Document:

Exhibit 10.7

 

Grant Agreement

 

I
acknowledge receipt of a copy of the Protection One, Inc. Stock Appreciation
Rights Plan (the “Plan) to which this Grant Agreement is attached.  As a condition of being selected as a
Participant in the Plan, I agree to be bound by the terms of the Plan and to
accept the decisions of the Committee taken in accordance with such terms.  Except as otherwise required by law or with
the express prior written consent of the Committee, I agree to keep the
existence and terms of this Plan, and the amount of my award, strictly
confidential.  I further agree that the
benefits, if any, that are paid or payable under the Plan shall in no event be
taken into account for purposes of determining the amount of any severance or
similar benefit to which I may be entitled under my employment agreement, or
any other plan, agreement or practice of the Company, regardless of the date of
implementation.

 

	
  Grant
  Date:

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
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  Agreed
  and Accepted by

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Print
  Name: 

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Signature:
  

  	
   

  	
   

  	
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  PROTECTION
  ONE, INC.

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  By:

  	
   

  	
   

  	
  Date:

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Print
  Name:

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Title:

  	
  Chief Executive OfficerEXIBIT 10.8

 

MANAGEMENT
STOCKHOLDER’S AGREEMENT

 

This MANAGEMENT STOCKHOLDER’S AGREEMENT (this
“Agreement”) is entered into as of February 8, 2005 (the “Effective
Date”) by and among Protection One, Inc., a Delaware corporation (the “Company”),
POI Acquisition, L.L.C., a Delaware limited liability company (“POI
Acquisition”), Quadrangle Master Funding Ltd, a Cayman Islands limited
liability company (“QDRF”) and the undersigned person (the “Management
Stockholder”) (the Company, POI Acquisition, QDRF and the Management
Stockholder being hereinafter collectively referred to as the “Parties”).

 

WHEREAS, (i) POI Acquisition owns two-thirds
of the outstanding shares of common stock of POI Acquisition I, Inc. (“PAII”),
which directly owns approximately 88% of the outstanding shares of common stock
of the Company prior to the Restructuring, and QDRF owns one-third of the
outstanding shares of common stock of PAII and (ii) POI Acquisition owns
two-thirds of the lenders’ rights under a revolving Credit Facility with Protection
One Alarm Monitoring, Inc. (“POAM”), a wholly-owned subsidiary of the
Company, dated December 21, 1998 (as modified, amended, renewed, extended
or restated from time to time, the “Credit Facility”) and QDRF owns
one-third of the lenders’ rights under the Credit Facility;

 

WHEREAS, pursuant to an exchange agreement
dated as of November 12, 2004 (as amended, modified or supplemented, the “Exchange
Agreement”), by and among the Company, POAM, POI Acquisition, PAII and
QDRF, in connection with discharge of certain indebtedness under the Credit
Facility, the Company will issue 10,666,667 shares of Common Stock to POI
Acquisition and 5,333,333 shares of Common Stock to QDRF (the “Restructuring”);

 

WHEREAS, in connection with the
Restructuring, the Management Stockholder wishes to acquire the number of
shares of Common Stock set forth herein; and

 

WHEREAS, the execution and delivery of this
Agreement by the Parties hereto is a condition precedent to the consummation of
the Restructuring pursuant to Section 4.6 of the Exchange Agreement.

 

NOW, THEREFORE, in consideration of the
mutual promises and agreements set forth herein and in the Exchange Agreement,
and other valuable consideration, the receipt and sufficiency of which is
hereby acknowledged, the Parties hereto hereby agree as follows:

 

SECTION 1.                                Definitions
and Terms.

 

1.1                                 Definitions:  As used in this Agreement, the following
capitalized terms shall have the following meanings:

 

“Affiliate” shall mean, with respect
to any entity, any other entity that, directly or indirectly through one or
more intermediaries, controls, is controlled by or is under common control with
such entity.  For the purposes of this
definition, control means the possession, direct 

 

 

or indirect, of the power to direct or cause the direction of the
management and policies of a Person (as such term is used for purposes of Section 13(d)
or 14(d) of the Exchange Act), whether through the ownership of voting
securities, by contract or otherwise.

 

“Agreement” shall have the meaning set
forth in the introductory paragraph.

 

“Cash Equivalents” shall mean any of
the following:

 

(1)                                  securities
issued or directly and fully guaranteed or insured by the United States
government or any agency or instrumentality of the United States (provided that the full faith and credit of
the United States is pledged in support thereof), having maturities of not more
than one year from the date of acquisition;

 

(2)                                  marketable
general obligations issued by any state of the United States of America or any
political subdivision of any such state or any public instrumentality thereof
maturing within one year from the date of acquisition of the United States (provided that the full faith and credit of
the United States is pledged in support thereof) and, at the time of
acquisition, having a credit rating of “A” or better from either Standard &
Poor’s Ratings Services or Moody’s Investors Service, Inc.;

 

(3)                                  certificates
of deposit, time deposits, eurodollar time deposits, overnight bank deposits or
bankers’ acceptances having maturities of not more than one year from the date
of acquisition thereof issued by any commercial bank the long-term debt of
which is rated at the time of acquisition thereof at least “A” or the
equivalent thereof by Standard & Poor’s Ratings Services, or “A” or the
equivalent thereof by Moody’s Investors Service, Inc., and having combined
capital and surplus in excess of $500 million; or

 

(4)                                  commercial
paper rated at the time of acquisition thereof at least “A-2” or the equivalent
thereof by Standard & Poor’s Ratings Services or “P-2” or the equivalent
thereof by Moody’s Investors Service, Inc., or carrying an equivalent rating by
a nationally recognized rating agency, if both of the two named rating agencies
cease publishing ratings of investments, and in any case maturing within one
year after the date of acquisition thereof.

 

“Common Stock” shall mean the shares
of common stock, $0.01 par value per share, of the Company.

 

“Company” shall have the meaning set
forth in the introductory paragraph.

 

“Drag-Along Rights” shall have the
meaning set forth in Section 5.2(a) hereof.

 

“Effective Date” shall have the
meaning set forth in the introductory paragraph.

 

“Exchange Act” shall mean the
Securities Exchange Act of 1934, as amended from time to time, and the rules
and regulations promulgated thereunder.

 

2

 

“Holder” shall have the meaning set
forth in Section 6.2 hereof.

 

“Management Stockholder” shall have
the meaning set forth in the introductory paragraph.

 

“Management Stockholder’s Estate”
shall mean, as used in Section 3.1(b), the conservators, guardians,
executors, administrators, testamentary trustees, legatees or beneficiaries of
the Management Stockholder.

 

“Management Stockholder’s Trust” shall
mean, as used in Section 3.1(c), a partnership, limited liability company,
corporation, trust or custodianship, the beneficiaries of which may include
only the Management Stockholder, his or her parents, his or her spouse (or
ex-spouse) or lineal descendants (including adopted) or, if at any time after
any such transfer there shall be no then living spouse or lineal descendants,
then to the ultimate beneficiaries of any such trust or to the estate of a
deceased beneficiary.

 

“Marketable Securities” shall mean
securities that are traded on an established securities exchange, reported
through an established over-the-counter trading system or otherwise traded
over-the-counter.

 

“Offeror” shall have the meaning set
forth in Section 4.1 hereof.

 

“Other Selling Stockholders” shall
mean any holders of shares of Common Stock, other than the Management
Stockholder and POI Acquisition, possessing tag-along rights, drag-along rights
or registration rights of similar terms and conditions as those provided to the
Management Stockholder pursuant to this Agreement.

 

“Parties” shall have the meaning set
forth in the introductory paragraph.

 

“Permanent Disability” shall mean “Disability”
or “Permanent Disability” (as applicable) as such term may be defined in any
employment agreement or change-in-control agreement in effect at the time of
termination between the Management Stockholder and the Company or any of its
Affiliates; or, if there is no such employment or change-in-control agreement, “Permanent
Disability” shall mean the permanent and total disability of a person within
the meaning of Section 22(e)(3) of the Internal Revenue Code of 1986, as
amended.

 

“Permitted Transfer” shall mean:  (i) a transfer to an Affiliate, (ii) a
Registered Sale or (iii) a Rule 144 Sale.

 

“Piggyback Registration” shall have
the meaning set forth in Section 6.1.

 

“Piggyback Shares” shall have the
meaning set forth in Section 6.2.

 

“POI Acquisition” shall have the
meaning set forth in the introductory paragraph.

 

“Purchase Stock” shall have the
meaning set forth in Section 2.1 hereof.

 

“QDRF” shall have the meaning set
forth in the introductory paragraph.

 

3

 

“Qualified Public Offering” shall mean
(i) an underwritten public offering (either primary or secondary) of shares of
Common Stock that is registered under the Securities Act with an aggregate
offering value of at least $40 million or (ii) an offering of shares of Common
Stock that is registered under the Securities Act in connection with a merger,
consolidation, exchange offer (but not an exchange offer for securities of the
Company or any of its subsidiaries) or other business combination transaction,
in each case with an aggregate offering value (based on the fair market value
of the shares of Common Stock offered determined as of the date of the closing
of the applicable transaction) of at least $40 million.

 

“Qualified Sale” shall mean the first
transaction that results in the Quadrangle Parties (which has the meaning
ascribed thereto in the Exchange Agreement) and their Affiliates, as a group,
having sold, assigned or otherwise transferred (including, without limitation,
by merger, consolidation or distribution), in one or more transaction, to one
or more parties that are not affiliated with the Quadrangle Parties, an
aggregate of at least 60% of the aggregate number of shares , adjusted in
accordance with Section 10 below, of Common Stock owned by the Quadrangle
Parties, as a group, on the Effective Date.

 

“Registered Sale” shall mean a sale of
shares of Common Stock effected pursuant to an effective registration statement
under the Securities Act.

 

“Restructuring” shall have the meaning
set forth in the recitals.

 

“Rule 144 Sale” shall mean a sale of
shares of Common Stock pursuant to Rule 144 promulgated under the Securities
Act (or any similar rule then in effect).

 

“Securities Act” shall mean the
Securities Act of 1933, as amended from time to time and the rules and
regulations promulgated thereunder.

 

“Tag-Along Rights” shall have the
meaning set forth in Section 5.1(b) hereof.

 

“Third Party Offer” shall have the
meaning set forth in Section 4.1 hereof.

 

“Transfer” shall have the meaning set
forth in Section 3.1 hereof.

 

“Underwritten Offering” shall mean a
distribution, registered pursuant to the Securities Act, in which securities of
the Company are sold to the public through one or more underwriters in a “firm
commitment” underwriting.

 

1.2                       When
used in this Agreement, the term “including” shall be deemed to mean “including,
without limitation”, all references to “dollars” or “$” are to United States
dollars, the masculine pronoun shall include the feminine and neuter, and the
singular the plural, where the context so indicates.  The words “hereof,” “herein” and “hereunder”
and words of similar import when used in this Agreement shall refer to this
Agreement as a whole and not to any particular provision of this Agreement, and
Section references are to this Agreement unless otherwise specified.  The meanings given to terms defined herein
shall be equally applicable to both the singular and plural forms of such
terms.

 

4

 

SECTION 2.                                Purchase
of Common Stock.

 

2.1                       Subject
to the terms and conditions hereinafter set forth, at the Effective Date, the
Company shall, or shall cause its duly authorized agent to, issue and deliver
to Management Shareholder the number of shares of Common Stock specified on the
signature page hereto (such shares, the “Purchase Stock”), and in
consideration for such issuance and delivery, the Management Shareholder shall,
or shall cause its duly authorized agent to, pay to the Company in immediately
available funds the amount specified on the signature page hereto.

 

2.2                                 The
Effective Date shall be the same date as the “Closing Date” under the Exchange
Agreement.

 

SECTION 3.                                Transfers.

 

3.1                       The
Management Stockholder agrees not to, directly or indirectly, offer, transfer,
sell, assign, pledge, hypothecate or otherwise distribute or dispose of (any of
the foregoing acts being referred to herein as a “transfer”), shares of
Purchase Stock at any time prior to the date of consummation of the earlier of
a Qualified Public Offering or a Qualified Sale; provided, however,
that during such period the Management Stockholder may transfer shares of
Purchase Stock pursuant to any of the following exceptions:

 

(a)          a
transfer made pursuant to and in accordance with Sections 3.2, 4, 5 or 6
hereof;

 

(b)         a
transfer upon the death or Permanent Disability of the Management Stockholder
to the Management Stockholder’s Estate or a transfer to the executors,
administrators, testamentary trustees, legatees or beneficiaries of a person
who has become a holder of shares of Purchase Stock in accordance with the
terms of this Agreement; provided that such transfer is made expressly subject
to this Agreement and that the transferee agrees in writing to be bound by the
terms and conditions hereof;

 

(c)          a
transfer made in compliance with the federal securities laws to a Management
Stockholder’s Trust, provided that such transfer is made expressly subject to
this Agreement and that the transferee agrees in writing to be bound by the
terms and conditions hereof; and

 

(d)         other
transfers permitted, in writing, by POI Acquisition acting in its sole
discretion.

 

No transfer of any such shares in violation
hereof shall be made or recorded on the books of Company and any such transfer
shall be void ab initio and of no effect.

 

3.2                       Notwithstanding
the provisions of Section 3.1 above, if, at any time prior to the date of
consummation of the earlier of a Qualified Public Offering or a Qualified Sale,
POI Acquisition has transferred shares of Common Stock held by it (after giving
effect to the Restructuring) as of the Effective Date, other than to an
Affiliate, the Management Stockholder shall be permitted to transfer, in the
aggregate (including transfers made pursuant to Sections 4, 5 and 6 hereof),
the Pro Rata Portion (as defined below) of his or her shares of Purchase
Stock.  As

 

5

 

used in this subsection, “Pro Rata Portion” shall mean a
fraction, the numerator of which is equal to the number of shares of Common
Stock transferred by POI Acquisition, other than to an Affiliate, and the
denominator of which is the aggregate number of shares of Common Stock held
(after giving effect to the Restructuring) by POI Acquisition as of the
Effective Date.

 

SECTION 4.                                Right
of First Refusal. 

 

4.1                       If,
at any time prior to the date of consummation of the earlier of a Qualified Public
Offering or a Qualified Sale, the Management Stockholder receives a bona fide
offer to purchase any or all shares of his or her Purchase Stock (such shares,
the “Offered Shares” and such offer, the “Third Party Offer”)
from one or more third parties (the “Offeror”) (other than a transfer
made pursuant to and in accordance with Section 3.1(b), Section 3.1(c),
Section 3.1(d), Section 3.2, Section 5 or Section 6), which
the Management Stockholder wishes to accept, the Management Stockholder shall
notify POI Acquisition and QDRF (the “Quadrangle Purchasers”) in writing
of his or her wish to accept the Third Party Offer.  The Management Stockholder’s notice to each
Quadrangle Purchaser shall contain an irrevocable offer to sell the Offered
Shares to such Quadrangle Purchaser (in the manner and subject to the
provisions set forth below) at a purchase price equal to the price contained
in, and on substantially the same terms and conditions of, the Third Party
Offer.  At any time within
fifteen (15) days after the date of the receipt by a Quadrangle Purchaser
of the Management Stockholder’s notice, such Quadrangle Purchaser shall have
the right and option to purchase, or to arrange for a third party (including,
for purposes of this sentence, the Company) to
purchase, up to its pro rata portion of the Offered Shares based on the number
of shares of Common Stock held by each such Quadrangle Purchaser at the time
the calculation is made relative to the aggregate number of shares of Common
Stock held by all of the Quadrangle Purchasers at such time and, in the event
that a Quadrangle Purchaser does not elect to purchase its pro rata portion of
the Offered Shares, then the other Quadrangle Purchaser shall be entitled to
purchase any such Offered Shares not elected to be purchased; provided, that
any Quadrangle Purchaser electing to purchase Offered Shares shall notify the
other Quadrangle Purchaser at least two days prior to tendering payment for
such shares pursuant to Section 4.2.

 

4.2                       A
Quadrangle Purchaser shall exercise its right of first refusal by delivering a
certified bank check or checks in the appropriate amount (or by wire transfer
of immediately available funds, if the Management Stockholder provides to the
Quadrangle Purchaser wire transfer instructions) (and any such non-cash
consideration to be paid) to the Management Stockholder against delivery of
certificates or other instruments representing the Offered Shares so purchased,
appropriately endorsed by the Management Stockholder.  If at the end of the 15-day period, the
Quadrangle Purchaser(s) have not tendered the purchase price for any of the
Offered Shares in the manner set forth above, the Management Stockholder may,
during the succeeding 60-day period, sell to one or more third parties some or
all of the Offered Shares on terms no less favorable to the Management
Stockholder than those contained in the Third Party Offer.  Promptly after such sale, the Management
Stockholder shall notify the Quadrangle Purchasers of the consummation thereof
and shall furnish such evidence of the completion and time of completion of
such sale and of the terms thereof as may reasonably be requested by the
Quadrangle Purchasers.  To the extent
that, at the end of sixty (60) days following the expiration of the 15-day
period during which the Quadrangle Purchasers are entitled hereunder to
purchase the Offered Shares, the Management Stockholder has not completed the
sale of all Offered 

 

6

 

Shares, all of the restrictions on sale, transfer or assignment
contained in this Agreement shall, to the extent applicable, again be in effect
with respect to any Offered Shares that have not been sold.

 

SECTION 5.                                Tag-Along
and Drag-Along Rights.

 

5.1                       Tag-Along
Rights.

 

(a)                        In
the event that POI Acquisition proposes to transfer (other than by way of a
Permitted Transfer) a number of shares of Common Stock representing at least
25% of the total number of shares of Common Stock outstanding at such time (any
of the foregoing, a “Sale”) at any time prior to the date of
consummation of the earlier of a Qualified Public Offering or a Qualified Sale,
then unless POI Acquisition is entitled to give and does give a Drag-Along
Notice pursuant to Section 5.2, POI Acquisition shall give notice (a “Notice
of Intention to Sell”) to the Management Stockholder and the Company
promptly, and in any event not more than ten (10) days after the execution and
delivery by all the parties thereto of the definitive agreement relating to the
Sale, setting forth in reasonable detail the terms and conditions of such
proposed Sale, including the number of shares of Common Stock proposed to be so
transferred, the name of the third party purchaser, the proposed amount and the
form of consideration.  In the event that
the terms and/or conditions set forth in the Notice of Intention to Sell are
thereafter amended in any respect, POI Acquisition shall give written notice
(an “Amended Notice”) of the amended terms and conditions of the
proposed Sale promptly to the Management Stockholder and the Company.

 

(b)                       The
Management Stockholder shall have the right, exercisable upon written notice to
POI Acquisition within 20 days after the Management Stockholder’s receipt of
any Notice of Intention to Sell, or, if later, within 20 days of the Management Stockholder’s
receipt of the most recent Amended Notice, to participate in the proposed Sale
by POI Acquisition to the proposed purchaser on the terms and conditions set
forth in such Notice of Intention to Sell or the most recent Amended Notice, as
the case may be (such participation rights being hereinafter referred to as “Tag-Along
Rights”).  The Management Stockholder
may participate with respect to shares of his or her Purchase Stock in an
amount equal to the product obtained by multiplying (i) the aggregate number of
shares of his or her Purchase Stock at the time of Management Stockholder’s
receipt of the Notice of Intention to Sell by (ii) a fraction, the numerator of
which is equal to the number of shares of Common Stock proposed to be sold or
transferred by POI Acquisition and the denominator of which is the aggregate
number of shares of Common Stock owned by the POI Acquisition.  If the Management Stockholder has not
notified POI Acquisition of his or her intent to exercise tag-along rights 20
days after receipt of the Notice of Intention to Sell or, if later, within 20
days of receipt of an Amended Notice, the Management Stockholder shall be
deemed to have elected not to exercise such tag-along rights with respect to
the Sale contemplated by such Notice of Intention to Sell or such Amended
Notice, as the case may be (in the case of an Amended Notice, regardless of its
election pursuant to the Notice of Intention to Sell relating to such
Sale).  If the number of shares of Common
Stock elected to be sold by POI Acquisition and the Management Stockholder, in
addition to the number of shares of Common Stock elected to be sold by Other
Selling Stockholders pursuant to similar tag-along rights as those contained in
this Agreement, is greater than the number of shares of Common Stock specified
in the Notice of Intention to Sell, the number of shares of Common Stock being
sold by 

 

7

 

each such holder shall be reduced such that the applicable holder shall
be entitled to (and obligated to) sell only its pro rata portion of the number
of shares of Common Stock specified in the Notice of Intention to Sell (based
on the number of shares of Common Stock owned by such holder to the total
number of shares of Common Stock owned by all of such electing holders).  If the Management Stockholder elects not to
include the maximum number of shares of his or her Purchase Stock that would
have been permitted for inclusion in a proposed Sale, POI Acquisition and the Other
Selling Stockholders may sell in the proposed Sale a number of additional
shares of Common Stock owned by any of them equal to their pro rata portion of
the number of shares of Common Stock eligible to be included in the proposed
Sale and not so elected to be included (based on the number of shares of Common
Stock owned by such holder to the total number of shares of Common Stock owned
by all of such electing holders).

 

(c)                        If
the Management Stockholder exercises its rights under this Section 5.1,
the closing of the sale of the shares of Common Stock with respect to which
such rights have been exercised will take place concurrently with the closing
of the sale of the shares of Purchase Stock to the purchaser.

 

(d)                       In
connection with any Sale pursuant to this Section 5.1, the Management
Stockholder shall make to the purchaser in the Sale the same representations,
warranties, covenants, indemnities and agreements as POI Acquisition makes in
connection with the proposed Sale (except that in the case of representations,
warranties, covenants, indemnities and agreements pertaining specifically to
POI Acquisition, the Management Stockholder exercising his or her “tag-along”
rights shall make the comparable representations, warranties, covenants,
indemnities and agreements pertaining specifically to his or herself); provided,
that all representations, warranties, covenants and indemnities shall be made
by POI Acquisition, the Management Stockholder and any Other Selling
Stockholders severally and not jointly. 
Each of POI Acquisition, the Management Stockholder and any Other
Selling Stockholders participating in the Sale will be responsible for funding
its proportionate share of any escrow arrangements in connection with the Sale
and for its proportionate share of any withdrawals therefrom.  All fees, commissions, adjustments to
purchase price, expenses and indemnities of POI Acquisition, the Management
Stockholder and any Other Selling Stockholders thereunder shall be borne by
each of them on a pro rata basis
based on the number of shares of Common Stock sold by each of them in such
Sale.

 

5.2                       Drag-Along
Rights.

 

(a)                        If
at any time prior to the date of consummation of the earlier of a Qualified
Public Offering or a Qualified Sale, (i) POI Acquisition receives a bona fide
offer from any third party who is not an Affiliate of either the Company or POI
Acquisition to purchase (including a purchase by merger, consolidation or
similar transaction) 100% of the shares of Common Stock owned by POI
Acquisition at such time, (ii) at least 90% of the fair market value of the
consideration to be received by POI Acquisition in such offer is in the form of
cash, Cash Equivalents or Marketable Securities and (iii) such offer is
accepted by POI Acquisition, then the Management Stockholder hereby agrees
that, if requested by POI Acquisition, it will transfer to such purchaser,
subject to Section 5.2(b), on the terms of the offer so accepted by POI
Acquisition, including time of payment, form of consideration and adjustments
to purchase price, all of the shares of his or her Purchase Stock (the “Drag-Along
Rights”).

 

8

 

(b)                       POI
Acquisition will give notice (the “Drag-Along Notice”) to the Management
Stockholder of any proposed transfer giving rise to the rights of POI
Acquisition set forth in Section 5.2(a) (a “Drag-Along Sale”) not
more than 10 days after the execution and delivery by all of the parties
thereto of the definitive agreement relating to the Drag-Along Sale and, in any
event, no later than 20 days prior to the closing date for such Drag-Along
Sale.  The Drag-Along Notice will set
forth the number of shares of Common Stock proposed to be so transferred, the
name of the purchaser, the proposed amount and form of consideration, the
number of shares of Common Stock sought and the other terms and conditions of
the offer.  The Management Stockholder
shall make to the purchaser in the Drag-Along Sale the same representations,
warranties, covenants, indemnities and agreements as POI Acquisition makes in
connection with the proposed Drag-Along Sale (except that in the case of
representations, warranties, covenants, indemnities and agreements pertaining
specifically to POI Acquisition, the Management Stockholder subject to this
Drag-Along Rights shall make the comparable representations, warranties,
covenants, indemnities and agreements pertaining specifically to his or
herself); provided, that all representations, warranties, covenants and
indemnities shall be made by POI Acquisition, the Management Stockholder and
any Other Selling Stockholders severally and not jointly.  Each of POI Acquisition, the Management
Stockholder and any Other Selling Stockholders participating in the Drag-Along
Sale will be responsible for funding its proportionate share of any escrow
arrangements in connection with the Drag-Along Sale and for its proportionate
share of any withdrawals therefrom.  All
fees, commissions, adjustments to purchase price, expenses and indemnities of
POI Acquisition, the Management Stockholder and any Other Selling Stockholders
under the applicable transaction agreement shall be borne by each of them on a pro  rata
basis based on the number of shares of Common Stock sold by each of them in
such Drag-Along Sale.  If the Drag-Along
Sale is not consummated within 90 days from the date of the Drag-Along Notice
(subject to extension to obtain
any necessary regulatory approvals), POI Acquisition must deliver another
Drag-Along Notice in order to exercise their rights under this Section 5.2
with respect to such Drag-Along Sale.

 

SECTION 6.                                “Piggyback”
Registration Rights.

 

6.1                       Right
to Piggyback.  If the Company
proposes to file a Registration Statement, whether or not for sale for the
Company’s own account, on a form and in a manner that would also permit
registration of shares of Purchase Stock (other than in connection with a
registration statement on Forms S-4 or S-8 or any similar or successor form),
the Company shall give to the Management Stockholder written notice of such
proposed filing at least thirty (30) days before the anticipated filing.  The notice referred to in the preceding
sentence shall offer the Management Stockholder the opportunity to register
such amount of shares of Purchase Stock as the Management Stockholder may
request (a “Piggyback Registration”). 
Subject to Section 6.3, the Company will include in each such
Piggyback Registration (and any related qualification under state blue sky laws
and other compliance filings, and in any underwriting involved therein) any
shares of Purchase Stock with respect to which the Company has received written
requests for inclusion therein within fifteen (15) days after the written
notice from the Company is given.  The
Management Stockholder will be permitted to withdraw all or part of the shares
of his or her Purchase Stock from a Piggyback Registration at any time prior to
the effective date of such Piggyback Registration.

 

9

 

6.2                       Priority
on Piggyback Registrations.  The
Company will use its reasonable best efforts to cause the managing underwriter
or underwriters of a proposed Underwritten Offering to permit the Management
Stockholder, along with POI Acquisition and any Other Selling Stockholders
having similar piggyback rights (together, the “Holders”), if requested
to be included in the registration for such offering, to include therein all
such shares of Common Stock requested to be so included (such securities, the “Piggyback
Shares”) on the same terms and conditions as any securities of the Company
included therein (other than the indemnification by the Holders, provided,
that the Holders give customary covenants, representations and
warranties).  The Company shall cooperate
with the Management Stockholder in order to seek to limit any representations
and warranties to, or agreements with, the Company or the underwriters to be
made by the Management Stockholder only to those representations, warranties or
agreements regarding such Management Stockholder, such Management Stockholder’s
Piggyback Shares and such Management Stockholder’s intended method of
distribution and any other representations required by law.  Notwithstanding the foregoing, if the
managing underwriter or underwriters of such Underwritten Offering advises the
Company to the effect that the total amount of securities that the Holders and
the Company propose to include in such Underwritten Offering is such as to
materially and adversely affect the success of such offering (including by
affecting the price per share in the offering), then the Company will include
in such registration:

 

(a)                        in
the case of a registration in connection with a sale of securities for the
Company’s own account, (i) first, 100% of the securities that the Company
proposes to sell for its own account, (ii) second, to the extent that the
number of securities in clause (i) above is less than the number of securities
which the Company has been advised can be sold in such offering without having
the adverse effect referred to above, the number of Piggyback Shares of the
Holders, determined pro rata on the basis of the number of shares of Common
Stock beneficially owned by each of the Holders; and

 

(b)                       in
the case of a registration in connection with a sale of securities for the
account of POI Acquisition or any other Holder (a “Demand Registration”),
(i) first, 100% of the number of shares of Common Stock requested to be
included in such Demand Registration by the demanding Holder, (ii) second, to
the extent that the number of securities in clause (i) above, if applicable, is
less than the number of securities which the Company has been advised can be
sold in such offering without having the adverse effect referred to above, the
number of Piggyback Shares requested to be included in such offering by the other
Holders, determined pro rata on the basis of the number of shares of Common
Shares beneficially owned by each of the other Holders and (iii) third, to the
extent that the number of securities in clauses (i) and (ii) above is less than
the number of securities which the Company has been advised can be sold in such
offering without having the adverse effect referred to above, the securities
sought to be included by the Company in the offering.

 

6.3                       Right
to Terminate Registration.  The
Company shall have the right to postpone, terminate or withdraw any
registration initiated by it under this Section 6 prior to the
effectiveness of such registration whether or not the Holders have elected to
include Piggyback Shares in such registration.

 

10

 

SECTION 7.                                Management
Stockholder’s Representations, Warranties and Agreements.

 

7.1                       In
addition to agreeing to the restrictions on the transfer of shares of Purchase
Stock set forth in Section 3, the Management Stockholder also agrees and
acknowledges that he or she will not transfer any shares of Purchase Stock
unless:

 

(a)                        the
transfer is pursuant to an effective registration statement under the
Securities Act and in compliance with applicable provisions of state securities
laws; or

 

(b)                       (A)
unless waived by the Company, counsel for the Management Stockholder (which
counsel shall be reasonably acceptable to the Company) shall have furnished the
Company with an opinion, reasonably satisfactory in form and substance to the
Company, that no such registration under the Securities Act is required because
of the availability of an exemption from registration under the Securities Act
and (B) if the Management Stockholder is a citizen or resident of any
country other than the United States, or the Management Stockholder desires to
effect any transfer in any such country, counsel for the Management Stockholder
(which counsel shall be reasonably satisfactory to the Company) shall have
furnished the Company with an opinion or other advice reasonably satisfactory
in form and substance to the Company to the effect that such transfer will
comply with the securities laws of such jurisdiction.

 

Notwithstanding the conditions in this Section 7.1,
the Company and POI Acquisition each acknowledges and agrees that any transfer
permitted under Sections 3.1(b) or 3.1(c) is deemed to be in compliance with
this Agreement (including without limitation any restrictions or prohibitions
herein) and no opinion of counsel is required in connection therewith.

 

7.2                       The
certificate (or certificates) representing any shares of Purchase Stock shall
bear the following legend:

 

“THE SHARES REPRESENTED BY THIS CERTIFICATE
WERE ORIGINALLY ISSUED ON FEBRUARY 8, 2005, HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), AND MAY NOT BE SOLD OR
TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT
OR AN EXEMPTION FROM REGISTRATION THEREUNDER. 
IN ADDITION, THE SHARES REPRESENTED BY THIS CERTIFICATE MAY NOT BE
TRANSFERRED, SOLD, ASSIGNED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF
UNLESS SUCH TRANSFER, SALE, ASSIGNMENT, PLEDGE, HYPOTHECATION OR OTHER
DISPOSITION COMPLIES WITH THE PROVISIONS OF THE MANAGEMENT STOCKHOLDER’S
AGREEMENT DATED AS OF FEBRUARY 8, 2005 AMONG PROTECTION ONE, INC., POI
ACQUISITION, L.L.C. AND THE MANAGEMENT STOCKHOLDER NAMED ON THE FACE HEREOF (A
COPY OF WHICH IS ON FILE WITH THE SECRETARY OF PROTECTION ONE, INC.).”

 

11

 

7.3                       The
Management Stockholder acknowledges that he or she has been advised that
(i) a restrictive legend in the form heretofore set forth shall be placed
on the certificates representing the Purchase Stock and (ii) a notation
shall be made in the appropriate records of the Company indicating that the
Purchase Stock is subject to restrictions on transfer and appropriate stop
transfer restrictions will be issued to the Company’s transfer agent with
respect to the Purchase Stock.  If the
Management Stockholder is an Affiliate of the Company, the Management
Stockholder also acknowledges that (1) the shares of Purchase Stock must
be held indefinitely and the Management Stockholder must continue to bear the
economic risk of the investment in the shares of Purchase Stock unless it is
subsequently registered under the Securities Act or an exemption from such
registration is available, (2) when and if shares of the Purchase Stock
may be disposed of without registration in reliance on Rule 144 of the
rules and regulations promulgated under the Securities Act, such disposition
can be made only in limited amounts in accordance with the terms and conditions
of such Rule and (3) if the Rule 144 exemption is not available,
public sale without registration will require compliance with some other exemption
under the Securities Act.

 

7.4                       If
any shares of the Purchase Stock are to be disposed of in accordance with
Rule 144 under the Securities Act or otherwise, the Management Stockholder
shall promptly notify the Company of such intended disposition and shall
deliver to the Company at or prior to the time of such disposition such
documentation as POI Acquisition may reasonably request in connection with such
sale, including an executed copy of any notice on Form 144 required to be
filed with the SEC.

 

7.5                       The
Management Stockholder agrees that, if any shares of Purchase Stock are offered
to the public in an underwritten offering pursuant to an effective registration
statement under the Securities Act (other than registration of securities
issued on Form S-8, S-4 or any successor or similar form), the Management
Stockholder will not effect any public sale or distribution of any shares of
Purchase Stock not covered by such registration statement during the period
beginning seven days before (as estimated by the Company in good faith, and set
forth in a notice to the Management Stockholder) and ending ninety (90)
days (or such shorter period as may be consented to by the managing underwriter
or underwriters, if any) after, the effective date of such registration
statement.

 

7.6                       The
Management Stockholder represents and warrants that (i) with respect to
the shares of Purchase Stock, he or she has received and reviewed the available
information relating to the shares of Purchase Stock, including having received
and reviewed the documents related thereto, and (ii) he or she has been
given the opportunity to obtain any additional information or documents and to
ask questions and receive answers about such information, the Company and the
business and prospects of the Company which he or she deems necessary to
evaluate the merits and risks related to his or her investment in the shares of
Purchase Stock and to verify the information contained in the information
received as indicated in this Section 7.6, and he or she has relied solely
on such information.

 

7.7                       The
Management Stockholder further represents and warrants that (i) his or her
financial condition is such that he or she can afford to bear the economic risk
of holding the shares of Purchase Stock for an indefinite period of time and
has adequate means for providing for his or her current needs and personal
contingencies, (ii) he or she can afford to suffer a 

 

12

 

complete loss of his or her investment in the shares of Purchase Stock,
(iii) he or she understands and has taken cognizance of all risk factors
related to the purchase of the shares of Purchase Stock, (iv) his or her
knowledge and experience in financial and business matters are such that he or
she is capable of evaluating the merits and risks of his or her purchase of the
shares of Purchase Stock as contemplated by this Agreement and (v) he or she is
an “accredited investor” as defined in Rule 501(a) promulgated under the
Securities Act.

 

SECTION 8.                                Company’s
Representations and Warranties.  The
Company represents and warrants to the Management Stockholder that
(i) this Agreement has been duly authorized, executed and delivered by
Company and is enforceable against Company in accordance with its terms and (ii) the
Purchase Stock, when issued and delivered in accordance with the terms hereof,
will be duly and validly issued, fully paid and nonassessable.

 

SECTION 9.                                POI
Acquisition’s Representations and Warranties.  POI Acquisition represents and warrants to
the Management Stockholder that this Agreement has been duly authorized,
executed and delivered by POI Acquisition and is enforceable against POI
Acquisition in accordance with its terms.

 

SECTION 10.                          Recapitalizations,
etc.  The provisions of this Agreement
shall apply, to the full extent set forth herein with respect to the shares of
Purchase Stock, to any and all shares of Common Stock or any capital stock,
partnership units or any other security evidencing ownership interests in the
Company or any successor or assign of Company (whether by merger,
consolidation, sale of assets or otherwise) which may be issued in respect of,
in exchange for, or substitution of the shares of Purchase Stock by reason of
any stock dividend, split, reverse split, combination, recapitalization,
liquidation, reclassification, merger, consolidation or otherwise.

 

SECTION 11.                          Binding
Effect.  The provisions of this
Agreement shall be binding upon and accrue to the benefit of the parties hereto
and their respective heirs, legal representatives, successors and permitted
assigns.  In the case of a transferee
permitted under Section 3.1 hereof (other than clause (a) thereof),
such transferee shall be deemed the Management Stockholder hereunder; provided,
however, that no transferee (including without limitation, transferees referred
to in Section 3.1 hereof) shall derive any rights under this Agreement
unless and until such transferee has delivered to POI Acquisition and the
Company a valid undertaking and becomes bound by the terms of this Agreement.

 

SECTION 12.                          Amendment.  This Agreement may be amended only by a
written instrument signed by the Parties hereto; provided that QDRF’s consent
shall only be required with respect to amendments to Section 4.

 

SECTION 13.                          Assignability
of Certain Rights by POI Acquisition. 
POI Acquisition and QDRF shall have, without limitation, the right to
assign any or all of its rights or obligations to purchase shares of Purchase
Stock pursuant to this Agreement.

 

SECTION 14.                          APPLICABLE
LAW.  THIS AGREEMENT SHALL BE
GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.

 

13

 

SECTION 15.                          Severability.  If any provision of this Agreement shall be
declared illegal, void or unenforceable by any court of competent jurisdiction,
the other provisions shall not be affected, but shall remain in full force and
effect.

 

SECTION 16.                          Notices.  All notices and other communications provided
for herein shall be in writing.  Any
notice or other communication hereunder shall be deemed duly given
(i) upon electronic confirmation of facsimile, (ii) one business day
following the date sent when sent by overnight delivery and
(iii) five (5) business days following the date mailed when mailed by
registered or certified mail return receipt requested and postage prepaid, in
each case as follows:

 

(a)                                  If
to the Company:

 

Protection One, Inc

1035 N. 3rd Street, Suite 101

Lawrence, Kansas 66044

Telephone:  785-575-1707

Facsimile:  785-575-1711

Attention:  Darius G. Nevin

 

(b)                                 If
to POI Acquisition:

 

c/o Quadrangle Group LLC

375 Park Avenue

New York, New York 10152

Telephone: 212-418-1700

Facsimile: 212-418-1701

Attention: David Tanner

 

(c)                                  If
to QDRF:

 

c/o Quadrangle Group LLC

375 Park Avenue

New York, New York 10152

Telephone: 212-418-1700

Facsimile: 212-418-1701

Attention: Michael Weinstock

 

(d)                                 If
to the Management Stockholder, to him or her at the address set forth below
under his or her signature; 

 

or at such other address as any
Party shall have specified by notice in writing to the other Parties.

 

[Signatures on next page.]

 

14

 

IN WITNESS WHEREOF, the Parties have executed
this Agreement as of the date first above written.

 

	
   

  	
  PROTECTION ONE, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
  Name:

  	
   

  	
   

  
	
   

  	
  Title:

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  POI ACQUISITION, L.L.C.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
  Name:

  	
   

  	
   

  
	
   

  	
  Title:

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  QUADRANGLE MASTER FUNDING LTD

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
  Name:

  	
   

  	
   

  
	
   

  	
  Title:

  	
   

  	
   

  
							

 

 

	
   

  	
  MANAGEMENT STOCKHOLDER:

  
	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  ADDRESS:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  SHARES:

  	
   

  	
   

  
	
   

  	
  PURCHASE PRICE:

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