Document:

Exhibit 10.3

 

PROTECTION ONE, INC. 

2004 STOCK OPTION PLAN

 

1.                                      PURPOSE.

 

The purpose of the Plan is to assist the
Company in attracting, retaining, motivating and rewarding key employees, and
to promote the creation of long-term value for stockholders by closely aligning
the interests of key employees with those of stockholders.

 

2.                                      DEFINITIONS.

 

For purposes of the Plan, the following terms
shall be defined as set forth below:

 

(a)                                  “Affiliate”
means, 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.

 

(b)                                 “Board” means
the Board of Directors of the Company.

 

(c)                                  “Cause” means,
in the absence of any employment, consulting or other agreement between a
Participant and the Employer otherwise defining Cause, (i) material acts of
fraud, personal dishonesty, gross negligence or willful misconduct on the part
of Participant in the course of his or her employment or services, (ii) a Participant’s
engagement in conduct that is materially injurious to the Company or an
Affiliate, (iii) a material misappropriation by Participant of the assets or
business opportunities of the Company or its Affiliates; (iv) material
embezzlement or other material financial fraud committed by Participant, at his
direction, or with his or her personal knowledge; (v) a Participant’s
conviction by a court of competent jurisdiction of, or pleading “guilty” or “no
contest” to, a felony or any other criminal charge (other than minor traffic
violations) that could reasonably be expected to have a material adverse impact
on the Company’s or an Affiliate’s reputation or business; or (vi) failure by a
Participant to follow the lawful directions of a superior officer or the Board
with respect to material business of the Company.  In the event there is an employment,
consulting or other agreement between a Participant and the Employer defining
Cause, “Cause” shall have the meaning provided in such agreement.

 

(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; provided, however, that directors appointed as members of
the Committee shall not be employees of the Company or any Subsidiary.  In appointing members of the Committee, the
Board will consider whether a member is or will be a Qualified Member, but such
members are not required to be Qualified Members at the time of appointment or
during

 

 

their term of service on the Committee, and no action of the Committee
shall be void or invalid due to the participation of a member who is not a
Qualified Member.

 

(g)                                 “Company” means
Protection One, Inc., a Delaware corporation.

 

(h)                                 “Disability”
means the permanent and total disability of a person within the meaning of Section 22(e)(3)
of the Code.

 

(i)                                     “Eligible
Person” means each employee of the Company or of any Subsidiary, including each
such person who may also be a director of the Company, and any person who has
been offered employment by the Company or a Subsidiary, provided that such
prospective employee may not exercise any right relating to an Option until
such person has commenced employment with the Company or a Subsidiary.  An employee on an approved leave of absence
may be considered as still in the employ of the Company or a Subsidiary for
purposes of eligibility for participation in the Plan.

 

(j)                                     “Employer”
means either the Company or a Subsidiary that the Participant (determined
without regard to any permitted transfer of an Option) is employed by or
provides services to, as applicable.

 

(k)                                  “Exchange
Agreement” means that certain Exchange Agreement dated as of November 12,
2004, to which the Company is a party.

 

(l)                                     “Exchange Act”
means the Securities Exchange Act of 1934, as amended from time to time,
including rules thereunder and successor provisions and rules thereto.

 

(m)                               “Expiration Date”
means the date upon which the term of an Option expires, as determined under 6(b)
hereof.

 

(n)                                 “Fair Market Value” means (i)
if the Stock is listed on a national securities exchange, the closing price
reported as having occurred on the primary exchange with which the Stock is
listed and traded on the date prior to such date, or, if there is no such sale
on that date, then on the last preceding date on which such a sale was
reported, (ii) if the Stock is not listed on any national securities exchange
but is quoted in the National Market System of the National Association of
Securities Dealers Automated Quotation System (“NASDAQ-NMS”) the closing
price on the date prior to such date, or, if there is no such sale on that date
then on the last preceding date on which such a sale was reported, or (iii) if
the Stock is not quoted on NASDAQ-NMS or listed on an exchange, or
representative quotes are not otherwise available, the Fair Market Value shall
mean the amount determined by the Board in good faith to be the fair market
value per share of Stock.

 

(o)                                 “Good Reason”
with respect to any Participant, has the meaning ascribed thereto in such
Participant’s employment agreement with the Company.  When used in this Plan, the term “Good Reason”
shall apply only to those Participants who are parties to employment agreements
defining such term.

 

(p)                                 “Option” means
a conditional right, granted to a Participant under Section 6 hereof, to
purchase Stock at a specified price during specified time periods.  Options under the

 

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Plan are intended to qualify as incentive stock options to the extent
permissible under the requirements of Section 422 of the Code.

 

(q)                                 “Option Agreement”
means a written agreement between the Company and a Participant evidencing the
terms and conditions of an individual Option.

 

(r)                                    “Option Stock”
means shares of Stock acquired by a Participant through the exercise of
Options.

 

(s)                                  “Participant”
means an Eligible Person who has been granted an Option under the Plan that
remains outstanding, or if applicable, such other person or entity who holds an
outstanding Option.

 

(t)                                    “Plan” means
this Protection One, Inc. Stock Option Plan.

 

(u)                                 “Quadrangle Parties”
has the meaning ascribed thereto in the Exchange Agreement.

 

(v)                                 “Qualified Member”
means a member of the Committee who is a “Non-Employee Director” within the
meaning of Rule 16b-3 and an “outside director” within the meaning of
Regulation 1.162-27(e)(3) under Section 162(m) of the Code.

 

(w)                               “Qualified Public
Offering” means (i) an underwritten public offering (either primary or secondary) of Stock
that is registered under the Securities Act with an aggregate offering value of
at least $40 million or (ii) an offering of Stock that is registered under the
Securities Act in connection with a merger, consolidation, exchange offer or
other business combination transaction, or an exchange offer for securities of
the Company, in each case with an aggregate offering value (based on the Fair
Market Value of the Stock offered determined as of the date of the closing of
the applicable transaction) of at least $40 million.

 

(x)                                   “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 7(a)
below, of Stock owned by the Quadrangle Parties, as a group, on the Closing
Date.

 

(y)                                 “Rule 16b-3”
means Rule 16b-3, as from time to time in effect and applicable to the Plan and
Participants, promulgated by the Securities and Exchange Commission under Section 16
of the Exchange Act.

 

(z)                                   “Securities Act”
means the Securities Act of 1933, as amended from time to time, including rules
thereunder and successor provisions and rules thereto.

 

(aa)                            “Stock” means the common
stock, $.0.01 per share, of the Company.

 

(bb)                          “Subsidiary” means a
corporation that is a “subsidiary corporation” of the Company as that term is
defined in Section 424 of the Code.

 

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3.                                      ADMINISTRATION.

 

(a)                                  Authority of the
Committee.  Except as otherwise
provided below, the Plan shall be administered by the Committee.  The Committee shall have full and final
authority, in each case subject to and consistent with the provisions of the
Plan, to (i) select Eligible Persons to become Participants; (ii) grant
Options, taking into account recommendations of the Company’s Chief Executive
Officer; (iii) determine the type, number, and other terms and conditions of,
and all other matters relating to, Options; (iv) prescribe Option
agreements (which need not be identical for each Participant) and rules and
regulations for the administration of the Plan; (v) construe and interpret the
Plan and Option agreements and correct defects, supply omissions, or reconcile inconsistencies
therein; and (vi) make all other decisions and determinations as the Committee
may deem necessary or advisable for the administration of the Plan.  The foregoing notwithstanding, the Board
shall perform the functions of the Committee for purposes of granting Options
under the Plan to directors.  In any case
in which the Board is performing a function of the Committee under the Plan,
each reference to the Committee herein shall be deemed to refer to the Board,
except where the context otherwise requires. 
Any action of the Committee shall be final, conclusive and binding on
all persons, including, without limitation, the Company, its Subsidiaries,
Affiliates, Eligible Persons, Participants and beneficiaries of Participants.

 

(b)                                 Manner of Exercise
of Committee Authority.  At any time that a member of the Committee is
not a Qualified Member, (i) any action of the Committee relating to an Option
intended by the Committee to qualify as “performance-based compensation” within
the meaning of Section 162(m) of the Code and regulations thereunder may
be taken by a subcommittee, designated by the Committee or the Board, composed
solely of two or more Qualified Members; and (ii) any action relating to an
Option granted or to be granted to a Participant who is then subject to Section 16
of the Exchange Act in respect of the Company will be taken either by such a
subcommittee or by the Committee but with each such member who is not a
Qualified Member abstaining or recusing himself or herself from such action,
provided that, upon such abstention or recusal, the Committee remains composed
of two or more Qualified Members or, if the Committee would not remain composed
of two or more Qualified Members upon such abstention or recusal, by the Board.  Such action, authorized by such a
subcommittee or by the Committee upon the abstention or recusal of such
non-Qualified Member(s) or by the Board, shall be the action of the Committee
for purposes of the Plan.  The express
grant of any specific power to the Committee, and the taking of any action by
the Committee, shall not be construed as limiting any power or authority of the
Committee.

 

(c)                                  Delegation.  The Committee may delegate to officers or
employees of the Company or any Affiliate, or committees thereof, the authority,
subject to such terms as the Committee shall determine, to perform such
functions, including but not limited to administrative functions, as the
Committee may determine appropriate.  The
Committee may appoint agents to assist it in administering the Plan.  Notwithstanding the foregoing or any other
provision of the Plan to the contrary, any Option granted under the Plan to any
person or entity who is not an employee of the Company or any of its Affiliates
shall be expressly approved by the Committee.

 

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4.                                      SHARES AVAILABLE UNDER THE PLAN.

 

(a)                                  Number of Shares
Available for Delivery.  Subject to
adjustment as provided in Section 7 hereof, the total number of shares of
Stock reserved and available for delivery in connection with Options under the
Plan shall be 1,996,184 (on a post-Reverse Stock Split (as defined below)
basis) (all of which shares may be, but are not required to be, issued pursuant
to incentive stock options).  Shares of
Stock delivered under the Plan shall consist of authorized and unissued shares
or previously issued shares of Stock reacquired by the Company on the open
market or by private purchase.

 

(b)                                 Share Counting
Rules.  The Committee may adopt
reasonable counting procedures to ensure appropriate counting and make
adjustments if the number of shares of Stock actually delivered differs from
the number of shares previously counted in connection with an Option.  To the extent that an Option expires or is
canceled, forfeited, settled in cash or otherwise terminated or concluded
without a delivery to the Participant of the full number of shares to which the
Option related, the undelivered shares will again be available for
Options.  Shares withheld in payment of
the exercise price or taxes relating to an Option and shares equal to the
number surrendered in payment of any exercise price or taxes relating to an
Option shall be deemed to constitute shares not delivered to the Participant
and shall be deemed to again be available for Options under the Plan; provided,
however, that, where shares are withheld or surrendered more than ten years
after the date of the most recent shareholder approval of the Plan or any other
transaction occurs that would result in shares becoming available under this Section 4(b),
such shares shall not become available if and to the extent that it would
constitute a material revision of the Plan subject to shareholder approval
under then applicable rules of the principle stock exchange or automated
quotation system on which the shares are then listed or designated for trading.

 

5.                                      ELIGIBILITY; LIMITATIONS ON OPTIONS.

 

(a)                                  Grants to Eligible
Persons.  Options may be granted
under the Plan only to Eligible Persons.

 

(b)                                 162(m) Limitation.  Subject to Section 7 relating to
adjustments, no Employee shall be eligible to be granted Options covering more
than 898,283 shares (on a post-Reverse Stock Split basis) of Stock during any
calendar year.

 

6.                                      OPTIONS.

 

(a)                                  General.  Options granted hereunder shall be in such
form and shall contain such terms and conditions as the Committee shall deem
appropriate.  The provisions of separate
Options shall be set forth in an Option Agreement, which agreements need not be
identical.

 

(b)                                 Term.  The term of each Option shall be set by the Committee
at the time of grant; provided, however, that no Option granted hereunder shall
be exercisable after the expiration of ten (10) years from the date it was
granted.

 

(c)                                  Exercise Price.  The exercise price per share of Stock for
each Option shall be set by the Committee at the time of grant but shall not be
less than the Fair Market Value of a share of Stock on the date such Option is
granted.

 

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(d)                                 Payment for Stock.  Payment for shares of Stock to be acquired
pursuant to Options granted hereunder shall be made in full, upon exercise of
the Options (i) in immediately available funds in United States dollars, by
certified or bank cashier’ s check or by wire transfer; (ii) by surrender to
the Company of shares of Stock already owned by the Participant for at least
six months (including, without limitation, by attestation to the ownership of
such Stock); (iii) by a combination of (i) and (ii); or (iv) by any other means
approved by the Committee, consistent with applicable law, rules and
regulations.  Anything herein to the
contrary notwithstanding, the Company shall not directly or indirectly extend
or maintain credit, or arrange for the extension of credit, in the form of a
personal loan to or for any director or executive officer of the Company
through the Plan in violation of Section 402 of the Sarbanes-Oxley Act of
2002 (“Section 402 of SOX”), and to the extent that any form of
payment would, in the opinion of the Company’s counsel, result in a violation
of Section 402 of SOX, such form of payment shall not be available.

 

(e)                                  Vesting.  Options shall vest and become exercisable in
such manner and on such date or dates set forth in the Option Agreement, as may
be determined by the Committee; provided, however, that notwithstanding any
vesting dates contained herein or otherwise set by the Committee, the Committee
may in its sole discretion accelerate the vesting of an Option, which
acceleration shall not affect the terms and conditions of any such Option other
than with respect to vesting.  Unless
otherwise specifically provided herein, determined by the Committee or as set
forth in the Option Agreement, the vesting of an Option shall occur only while
the Participant is employed or rendering services to the Company or an
Affiliate and all vesting shall cease upon a Participant’s termination of
employment or services for any reason.

 

(f)                                    Transferability
of Options.  Except as otherwise
provided by the Committee, Options shall not be transferable except by will or
by the laws of descent and distribution and shall be exercisable during the
lifetime of the Participant only by the Participant.  The Committee shall prescribe rules whereby
Options (other than “incentive stock options” under Section 422 of the
Code) may be transferred to a Participant’s immediate family members, or to
trusts or partnerships exclusively for the benefit of such family members, in
each case for legitimate estate tax planning purposes.

 

(g)                                 Termination of
Employment.  Except as may otherwise
be provided by the Committee in the applicable Option Agreement:

 

(i)                                     If prior to the
Expiration Date, a Participant voluntarily terminates employment with the
Employer other than for Good Reason (if applicable), (1) all vesting with
respect to the Options shall cease, (2) any unvested Options shall expire as of
the date of such termination, and (3) any vested Options shall remain
exercisable until the earlier of the Expiration Date or ninety (90) days after
the date of such termination.

 

(ii)                                  If prior to the
Expiration Date, a Participant’s employment is terminated by the Employer
without Cause, or by the Participant for Good Reason (if applicable), (1) the
Participant will be credited with 12 additional months of vesting service, less
one month for each two months elapsed from the Closing Date through the
termination date, (2) any unvested Options shall expire as of the date of such
termination (after giving effect to the accelerated vesting provision in clause
(1)), and (3) any vested

 

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Options shall remain exercisable until the
earlier of the Expiration Date or the first anniversary of such termination.

 

(iii)                               If prior to the
Expiration Date, a Participant’s employment with the Employer terminates by reason
of such Participant’s death, Disability or a sale of a Subsidiary employing the
Participant, (1) all vesting with respect to the Options shall cease, (2) any
unvested Options shall expire as of the date of such termination, and (3) any
vested Options shall expire on the earlier of the Expiration Date or the first
anniversary of the date of such termination. 
In the event of a Participant’s death, the Options shall remain
exercisable by the person or persons to whom a Participant’s rights under the
Options pass by will or the applicable laws of descent and distribution.

 

(iv)                              If prior to the
Expiration Date, a Participant’s employment with the Employer is terminated by
the Employer for Cause, all Options (whether or not vested) shall immediately
expire as of the date of such termination.

 

(h)                                 Initial Option
Grant.  The allocation of the initial
grant of Options under the Plan shall be determined by the Committee prior to
the Closing Date.  The initial grant of
Options under the Plan shall occur and be effective not later than the second
business day after the Closing Date.  The
per share exercise price of such Options shall be not less than the greater of
$7.50 (on a post-reverse stock split basis) or Fair Market Value of a share of
Stock on the effective date of grant.

 

7.                                      ADJUSTMENT FOR RECAPITALIZATION, MERGER, ETC.

 

(a)                                  Capitalization
Adjustments.  The aggregate number of
shares of Stock which may be granted or purchased pursuant to Options granted
hereunder, the number of shares of Stock covered by each outstanding Option,
the kind of security or other consideration subject to such option, the maximum
number of shares of Stock with respect to which any one person may be granted
Options in any calendar year, and the price per share thereof in each such
Option shall be equitably and proportionally adjusted or substituted, as
determined by the Committee in good faith and in its sole discretion, as to the
number, price or kind of security or other consideration subject to such
Options or as otherwise determined by the Committee in good faith to be fair
and equitable (i) in the event of changes in the outstanding Stock or in the
capital structure of the Company by reason of stock dividends, stock splits,
reverse stock splits, recapitalizations, reorganizations, mergers,
consolidations, combinations, exchanges, or other relevant changes in
capitalization occurring after the date of grant of any such Option, (ii) in
the event of any change in applicable laws or any change in circumstances which
results in or would result in any substantial dilution or enlargement of the
rights granted to, or available for, Participants in the Plan, or (iii) for any
other reason which the Committee determines, in its sole discretion and acting
in good faith, to otherwise warrant equitable adjustment.

 

(b)                                 Corporate Events.  Notwithstanding the foregoing, except as may
otherwise be provided in an Option Agreement, in the event of (i) a merger or
consolidation involving the Company in which the Company is not the surviving
corporation, (ii) a merger or consolidation involving the Company in which the
Company is the surviving corporation but the holders of shares of Stock receive
securities of another corporation and/or other property,

 

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including cash, (iii) the sale of all or substantially all of the
assets of the Company, (iv) the reorganization or liquidation of the Company or
(v) a sale of greater than fifty percent (50%) of the securities of the Company
entitled to vote in the election of directors to the Board (each, a “Corporate
Event”), in lieu of providing the adjustment set forth in subsection (a)
above, the Committee may, in its discretion, provide that all outstanding
Options shall terminate as of the consummation of such Corporate Event, and
provide that holders of such Options will receive a payment in respect of
cancellation of their Options based on the amount of the per share
consideration being paid for the Stock in connection with such Corporate Event
less the applicable Option exercise price. 
Payments to holders pursuant to the preceding sentence shall be made in
cash, or, in the sole discretion of the Committee, in such other consideration
necessary for a holder of an Option to receive property, cash or securities as
such holder would have been entitled to receive upon the occurrence of the
transaction if the holder had been, immediately prior to such transaction, the
holder of the number of shares of Stock covered by the Option at such time.

 

(c)                                  Fractional Shares.  Any such adjustment may provide for the
elimination of any fractional share which might otherwise become subject to an
Option.

 

8.                                      RIGHT OF FIRST REFUSAL

 

(a)                                  If, at any time prior
to the date of consummation of the earlier of a Qualified Public Offering or a
Qualified Sale, a Participant intends to sell or offer for sale any or all
shares of his or her Option Stock (other than in connection with a Qualified
Sale or pursuant to contractual “drag-along” or similar obligation under a
contract to which the Company is a party) to one or more third parties (such
shares of Option Stock that the Participant intends to sell or offer for sale, “Offered
Shares”), the Participant shall notify the Company in writing of his or her
intention to sell or offer for sale the Offered Shares.  The Participant’s notice to the Company shall
contain an irrevocable offer to sell such Offered Shares to the Company (in the
manner set forth below) at a purchase price specified by the Participant in
such notice (the “Minimum Price”), pursuant to Section 8(b).  At any time within fifteen (15) days
after the date of the receipt by the Company of the Participant’s notice, the
Company shall have the right and option to purchase, or to arrange for a third
party to purchase, all (but not less than all) of the Offered Shares, pursuant
to Section 8(b).

 

(b)                                 The Company 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 Participant provides to the Company wire transfer instructions)
to the Participant against delivery of certificates or other instruments
representing the Offered Shares so purchased, appropriately endorsed by the
Participant.  If at the end of the 15-day
period, the Company has not tendered the purchase price for such shares in the
manner set forth above, the Participant may, during the succeeding 60-day
period, sell to one or more third parties an aggregate number of shares of
Option Stock less than or equal to the number of Offered Shares, in each case
for a purchase price greater than or equal to the Minimum Price.  Promptly after any such sale, the Participant
shall notify the Company 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 Company.  To the extent that, at the end of
sixty (60) days following the expiration of the 15-day period during which
the Company is

 

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

 

9.                                      REPURCHASE RIGHTS UPON TERMINATION OF EMPLOYMENT.

 

If, prior to a Qualified Public Offering or a
Qualified Sale, a Participant’s employment with the Employer terminates for any
reason, the Company shall thereafter have the right to repurchase such
Participant’s Option Stock.  Such
repurchase right may be exercised by written notice to a Participant, delivered
within 60 days of such termination of employment, indicating the number of
shares of Stock to be repurchased and the date on which the repurchase is to be
effected, such date to be not more than thirty (30) days nor less than five (5)
days after the date of such notice.  The
certificates representing the shares of Option Stock to be repurchased shall be
delivered to the Company, and the Company shall deliver cash to the Participant
in an amount equal to the repurchase price, prior to the close of business on
the date specified for the repurchase. 
Repurchase under this Section 9 shall be made at a price equal to
the Fair Market Value of the Option Stock as of the date of such repurchase;
provided, that in the event a Participant’s employment with the Employer was
terminated for Cause, the repurchase shall be the exercise price paid by the
Participant for the Option Stock or, if lower, the Fair Market Value of the
Option Stock as of the date of repurchase.

 

10.                               USE OF PROCEEDS.

 

The proceeds received from the sale of Stock
pursuant to the Plan shall be used for general corporate purposes.

 

11.                               RIGHTS AND PRIVILEGES AS A STOCKHOLDER.

 

Except as otherwise specifically provided in
the Plan, no person shall be entitled to the rights and privileges of stock
ownership in respect of shares of Stock which are subject to Options hereunder
until such shares have been issued to that person.

 

12.                               EMPLOYMENT OR SERVICE RIGHTS.

 

No individual shall have any claim or right
to be granted an Option under the Plan or, having been selected for the grant
of an Option, to be selected for a grant of any other Option.  Neither the Plan nor any action taken
hereunder shall be construed as giving any individual any right to be retained
in the employ or service of the Company or an Affiliate.

 

13.                               COMPLIANCE WITH LAWS.

 

The obligation of the Company to make payment
of Options in Stock or otherwise shall be subject to all applicable laws,
rules, and regulations, and to such approvals by governmental agencies as may
be required.  Notwithstanding any terms
or conditions of any Option to the contrary, the Company shall be under no
obligation to offer to sell or to sell and shall be prohibited from offering to
sell or selling any shares of Stock pursuant to an Option unless such shares
have been properly registered for sale pursuant to the Securities Act with the Securities
and Exchange Commission or unless the Company has received an opinion of
counsel,

 

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satisfactory to the Company, that such shares
may be offered or sold without such registration pursuant to an available
exemption therefrom and the terms and conditions of such exemption have been
fully complied with.  The Company shall
be under no obligation to register for sale or resale under the Securities Act
any of the shares of Stock to be offered or sold under the Plan or any shares
of Stock issued upon exercise or settlement of Options.  If the shares of Stock offered for sale or
sold under the Plan are offered or sold pursuant to an exemption from
registration under the Securities Act, the Company may restrict the transfer of
such shares and may legend the Stock certificates representing such shares in
such manner as it deems advisable to ensure the availability of any such
exemption.  Promptly after the date of
the consummation of the debt-for-equity exchange contemplated by the Exchange
Agreement, dated as of November 12, 2004 (the “Exchange Agreement”),
by and among the Company and the Quadrangle Parties, the Company shall file a
registration statement on Form S-8 under the Securities Act covering the shares
of Stock issuable upon the exercise of Options and will use reasonable best
efforts to maintain the effectiveness of such registration, and the current
status of the prospectus contained therein, until the exercise or expiration of
the Options or, if earlier, until Stock ceases to be registered under Section 12
(or any successor provision) of the Securities Exchange Act of 1934, as
amended.

 

14.                               MARKET STANDOFF AGREEMENT.

 

As a condition of receiving any Option
hereunder, the Participant agrees that in connection with any registration of
the Stock in connection with an underwritten public offering, upon the request
of the Committee or the underwriters managing any public offering of the Stock,
the Participant will not sell or otherwise dispose of any Option Stock without
prior written consent of the Committee or such underwriters, as the case may
be, for a period of time (not to exceed 180 days) from the effective date of
such registration as the Committee or the underwriters may specify for
employee-shareholders generally.

 

15.                               WITHHOLDING OBLIGATIONS.

 

As a condition to the exercise of any Option,
the Committee may require that a Participant satisfy, through deduction or
withholding from any payment of any kind otherwise due to the Participant, or
through such other arrangements as are satisfactory to the Committee, the
minimum amount of all Federal, state and local income and other taxes of any
kind required or permitted to be withheld in connection with such
exercise.  The Committee, in its
discretion, may permit shares of Stock to be used to satisfy tax withholding
requirements and such shares shall be valued at their Fair Market Value as of
the settlement date of the Option; provided, however, that the
aggregate Fair Market Value of the number of shares of Stock that may be used
to satisfy tax withholding requirements may not exceed the minimum statutory
required withholding amount with respect to the exercise of such Option.

 

16.                               AMENDMENT OF THE PLAN OR OPTIONS.

 

(a)                                  Amendment of Plan.  The Board at any time, and from time to time,
may amend the Plan; provided, however, that without further stockholder
approval the Board shall not make any amendment to the Plan which would
increase the maximum number of shares of Stock which may be issued pursuant to
Options under the Plan, except as contemplated by Section 7

 

10

 

hereof, or which would otherwise violate the shareholder approval
requirements of the national securities exchange on which the Stock is listed
or NASDAQ-NMS, as applicable.

 

(b)                                 No Impairment of Rights. 
Rights under any Option granted before amendment of the Plan shall not
be impaired by any amendment of the Plan unless the Participant consents in
writing.

 

(c)                                  Amendment of Stock
Options.  The Committee, at any time,
and from time to time, may amend the terms of any one or more Options;
provided, however, that the rights under any Option shall not be impaired by
any such amendment unless the Participant consents in writing.

 

17.                               TERMINATION OR SUSPENSION OF THE PLAN.

 

The Board may suspend or terminate the Plan
at any time.  Unless sooner terminated,
the Plan shall terminate on the day before the tenth (10th)
anniversary of the date the Plan is adopted by the Board.  No Options may be granted under the
Plan while the Plan is suspended or after it is terminated.   Rights under any Option granted before
suspension or termination of the Plan shall not be impaired by any suspension
or termination of the Plan unless the Participant consents in writing.

 

18.                               EFFECTIVE DATE OF THE PLAN; NUMBERS OF SHARES.

 

The Plan shall be effective as of the date
the Plan is approved by the Board, subject to approval of the Company’s
stockholders at the Company’s next meeting at which a quorum is present and
subject to the consummation of the debt-for-equity exchange contemplated by the
Exchange Agreement.  Prior to the
consummation of the debt-for-equity exchange contemplated by the Exchange
Agreement, the Company will effectuate a one-share-for-fifty reverse stock
split (the “Reverse Stock Split”). 
All references in the Plan to numbers of shares of Stock refer to shares
on a post-Reverse Stock Split basis. This Plan and any Options shall be void
and of no effect if the Plan is not approved by the Company’s stockholders at
the Company’s next meeting at which a quorum is present or if the
debt-for-equity exchange contemplated by the Exchange Agreement is not
consummated.

 

19.                               MISCELLANEOUS.

 

(a)                                  Options to
Participants Outside of the United States. 
The Committee may modify the terms of any Option under the Plan made to
or held by a Participant who is then resident or primarily employed outside of
the United States in any manner deemed by the Committee to be necessary or
appropriate in order that such Option shall conform to laws, regulations and
customs of the country in which the Participant is then resident or primarily
employed, or so that the value and other benefits of the Option to the
Participant, as affected by foreign tax laws and other restrictions applicable
as a result of the Participant’s residence or employment abroad, shall be
comparable to the value of such Option to a Participant who is resident or
primarily employed in the United States. 
An Option may be modified under this Section 19(a) in a manner that
is inconsistent with the express terms of the Plan, so long as such
modifications will not contravene any applicable law or regulation or result in
actual liability under Section 16(b) of the Exchange Act for the
Participant whose Option is modified.

 

11

 

(b)                                 No Liability of Committee Members.  No member of the Committee shall be
personally liable by reason of any contract or other instrument executed by
such member or on his behalf in his capacity as a member of the Committee nor
for any mistake of judgment made in good faith, and the Company shall indemnify
and hold harmless each member of the Committee 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 willful 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 Articles 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.

 

(c)                                  Payments Following
Accidents or Illness.  If the
Committee shall find that any person to whom any amount is payable under the
Plan is unable to care for his affairs because of illness or accident, or is a
minor, or has died, then any payment due to such person or his estate (unless a
prior claim therefor has been made by a duly appointed legal representative)
may, if the Committee so directs the Company, be paid to his spouse, child,
relative, an institution maintaining or having custody of such person, or any
other person deemed by the Committee to be a proper recipient on behalf of such
person otherwise entitled to payment. 
Any such payment shall be a complete discharge of the liability of the
Committee and the Company therefor.

 

(d)                                 Designation and
Change of Beneficiary.  Each
Participant may file with the Company a written designation of one or more
persons as the beneficiary who shall be entitled to receive the rights or
amounts payable with respect to an Option due under the Plan upon his
death.  A Participant may, from time to
time, revoke or change his beneficiary designation without the consent of any
prior beneficiary by filing a new designation with the Committee.  The last such designation received by the
Company shall be controlling; provided, however, that no
designation, or change or revocation thereof, shall be effective unless
received by the Company prior to the Participant’s death, and in no event shall
it be effective as of a date prior to such receipt.  If no beneficiary designation is filed by the
Participant, the beneficiary shall be deemed to be his or her spouse or, if the
Participant is unmarried at the time of death, his or her estate.  Any beneficiary of the Participant receiving
an Option hereunder shall remain subject to the terms of the Plan and the
applicable Option agreement.

 

(e)                                  Governing Law.  The Plan shall be governed by and construed
in accordance with the internal laws of the State of Delaware without reference
to the principles of conflicts of laws thereof.

 

(f)                                    Funding.  No provision of the Plan shall require the
Company, for the purpose of satisfying any obligations under the Plan, to
purchase assets or place any assets in a trust or other entity to which
contributions are made or otherwise to segregate any assets, nor shall the
Company maintain separate bank accounts, books, records or other evidence of
the existence of a segregated or separately maintained or administered fund for
such purposes.

 

12

 

Participants shall have no rights under the Plan other than as
unsecured general creditors of the Company, except that insofar as they may
have become entitled to payment of additional compensation by performance of
services, they shall have the same rights as other employees under general law.

 

(g)                                 Reliance on Reports.  Each member of the Committee and each member
of the Board shall be fully justified in relying, acting or failing to act, and
shall not be liable for having so relied, acted or failed to act in good faith,
upon any report made by the independent public accountant of the Company and
its Affiliates and upon any other information furnished in connection with the
Plan by any person or persons other than himself.

 

(h)                                 Titles and Headings.  The titles and headings of the sections in
the Plan are for convenience of reference only, and in the event of any
conflict, the text of the Plan, rather than such titles or headings shall
control.

 

13Exhibit
10.4

 

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 (A) the terms “Permissible Distribution Event” and “Qualified
Sale” shall have the meaning set forth in the Protection One, Inc. Stock
Appreciation Rights Plan, and (B) the term “Qualifying Termination”
shall have the meaning set forth in the Employment Agreement dated July 23,
2004 between the Company and the Participant, provided Section 1(i)(E) of
such Employment Agreement shall be disregarded for purposes of determining
whether or not a “Qualifying Termination” has occurred for purposes of this
Option.

 

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. Notwithstanding the foregoing, all
  Options shall vest and become exercisable immediately on a Qualifying
  Termination that occurs on or after a Qualified Sale and shall remain
  exercisable until the earlier of the Expiration Date or the first anniversary
  of such termination.

  

 

 

	
  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

  

 

2

 

	
   

  	
  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 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:

  	
   

  	
   

  	
   

  	
   

  	
   

  
								

 

3

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