Exhibit
10.3


 


EMPLOYMENT
AGREEMENT


 


THIS EMPLOYMENT
AGREEMENT (the “Agreement” is entered into as of the 23rd day of
July, 2004 by and between Protection One, Inc., a Delaware corporation (the
“Company”), Protection One Alarm Monitoring, Inc., a Delaware corporation, and
Peter J. Pefanis (“Executive”).


 


W I T N E S S E T
H :


 


WHEREAS, POAMI and
Executive agreed to employment terms pursuant to an offer letter effective
June 4, 2001 and superseded the offer letter with an Employment Agreement
dated as of March 18, 2003 (such agreement hereinafter referred to as the
“Prior Employment Agreement”); and


 


WHEREAS, the Board
(as defined in Section 1) has determined that it is in the best interest
of the Company, its creditors and its stockholders to assure that the Company
will have the continued dedication of Executive during and after the period of
the Company’s and POAMI’s (as defined in Section 1) anticipated
Restructuring (as defined in Section 1) of its indebtedness and capital
stock notwithstanding the possibility or occurrence of a Change in Control (as
defined in Section 1), to provide Executive with assurance of continued
employment beyond the expiration of the Prior Employment Agreement and to
provide compensation and benefits arrangements which are competitive with those
of other comparable and similarly situated corporations; and


 


WHEREAS, during
the period of the Company’s anticipated Restructuring, Executive’s continued
high performance and retention is critical to ensure that the Company maintains
its value; and


 


WHEREAS, Executive
has agreed to enter into this Agreement because the Company has satisfied all
of its obligations under the Prior Employment Agreement, including without
limitation, the making of payments upon the change in control of the Company on
February 17, 2004; and


 


WHEREAS, POAMI is
a direct and wholly owned subsidiary of the Company and will receive
substantial direct and indirect value from Executive; and


 


WHEREAS, each of
the board of directors of the Company and of POAMI has authorized the Company
and POAMI, respectively, to enter into this Agreement.


 


NOW, THEREFORE,
for and in consideration of the premises and the mutual covenants and
agreements herein contained, the Company, POAMI and Executive hereby agree as
follows:


 


1.                   Definitions.  As used in this Agreement, the following
terms shall have the respective meanings set forth below:


 

















 


(a)  “Board” means the Board of Directors
of the Company, as the case may be, whether prior to or after the
Restructuring.


 


(b)  “Bonus Amount” means:


 


(A)  for a Date of Termination
occurring in fiscal year 2004, the average of the annual incentive bonuses
payable by the Company to or for the benefit of or deferred by Executive for
the 2002 and 2003 fiscal years of the Company; and


 


(B)  for a Date of Termination
occurring after fiscal year 2004, the average of the annual incentive bonuses
payable by the Company to or for the benefit of or deferred by Executive for
the last three (3) completed fiscal years of the Company immediately preceding
the Date of Termination or Change in Control.


 


(c)  “Cause” means:


 


(A)  the willful and continued
failure of Executive to perform substantially his duties with the Company
(other than any such failure resulting from Executive’s incapacity due to
physical or mental illness or any such failure subsequent to Executive being
delivered a Notice of Termination without Cause by the Company or Executive
delivering a Notice of Termination for Good Reason to the Company) that is not
remedied within 30 days after a written demand for substantial performance
is delivered to Executive by the Chairman of the Board, the Chairman of the
Compensation Committee or the Chief Executive Officer which specifically
identifies the manner in which Executive has not substantially performed
Executive’s duties and that such failure if not remedied constitutes “Cause”
under this Agreement, or


 


(B)  Executive’s conviction by a
court of law, Executive’s admission in a legal proceeding that he is guilty or
Executive’s plea of nolo contendre,
in each case, with respect to a felony.


 


For purposes of
this subsection (c), no act or failure to act by Executive shall be
considered “willful” unless done or omitted to be done by Executive in bad
faith and without reasonable belief that Executive’s action or omission was in,
or not opposed to, the best interests of the Company.


 


(d)  “Change in Control” means


 


(i) the occurrence of any one of the following events after the earlier
of the date the Restructuring is consummated or December 31, 2005:


 


(A)  individuals who, as of the
date the Restructuring is consummated, constitute the Board (or, in the case no
Restructuring is consummated by December 31, 2005, the individuals who
constitute the Board as of such date) (the “Incumbent Directors”) cease for any
reason to constitute at least a majority of the Board, provided that any person
becoming a director subsequent to


 


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the date the
Restructuring is consummated (or, in the case no Restructuring is consummated
by December 31, 2005, December 31, 2005), whose election or
nomination for election was approved by a vote of at least two-thirds of the
Incumbent Directors then on the Board (either by a specific vote or by approval
of the proxy statement of the Company in which such person is named as a
nominee for director, without written objection to such nomination) or, prior
to the date that a Restructuring is consummated, as elected at any time by
Quadrangle Group shall be an Incumbent Director.


 


(B)  any “person” (as such term
is defined in Section 3(a)(9) of the Securities Exchange Act of 1934 (the
“Exchange Act”) and as used in Sections 13(d)(3) and 14(d)(2) of the
Exchange Act) is or becomes a “beneficial owner” (as defined in Rule 13d-3
under the Exchange Act), directly or indirectly, of securities of the Company
representing more than thirty-three and one-third percent (33 1/3%) of the
combined voting power of the Company’s then outstanding securities eligible to
vote for the election of the Board (the “Company Voting Securities”); provided, however, that the event
described in this paragraph (B) shall not be deemed to be a Change in
Control if such beneficial owner is any of the following or becomes a
beneficial owner as a result of any of the following:


 


(I)                                    one
or more Current Debt Holder or a syndicate or group in which one or more
Current Debt Holders, collectively, beneficially own a majority of the Company
Voting Securities beneficially owned by such syndicate or group;


 


(II)  any employee benefit plan
(or related trust) sponsored or maintained by the Company or any of its
Subsidiaries or one or more Current Debt Holder;


 


(III)  any underwriter
temporarily holding securities pursuant to an offering of such securities;


 


(IV)                            a
person involved in a Non-Qualifying Transaction (as defined in
paragraph (C));


 


(V)                                an
entity (x) controlled by Executive or a group of persons consisting, at
the time of such acquisitions, of Executive and other employees of the Company
or (y) of which the majority of common equity securities, at the time of
such acquisitions, is owned by Executive or a group of persons consisting of
Executive and other employees of the Company; or


 


(VI)                            any
event in which a Current Debt Holder continues to be directly or indirectly the
beneficial owner of a greater number of shares of the Company than that held by
any other person as a result of the event described in this paragraph (B)
or has the right to direct the vote of a greater number of voting securities
for directors (or the equivalent) of the Company than any other person as a
result of the event described in this paragraph (B);


 


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(C)  the consummation of a
merger, consolidation, statutory share exchange, sale of all or substantially
all of the assets of the Company or similar form of corporate transaction
(whether in one transaction or a series of transactions) involving the Company
(a “Business Combination”), unless immediately following such Business
Combination:


 


(I)                                    more
than 50% of the total voting power of (x) the corporation that owns,
leases or controls all or substantially all of the assets of the Company
resulting from such Business Combination (the “Surviving Corporation”), or
(y) if applicable, the ultimate parent corporation that directly or
indirectly has beneficial ownership of 100% of the voting securities eligible
to elect directors (or the equivalent) of the Surviving Corporation (the
“Parent Corporation”), is represented by Company Voting Securities that were
outstanding immediately prior to such Business Combination (or, if applicable,
is represented by shares into which such Company Voting Securities were
converted pursuant to such Business Combination);


 


(II)                                no
person (other than (a) one or more Current Debt Holder, (b) any employee
benefit plan (or related trust) sponsored or maintained by one or more Current
Debt Holder, the Surviving Corporation or the Parent Corporation or (c) a
syndicate or group in which one or more Current Debt Holders, collectively,
beneficially own a majority of the total voting power of the subject voting
securities beneficially owned by such syndicate or group) is or becomes the
beneficial owner, directly or indirectly, of more than thirty-three and
one-third percent (33 1/3%) of the total voting power of the outstanding voting
securities eligible to elect directors (or the equivalent) of the Parent
Corporation (or, if there is no Parent Corporation, the Surviving Corporation);
and


 


(III)                            at
least a majority of the members of the board of directors of the Parent
Corporation (or, if there is no Parent Corporation, the Surviving Corporation)
following the consummation of the Business Combination were Incumbent Directors
at the time of the Board’s approval of the execution of the initial agreement providing
for such Business Combination (any Business Combination which satisfies all of
the criteria specified in (I), (II) and (III) above shall be deemed to be a
“Non-Qualifying Transaction”); or


 


(D)  the Company substantially
completes a plan of complete liquidation or dissolution whether in one
transaction or a series of transactions;


 


(ii)  in connection with the
Restructuring, the occurrence of any one of the following events:


 


(A)  on the date the
Restructuring is consummated, any “person” (as such term is defined in
Section 3(a)(9) of the Exchange Act and as used in Sections 13(d)(3)
and 14(d)(2) of the Exchange Act) other than a Current Debt Holder (or a
syndicate or group in which one or more Current Debt Holders, collectively,
beneficially own a majority of the total voting power of the Company


 


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Voting Securities
beneficially owned by such syndicate or group) is or becomes a “beneficial
owner” (as defined in Rule 13d-3 under the Exchange Act), directly or
indirectly, of securities of the Company representing more than thirty-three
and one-third percent (33 1/3%) of the Company Voting Securities and is the
largest holder of Company Voting Securities issued in connection with the
Restructuring;


 


(B)  the consummation of a
Business Combination, unless immediately following such Business Combination:


 


(I)                                    more
than 50% of the total voting power of (x) the corporation that owns,
leases or controls all or substantially all of the assets of the Surviving Corporation,
or (y) if applicable, the Parent Corporation, is represented by Company
Voting Securities that were outstanding immediately prior to such Business
Combination (or, if applicable, is represented by shares into which such
Company Voting Securities were converted pursuant to such Business
Combination);


 


(II)                                no
person (other than (a) one or more Current Debt Holder, (b) any employee
benefit plan (or related trust) sponsored or maintained by one or more Current
Debt Holder, the Surviving Corporation or the Parent Corporation or (c) a
syndicate or group in which one or more Current Debt Holders, collectively,
beneficially own a majority of the total voting power of the subject voting
securities beneficially owned by such syndicate or group) is or becomes the
beneficial owner, directly or indirectly, of more than thirty-three and
one-third percent (33 1/3%) of the total voting power of the outstanding voting
securities eligible to elect directors (or the equivalent) of the Parent
Corporation (or, if there is no Parent Corporation, the Surviving Corporation);
and


 


(III)                            at
least a majority of the members of the board of directors of the Parent
Corporation (or, if there is no Parent Corporation, the Surviving Corporation)
following the consummation of the Business Combination were Incumbent Directors
at the time of the Board’s approval of the execution of the initial agreement
providing for such Business Combination; or


 


(C)  the Company substantially
completes a plan of complete liquidation or dissolution whether in one
transaction or a series of transactions.


 


(iii)  the occurrence of any one
of the following events prior to the earlier of the date the Restructuring is
consummated or December 31, 2005:


 


(A)  individuals who, as of the
date hereof or as otherwise elected by Quadrangle Group, constitute the Board
(the “Incumbent Directors”) cease for any reason to constitute at least a
majority of the Board, provided that any person becoming a director subsequent
to the date hereof, whose election or nomination for election was approved by a
vote of at least two-thirds of the Incumbent Directors then on the Board
(either by a specific vote or by approval of the proxy statement of


 


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the Company in
which such person is named as a nominee for director, without written objection
to such nomination) shall be an Incumbent Director.


 


(B)  any “person” (as such term
is defined in Section 3(a)(9) of the Exchange Act and as used in
Sections 13(d)(3) and 14(d)(2) of the Exchange Act) other than a Current
Debt Holder (or a syndicate or group in which one or more Current Debt Holders
beneficially own a majority of the debt of the Company and POAMI beneficially
owned by such syndicate or group) is or becomes a “beneficial owner” (as
defined in Rule 13d-3 under the Exchange Act as if such rule applied to
ownership of debt), directly or indirectly, of more than thirty-three and
one-third (33 1/3%) of the total debt of the Company and POAMI;


 


(C)  any “person” (as such term
is defined in Section 3(a)(9) of the Exchange Act and as used in
Sections 13(d)(3) and 14(d)(2) of the Exchange Act) other than a Current
Debt Holder (or a syndicate or group in which one or more Current Debt Holders,
collectively, beneficially own a majority of the total voting power of the
Company Voting Securities beneficially owned by such syndicate or group) is or
becomes a “beneficial owner” (as defined in Rule 13d-3 under the Exchange
Act), directly or indirectly, of securities of the Company representing more
than fifty percent (50%) of the Company Voting Securities; or


 


(D)  the consummation of a
Business Combination, unless immediately following such Business Combination:


 


(I)                                    more
than 50% of the total voting power of (x) the corporation that owns, leases
or controls all or substantially all of the assets of the Surviving
Corporation, or (y) if applicable, the Parent Corporation, is represented
by Company Voting Securities that were outstanding immediately prior to such
Business Combination (or, if applicable, is represented by shares into which
such Company Voting Securities were converted pursuant to such Business
Combination);


 


(II)                                no
person (other than one or more Current Debt Holder or any employee benefit plan
(or related trust) sponsored or maintained by one or more Current Debt Holder
(or a syndicate or group in which one or more of such persons, collectively,
beneficially own a majority of the total voting power of the subject voting
securities beneficially owned by such syndicate or group), the Surviving
Corporation or the Parent Corporation) is or becomes the beneficial owner,
directly or indirectly, of more than thirty-three and one-third percent (33
1/3%) of the total voting power of the outstanding voting securities eligible
to elect directors (or the equivalent) of the Parent Corporation (or, if there
is no Parent Corporation, the Surviving Corporation); and


 


(III)                            at
least a majority of the members of the board of directors of the Parent
Corporation (or, if there is no Parent Corporation, the Surviving Corporation)
following the consummation of the Business Combination were


 


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Incumbent
Directors at the time of the Board’s approval of the execution of the initial
agreement providing for such Business Combination.


 


It is the intent of the
parties that if an event that would constitute a “Change in Control” under this
Agreement occurs at POAMI, a “Change in Control” shall have occurred for the
purpose of this Agreement.  Upon the
occurrence of an event described in the preceding sentence, unless the context
otherwise requires, for purposes of this Agreement, POAMI shall be substituted
for the defined term “the Company” in the definition of “Change in Control”
together with appropriate changes to other references in the definition of
“Change in Control” to give effect to the parties’ intent;


 


(e)  “Citicorp Group” means Citibank
International plc, any fund that is controlled by the foregoing and, as
applicable, their respective partners, members, subsidiaries and affiliates
(including without limitation, any other entities controlled by or under common
control with such entities), where the assets of each such partner, member,
subsidiary or affiliate primarily consist of Company Voting Securities and/or
debt of the Company or POAMI.


 


(f)  “Current Debt Holders” means
Quadrangle Group, Citicorp Group and MacKay Shields Group.


 


(g)  “Date of Termination” means:


 


(A)  if Executive’s employment
is to be terminated for Disability, 30 days after Notice of Termination is
given (provided that Executive shall not have returned to the performance of
Executive’s duties on a full-time basis during such 30 day period);


 


(B)  if Executive’s employment
is to be terminated by the Company for Cause or by Executive for Good Reason,
the date specified in the Notice of Termination;


 


(C)  if Executive’s employment
is to be terminated by the Company for any reason other than Cause, the date
specified in the Notice of Termination, which shall be 90 days after the
Notice of Termination is given, unless an earlier date has been expressly
agreed to by Executive in writing;


 


(D)  if Executive’s employment
terminates by reason of death, the date of death of Executive; or


 


(E)  if Executive’s employment
is terminated by Executive in a Non-Qualifying Termination, the date specified
in Executive’s Notice of Termination, but not more than 30 days after the
Notice of Termination is given, unless expressly agreed to by the Company in
writing.


 


(h)  “Disability” means termination of
Executive’s employment by the Company due to Executive’s absence from
Executive’s duties with the Company on a full-time basis for at least
one-hundred-eighty (180) consecutive days as a result of Executive’s incapacity
due to physical or mental illness, unless within 30 days after Notice of
Termination is given to


 


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Executive following such
absence Executive shall have returned to the full-time performance of
Executive’s duties.


 


(i)  “Good Reason” shall mean termination
of Executive’s employment by Executive based on any of the following events:


 


(A)  any change in the duties or
responsibilities (including reporting responsibilities) of Executive that is
inconsistent in any material and adverse respect (which may be cumulative) with
Executive’s position(s), duties, responsibilities or status with the Company
(including any adverse diminution of such duties or responsibilities), provided, however, that Good Reason shall
not be deemed to occur upon a change in duties or responsibilities (other than
reporting responsibilities) that is solely and directly due to the Company no
longer being a publicly traded entity.


 


(B)  the failure to reappoint or
reelect Executive to any position held by Executive without Executive’s
consent;


 


(C)  a material breach of this
Agreement by the Company or POAMI including but not limited to reduction in
Executive’s Annual Base Salary (as defined in Section 4(a)) or other
reduction in medical, dental, life or disability benefits (except to the extent
such reductions apply consistently to all other senior executives),


 


(D)  failure to offer a
short-term incentive plan each year with a target bonus of not less than 60% of Annual Base Salary and a
potential to earn at least 100% of Annual Base Salary (unless Executive
consents otherwise, to be paid no later than the end of the first calendar
quarter after the year with respect to which such bonus relates);


 


(E)  the resignation by
Executive for any reason during the 30 day period beginning six months after
(i) the occurrence of a Change in Control described in Section 1(d)(ii) or
(ii) the occurrence of a Change in Control described in Section 1(d)(iii)


 


(F)  the resignation by
Executive for any reason during the 30 day period beginning on December 31,
2005, if a Restructuring is not consummated by such date;


 


(G)  the relocation by the
Company of Executive’s principal workplace location more than 35 miles from
Executive’s residence as of the date hereof;


 


(H)  failure by the Company to
comply with Section 25 (Indemnification of Prior Payments) within 60 days
of Executive’s written request for the Company’s compliance with
Section 25.


 


Executive must
provide Notice of Termination of employment within one-hundred-eighty (180)
days following Executive’s knowledge of an event or facts constituting Good
Reason (or the last


 


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of such events or
facts if cumulative) (other than under Sections (i)(E) and (i)(F) in which case
such notice must be provided within the 30 day period after (x)
December 31, 2005 or (y) six months after a Change in Control, as
applicable) or such event or facts shall not constitute Good Reason under this
Agreement.


 


(j)  “MacKay Group” means MacKay Shields,
LLC and any fund that is controlled by the foregoing and, as applicable, their
respective partners, members, subsidiaries and affiliates (including without
limitation, any other entities controlled by or under common control with such
entities), where the assets of each such partner, member, subsidiary or
affiliate primarily consist of Company Voting Securities and/or debt of the
Company or POAMI.


 


(k)  “Non-Qualifying Termination” means a
termination of Executive’s employment under any circumstances not qualifying as
a Qualifying Termination, including without limitation any termination by the
Company for Cause, any termination by Executive without Good Reason or for no
reason at all or any termination on account of death, Disability or Retirement.


 


(l)  “Notice of Termination” means a
written notice of termination of employment given by one party to the other
party pursuant to Section 16(b).


 


(m)  “POAMI” means Protection One Alarm
Monitoring, Inc., a Delaware corporation, and its successors and assignees.


 


(n)  “Quadrangle Group” means Quadrangle
Group LLC, POI Acquisition I, Inc., POI Acquisition, LLC, Quadrangle Master
Funding Ltd., any fund that is controlled by the foregoing and, as applicable,
their respective partners, members, subsidiaries and affiliates (including
without limitation, any other entities controlled by or under common control
with such entities), where the assets of each such partner, member, subsidiary
or affiliate primarily consist of Company Voting Securities and/or debt of the
Company or POAMI.


 


(o)  “Qualifying Termination” means a
termination of Executive’s employment (i) by the Company other than for
Cause, including by the Company providing notice of nonrenewal of this
Agreement or (ii) by Executive for Good Reason.  Termination of Executive’s employment on account of death,
Disability, Retirement shall not be treated as a Qualifying Termination.


 


(p)  “Restructuring” means shall mean any
transaction or series of transactions that effectuates any reorganization,
recapitalization, consolidation, business combination, merger, or other similar
transaction or any transaction that effectuates any material amendment to, or
other material change in, the Company’s or POAMI’s obligations or indebtedness
for borrowed money as of the date hereof (including accrued or accreted
interest thereon) excluding changes in beneficial ownership of such
indebtedness, but including, without limitation, (i) any amendment or
modification to the Company’s revolving credit facility, 7.375% Senior
Unsecured Notes due 2005 or 8.125% Senior Subordinated Notes due 2009 or that
modifies any material payment term or any material financial or operating
covenant or that provides for a forbearance of any material payment obligation
or material covenant, in each case, such that an amount that otherwise would be
due and payable (according to its terms, by put, upon default and acceleration
or otherwise) is


 


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delayed or otherwise
extended for at least twelve months or that converts a material amount of the
Company’s or POAMI’s obligations or indebtedness for borrowed money as of the
date hereof (including accrued or accreted interest thereon) to equity and/or
to a security junior to the claim’s existing priority or is otherwise
compromised, or any cash tender offer or any combination thereof; or (ii) (A)
any merger, consolidation, reorganization, recapitalization, business
combination or other transaction pursuant to which the Company is acquired by,
or combined with, any person, group of persons, partnership, corporation or
other entity other than a Current Debt Holder (an “Acquiror”) or (B) the
acquisition, directly or indirectly by an Acquiror (or by one or more persons
acting together with an Acquiror pursuant to a written agreement or otherwise),
in a single transaction or a series of transactions, of (x) all or a
preponderance of the assets or operations of the Company, or all or any
material portion of any operating division of the Company or (y) all,
substantially all, or a majority of the outstanding or newly issued shares of
the Company’s (or any of its Subsidiary’s) capital stock (or any securities
convertible into, or options, warrants or other rights to acquire such capital
stock); in each case, whether accomplished out-of-court or through the
confirmation of any plan of reorganization pursuant to Section 1129 of the
United States Bankruptcy Code, whether the requisite consents were obtained
in-court or out-of-court.


 


(q)  “Retirement” means Executive’s
termination of his employment on or after his attainment of age 65.


 


(r)  “Subsidiary” means any corporation or
other entity in which the Company has a direct or indirect ownership interest
of 50% or more of the total combined voting power of the then outstanding
securities or interests of such corporation or other entity entitled to vote
generally in the election of directors or in which the Company has the right to
receive 50% or more of the distribution of profits or 50% or more of the assets
upon liquidation or dissolution.


 


2.                   Employment
and Duties.


 


(a)     Term of Employment.  The Company agrees to employ Executive, and
Executive agrees to enter into employment with the Company, in accordance with
the terms and provisions of this Agreement, for the Term of this Agreement.  The execution of this Agreement shall
constitute acceptance by Executive and the Company that Executive’s employment
shall not terminate as a result of any Change in Control prior to the date
hereof.  Upon termination of Executive’s
employment (regardless of whether such termination constitutes a Qualifying
Termination or Non-Qualifying Termination), Executive shall be relieved of any
obligation to continue to perform the duties described in Section 2(b)
effective as of the Date of Termination. 
The termination of the employment relationship by either party for any
reason or for no reason at all shall not constitute a breach of this Agreement,
but certain obligations and benefits shall survive such termination of
employment as set forth in Section 19.


 


(b)    Duties.  During the period of Executive’s employment
under this Agreement, Executive shall serve as Executive Vice President
Operations of the Company, in which capacity Executive’s principal
responsibility will be managing the field operations of POAMI.  Executive shall devote Executive’s full
business time and attention to the affairs of the Company and his duties as its
Executive Vice President Operations. 
Executive shall have such duties as are appropriate to Executive’s
position as Executive Vice President Operations, and shall have such


 


10

















 


authority as required to
enable Executive to perform these duties. 
Consistent with the foregoing, Executive shall comply with all
reasonable instructions of the Chief Executive Officer and Board of Directors
of the Company.  Executive shall report
to the Chief Executive Officer. 
Executive may continue to reside in the State of New Jersey or in any
location that he wishes as long as he is able to effectively carry out the
duties contemplated by this Agreement. 
In addition, during the period of Executive’s employment under this
Agreement, Executive may serve as an officer and/or director of a Subsidiary or
Subsidiaries if requested to do so by the Board.  Executive may resign from the board of directors of any
Subsidiaries at any time in his sole and absolute discretion.


 


3.                   Term
of Agreement.  The Term of this
Agreement shall commence on the date of this Agreement and shall continue until
the earlier of (i) the second anniversary of the date of this Agreement or
(ii) the Date of Termination that results from a Qualifying Termination or
Non-Qualifying Termination.  If this
Agreement remains in effect through the second anniversary of the date of this
Agreement, it shall thereafter be automatically extended for an indefinite
number of one (1) year periods unless either party sends written notice to the
other party of its intention not to renew at least thirty (30) days prior to
expiration of said Term.  If the
election not to renew is made, this Agreement shall remain in full force and
effect for the remaining original term and any extension periods thereafter if
the original term has been renewed.  The
original term and any renewal periods thereafter are hereinafter collectively
referred to as the “Term.”  Certain
obligations and benefits shall survive the expiration of the Term as set forth
in Section 19.


 


4.                   Base
Salary and Benefits.


 


(a)     Base Salary.  During the period of Executive’s employment
under this Agreement, the Company shall pay Executive an annual base salary
(“Annual Base Salary”) at an annual rate equal to not less than Two Hundred
Sixty Seven Thousand and No/100 Dollars ($267,000.00), which shall be reviewed
annually by the Board or the Compensation Committee of the Board.  Executive’s Annual Base Salary shall be paid
in accordance with the standard practices for other senior corporate executives
of the Company.


 


(b)    Bonuses.  Executive shall be eligible to receive
annually or otherwise any bonus awards, whether payable in cash, shares of
common stock of the Company or otherwise, which the Company, the Board, the
Compensation Committee of the Board or such other authorized committee of the
Board determines to award or grant; provided, however, that Executive shall
participate under a short-term incentive plan (subject to its terms which shall
be reasonably determined by the Board and based on targets that are reasonably
attainable) each year with a target bonus of not less than 60% of base salary and a potential to
earn at least 100% of base salary. 
Executive acknowledges that he received a pro-rata portion of the 2004
annual bonus for the period of January 1, 2004 through February 17,
2004.  The bonus payable to Executive,
if any, under the short-term incentive plan with respect to 2004 shall be
calculated in accordance with the respective plan and shall take into account a
pro-ration based on the number of days from February 17, 2004 through
December 31, 2004 (i.e., 318/366)  Company
shall provide Executive with participation under a long-term equity incentive
plan (with terms that are competitive with companies of similar size and
similar circumstances and reasonably acceptable to Executive) upon consummation
of the Restructuring.


 


11

















 


(c)     Benefit Programs.  During the period of Executive’s employment
under this Agreement, Executive shall be eligible to participate in all
employee benefit plans and programs of the Company from time to time in effect
for the benefit of senior executives of the Company (subject to meeting
generally applicable participation requirements under the applicable plan or
program), including, but not limited to, retention plans, stock option plans,
restricted stock grants, 401(k) plans, group life insurance, hospitalization
and surgical and major medical coverages, sick leave, employee stock purchase
plans, car allowances, vacations and holidays, long-term disability, and such
other benefits as are or may be made available from time to time to senior
executives of the Company.  For purposes
of this Section 4(c), the term “the Company” shall also include
POAMI.  If there is a sale in an
underwritten public offering registered under the Securities Act of 1933, as
amended, of Company Voting Securities having an aggregate offering value of at
least $40 million, all of Executive’s Awards (as defined below) will fully
vest, all restrictions on such Awards shall lapse and the maximum level of
achievement of all performance criteria with respect to such Awards shall be
deemed fully satisfied.  In the case of
stock options or any other equity based Awards in the nature of a right that
may be exercised, such stock options and other equity based Awards shall remain
exercisable for three years after the Date of Termination.


 


(d)    Business Expenses and
Perquisites.  Executive shall be
reimbursed for all reasonable expenses incurred by Executive in connection with
the conduct of the business of the Company, provided Executive properly
accounts therefor in accordance with the Company’s policies. During the period
of Executive’s employment under this Agreement, Executive shall also be
entitled to such other perquisites as are customary for senior executives of
the Company.  The parties hereto
acknowledge that Executive’s employment will entail substantial travel away
from Executive’s residence and that Executive’s reimbursable business expenses
will include reasonable travel expenses, including without limitation,
reasonable costs of air travel (including use of American Airlines AAirpass or
equivalent) and other transportation, frequent travel to and from New Jersey,
parking, rental cars, hotel accommodations and meals incurred with respect to
travel to and from his residence and any of the Company’s facilities outside of
Morris County, New Jersey and other travel associated with the performance of
his duties hereunder.  If it is
determined by the Company that any portion of the Company’s reimbursement of
the travel expenses described in the preceding sentence constitutes taxable wages
for federal income and/or employment tax purposes, the Company agrees to pay
Executive an additional amount (the “Gross-Up Payment”) such that the net
amount retained by Executive from the amount of the travel expenses reimbursed
pursuant to the preceding sentence (the “Travel Reimbursement”) and the
Gross-Up Payment, after reduction for any federal, state and local income and
employment taxes on the Travel Reimbursement and the Gross-Up Payment, shall
equal the Travel Reimbursement.  For
purposes of determining the Gross-Up Payment, Executive shall be deemed to pay
Federal income taxes at the highest marginal rate of Federal income taxation in
the calendar year in which the Gross-Up Payment is to be made and state and
local income taxes at the highest marginal rate of taxation to which such
payment could be subject based upon the state and locality of Executive’s
resident or employment, net of the maximum deduction in Federal income taxes
which could be obtained from deducting such state and local taxes. The Company
shall make a determination of the amount of any employment taxes required on
the Gross-Up Payment.


 


12

















 


(e)     Office and Services
Furnished.  During the period of
Executive’s employment under this Agreement, the Company shall make available
to Executive office space at the Company’s branch located closest to
Executive’s residence, to the extent needed while he is at such branch,
secretarial assistance and such other facilities and services as shall be
suitable to Executive’s position and adequate for the performance of
Executive’s duties hereunder.  During
the period of Executive’s employment under this Agreement, the Company shall
install and maintain, at its expense, a broadband (cable modem or DSL)
connection at his home for the use of Executive in connection with the
performance of his duties hereunder. 
Executive shall not be required to be in the Company’s headquarters
except as he may determine necessary for him to effectively carry out the duties
contemplated by this Agreement.


 


(f)     Retention Bonus.  Executive will receive two retention bonuses
each in an amount equal to 67.5% of Executive’s Annual Base Salary (with such
Annual Base Salary to be determined as of the date such bonus is paid) (“Retention
Bonus”).  The first retention bonus
shall be payable if he remains continuously employed by the Company from the
date hereof through the earlier of the date of the consummation of the
Restructuring or December 31, 2004 or, if prior to the consummation of the
Restructuring or such date, as applicable, (i) he is terminated by the Company
other than for Cause, (ii) he resigns his employment because of Good Reason or
(iii) the Company does not renew the Agreement upon expiration of the Term.  The second retention bonus shall be payable
if he remains continuously employed by the Company from the date hereof through
the earlier of the date of the consummation of the Restructuring or
December 31, 2005 or, if prior to the consummation of the Restructuring or
such date, as applicable, (i) he is terminated by the Company other than for
Cause, (ii) he resigns his employment because of Good Reason or (iii) the
Company does not renew the Agreement upon expiration of the Term.  Payment of any amount pursuant to this
paragraph shall not reduce any other payments or benefits to which Executive is
entitled under this Agreement.  Should
the Chief Executive Officer of the Company agree to forgo any portion of his
Retention Bonus for any reason at any time, Executive agrees to forgo the same
percentage of his Retention Bonus.


 


5.                   Payments
Upon Termination of Employment.


 


(a)     Qualifying Termination.  If the employment of Executive terminates
pursuant to a Qualifying Termination, then:


 


(A)  within five (5) business
days following the Date of Termination, the Company shall pay to Executive a
lump-sum cash payment equal to the sum of


 


(I)                                    Executive’s
Annual Base Salary payable through the Date of Termination;


 


(II)                                bonus
amounts payable to Executive for prior fiscal years (to the extent not
previously paid);


 


(III)                            bonus
amounts not paid to Executive as a result of Executive’s election to defer
payment;


 


(IV)                            a
pro rata portion of Executive’s annual bonus for the fiscal year in which
the Date of Termination occurs (to the extent not previously paid)


 


13

















 


in an amount at
least equal to (1) Executive’s Bonus Amount multiplied by a fraction, the
numerator of which is the number of days in a fiscal year in which the Date of
Termination occurs through the Date of Termination and the denominator of which
is three hundred sixty-five (365), and reduced by (2) any amounts paid to
Executive from the Company’s annual incentive plan for the fiscal year in which
the Date of Termination occurs; and


 


(V)                                the
cash equivalent of any accrued Paid Time Off; in each case to the extent not
already paid.


 


(B)  within five (5) business
days following the Date of Termination, the Company shall pay to Executive a
cash lump-sum equal to the sum of 2.0 times Executive’s highest Annual Base
Salary during the 12-month period immediately prior to the Date of Termination,
plus 2.0 times Executive’s Bonus
Amount; provided, however, if a Notice of Termination is given by the Company
or Executive within four months prior to a Change in Control or one year
following a Change of Control, the Company shall pay Executive an additional
lump-sum cash payment equal to (x) .99 times Executive’s highest Annual
Base Salary during the 12-month period immediately prior to the Date of
Termination plus (y) .99
times Executive’s Bonus Amount;


 


(C)  the Company shall continue,
for a period of three (3) years following Executive’s Date of Termination, to
provide Executive (and Executive’s dependents, if applicable) with substantially
similar levels of medical, dental, and life insurance benefits upon
substantially similar terms and conditions as Executive would have been
entitled to receive if he had continued in employment; provided, that, if Executive cannot
continue to participate in the Company benefit plans providing such benefits,
the Company shall otherwise provide, at the Company’s option, (i) such
benefits on a substantially similar basis as if continued participation had
been permitted through the Company’s benefit plans (the “Continued Benefit
Plans”) or (ii) a lump-sum cash payment based on the cost of premiums
comparable to those that would be required to receive such benefits on a
substantially similar basis plus the amount of any conversion fees required to
convert from group coverage to individual coverage under the Company’s existing
benefit plans (the “Benefits Lump-Sum Payment”).  If the Company elects to provide Executive with Continued Benefit
Plans, Executive shall cooperate with the Company and each provider of any such
Continued Benefit Plan in order for the Company to obtain such Continued
Benefit Plans for Executive, which cooperation shall include but not be limited
to providing copies of medical records and other information required by any
provider of such Continued Benefit Plan and undergoing one or more physical
examinations.  If the Company elects to
provide Executive with the Benefits Lump-Sum Payment, the Company shall notify
Executive of its intention to make this election not later than 90 days
prior to the date on which Executive’s coverage under existing benefit plans
will expire, and if, within 60 days after Executive receives such
notification from the Company, Executive presents the Company with one or more
benefit plans that Executive has obtained or intends to obtain that provide
benefits on a substantially similar basis as the benefits provided


 


14

















 


to Executive prior
to the Date of Termination (and acknowledgment from the provider of such
benefit plans that such benefit plans have been or can be obtained by Executive
on those terms, including, without limitation, at least substantially similar
scope of coverage, substantially similar deductibles and substantially similar
co-payments), then the Benefits Lump-Sum Payment shall be made based on the
premiums plus any other administrative fees (except co-payments) charged by the
Company offering such plans.  If the
Company elects to provide Executive with the Benefits Lump-Sum Payment and it
is determined by the Company that any portion of the Benefits Lump-Sum Payment
constitutes taxable wages for federal income and/or employment tax purposes,
the Company agrees to pay Executive an additional amount (the “Benefits
Gross-Up Payment”) such that the net amount retained by Executive from the
Benefit Lump-Sum Payment and the Benefits Gross-Up Payment, after reduction for
any federal, state and local income and employment taxes on the Benefits
Lump-Sum Payment and the Benefits Gross-Up Payment, shall equal the Benefits
Lump-Sum Payment.  Notwithstanding the
foregoing, in the event Executive becomes reemployed with another employer and
becomes eligible to receive benefits from such employer, the benefits described
herein shall be secondary to such benefits during the period of Executive’s
eligibility, but only to the extent that the Company reimburses Executive for
any increased cost and provides any additional benefits necessary to give
Executive the benefits provided hereunder; and


 


(D)  all outstanding stock options,
restricted stock and other equity based awards (collectively, “Awards”) shall
fully vest, all restrictions on such Awards shall lapse and the maximum level
of achievement of all performance criteria with respect to such Awards shall be
deemed fully satisfied.  In the case of
stock options or any other equity based Awards in the nature of a right that
may be exercised, such stock options and other equity based Awards shall remain
exercisable for three years after the Date of Termination.


 


(b)    Non-Qualifying
Termination.  If the employment of
Executive terminates pursuant to a Non-Qualifying Termination, then the Company
shall pay to Executive within five (5) business days following the Date of
Termination, a lump-sum cash payment equal to the sum of (i) Executive’s
Annual Base Salary payable through the Date of Termination; (ii) bonus
amounts earned by Executive and declared and approved by the Board; and
(iii) the cash equivalent of any accrued Paid Time Off; in each case to
the extent not already paid.  The
Company may make such additional payments and provide such additional benefits
to Executive as the Company and Executive may agree in writing.


 


15

















 


6.                   Excise
Tax Gross Up.


 


(a)     Anything in this Agreement
to the contrary notwithstanding, in the event that it shall be determined that
the vesting of Awards, aggregate payments or distributions by the Company or
its affiliated companies to or for the benefit of Executive, whether paid or
payable or distributed or distributable pursuant to the terms of this Agreement
or otherwise but determined without regard to any additional payments required
under this Section 6 (a “Payment”), constitute “parachute payments” (as
such term is defined under Section 280G of the Internal Revenue Code of
1986, as amended (the “Code”) or any successor provision, and the regulations
promulgated thereunder (collectively, “Section 280G”)) the aggregate
present value of which equals or exceeds three times Executive’s “base amount”
(as such term is defined under Section 280G) and are therefore subject to
the excise tax imposed by Section 4999 of the Code or any successor
provision (collectively, “Section 4999”) or any interest, penalties or
additions to tax with respect to such excise tax (the total excise tax,
together with any interest, penalties or additions to tax, are hereinafter
collectively referred to as the “Excise Tax”)), then Executive shall be
entitled to receive an additional payment (a “Gross-Up Payment”) in an amount
such that after payment by Executive of all taxes (including any interest or
penalties imposed with respect to such taxes), including, without limitation,
any Federal, state or local income and employment taxes and Excise Tax (and any
interest and penalties imposed with respect to any such taxes) imposed upon the
Gross-Up Payment, Executive retains an amount of the Gross-Up Payment equal to
the Excise Tax imposed upon the Payments. 
Notwithstanding the foregoing, Executive agrees to reduce the aggregate
amount of any Payments that constitute “parachute payments” to the extent
necessary so that such Payments do not equal or exceed three times Executive ‘
s “base amount”  (and therefore are not
subject to the excise tax imposed by Section 4999); provided, however, that
Executive shall not be required to make any such reduction if the reduction
necessary to cause such Payments not to equal or exceed three times Executive’s
“base amount” is more than $100,000.


 


(b)    Subject to the provisions
of Section 6(c) hereof, all determinations required to be made under this
Section 6, including whether and when a Gross-Up Payment is required and
the amount of such Gross-Up Payment and the assumptions to be utilized in
arriving at such determination, shall be made by the Company’s public
accounting firm (the “Accounting Firm”) which shall provide detailed supporting
calculations both to the Company and Executive within fifteen (15) business
days of the receipt of notice from Executive that there has been a Payment, or
such earlier time as is requested by the Company.  In the event that the Accounting Firm is serving as accountant or
auditor for the individual, entity or group effecting the change in control,
Executive may appoint another nationally recognized public accounting firm to
make the determinations required hereunder (which accounting firm shall then be
deemed to be the Accounting Firm hereunder). 
All fees and expenses of the Accounting Firm shall be borne solely by
the Company. Any Gross-Up Payment, as determined pursuant to this
Section 6, shall be paid by the Company to Executive within five (5) days
of the receipt of the Accounting Firm’s determination (it being understood,
however, that the Gross Up Payment may, if permitted by law, be paid directly
to the applicable taxing authorities). 
If the Accounting Firm determines that no Excise Tax is payable by
Executive, it shall furnish Executive with a written opinion that failure to
report the Excise Tax on Executive’s applicable federal income tax return would
not result in the imposition of a negligence or similar penalty.  Any determination by the Accounting Firm
shall be binding upon the Company and Executive.  As a result of the


 


16

















 


uncertainty in the
application of Section 4999 at the time of the initial determination by
the Accounting Firm hereunder, it is possible that Gross-Up Payments which will
not have been made by the Company should have been made by the Company
(“Underpayment”), or that Gross-Up Payments will have been made by the Company
which should not have been made (“Overpayment”), consistent with the
calculations required to be made hereunder. 
In either such event, the Accounting Firm shall determine the amount of
the Underpayment or Overpayment that has occurred.  In the event that the Company exhausts its remedies pursuant to
Section 6(c) and Executive thereafter is required to make a payment of any
Excise Tax, the Accounting Firm shall determine the amount of the Underpayment
that has occurred and any such Underpayment shall be promptly paid by the
Company to or for the benefit of Executive. 
In the case of an Overpayment, Executive shall, at the direction and
expense of the Company, take such steps as are reasonably necessary (including,
if reasonable, the filing of returns and claims for refund), and otherwise
reasonably cooperate with the Company to correct such Overpayment; provided,
however, that (i) Executive shall not in any event be obligated to return to
the Company an amount greater than the net after-tax portion of the Overpayment
that he has retained or has recovered as a refund from the applicable taxing
authorities and (ii) this provision shall be interpreted in a manner consistent
with the intent of Section 6(a) hereof to make Executive whole, on an
after-tax basis, from the application of Section 4999.


 


(c)     Executive shall notify the
Company in writing of any claim by the Internal Revenue Service that, if
successful, would require a payment by the Company, or a change in the amount
of the payment by the Company of, the Gross-Up Payment.  Such notification shall be given as soon as
practicable after Executive is informed in writing of such claim and shall
apprise the Company of the nature of such claim and the date on which such
claim is requested to be paid; provided that the failure to give any notice
pursuant to this Section 6(c) shall not impair Executive’s rights under
this Section 6 except to the extent the Company is materially prejudiced
thereby.  Executive shall not pay such
claim prior to the expiration of the 30-day period following the date on which
Executive gives such notice to the Company (or such shorter period ending on
the date that any payment of taxes with respect to such claim is due).  If the Company notifies Executive in writing
prior to the expiration of such period that it desires to contest such claim,
Executive shall:


 


(i)                 give
the Company any information reasonably requested by the Company relating to
such claim,


 


(ii)              take
such action in connection with contesting such claim as the Company shall
reasonably request in writing from time to time, including, without limitation,
accepting legal representation with respect to such claim by an attorney
reasonably selected by the Company,


 


(iii)           cooperate
with the Company in good faith in order effectively to contest such claim, and


 


(iv)          permit the
Company to participate in any proceedings relating to such claim; provided,
however, that the Company shall bear and pay directly all costs and expenses
(including additional interest, penalties or additions to tax) incurred in
connection with such contest and shall indemnify and hold Executive harmless,


 


17

















 


on an after-tax
basis, for any Excise Tax or income, employment or other tax (including
interest, penalties or additions to tax with respect thereto) imposed as a
result of such representation and payment of costs and expenses.  Without limitation on the foregoing
provisions of this Section 6(c) hereof, the Company shall control all
proceedings taken in connection with such contest and, at its sole option, may
pursue or forgo any and all administrative appeals, proceedings, hearings and
conferences with the taxing authority in respect of such claim and may, at its
sole option, either direct Executive to pay the tax claimed and sue for a
refund or contest the claim in any permissible manner, and Executive agrees to
prosecute such contest to a determination before any administrative tribunal,
in a court of initial jurisdiction and in one or more appellate courts, as the
Company shall determine; provided further, that if the Company directs
Executive to pay such claim and sue for a refund, the Company shall advance the
amount of such payment to Executive on an interest-free basis and shall
indemnify and hold Executive harmless, on an after-tax basis, from any Excise
Tax or income, employment or other tax (including interest, penalties or
additions to tax with respect to any such taxes) imposed with respect to such
advance or with respect to any imputed income with respect to such advance; and
provided further, that any extension of the statute of limitations relating to
payment of taxes for the taxable year of Executive with respect to which such
contested amount is claimed to be due is limited solely to such contested
amount.  Furthermore, the Company’s
control of the contest shall be limited to issues with respect to which a
Gross-Up Payment would be payable hereunder and Executive shall be entitled to
settle or contest, as the case may be, any other issue raised by the Internal
Revenue Service or any other taxing authority.


 


(d)    If, after the receipt by
Executive of an amount advanced by the Company pursuant to Section 6(c)
hereof, Executive becomes entitled to receive, and receives, any refund with
respect to such claim, Executive shall (subject to the Company’s complying with
the requirements of Section 6(c) hereof) promptly pay to the Company the
amount of such refund (together with any interest paid or credited thereon
after taxes applicable thereto).  If,
after the receipt by Executive of an amount advanced by the Company pursuant to
Section 6(c), a determination is made that Executive shall not be entitled
to any refund with respect to such claim and the Company does not notify
Executive in writing of its intent to contest such denial of refund prior to
the expiration of thirty (30) days after such determination, then such advance
shall be forgiven and shall not be required to be repaid and the amount of such
advance shall offset, to the extent thereof, the amount of Gross-Up Payment
required to be paid.


 


7.                   Non-Competition.  Executive hereby acknowledges that the
services which he will perform for the Company are of a special and unique
nature, and that the Company would find it extremely difficult or impossible to
replace Executive.  Accordingly,
Executive agrees that, in consideration of this Agreement and the payments to
be received by him hereunder, from and after the date hereof through the period
during which Executive continues to be employed by the Company and following
termination of Executive’s employment for any reason until the second
anniversary of such termination of employment (the “Non-Competition Period”),
Executive shall not, directly or indirectly, own, manage, operate, join,
control or participate in the ownership, management, operation or control of,
or be connected as a director, officer,


 


18

















 


employee, partner,
lender, consultant or otherwise (“Participate” or a “Participation”) with any
Competitor (as hereinafter defined), except with the Company’s prior written
consent.  For purposes of this
Agreement, the term “Competitor” shall mean any entity engaged in the business
of providing property monitoring services with revenue in excess of One Hundred
Sixty Million Dollars ($160,000,000) during the most recent twelve (12) month
period for which financial statements are available, including without
limitation, ADT Security Services, Brink’s Home Security, Inc., Honeywell Inc.
and their respective subsidiaries, affiliates and successors.  Nothing in this section shall prohibit
Executive from owning for investment purposes an aggregate of up to 3% of the
publicly traded securities of any corporation listed on the New York Stock
Exchange or American Stock Exchange or whose securities are quoted on the
NASDAQ National Market.  Notwithstanding
anything which may be to the contrary herein, Executive shall not be required
to cease Participation in any business or organization which begins to compete
with the Company subsequent to the time Executive commences such Participation,
provided that such business or
organization began to compete with the Company through no action, assistance,
or plan of Executive.


 


It is the desire
and intent of the parties that the provisions of this Section 7 shall be
enforced under the laws and public policies applied in each jurisdiction in
which enforcement is sought. 
Accordingly, if any particular provision of this Section 7 is
adjudicated to be invalid or unenforceable or shall for any reason be held to
be excessively broad as to duration, geographic scope, activity or subject, it
shall be construed by limiting and reducing it, so as to be enforceable to the
extent compatible with applicable law and such provision shall be deemed
modified and amended to the extent necessary to render such provision
enforceable in such jurisdiction.


 


If Executive
challenges the enforceability of the provisions of this Section 7 in whole
or in part as to any Competitors, Executive shall, immediately upon such
challenge, forfeit any right to any payments and benefits under
Section 5(a) or 5(b) that he has not already received.


 


8.                   Confidential
Information.  Executive acknowledges
that:


 


(a)     the business of the
Company and its Subsidiaries and affiliates is intensely competitive and that
Executive’s engagement by the Company requires that Executive have access to
and knowledge of confidential information of the Company and its Subsidiaries
and affiliates, including, but not limited to, the identity of customers, the
identity of the representatives of customers with whom the Company and its
Subsidiaries and affiliates have dealt, the kinds of services provided by the
Company and its Subsidiaries and affiliates to customers and offered to be
performed for potential customers, the manner in which such services are
performed or offered to be performed, the service needs of actual or
prospective customers, pricing information, information concerning the
creation, acquisition or disposition of products and services, customer
maintenance listings, computer software applications and other programs,
personnel information and other trade secrets (the “Confidential Information”);


 


(b)    the direct or indirect
disclosure of such Confidential Information to existing or potential
competitors of the Company and its Subsidiaries and affiliates would place the
Company and its Subsidiaries and affiliates at a competitive disadvantage and
would do damage, monetary or otherwise, to the business of the Company and its
Subsidiaries and affiliates; and


 


19

















 


(c)     the engaging by Executive
in any of the activities prohibited by this Section 8 may constitute
improper appropriation and/or use of such information and trade secrets.


 


Notwithstanding
the foregoing, Confidential Information shall not include information which (x)
is or becomes part of the public domain through a source other than Executive,
(y) is or becomes available to Executive from a source independent of the
Company and its Subsidiaries and affiliates, or (z) constitutes general
industry knowledge possessed by Executive by virtue of Executive’s employment
with the Company.  Executive expressly
acknowledges the trade secret status of the Confidential Information and that
the Confidential Information constitutes a protectable business interest of the
Company and its Subsidiaries and affiliates. 
Accordingly, the Company and Executive agree as follows:


 


(A)  During the Non-Competition
Period, Executive shall not, directly or indirectly, whether individually, as a
director, stockholder, owner, partner, employee, principal or agent of any
business, or in any other capacity, make known, disclose, furnish, make
available, or use any of the Confidential Information, other than in the proper
performance of the duties contemplated herein or requested by the Company, or
as required by law or by a court of competent jurisdiction or other
administrative or legislative body; provided,
however, that prior to disclosing any of the Confidential
Information to a court or other administrative or legislative body, Executive
shall promptly notify the Company so that the Company may seek a protective
order or other appropriate remedy.


 


(B)  Executive agrees to return
all computer hardware and all Confidential Information, including all
photocopies, extracts and summaries thereof, and any such information stored
electronically on tapes, computer disks or in any other manner to the Company
at any time upon request of the Chairman of the Board or the Chief Executive
Officer of the Company and upon the termination of Executive’s employment for
any reason.


 


9.                   Nonsolicitation.  During the Non-Competition Period, Executive
shall not, directly or indirectly, solicit, interfere with, hire, offer to hire
or induce any person who is an employee of the Company or any of its
Subsidiaries or affiliates and whose salary is in excess of $50,000 to
discontinue his or her relationship with the Company or any of its Subsidiaries
or affiliates and accept employment by, or enter into a business relationship
with, Executive or any other person or entity; provided,
however, that this provision shall not apply to solicitation by
general advertising.


 


10.             Antidisparagement.


 


(a)  Unless otherwise required by a court of
competent jurisdiction, pursuant to any recognized subpoena power or by any
applicable law, rule or regulation, Executive agrees and promises that
Executive shall not make any oral or written statements or reveal any
information to any person, company or agency which (i) is materially
negative, disparaging or damaging to the name, reputation or business of the
Company or any of its Subsidiaries or affiliates, or any of their shareholders,
directors, officers or employees, or (ii) has or would have a materially
negative financial impact, whether directly or indirectly, on the Company or
any of 


 


20

















 


its Subsidiaries and
affiliates, or any of their shareholders, directors, officers or employees; provided that this subsection (ii)
shall not be deemed to have been violated by statements or releases of
information by Executive during the period of his employment under this
Agreement which Executive believes to be truthful and which are made in the
performance of his duties under this Agreement.


 


(b)    Unless otherwise required
by a court of competent jurisdiction, pursuant to any recognized subpoena power
or by any applicable law, rule or regulation, the Company agrees and promises
that neither it nor any of its Subsidiaries and affiliates shall make any oral
or written statements or reveal any information to any person, company or
agency which (i) is materially negative, disparaging or damaging to the
name, reputation or business of Executive or (ii) has or would have a
negative financial impact whether directly or indirectly, on Executive.


 


11.             Injunctive
Relief.


 


(a)     Executive acknowledges
that a breach of the undertakings in Sections 7, 8, 9 or 10(a) of this
Agreement would cause irreparable damage to the Company and its Subsidiaries
and affiliates, the exact amount of which shall be difficult to ascertain, and
that remedies at law for any such breach would be inadequate.  Executive agrees that, if Executive breaches
or attempts or threatens to breach any of the undertakings in Sections 7,
8, 9 or 10(a) of this Agreement, then the Company shall be entitled to
injunctive relief without posting bond or other security, in addition to any
other remedy or remedies available to the Company at law or in equity.


 


(b)    The Company acknowledges
that a breach of the undertakings in Section 10(b) of this Agreement would
cause irreparable damage to Executive, the exact amount of which shall be
difficult to ascertain, and that remedies at law for any such breach would be
inadequate.  The Company agrees that, if
the Company or any of its Subsidiaries or affiliates breaches or attempts or
threatens to breach any of the undertakings in Section 10(b) of this
Agreement, then Executive shall be entitled to injunctive relief, without
posting bond or other security, in addition to any other remedy or remedies
available to Executive at law or in equity.


 


12.             Withholding
Taxes.  The Company may withhold
from all payments due to Executive (or his beneficiary or estate) hereunder all
taxes which, by applicable federal, state, local or other law, the Company is
required to withhold therefrom. 
Executive has represented that he is and will continue to be a resident
of the State of New Jersey for all purposes.


 


13.             Directors
and Officers Insurance; Indemnity. 
The Company shall take all steps necessary to ensure that Executive is
covered under any directors and officers liability insurance policy in effect
from time to time for current and former directors and officers of the Company.  In addition, the Company shall hold harmless
and indemnify Executive against any and all expenses (including attorneys’
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by Executive in connection with any threatened, pending, or completed
action, suit, or proceeding whether civil, criminal, administrative, or
investigative (including an action by or in the right of the corporation) to
which Executive is, was, or at any time becomes a party, or is threatened to be
made a party, by reason of the fact that Executive is, was, or at any time
becomes a director, officer, employee or agent of the Company, or is or was


 


21

















 


serving, or at any
time serves at the request of the Company as a director, officer, employee, or
agent of another corporation, partnership, joint venture, trust, or other
enterprise; or otherwise to the fullest extent as may be provided to Executive
by the Company under the provisions of the Bylaws and the Articles of
Incorporation of the Company and Delaware law.


 


14.             Scope
of Agreement.  Nothing in this
Agreement shall be deemed to entitle Executive to continued employment with the
Company or its Subsidiaries or shall require Executive to continue the employment
relationship against his wishes; provided,
however, that any termination of Executive’s employment during the
Term of this Agreement shall be subject to all of the provisions of this
Agreement as provided in Section 19.


 


15.             Successors;
Binding Agreement.


 


(a)     This Agreement shall inure
to the benefit of and be legally binding upon all successors and assigns of the
Company and POAMI.  The Company and
POAMI will require a successor (whether direct or indirect, by purchase,
merger, consolidation or otherwise) to all or substantially all of the business
and/or assets of the Company and/or POAMI, by agreement in form and substance
satisfactory to Executive, to expressly assume and agree to perform this
Agreement in the same manner and to the same extent that the Company and POAMI
would be required to perform it if no such succession had taken place.  For purposes of this Section 15(a),
“Company” shall mean the Company as defined above and all successors to its
business or assets that execute and deliver the agreement provided for in this
Section 15(a) or that otherwise become bound by the terms and provisions
of this Agreement by operation of law. 
For purposes of this Section 15(a), “POAMI” shall mean POAMI as
defined above and all successors to its business or assets that execute and
deliver the agreement provided for in this Section 15(a) or that otherwise
become bound by the terms and provisions of this Agreement by operation of law


 


(b)    This Agreement shall inure
to the benefit of and be enforceable by Executive’s personal or legal
representatives, executors, administrators, successors, heirs, distributes,
devisees and legatees.  If Executive
shall die while any amounts would be payable to Executive hereunder had
Executive continued to live, all such amounts, unless otherwise provided
herein, shall be paid in accordance with the terms of this Agreement to such
person or persons appointed in writing by Executive to receive such amounts or,
if no person is so appointed, to Executive’s estate.


 


16.             Notice.


 


(a)     For purposes of this
Agreement, all notices and other communications required or permitted hereunder
shall be in writing and shall be deemed to have been duly given when delivered
or five (5) days after deposit in the United States mail, certified and return
receipt requested, postage prepaid, addressed as follows:


 


	
  If to Executive:

  	
  Peter J. Pefanis

  
	
   

  	
  141 Forest Drive

  
	
   

  	
  Stirling, NJ
  07980

  



 


22

















 


	
  If to the
  Company:

  	
  Protection One,
  Inc.

  
	
   

  	
  818 S. Kansas
  Avenue

  
	
   

  	
  Topeka, KS 66612

  
	
   

  	
  Attention:  General Counsel

  



 


or to such other
address as either party may have furnished to the other in writing in
accordance herewith, except that notices of change of address shall be
effective only upon receipt.


 


(b)    A written notice of
Executive’s Date of Termination by the Company or Executive, as the case may
be, to the other, shall (i) indicate the specific termination provision in
this Agreement relied upon, (ii) to the extent applicable, set forth in
reasonable detail the facts and circumstances claimed to provide a basis for
termination of Executive’s employment under the provision so indicated, and
(iii) specify the Date of Termination. 
The failure by Executive or the Company to set forth in such notice any
fact or circumstance which contributes to a showing of Good Reason or Cause
shall not waive any right of Executive or the Company hereunder or preclude
Executive or the Company from asserting such fact or circumstance in enforcing
Executive’s or the Company’s rights hereunder.


 


17.             Full
Settlement; Resolution of Disputes. 
Subject to Section 25, the Company’s obligation to make any
payments provided for in this Agreement and otherwise to perform its
obligations hereunder shall be in lieu and in full settlement of all other
severance payments to Executive under any other severance or employment
agreement between Executive and the Company, and any severance plan of the
Company.  In no event shall Executive be
obligated to seek other employment or take other action by way of mitigation of
the amounts payable to Executive under any of the provisions of this Agreement
and except as otherwise provided in Section 5 (a)(iii), such amounts shall
not be reduced whether or not Executive obtains other employment. Any dispute or
controversy arising under or in connection with this Agreement shall be settled
exclusively by arbitration in Wilmington, Delaware by three arbitrators in
accordance with the rules of the American Arbitration Association then in
effect.  Judgment may be entered on the
arbitrators’ award in any court having jurisdiction.  The arbitrators shall determine the allocation of the costs and
expenses arising in connection with any arbitration proceeding pursuant to this
section based on the arbitrator’s assessment of the merits of the
positions of the parties.


 


18.             Employment
with Subsidiaries.  Employment with
the Company for purposes of this Agreement shall include employment with any
Subsidiary.


 


19.             Survival.  The respective obligations and benefits
afforded to the Company and Executive as provided in Sections 1, 5, 6, 7, 8, 9,
10, 11, 12, 13, 15, 17, 19, 20, 22, 23, 24, 25, 26 and 27 shall survive the
termination of this Agreement.


 


20.             GOVERNING
LAW; VALIDITY.  THE INTERPRETATION,
CONSTRUCTION AND PERFORMANCE OF THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF
DELAWARE WITHOUT REGARD TO THE PRINCIPLE OF CONFLICTS OF LAWS.  THE INVALIDITY OR


 


23

















 


UNENFORCEABILITY
OF ANY PROVISION OF THIS AGREEMENT SHALL NOT AFFECT THE VALIDITY OR
ENFORCEABILITY OF ANY OTHER PROVISION OF THIS AGREEMENT, WHICH OTHER PROVISIONS
SHALL REMAIN IN FULL FORCE AND EFFECT.


 


21.             Counterparts.  This Agreement may be executed in counterparts,
each of which shall be deemed to be an original and all of which together shall
constitute one and the same instrument.


 


22.             Miscellaneous.  No provision of this Agreement may be
modified or waived unless such modification or waiver is agreed to in writing
and signed by Executive and by a duly authorized officer of the Company.  No waiver by either party hereto at any time
of any breach by the other party hereto of, or compliance with, any condition
or provision of this Agreement to be performed by such other party shall be
deemed a waiver of similar or dissimilar provisions or conditions at the same
or at any prior to subsequent time. 
Failure by Executive or the Company to insist upon strict compliance
with any provision of this Agreement or to assert any right Executive or the
Company may have hereunder, including without limitation, the right of
Executive to terminate employment for Good Reason, shall not be deemed to be a
waiver of such provision or right or any other provision or right of this Agreement.  Except as otherwise specifically provided
herein, the rights of, and benefits payable to, Executive, his estate or his
beneficiaries pursuant to this Agreement are in addition to any rights of, or
benefits payable to, Executive, his estate or his beneficiaries under any other
employee benefit plan or compensation program of the Company.


 


23.             No
Mitigation.  Subject to
Section 25, the amounts payable to Executive upon any termination of his
employment shall be considered severance pay in consideration of past services
rendered on behalf of the Company and his continued service from the date
hereof to the date he becomes entitled to such payments and shall be the sole
amount of severance pay to which Executive is entitled from the Company and its
affiliates upon termination of his employment. 
Executive shall have no duty to mitigate his damages by seeking other
employment and, should Executive actually receive compensation from any such
other employment, the payments required hereunder shall not be reduced or
offset by any such other compensation.


 


24.             Legal
Fees.  All legal fees of Paul
Hastings incurred by Executive in connection with negotiating this employment
agreement and in connection with the Restructuring within the scope of
engagement set forth in the letter of engagement between Executive and Paul
Hastings dated July 6, 2004 shall be paid by the Company.  


 


25.             Indemnification
of Prior Payments.  The Company
hereby agrees to defend (or reimburse Executive for reasonable costs of
defense), protect and indemnify Executive from and against any and all
liabilities, obligations, damages, judgments, claims, costs, expenses and
disbursements of any kind or nature whatsoever asserted against Executive in
any manner relating to or arising out of or in connection with any payments
(“Prior Payments”) previously paid to Executive, including, without limitation,
those payments resulting as of the change in control that occurred on
February 17, 2004, and any obligation of the Company to make such Prior
Payments contained in any employment agreement or other agreement shall
continue to be effective or be reinstated, as the case may be, if at any time
payment and performance of such Prior Payments or any part thereof is rescinded
or reduced in amounts or must otherwise be


 


24

















 


restored or
returned to the Company or its successors by Executive, whether as a “voidable
preference,” “fraudulent conveyance” or otherwise, all as though such payment
or performance had not been made (in whole or in part, as applicable).  If any such Prior Payment, or any part
thereof is rescinded, reduced, restored or returned, the agreement and
obligation to make such Prior Payments shall be reinstated and the obligation
to make such Prior Payment shall be reduced only by such amount paid and not so
rescinded, reduced, restored or returned. 
All obligations and amounts payable pursuant to this Agreement,
including those set forth in this Section 25, shall, to the maximum extent
permitted under law, constitute administrative priority expenses pursuant to
Bankruptcy Code Sections 503(b) and 507(a)(1) of the Company’s estate in the
event of a bankruptcy filing by or against the Company.


 


26.             POAMI’s
Obligations.  All of the obligations
of the Company hereunder shall also be direct obligations of POAMI without the
need for Executive to seek or exhaust remedies against the Company.


 


27.             Entire
Agreement.  This Agreement
constitutes the entire agreement of the parties with respect to its subject
matter and supersedes and replaces all previous verbal or written agreements
that the parties may have made, including the Prior Employment Agreement.


 


*   *  
*   *   *


 


[Remainder
of page intentionally left blank. 
Signatures on next page.]


 


25

















 


IN WITNESS
WHEREOF, each of the Company and POAMI has caused this Agreement to be executed
by a duly authorized representative of the Company and POAMI and Executive has
executed this Agreement as of the day and year first above written.


 


 


	
   

  	
  PROTECTION
  ONE, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/
  Richard Ginsburg

  
	
   

  	
  Its:

  	
  President
  and CEO

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  PROTECTION
  ONE ALARM MONITORING, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/
  Richard Ginsburg

  
	
   

  	
  Its:

  	
  President
  and CEO

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/
  Peter J. Pefanis

  
	
   

  	
   

  	
    Peter
  J. Pefanis