Document:

Exhibit
10.5

 

OPTION AGREEMENT

 

Protection One, Inc. (the “Company”),
pursuant to its 2004 Stock Option Plan (the “Plan”), hereby grants to
the Participant Options to purchase the number of shares of Stock set forth
below.  The Options are subject to all of
the terms and conditions set forth herein as well as all of the terms and
conditions of the Plan, all of which are incorporated herein in their
entirety.  Capitalized terms not
otherwise defined herein shall have the same meaning as set forth in the Plan;
provided that the term “Permissible Distribution Event” shall have the
meaning set forth in the Protection One, Inc. Stock Appreciation Rights
Plan.  In the event of a conflict or
inconsistency between the terms and provisions of the Plan and the provisions
of this Agreement, the Plan shall govern and control.

 

	
  Participant:

  	
   

  
	
   

  	
   

  
	
  Date of Grant:

  	
  February 8, 2005

  
	
   

  	
   

  
	
  Number of Shares of Stock

  Subject to the Options:

  	
  

  
	
   

  	
   

  
	
  Exercise Price per Share:

  	
  $7.50

  
	
   

  	
   

  
	
  Expiration Date:

  	
  Six years from the date of
  grant.

  
	
   

  	
   

  
	
  Type of Option:

  	
  The Options granted hereby are
  intended to qualify as incentive stock options (“ISOs”) to the extent
  permissible under the requirements of Section 422 of the Code (and shall
  constitue nonqualifeid stock options to the extent such Options do not
  qualify as ISOs).

  
	
   

  	
   

  
	
  Vesting Schedule:

  	
  Subject to the Participant’s
  continued employment through the applicable vesting date and subject to Section 6(g)
  of the Plan, Options covering one-forty-eighth (1/48th) of the
  total shares of Stock set forth above shall vest and become exercisable on
  the last day of each full calendar month following the date of grant.

  
	
   

  	
   

  
	
  Exercise of Options

  	
  A Participant may exercise (subject to Section 6(g)
  and other provisions of the Plan) vested Options in whole or in part at any
  time and from time to time prior to their expiration; provided that, notwithstanding anything to the
  contrary in Section 6(g) of the Plan, outstanding Options that are
  vested at the time of, or in connection with, a Permissible Distribution Event
  shall expire if such Options are not exercised, or terminated in exchange for
  a net payment (if any) in accordance with Section 7(b) of the Plan,
  (1) within 6 months of the date of such Permissible Distribution
  Event, if such Permissible Distribution Event is an event described in
  paragraph (i), (ii) or (iii) of Section 409A(a)(2)(A) of the Code,
  or (2) within 10 calendar days of such Permissible Distribution
  Event, if such Permissible Distribution Event is an event described

  

 

 

	
   

  	
  in paragraph (v) of Section 409A(a)(2)(A)
  of the Code (provided, for the avoidance of doubt, that outstanding
  Options that are unvested at the time of a Permissible Distribution Event
  shall not expire as a result of this proviso);
  and provided, further, that regardless of when exercise occurs, the
  shares of Stock (as adjusted pursuant to the Plan) to be issued upon such
  exercise shall only be issued and delivered to the Participant according to
  the terms set forth below (and any such shares shall be issued and delivered
  according to the terms set forth below regardless of whether the Participant’s
  employment with the Company has terminated, for any reason, prior to the date
  on which such shares are to be so issued and delivered).

  
	
   

  	
   

  
	
  Delivery of Shares

  	
  Any shares of Stock that a Participant has
  purchased through the exercise of Options will be issued and delivered to the
  Participant, and any net payment due to a Participant in accordance with Section 7(b)
  of the Plan shall be paid to the Participant, upon (and only upon) the earlier
  of:

   

  (1) 6 months after a Permissible
  Distribution Event that is described in paragraphs (i), (ii) or (iii) of
  Section 409A(2)(A) of the Code; or

   

  (2) 10 calendar days after a Permissible
  Distribution Event that is described in paragraph (v) of Section 409A(2)(A)
  of the Code; or

   

  (3) the sixth anniversary of the date
  of grant

   

  (the earlier of such dates, a “Payment
  Date”);

   

  provided, for the
  avoidance of doubt, that there may be more than one Payment Date in the event
  a Permissible Distribution Event occurs prior to the date that all of a
  Participant’s outstanding Options have vested; and provided, further,
  that shares of Stock issuable and deliverable to a Participant shall be
  subject to adjustment and substitution (but not accelerated delivery) as
  provided in Section 7 of the Plan (and upon such issuance and delivery
  the Company shall also issue, if applicable, and deliver to the Participant
  all dividends or other distributions (including cash or securities and
  including, if applicable, merger consideration) that would have accrued on or
  been issued or delivered in respect of such shares from the date of exercise
  with respect thereto through the date of such issuance and delivery had
  shares been issued and delivered on the date of exercise); and provided,
  further, that to the extent the Participant’s right to receive Stock
  is converted pursuant to Section 7(b) of the Plan into a right to

  

 

2

 

	
   

  	
  receive cash, the amount of cash so payable
  shall be credited with interest at six percent (6%) per annum, compounded
  annually, from the date such conversion is effective until the applicable
  Payment Date.

  
	
   

  	
   

  
	
  Holding Period for Shares Issued

  Upon Exercise of ISOs

  	
  Participant will report to the
  Company any disposition of shares purchased upon exercise of an ISO prior to
  the expiration of the holding periods specified by Section 422(a)(1) of
  the Code. If and to the extent that such disposition imposes upon the Company
  federal, state, local or other withholding tax requirements, or any such
  withholding is required to secure for the Company an otherwise available tax
  deduction, the Participant shall remit to the Company an amount sufficient to
  satisfy those requirements.

  

 

 

THE UNDERSIGNED
PARTICIPANT ACKNOWLEDGES RECEIPT OF THE PLAN AND, AS AN EXPRESS CONDITION TO
THE GRANT OF OPTIONS UNDER THIS OPTION AGREEMENT, AGREES TO BE BOUND BY THE
TERMS OF BOTH THE OPTION AGREEMENT AND THE PLAN.

 

	
  PROTECTION ONE, INC.

  	
   

  	
  PARTICIPANT

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  By:

  	
   

  	
   

  	
   

  	
   

  
	
  Signature

  	
   

  	
  Signature

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Name:

  	
   

  	
   

  	
   

  	
   

  
	
  Title:

  	
   

  	
   

  	
  Date:

  	
   

  	
   

  
	
  Date:

  	
   

  	
   

  	
   

  	
   

  	
   

  
								

 

3Exhibit 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.

 

 

(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

 

2

 

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

 

3

 

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).

 

4

 

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

 

5

 

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.

 

6

 

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

 

7

 

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

 

8

 

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

 

9

 

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

 

10

 

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.

 

11

 

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.

 

12

 

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.

 

13

 

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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