trustee or the person designated by the Trustee,
and shall in no event be exercisable by or through Beneficiaries.  The Company
shall have the right, in its sole discretion, to substitute assets of equal fair
market value for any assets held by the Trust.  This right is exercisable by the
Company in a non-fiduciary capacity without consent of any person in a fiduciary
capacity.

 

Section 6.  Disposition of Income

 

During the term of this Trust, all income received by the Trust, net of expenses
and taxes, shall be reinvested.

 

Section 7.  Accounting by Trustee

 

The Trustee shall keep accurate and detailed records of all investments,
receipts, disbursements of all transactions, including such specific records as
shall be agreed upon in writing between the Company and the Trustee.  Within 75
days following each December 31 after the execution of this Agreement, and
within 20 days after the removal or resignation of the Trustee, the Trustee
shall deliver (i) to each Beneficiary a statement, substantially in the form
attached as Exhibit A, delineating his or her beneficial interest in the Trust,
and (ii) to the Company a written account of

 

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its administration of the Trust during such year or during the period from the
close of the last preceding year to the date of such removal or resignation,
reflecting all investments, receipts, disbursements and other transactions
effected by it, including a description of all securities and investments
purchased and sold with the cost or net proceeds of such purchases or sales
(accrued interest paid or receivable recorded separately), and reflecting all
cash, securities and other property held in the Trust at the end of such year or
as of the date of such removal or resignation, as applicable.

 

Section 8.  Responsibility of Trustee

 

(a)                                  The Trustee shall act with the care, skill,
prudence and diligence under the circumstances then prevailing that a prudent
person acting in like capacity and familiar with such matters would use in the
conduct of an enterprise of a like character and with like objectives, provided,
however, that the Trustee shall incur no liability to any person for any action
taken pursuant to a direction, request or approval given by the Company which is
contemplated by, and in conformity with, the terms of the Plan or this Trust
Agreement and is given in writing by the Company.  In the event of a dispute
between the Company and a party, the Trustee may apply to a court of competent
jurisdiction to resolve the dispute.

 

(b)                                 If the Trustee undertakes or defends any
litigation arising in connection with this Trust, the Company agrees to
indemnify the Trustee against Trustee’s costs, expense and liabilities
(including, without limitation, attorneys’ fees and expenses) relating thereto
and to be primarily liable for such payments, except in those cases where the
Trustee shall have been found by a court of competent jurisdiction to have acted
with negligence or willful misconduct.  If the Company does not pay such costs,
expenses and liabilities in a reasonably timely manner, the Trustee may obtain
payment from the Trust.

 

(c)                                  The Trustee may consult with legal counsel
with respect to any of its duties or obligations hereunder.

 

(d)                                 The Trustee may hire agents, accountants,
actuaries, investment advisors, financial consultants or other professionals to
assist it in performing any of its duties or obligations hereunder.

 

(e)                                  The Trustee shall have, without exclusion,
all powers conferred on trustees by applicable law, unless expressly provided
otherwise herein, provided, however, that if an insurance policy is held as an
asset of the Trust, the Trustee shall have no power to name a beneficiary of the
policy other than the Trust, to assign the policy (as distinct from conversion
of the policy to a different form) other than to a successor Trustee, or to loan
to any person the proceeds of any borrowing against such policy.

 

(f)                                    Notwithstanding any powers granted to the
Trustee pursuant to this Trust Agreement or to applicable law, the Trustee shall
not have any power that may accord the Trust the authority to engage in a
business and to receive the gains therefrom, within the meaning of
section 301.7701-2 of the Procedure and Administrative Regulations promulgated
pursuant to the Code.

 

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Section 9.  Compensation and Expenses of Trustee

 

The Company shall pay all administrative expenses and the Trustee’s fees and
expenses relating to the Plan and this Trust.  If not so paid, the fees and
expenses shall be paid from the Trust.

 

Section 10.  Resignation and Removal of Trustee

 

The Trustee may resign at any time by written notice to the Company, which
resignation shall be effective 30 days after the Company receives such notice
(unless the Company and the Trustee agree otherwise).  The Trustee may be
removed by the Company on 30 days notice, or upon shorter notice accepted by the
Trustee; provided that if such removal occurs on or after a Qualifying Sale, or
within 90 days beforehand, the removal will be ineffective unless it is done
with the written consent of Beneficiaries who are entitled to at least 75% of
the Trust’s assets.

 

If the Trustee resigns or is removed, a successor shall be appointed, in
accordance with Section 11 hereof, by the effective date or resignation or
removal under this section.  If no such appointment has been made, the Trustee
may apply to a court of competent jurisdiction for appointment of a successor or
for instructions.  All expenses of the Trustee in connection with the proceeding
shall be allowed as administrative expenses of the Trust.  Upon resignation or
removal of the Trustee and appointment of a Successor Trustee, all assets shall
subsequently be transferred to the Successor Trustee.  The transfer shall be
completed within 60 days after receipt of a notice of resignation, removal or
transfer, unless the Company extends the time for such transfer.

 

Section 11.  Appointment of Successor

 

If the Trustee resigns or is removed in accordance with Section 10 hereof, the
Company may appoint any other party as a successor to replace the Trustee upon
such resignation or removal.  The appointment shall be effective when accepted
in writing by the new trustee, who shall have all of the rights and powers of
the former trustee, including ownership rights in the Trust assets.  The former
trustee shall execute any instrument necessary or reasonably requested by the
Company or the Successor Trustee to evidence the transfer.  Notwithstanding the
foregoing, if the Trustee resigns or is removed in connection with or following
a Qualifying Sale, the Trustee that has resigned or is being removed shall
appoint as its successor a third party financial institution that has trust
powers, is independent of and unrelated to the Company, its affiliates, or their
successors, and is agreed to in writing by Beneficiaries who are entitled to at
least 75% of the Trust’s assets.

 

A Successor Trustee need not examine the records and acts of any prior trustee
and may retain or dispose of existing Trust assets, subject to Sections 7 and 8
hereof.  The Successor Trustee shall not be responsible for, and the Company
shall indemnify and defend the Successor Trustee from, any claim or liability
resulting from any action or inaction of any prior trustee or from any other
past event, or any condition existing at the time it becomes Successor Trustee.

 

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Section 12.  Amendment or Termination

 

(a)                                  This Trust Agreement may be amended by a
written instrument executed by the Trustee and the Company, provided that no
such amendment shall either conflict with the terms of the Plan.

 

(b)                                 Notwithstanding subsection (a) hereof, the
provisions of this Trust Agreement and the Trust created thereby may not be
amended, within six months before or at any time on or after a Qualifying Sale
occurs, without the written consent of Beneficiaries who are entitled to at
least 75% of the Trust’s assets.

 

(c)                                  The Trust shall not terminate until the
date on which no Beneficiary is entitled to benefits pursuant to the terms
hereof or of the Plan.  Upon termination of the Trust, the Trustee shall return
any assets remaining in the Trust to the Company.

 

(d)                                 The Company may terminate this Trust prior
to the payment of all benefits under the Plan only upon written approval of all
Beneficiaries entitled to payment of such benefits.

 

Section 13.  Miscellaneous

 

(a)                                  Any provision of this Trust Agreement
prohibited by law shall be ineffective to the extent of any such prohibition,
without invalidating the remaining provisions hereof.

 

(b)                                 Benefits payable to Beneficiaries under this
Trust Agreement may not be anticipated, assigned (either at law or in equity),
alienated, pledged, encumbered or subjected to attachment, garnishment, levy,
execution or other legal or equitable process, except pursuant to the terms of
the Plan and this Trust Agreement.

 

(c)                                  This Trust Agreement shall be governed by
and construed in accordance with the laws of the State of Delaware without
reference to the principles of conflicts of laws.

 

(d)                                 The Trustee agrees to be bound by the terms
of the Plan, as in effect from time to time.

 

Section 14.  Effective Date

 

The effective date of this Trust Agreement shall be the date referenced in the
Preamble.

 

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IN WITNESS WHEREOF, the Company, by its duly authorized officer, has caused this
Trust Agreement to be executed, and its corporate seal affixed, and the Trustee
has executed this Trust Agreement, on the date referenced in the Preamble.

 

 

Witnessed by:

 

PROTECTION ONE, INC.

 

 

 

 

 

 

 

By

 

 

 

 

Its

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Witnessed by:

 

TRUSTEE

 

 

 

 

 

 

 

 

 

 

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