Protection One 10Q/A 2000 Q2 Quarterly report (amended)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q/A

/x/	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
or
/ /	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

0-24780 (Commission File Number)		33-73002-01 (Commission File Number)
PROTECTION ONE, INC. (Exact Name of Registrant As Specified In Its Charter)		PROTECTION ONE ALARM MONITORING, INC. (Exact Name of Registrant As Specified In Its Charter)
Delaware (State or Other Jurisdiction Of Incorporation or Organization)		Delaware (State or Other Jurisdiction of Incorporation or Organization)
93-1063818 (I.R.S. Employer Identification No.)		93-1064579 (I.R.S. Employer Identification No.)
6011 Bristol Parkway, Culver City, California 90230 (Address of Principal Executive Offices, Including Zip Code)		6011 Bristol Parkway, Culver City, California 90230 (Address of Principal Executive Offices, Including Zip Code)
(310) 342-6300 (Registrant's Telephone Number, Including Area Code)		(310) 342-6300 (Registrant's Telephone Number, Including Area Code)

Indicate by check mark whether each of the registrants (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that such registrants were required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes /x/ No / /

As of July 31, 2000, Protection One, Inc. had outstanding 126,611,300 shares of Common Stock, par value $0.01 per share. As of such date, Protection One Alarm Monitoring, Inc. had outstanding 110 shares of Common Stock, par value $0.10 per share, all of which shares were owned by Protection One, Inc. Protection One Alarm Monitoring, Inc. meets the conditions set forth in General Instructions H(1)(a) and (b) for Form 10-Q and is therefore filing this form with the reduced disclosure format set forth therein.

FORWARD-LOOKING STATEMENTS

Certain matters discussed in this Form 10-Q are forward-looking statements. The Private Securities Litigation Reform Act of 1995 has established that these statements qualify for safe harbors from liability. Forward-looking statements may include words like the Company believes, anticipates, expects or words of similar meaning. Forward-looking statements describe the Company's future plans, objectives, expectations, or goals. Such statements address future events and conditions concerning capital expenditures, earnings, restructuring the dealer program and the methods of customer acquisition, the implementation of new financial and billing information systems, litigation, possible corporate restructurings, mergers, acquisitions, dispositions, liquidity and capital resources, compliance with debt covenants, interest, ability to enter new markets successfully and capitalize on growth opportunities, and accounting matters. What happens in each case could vary materially from what the Company expects because of such things as future economic conditions; legislative developments; competitive markets; and other circumstances affecting anticipated operations, revenues and costs.

INTRODUCTORY NOTE—RESTATEMENT

Following extensive conversations with the Staff of the SEC which have been previously disclosed, we have restated our Consolidated Financial Statements as of December 31, 1999, 1998 and 1997 and for the years then ended and for each of the three fiscal quarters ended March 31, 2000, June 30, 2000, and September 30, 2000. This restatement primarily relates to the amortization of customer accounts acquired and amounts allocated to obligations assumed in the Westinghouse Security Systems (WSS) acquisition. A description of the adjustments which comprise the restatement is disclosed in Note 2 of the Consolidated Financial Statements filed with this Form 10-Q/A.

For the purpose of this Form 10-Q/A we have amended and restated in its entirety the Form 10-Q. In order to preserve the nature and the character of the disclosures as of the date of the original June 30, 2000 Form 10-Q, no attempt has been made in this Form 10-Q/A to modify or update such disclosures except as required to reflect the results of the restatement.

PART I

FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

PROTECTION ONE, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except per share amounts)
(Unaudited)

			June 30, 2000			December 31, 1999
			RESTATED NOTE 2
ASSETS
Current assets:
	Cash and cash equivalents		$	3,229		$	7,658
	Restricted cash			779			11,175
	Marketable securities			—			6,664
	Receivables, net			36,210			71,716
	Inventories			10,806			12,908
	Prepaid expenses			2,547			3,471
	Related party tax receivable & current deferred tax assets			42,678			59,456
	Other assets			3,396			13,332

		Total current assets		99,645			186,380
Property and equipment, net				44,778			60,912
Customer accounts, net				959,578			1,132,095
Goodwill, net				875,921			1,056,671
Other				33,093			76,500

	Total assets		$	2,013,015		$	2,512,558

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
	Current portion of long-term debt		$	70,909		$	35,498
	Accounts payable			5,634			23,205
	Accrued liabilities			49,953			74,248
	Purchase holdbacks			5,868			20,213
	Deferred revenue			51,258			61,149

		Total current liabilities		183,622			214,313
Long-term debt, net of current portion				593,433			1,077,152
Other liabilities				538			4,173

	Total liabilities			777,593			1,295,638
Commitments and contingencies (See Note 7)
Stockholders' equity:
	Preferred stock, $0.10 par value, 5,000,000 authorized, none outstanding			—			—
	Common stock, $0.01 par value, 150,000,000 shares authorized, 126,611,300 and 126,945,337 shares issued and outstanding at June 30, 2000 and December 31, 1999, respectively			1,270			1,269
	Additional paid-in capital			1,380,637			1,358,978
	Accumulated other comprehensive income, net			(365	)		(1,805	)
	Accumulated deficit			(145,319	)		(141,522	)
	Treasury stock, at cost, 423,500 and no shares at June 30, 2000 and December 31, 1999 respectively			(801	)		—

		Total stockholders' equity		1,235,422			1,216,920

	Total liabilities and stockholders' equity		$	2,013,015		$	2,512,558

The accompanying notes are an integral part of these consolidated financial statements.

PROTECTION ONE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS

(Dollars in thousands, except for per share amounts)
(Unaudited)

			Six Months Ended June 30,
			2000			1999
			RESTATED NOTE 2
Revenues:
	Monitoring and related services		$	212,986		$	252,807
	Installation and rental			22,965			44,286

		Total revenues		235,951			297,093
Cost of revenues:
	Monitoring and related services			62,978			58,205
	Installation and rental			13,409			23,583

		Total cost of revenues		76,387			81,788

		Gross profit		159,564			215,305
Operating expenses:
	Selling, general and administrative expense			70,031			83,620
	Amortization of intangibles and depreciation expense			118,059			91,150
	Acquisition expense			6,676			11,633
	Severance and other nonrecurring expense			3,050			2,000

Total operating expenses				197,816			188,403

		Operating income (loss)		(38,252	)		26,902
Other (income) expense:
	Interest expense, net			33,091			42,015
	Other			(291	)		(1,015	)

		(Loss before income taxes and extraordinary gain)		(71,052	)		(14,098	)
Income tax (expense) benefit				17,983			(176	)

Loss before extraordinary gain				(53,069	)		(14,274	)
Extraordinary gain, net of tax effect of $26,531				49,273			—

		Net loss	$	(3,796	)	$	(14,274	)

Other comprehensive income (loss):
	Unrealized gain (loss) on marketable securities, net of tax		$	995		$	(1,647	)
	Unrealized gain (loss) on currency translation, net of tax			444			(1,093	)

(Comprehensive loss)			$	(2,357	)	$	(17,014	)

	Loss per common share		$	(0.41	)	$	(0.11	)

	Extraordinary gain per common share		$	0.38		$	—

	Net loss per common share		$	(0.03	)	$	(0.11	)

	Weighted average common shares outstanding (in thousands)			126,970			126,862

The accompanying notes are an integral part of these consolidated financial statements.

PROTECTION ONE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS

(Dollars in thousands, except for per share amounts)
(Unaudited)

			Three Months Ended June 30,
			2000			1999
			RESTATED NOTE 2
Revenues:
	Monitoring and related services		$	96,815		$	126,585
	Installation and rental			4,413			22,983

		Total revenues		101,228			149,568
Cost of revenues:
	Monitoring and related services			29,216			29,283
	Installation and rental			3,299			11,832

		Total cost of revenues		32,515			41,115

		Gross profit		68,713			108,453
Operating expenses:
	Selling, general and administrative expense			28,420			43,435
	Amortization of intangibles and depreciation expense			56,551			46,747
	Acquisition expense			2,880			6,767

Total operating expenses				87,851			96,949

		Operating income (loss)		(19,138	)		11,504
Other (income) expense:
	Interest expense, net			13,610			21,844
	(Other)			(8	)		(671	)

		Loss before income taxes and extraordinary gain		(32,740	)		(9,669	)
Income tax benefit				8,557			1,088

Loss before extraordinary gain				(24,183	)		(8,581	)
Extraordinary gain, net of tax effect of $9,340				17,347			—

		Net loss	$	(6,836	)	$	(8,581	)

Other comprehensive loss:
	Unrealized loss on marketable securities, net of tax		$	—		$	(880	)
	Unrealized loss on currency translation, net of tax			(267	)		(312	)

Comprehensive loss			$	(7,103	)	$	(9,773	)

	Loss per common share		$	(0.18	)	$	(0.07	)

	Extraordinary gain per common share		$	0.13		$	—

	Net loss per common share		$	(0.05	)	$	(0.07	)

	Weighted average common shares outstanding (in thousands)			126,952			126,888

The accompanying notes are an integral part of these consolidated financial statements.

PROTECTION ONE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)
(Unaudited)

			Six Months Ended June 30,
			2000			1999
			RESTATED NOTE 2
Cash flow from operating activities:
Net loss			$	(3,796	)	$	(14,274	)
Adjustments to reconcile net loss to net cash provided by operating activities:
	Extraordinary gain			(49,273	)		—
	Amortization and depreciation			118,059			91,150
	Accretion of discount note interest			(2,469	)		(3,345	)
	Deferred income taxes			(18,524	)		(75	)
	Provision for doubtful accounts			10,592			6,092
	Loss on sale of marketable securities			—			344
	Other charges			(3,512	)		2,000
Changes in assets and liabilities:
	Receivables, net			3,980			(8,278	)
	Other current assets			(10,212	)		(3,433	)
	Accounts payable			(133	)		4,576
	Other liabilities			(11,216	)		(2,824	)

		Net cash provided by operating activities		33,496			71,933

Cash flows from investing activities:
	Purchase of installed security systems, net			(20,943	)		(154,571	)
	Purchase of property and equipment, net			(7,591	)		(19,534	)
	Sale of investments			—			2,540
	Acquisition of alarm companies, net of cash received			—			(20,722	)
	Sale of European operations and other investments			183,025			—

		Net cash provided by (used in) investing activities		154,491			(192,287	)

Cash flows from financing activities:
	Repayments on Senior Credit Facility, net			(155,000	)		129,583
	Payments on long-term debt			(46,518	)		(2,067	)
	Proceeds from long-term debt			6,087			—
	Funding from (payment to) Parent			3,473			(50	)
	Acquisition of treasury stock			(801	)		—
	Stock options and warrants exercised			160			273

		Net cash provided by (used in) financing activities		(192,599	)		127,739

Effect of exchange rate changes on cash and equivalents				183			571

		Net increase (decrease) in cash and cash equivalents		(4,429	)		7,956
Cash and cash equivalents:
	Beginning of period			7,658			10,025

	End of period		$	3,229		$	17,981

Interest paid during the period			$	40,469		$	22,184

Taxes paid during the period			$	293		$	256

SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:

In the first quarter of 2000, the Company sold its European operations for $225,000 and certain investments for $19,000 to Westar Capital, as discussed in Note 3. In exchange, the Company received $183,025 in cash and $60,975 market value of its outstanding bonds. Also in the first quarter of 2000, the Company received $14,985 market value of its bonds and a $14,198 note receivable from Westar Capital for payment of the Company's 1998 income tax receivable of $20,287 and an intercompany receivable of $8,896. Westar Capital repaid all but $223 of the note by delivering $13,975 in market value of the Company's debt securities in March and April of 2000. The balance of the note was repaid in April.

The accompanying notes are an integral part of these consolidated financial statements.

PROTECTION ONE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands, except per share amounts)
(Unaudited)

1. Basis of Consolidation and Interim Financial Information:

Protection One, Inc., a Delaware corporation ("Protection One" or the "Company"), is a holding company principally engaged through its subsidiaries in the business of providing security alarm monitoring services, which include sales, installation and related servicing of security alarm systems for residential and small business subscribers in North America, and until February 29, 2000, the United Kingdom and Continental Europe.

Westar Capital, Inc. ("Westar Capital"), a wholly owned subsidiary of Western Resources, Inc. ("Western Resources"), owns approximately 85% of the Company's common stock. The accompanying unaudited consolidated financial statements include the accounts of Protection One and its wholly owned subsidiaries.

The Company's unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles ("GAAP") for interim financial information and in accordance with the instructions to Form 10-Q. Accordingly, certain information and footnote disclosures normally included in financial statements presented in accordance with generally accepted accounting principles have been condensed or omitted. These financial statements should be read in conjunction with the audited financial statements and notes thereto for the year ended December 31, 1999, included in the Company's Annual Report on Form 10-K/A-2 filed with the Securities and Exchange Commission (the "SEC").

In the opinion of management of the Company, all adjustments considered necessary for a fair presentation of the financial statements have been included. The results of operations for the three and six months ended June 30, 2000 are not necessarily indicative of the results to be expected for the full year.

The Company expects to adopt two new statements on January 1, 2001. SFAS No. 133 and No. 137, "Accounting for Derivative Instruments and Hedging Activities" establish accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, (collectively referred to as derivatives) and for hedging activities. The statements require that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. Changes in the derivative's fair value will be required to be recognized currently in earnings unless specific hedge accounting criteria are met. In addition, the statements will require the Company to formally document, designate and assess the effectiveness of transactions that receive hedge accounting. The Company has not traditionally been required to utilize derivative instruments in managing its business. Therefore, management has not yet determined what, if any, impact these pronouncements will have upon adoption.

Certain reclassifications have been made to prior year information to conform with the current year presentation.

2. Restatement of Financial Statements:

Following extensive conversations with the staff of the SEC which have previously been disclosed, the Company has restated its Consolidated Financial Statements as of December 31, 1999, 1998 and 1997 and for the years then ended and for each of the three fiscal quarters ended March 31, 2000, June 30, 2000 and September 30, 2000. This restatement primarily relates to the amortization of

customer accounts acquired and amounts allocated to obligations assumed in the Westinghouse Security Systems (WSS) acquisition. A description of the principal adjustments which comprise the restatement is as follows:

The first adjustment reflects a change in the historical amortization expense recorded for customer accounts acquired in the WSS acquisition. The life of the acquired WSS customers was initially estimated at ten years. Straight-line amortization had originally been implemented. With the restatement, an eight-year estimated life and an accelerated amortization method will be used for customers acquired from WSS as of the acquisition date.

The second adjustment reverses a special charge of $12,750 for excess customer attrition that was recorded in the fourth quarter of 1997. This charge had been recorded for attrition experienced in the WSS customer account base in 1997.

The third adjustment reduces a repurchase obligation (SAMCO contract financing) to more closely match the estimated fair value of the obligation to the estimated fair value of WSS customer accounts on a per account basis. This change in valuation has the effect of reducing the obligation and goodwill and eliminating $14,837 of a non-recurring $16,348 pre-tax gain that was reported in 1998 when this obligation was repaid.

The fourth adjustment reduces goodwill as a result of a purchase price adjustment related to the WSS acquisition. Goodwill has been reduced by the amount of the claim made by our parent company of $33,772. A receivable had not originally been recorded for this claim. The change was made to establish this receivable by our parent which reduces recorded goodwill at the Company. Our parent entered into a comprehensive settlement agreement with Westinghouse in November 2000 and received $37,500.

A summary of the net effect of the restatement has been reflected in the appropriate quarterly results as follows:

		As Previously Reported						Restatement						As Restated
		Amount			Earnings Per Share			Amount			Earnings Per Share			Amount			Earnings Per Share
		(Dollars in thousands, except for per share amounts)
Loss before extraordinary gain
For the six months ended:
	June 30, 2000	$	(51,235	)	$	(.40	)	$	(1,834	)	$	(.01	)	$	(53,069	)	$	(.41	)
	June 30, 1999		(12,459	)		(.10	)		(1,815	)		(.01	)		(14,274	)		(.11	)
Net loss
For the six months ended:
	June 30, 2000	$	(1,962	)	$	(.02	)	$	(1,834	)	$	(.01	)	$	(3,796	)	$	(.03	)
	June 30, 1999		(12,459	)		(.10	)		(1,815	)		(.01	)		(14,274	)		(.11	)

		As Previously Reported						Restatement						As Restated
		Amount			Earnings Per Share			Amount			Earnings Per Share			Amount			Earnings Per Share
		(Dollars in thousands, except for per share amounts)
Loss before extraordinary gain
For the three months ended:
	June 30, 2000	$	(23,266	)	$	(.18	)	$	(917	)	$	—		$	(24,183	)	$	(.18	)
	June 30, 1999		(7,674	)		(.06	)		(907	)		(.01	)		(8,581	)		(.07	)
Net loss
For the three months ended:
	June 30, 2000	$	(5,919	)	$	(.05	)	$	(917	)	$	—		$	(6,836	)	$	(.05	)
	June 30, 1999		(7,674	)		(.06	)		(907	)		(.01	)		(8,581	)		(.07	)

Prior to this restatement, during the third quarter of 1999 the Company changed its amortization method for its customer account intangible assets from a straight-line to an accelerated method to more closely match future amortization cost with the estimated revenue stream from these assets. The effect of the change in accounting principle increased amortization expense reported in the third quarter of 1999 by $47,000. The change in the WSS customer account amortization method restates the results of 1997, 1998 and 1999 and thereby reduces the cumulative charge recorded in the third quarter of 1999.

See the Company's Form 10-Q/A for the quarter ended September 30, 2000 for a more detailed breakdown of the restatement items for the quarterly periods restated in 2000.

3. Change in Accounting Estimate:

The excess of the cost over the fair value of net assets of businesses acquired is recorded as goodwill. The Company has historically amortized goodwill on a straight-line basis over 40 years. In the first quarter of 2000, the Company re-evaluated the original assumptions and rationale utilized in the establishment of the carrying value and estimated useful life of goodwill. The Company concluded that due to continued losses, increased levels of attrition experienced in 1999 and other factors, the estimated useful life of goodwill should be reduced from 40 years to 20 years. As of January 1, 2000, the remaining goodwill, net of accumulated amortization, is being amortized over its remaining useful life based on a 20-year life. The resulting increase in annual goodwill amortization on the Company's existing account base will be approximately $23,000 for North America and $6,000 for Multifamily. The additional goodwill recorded for Europe prior to its sale on February 29, 2000 was approximately $1,000.

The change in estimate resulted in additional goodwill amortization for the three months and six months ended June 30, 2000 of $7,073 and $14,686 respectively. The resulting reduction to net income for those periods was $6,293 and $13,126 respectively, or a decrease in earnings per share of $0.05 and $0.10, respectively.

Goodwill amortization expense for the six months ended June 30, 2000 and June 30, 1999, was $27,092 and $15,343, respectively. Goodwill amortization expense for the three months ended June 30, 2000 and June 30, 1999, was $12,853 and $7,178, respectively.

4. Related Party Sale and Amendment to Revolving Credit Agreement:

On February 29, 2000, the Company sold its European operations and certain investments to Westar Capital. The consideration received was approximately $244,000, comprised of approximately $183,025 in cash and certain of the Company's outstanding debt securities Westar Capital had acquired in open market purchases for approximately $60,975. As part of the agreement, Westar Capital agreed to pay Protection One a portion of the net gain, if any, on a subsequent sale of the business on a declining basis over the four years following the closing. The cash proceeds of the sale were used to reduce the $240,000 outstanding balance under the $250,000 Senior Credit Facility between the Company and Westar Capital.

Concurrently, the Senior Credit Facility was amended to, among other things, (1) reduce the commitment to $115,000 (resulting in availability of approximately $58,000 after the sale of the European operations), (2) increase the leverage ratio covenant to 5.75 to 1.0, (3) reduce the interest coverage ratio to 2.10 to 1.0, (4) change the termination date to January 2, 2001, (5) change the loan pricing grid to one based on leverage ratio rather than credit rating, (6) allow for the inclusion of certain add-backs to the calculation of EBITDA, (7) eliminate as an Event of Default Western Resources' failure to own more than 50% of the Company, (8) waive compliance with the leverage ratio and interest coverage ratio covenants for the fiscal quarters ended September 30, 1999 and December 31, 1999, and (9) provide for an increase in the amount of the commitment by up to $40,000 for the purpose of consummating acquisitions approved by Westar Capital.

Westar Capital also transferred to the Company $14,985 market value of the Company's debt securities and a note in the amount of $14,198 in payment of the Company's 1998 income tax receivable of $20,287 and an intercompany receivable of $8,896. Westar Capital repaid all but $223 of the note by delivering $13,975 in market value of the Company's debt securities in March and April of 2000. The balance of the note was repaid in April 2000.

The carrying amount for the respective debt securities received for the above transactions were as follows:

Debt Security (Interest Rate)	February 29 Transaction		Settlement Of Note		Total
	(in thousands)		(in thousands)		(in thousands)
Senior Subordinated Discount Notes (13.625%)	$	38,892	$	4,832	$	43,724
Convertible Senior Subordinated Notes (6.75%)		49,550		—		49,550
Senior Subordinated Notes (8.125%)		46,110		17,500		63,610

Totals	$	134,552	$	22,332	$	156,884

An extraordinary gain of $32,400 net of tax of $17,400 was recorded on the extinguishment of the debt securities received in these transactions, however no gain or loss was recognized on the related

party sale of the European operations. Adjustments were made to Additional Paid-In Capital to reflect the amounts that would have been considered gains or losses had the buyer not been a related party. The transactions were approved by the independent directors of the Protection One and Monitoring Boards of Directors upon the recommendation of a special committee of the Protection One Board of Directors. The special committee obtained a "fairness opinion" from an investment banker with regard to the sale of the European operations.

Pro Forma Financial Information:

The following unaudited pro forma consolidated results of operations for the six months ended June 30, 2000 and June 30, 1999 assume the sale of the European operations occurred on January 1, 1999.

		Six Months Ended June 30,
		2000			1999
		RESTATED NOTE 2
Revenues		$	208,046		$	216,096
Loss before extraordinary item			(49,030	)		(9,989	)
Net income (loss)			242			(9,989	)
Net income (loss) per common share (basic and diluted)
	Loss before extraordinary item		(.39	)		(.08	)
	Net income (loss)		—			(.08	)

The pro forma financial information is not necessarily indicative of the results of operations had the sale of the European operations to Westar Capital been reflected for the entire period, nor do they purport to be indicative of results which will be obtained in the future.

The following unaudited proforma consolidated assets and liabilities as of December 31, 1999 assume the sale occurred on December 31, 1999.

	December 31, 1999
	RESTATED NOTE 2
Total assets	$	2,201,802
Total liabilities		1,078,570

5. Customer Accounts:

The following reflects the changes in the Company's investment in customer accounts (at cost) for the following periods:

	Six Months Ended June 30, 2000			Year Ended December 31, 1999
	RESTATED NOTE 2
Beginning customer accounts, net	$	1,132,095		$	1,022,863
Acquisition of customer accounts, net		21,716			333,195
Amortization of customer accounts, net		(74,831	)		(187,092	)
Purchase holdbacks and other		(11,596	)		(36,871	)
Sale of European operations		(107,806	)		—

Total customer accounts	$	959,578		$	1,132,095

Accumulated amortization of the investment in customer accounts at June 30, 2000 and December 31, 1999 was $375,264 and $328,787 respectively. At December 31, 1999 accumulated amortization excluding Europe was $303,586.

In conjunction with certain purchases of customer accounts, the Company withholds a portion of the purchase price as a reserve to offset qualifying losses of the acquired customer accounts for a specified period as provided for in the purchase agreements, and as a reserve for purchase price settlements of assets acquired and liabilities assumed. The estimated amount to be paid at the end of the holdback period is capitalized and an equivalent current liability established at the time of purchase. As of June 30, 2000 and December 31, 1999, purchase holdbacks were $5,868 and $20,213, respectively.

6. Debt:

During the first six months of 2000, the Company reduced outstanding debt by $446,083. The reduction included extinguishing debt securities in the face amount of $221,349 for less than carrying value resulting in an extraordinary gain of $49,273 net of tax of $26,531. The decrease resulted primarily from the $183,025 reduction of the Senior Credit Facility and the extinguishment of $134,552 in debt securities received in the sale of the European operations and related party transactions, as discussed in Note 3. In the second quarter of 2000, the Company used available cash and borrowings under the Senior Credit Facility to purchase $70,497 of debt securities from Westar Capital and in open market transactions for less than carrying value resulting in an extraordinary gain of $17,347 net of tax of $9,340. See Note 9 below.

As of June 30, 2000 and December 31, 1999, total borrowings under the Senior Credit Facility were $70,000 and $225,000, respectively. The remaining availability under this facility as of June 30, 2000 and December 31, 1999 was $45,000 and $25,000, respectively. The Company's ability to borrow under the facility is subject to compliance with certain financial covenants, including a leverage ratio of 5.75 to 1.0 and an interest coverage ratio of 2.10 to 1.0. At June 30, 2000, these ratios were approximately 4.2 to 1.0 and 2.7 to 1.0, respectively.

The indentures governing the Company's outstanding senior and subordinated notes contain similar covenants with different calculations relating to the Company's ability to incur indebtedness. The Company is in compliance with all covenants contained in these indentures.

7. Commitments and Contingencies:

The Company, its subsidiary Protection One Alarm Monitoring, Inc. ("Monitoring"), and certain present and former officers and directors of Protection One are defendants in a purported class action litigation pending in the United States District Court for the Central District of California,Ronald Cats, et al v. Protection One, Inc., et al., No CV 99-3755 DT (RCx). Pursuant to an Order dated August 2, 1999, four pending purported class actions were consolidated into a single action. In March 2000, plaintiffs filed a Second Consolidated Amended Class Action Complaint ("Amended Complaint"). Plaintiffs purport to bring the action on behalf of a class consisting of all purchasers of publicly traded securities of Protection One, including common stock and notes, during the period of February 10, 1998 through November 12, 1999. The Amended Complaint asserts claims under Section 11 of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 against Protection One, Monitoring, and certain present and former officers and directors of Protection One based on allegations that various statements concerning Protection One's financial results and operations for 1997 and 1998 were false and misleading and not in compliance with generally accepted accounting principles. Plaintiffs allege, among other things, that former employees of Protection One have reported that Protection One lacked adequate internal accounting controls and that certain accounting information was unsupported or manipulated by management in order to avoid disclosure of accurate information. The Amended Complaint further asserts claims against Western Resources and Westar Capital as controlling persons under Sections 11 and 15 of the Securities Act of 1933 and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. A claim is also asserted under Section 11 of the Securities Act of 1933 against Protection One's auditor, Arthur Andersen LLP. The Amended Complaint seeks an unspecified amount of compensatory damages and an award of fees and expenses, including attorneys' fees. On June 12, 2000, the Company and the other defendants filed motions to dismiss in part the Amended Complaint. These motions are currently pending. The Company believes that all the claims asserted in the Amended Complaint are without merit and intends to defend against them vigorously. We cannot currently predict the impact of this litigation which could be material.

Six Protection One dealers have filed a class action lawsuit in the U. S. District Court for the Western District of Kentucky alleging breach of contract because of the Company's interpretation of their dealer contracts. The action is styledTotal Security Solutions, Inc., et al. v. Protection One Alarm Monitoring, Inc., Civil Action No. 3:99CV-326-H (filed May 21, 1999). In September 1999, the Court granted Protection One's motion to stay the proceeding pending the individual plaintiff's pursuit of arbitration as required by the terms of their agreements. On June 23, 2000, the Court denied plaintiffs' motion to have collective arbitration. As of August 7, 2000, none of these dealers individually has commenced arbitration.

Other Protection One dealers have threatened litigation or arbitration based upon a variety of theories surrounding calculations of holdback and other payments. The Company believes it has

complied with the terms of these contracts and intends to vigorously defend its position. Although the Company believes that no individual such claim will have a material adverse effect, the Company cannot currently predict the aggregate impact of these disputes with dealers which could be material.

The Company is a party to claims and matters of litigation incidental to the normal course of its business. Additionally, the Company receives notices of consumer complaints filed with various state agencies. The Company has developed a dispute resolution process for addressing these administrative complaints. The ultimate outcome of such matters cannot presently be determined; however, in the opinion of management of the Company, the resolution of such matters will not have a material adverse effect upon the Company's consolidated financial position or results of operations.

8. Segment Reporting:

The Company's reportable segments include North America, Multifamily and until February 29, 2000, Europe. North America provides residential, commercial and wholesale security alarm monitoring services, which include sales, installation and related servicing of security alarm systems in the United States and Canada. Multifamily provides security alarm services to apartments, condominiums and other multi-family dwellings. The Europe segment provided security alarm services to residential and business customers in Europe.

The accounting policies of the operating segments are the same as those described in the summary of significant accounting policies in the Company's 1999 Form 10-K/A-2. The Company manages its business segments based on earnings before interest, income taxes, depreciation and amortization (EBITDA).

Six Months Ended June 30, 2000
(Dollars in thousands)
RESTATED
NOTE 2

	North America			Multifamily		Europe(2)		Consolidated
Revenues	$	188,456		$	19,591	$	27,904	$	235,951
EBITDA		68,220			8,237		6,400		82,857
Amortization of intangibles and depreciation expense		104,920			7,719		5,420		118,059
Other(1)		3,050			—		—		3,050
Operating income (loss)		(39,750	)		518		980		(38,252	)

Six Months Ended June 30, 1999
(Dollars in thousands)
RESTATED
NOTE 2

	North America		Multifamily		Europe		Consolidated
Revenues	$	196,865	$	19,231	$	80,997	$	297,093
EBITDA		88,371		8,145		23,536		120,052
Amortization of intangibles and depreciation expense		75,670		4,615		10,865		91,150
Other(1)		2,000		—		—		2,000
Operating income		10,701		3,530		12,671		26,902

Three Months Ended June 30, 2000
(Dollars in thousands)
RESTATED
NOTE 2

	North America			Multifamily		Europe(2)		Consolidated
Revenues	$	91,777		$	9,451	$	—	$	101,228
EBITDA		33,297			4,116		—		37,413
Amortization of intangibles and depreciation expense		52,666			3,885		—		56,551
Operating income (loss)		(19,369	)		231		—		(19,138	)

Three Months Ended June 30, 1999
(Dollars in thousands)
RESTATED
NOTE 2

	North America		Multifamily		Europe		Consolidated
Revenues	$	98,870	$	9,235	$	41,463	$	149,568
EBITDA		43,356		3,547		11,348		58,251
Amortization of intangibles and depreciation expense		39,050		2,318		5,379		46,747
Operating income		4,306		1,229		5,969		11,504

(1): "Other" includes employee severance in 1999, and employee severance and costs related to the sale of the European operations in 2000.
(2): Information for Europe is for the two months ended February 29, 2000.

9. Related Party Transactions:

The Company is a party to a marketing agreement with Paradigm Direct LLC ("Paradigm"). Westar Capital has a 40% ownership interest in Paradigm. For the three and six months ended June 30, 2000, the Company expensed $1,087 and $2,267 for marketing services provided by Paradigm pursuant to the marketing agreement. The pilot program contemplated by the marketing agreement concluded on June 30, 2000 with unsatisfactory results. The Company is currently evaluating modifications to the marketing and customer acquisition strategies developed by Paradigm. At June 30, 2000, the Company has a refundable prepaid balance with Paradigm of approximately $921.

For the three and six months ended June 30, 2000, the Company incurred charges of approximately $738 and $2,353, respectively, for administrative and other services provided by Western Resources pursuant to a service agreement. At June 30, 2000, the Company had a net intercompany balance due to Western Resources of $2,583 primarily for these services.

At June 30, 2000, the Company had outstanding borrowings of $70,000 from the Senior Credit Facility with Westar Capital. During the six months ended June 30, 2000, interest expense of $4,601 was accrued on borrowings from this facility and total interest payments of $4,987 were made to Westar Capital.

The Company acquired approximately $59,520 of its outstanding debt securities from Westar Capital during the first six months of 2000, $45,065 of which were purchased in the three months ended June 30, 2000. This includes debt securities received in settlement of the note receivable described in Note 3. These purchases resulted in an extraordinary gain of $15,342 net of tax of $8,261 for the six months ended June 30, 2000 and $11,843 net of tax of $6,377 for the three months ended June 30, 2000.

See Note 4 above for a discussion of the sale of the Company's European operations to Westar Capital.

10. Income Taxes:

The income tax benefit recorded for the six-month period ended June 30, 2000 is approximately 26% of the pre-tax loss. This rate represents the expected effective rate for 2000. The difference between the expected annual effective rate of 26% and the federal statutory rate of 35% is primarily attributable to non-deductible goodwill amortization. The Company has a tax sharing agreement with Western Resources which allows it to be reimbursed for tax deductions utilized by Western Resources in its consolidated tax return. If the Company did not file its taxes on a consolidated basis with Western Resources, the Company's deferred tax assets might not be realizable and the Company might not be in a position to record a tax benefit for losses incurred.

11. Unrealized Gains and Losses:

The following reflects the changes in unrealized gains and losses in marketable securities and in currency fluctuations for the six-months ended June 30, 2000:

Unrealized loss on marketable securities		$	(1,202	)
	Less: reclassification adjustment for losses included in sale of European operations		2,830

Net unrealized gain		$	1,628

Unrealized loss on currency translation		$	(1,681	)
	Less: reclassification adjustment for losses included in sale of European operations		2,421

Net unrealized gain		$	740

12. Recent Developments:

On March 28, 2000, Western Resources Board of Directors approved the separation of its electric utility business from its non-electric businesses. On May 18, 2000, Western Resources announced that its Board of Directors had authorized management to explore strategic alternatives for the electric utility business. Western Resources indicated that it currently expects to identify a strategic partner for the electric business prior to year end. Western Resources also indicated that the non-electric businesses are expected to consist of the approximate 85% ownership interest in the Company, an approximate 45% ownership interest in ONEOK Inc., a Tulsa-based natural gas company, a 100% ownership interest in Protection One Europe (formerly the Europe segment of the Company), and a 40% ownership in Paradigm Direct LLC, and other investments. The Company can give no assurances as to whether or when the separation or the strategic transaction may occur.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Unless the context otherwise indicates, all references in this Report on Form 10-Q/A (this "Report") to the "Company," "Protection One," "we," "us" or "our" or similar words are to Protection One, Inc., its wholly owned subsidiary, Protection One Alarm Monitoring, Inc. ("Protection One Alarm Monitoring") and Protection One's other wholly owned subsidiaries. Protection One's primary asset is, and Protection One operates primarily through, its investments in Protection One Alarm Monitoring and its other wholly owned subsidiaries. Both Protection One and Protection One Alarm Monitoring are Delaware corporations organized in September 1991.

The following Management's Discussion and Analysis of Financial Condition and Results of Operations updates the information provided in and should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations in our 1999 Annual Report on Form 10-K/A-2.

Overview

Protection One is one of the leading providers of property monitoring services, providing electronic monitoring and maintenance of its alarm systems to over 1.4 million customers in North America. We also provide our residential customers with enhanced services that include:

•: extended service protection;
•: patrol and alarm response;
•: two-way voice communication;
•: medical information service; and
•: cellular back-up.

Approximately 85% of our revenues are contractually recurring for monitoring alarm security systems and other related services.

Our principal activity is responding to the security and safety needs of our customers. Our revenues are generated primarily from recurring monthly payments for monitoring and servicing the alarm systems that are installed in our customers' homes and businesses. Security systems are designed to detect burglaries, fires and other events. Through a network of approximately 70 service branches and satellite offices we provide repair service of security systems and, in certain markets, armed response to verify that an actual emergency has occurred.

We provide our services to residential (both single family and multifamily residences), commercial and wholesale customers. In prior years, the Company's strategy was focused primarily on growing its customer account base to achieve critical mass. We believe we have reached such critical mass and our strategic focus has now shifted to the following areas:

•: improving customer service;
•: reducing attrition;
•: reducing customer acquisition costs, and diversifying our customer acquisition strategy to include dealers, internal sales, tuck-in acquisitions and direct marketing;
•: integrating and building infrastructure such as common platforms for our central stations, billing, and other applications;
•: enhancing revenues and margins by offering additional services to new and existing customers;

•: establishing name recognition by targeting our growth to areas near existing branches to increase customer density; and
•: growing our commercial business.

Our company is divided into two business segments:

Protection One North America ("North America") generated approximately $188.5 million, or 79.9%, of our revenues in the first six months of 2000 and is comprised of Protection One Alarm Monitoring-our core alarm monitoring business based in Culver City, California.

Multifamily generated approximately $19.6 million, or 8.3%, of our revenues in the first six months of 2000 and is comprised of our alarm monitoring business servicing the multifamily/apartment market based in Addison, Texas.

On February 29, 2000, we sold Protection One Europe ("Europe") which generated approximately $27.9 million of revenues through February 29, 2000. Europe was comprised of:

•: Protection One Continental Europe—an alarm monitoring business servicing continental Europe established from our purchase of Compagnie Europeenne de Telesecurite ("CET") in September 1998, based in Paris and Vitrolles, France with offices in Germany, Switzerland, Belgium and the Netherlands; and
•: Protection One United Kingdom—an alarm monitoring business servicing the United Kingdom established from our purchase of Hambro Countrywide Security in May 1998, based in Basingstoke, United Kingdom.

Sale of European Assets and Other Transactions

On February 29, 2000 the Company sold its European operations and certain investments to Westar Capital. The consideration received was approximately $244 million, comprised of approximately $183 million in cash and certain of the Company's outstanding debt securities Westar Capital had acquired in open market purchases for approximately $61 million. As part of the agreement, Westar Capital agreed to pay Protection One a portion of the net gain, if any, on a subsequent sale of the business on a declining basis over the four years following the closing. The cash proceeds of the sale were used to reduce the $240 million outstanding balance under the $250 million Senior Credit Facility between the Company and Westar Capital.

Concurrently, the Senior Credit Facility was amended to, among other things, (1) reduce the commitment to $115 million (resulting in availability of approximately $58 million after the sale of the European operations), (2) increase the leverage ratio covenant to 5.75 to 1.0, (3) reduce the interest coverage ratio to 2.10 to 1.0, (4) change the termination date to January 2, 2001, (5) change the loan pricing grid to one based on leverage ratio rather than credit rating, (6) allow for the inclusion of certain add-backs to the calculation of EBITDA, (7) eliminate as an Event of Default Western Resources' failure to own more than 50% of the Company, (8) waive compliance with the leverage ratio and interest coverage ratio covenants for the fiscal quarters ended September 30, 1999 and December 31, 1999, and (9) provide for an increase in the amount of the commitment by up to $40 million for the purpose of consummating acquisitions approved by Westar Capital.

Westar Capital also transferred to the Company $14.9 million market value of the Company's debt securities and a note in the amount of $14.2 million for payment of the Company's 1998 income tax receivable of $20.3 million and an intercompany receivable of $8.9 million. Westar Capital repaid all but $0.2 million of the note by delivering $14.0 million in market value of the Company's debt securities in March and April of 2000. The balance of the note was repaid in April 2000.

The carrying amount for the respective debt securities received for the above transactions were as follows:

Debt Security (Interest Rate)	February 29 Transaction		Settlement of Note		Total
	(in thousands)		(in thousands)		(in thousands)
Senior Subordinated Discount Notes (13.625%)	$	38,892	$	4,832	$	43,724
Convertible Senior Subordinated Notes (6.75%)		49,550		—		49,550
Senior Subordinated Notes (8.125%)		46,110		17,500		63,610

Totals	$	134,552	$	22,332	$	156,884

An extraordinary gain of $32.4 million net of tax of $17.4 million was recorded on the extinguishment of the debt securities received in these transactions, however no gain or loss was recognized on the related party sale of the European operations. Adjustments were made to Additional Paid-In Capital to reflect the amounts that would have been considered gains or losses had the buyer not been a related party. The transactions were approved by the independent directors of the Protection One and Monitoring Boards of Directors upon the recommendation of a special committee of the Protection One Board of Directors. The special committee obtained a "fairness opinion" from an investment banker with regard to the sale of the European operations.

Change in Estimate of Useful Life of Goodwill

In the first quarter, we re-evaluated the original assumptions and rationale utilized in the establishment of the carrying value and estimated useful life of goodwill. Management concluded that due to continued losses, increased levels of attrition experienced in 1999 and other factors, the estimated useful life of goodwill should be reduced from 40 years to 20 years. As of January 1, 2000, the remaining goodwill, net of accumulated amortization, will be amortized over its remaining useful life based on a 20-year life. On our existing account base, we anticipate that this will result in an increase in annual goodwill amortization of approximately $23 million for North America and $6 million for Multifamily. The additional goodwill recorded for Europe prior to its sale on February 29, 2000 was approximately $1 million.

Attrition

Subscriber attrition has a direct impact on our results of operations since it affects both our revenues and amortization expense. We define attrition as a ratio, the numerator of which is the gross number of lost customer accounts for a given period, net of certain adjustments, and the denominator of which is the average number of accounts for a given period. In some instances, we use estimates to derive attrition data. The adjustments made to lost accounts are primarily related to those accounts which are covered under a purchase price holdback and are "put" back to the seller. We reduce the gross accounts lost during a period by the amount of the guarantee provided for in the purchase agreements with sellers. In some cases, the amount of the purchase holdback may be less than actual attrition experience. We do not reduce the gross accounts lost during a period by "move in" accounts, which are accounts where a new customer moves into a home installed with the Company's security system and vacated by a prior customer, or "competitive takeover" accounts, which are accounts where the owner of a residence monitored by a competitor requests that the Company provide monitoring services.

Our actual attrition experience shows that the relationship period with any individual customer can vary significantly and may be substantially shorter or longer than ten years. Customers discontinue service with us for a variety of reasons, including relocation, service issues and cost. A portion of the

acquired customer base can be expected to discontinue service every year. Any significant change in the pattern of our historical attrition experience would have a material effect on our results of operations.

We monitor attrition each quarter based on an annualized and trailing twelve-month basis. This method utilizes each segment's average customer account base for the applicable period in measuring attrition. Therefore, in periods of customer account growth, customer attrition may be understated and in periods of customer account decline, customer attrition may be overstated. When appropriate, we will adjust amortization of the cost of customer accounts.

Customer attrition by business segment for the periods ended June 30, 2000 and 1999 are summarized below:

	Customer Account Attrition
	June 30, 2000		June 30, 1999
	Annualized Second Quarter	Trailing Twelve Month	Annualized Second Quarter	Trailing Twelve Month
North America	14.2%	15.5%	15.9%	11.9%
Multifamily	16.1%	9.9%	9.7%	5.9%
Total Company*	14.6%	14.4%	14.8%	10.8%

*: Does not include Europe segment.

The Company experienced high levels of attrition for the North America segment in 1999 with quarterly annualized attrition reaching peak levels of 15.9%, 19.1% and 16.3% in the second, third and fourth quarters, respectively. The quarterly annualized attrition rate for North America in the first quarter of 2000 was 11.9% as compared to 11.2% in the first quarter of 1999. The quarterly annualized attrition rate for North America in the second quarter of 2000 increased to 14.2% from 11.9% in the first quarter but decreased from the 1999 second quarter attrition rate of 15.9%. Management believes the general decline in attrition for North America from the peak levels in 1999 is a result of efforts to improve customer service and collections of outstanding accounts. The increase in the attrition rate for Multifamily in the second quarter of 2000 is due to nonpayment of approximately 7,000 subscribers related to one developer. Had these accounts not attrited, the annualized quarterly attrition for Multifamily would have been approximately 6.6% and the twelve months trailing attrition percentage for Multifamily would have been approximately 7.5%. The Company is pursuing contractual remedies for nonpayment of these accounts.

In the second quarter we identified customer accounts which were incorrectly entered into our system, represent duplicate existing accounts or represent accounts for which credit and collection activities have not occurred. We have reported in our balance of customer accounts all accounts recorded in our billing system as customers. We currently have approximately 30,000 accounts which we are analyzing and will adjust our customer base appropriately either by reducing the number of accounts reported or by including such accounts in our reported attrition. We do not expect any material adverse effect on our financial statements or results of operations because we do not record revenue on these accounts until received.

Customer Creation and Marketing

For the three and six months ended June 30, 2000, our North America segment added 11,259 and 24,988 accounts, respectively, and our Multifamily segment added 11,252 and 19,120 accounts respectively. While our previous customer acquisition strategy relied primarily on the dealer program, our new customer acquisition strategy relies on a mix of dealers, internal sales, "tuck-in" acquisitions and direct marketing. The number of accounts being purchased through the dealer program decreased significantly from 126,779 for the six months ended June 30, 1999 to 14,334 for the six months ended

June 30, 2000. For the three months ended June 30, 2000, the dealer program produced 4,922 accounts, or approximately 44% of the total number of accounts purchased during such period. We expect small increases in the number of accounts purchased through the dealer program over the remainder of 2000. In February 2000, we started a commission only internal sales program, with a goal of acquiring accounts at a cost lower than our external programs. We currently have a commissioned sales force of approximately 160 persons which we plan to expand through the remainder of the year. This program utilizes our existing branch infrastructure in 54 markets. The internal sales program generated 6,196 accounts in the three months ended June 30, 2000. We expect the number of accounts produced by this program to increase as it becomes more established. Our pilot program with Paradigm Direct LLC which utilized direct marketing to produce customer accounts was concluded on June 30, 2000 with unsatisfactory results. We are currently evaluating modifications to the marketing and customer acquisition strategies developed by Paradigm.

Operating Results

We separate our business into three reportable segments: North America, Multifamily, and through February 29, 2000, Europe. North America provides security alarm monitoring services, which include sales, installation and related servicing of security alarm systems in the United States and Canada. Multifamily provides security alarm services to apartments, condominiums and other multi-family dwellings. The Europe segment provided security alarm services in Europe and was sold on February 29, 2000.

Six Months Ended June 30, 2000 Compared to Six Months Ended June 30, 1999

North America Segment

We present the table below for comparison of the North America operating results for the periods presented. Next to each period's results of operations, we provide the relevant percentage of our total revenues so that you can make comparisons about the relative change in revenues and expenses.

		Six Months Ended June 30,
		2000					1999
		(dollars in thousands) RESTATED NOTE 2
Revenues:
	Monitoring and related services	$	181,291		96.2	%	$	189,357	96.2	%
	Installation and rental		7,165		3.8			7,508	3.8

	Total revenues		188,456		100.0			196,865	100.0
Cost of revenues:
	Monitoring and related services		55,365		29.4			45,930	23.3
	Installation and rental		5,793		3.1			6,965	3.6

	Total cost of revenues		61,158		32.5			52,895	26.9

	Gross profit		127,298		67.5			143,970	73.1
Selling, general and administrative expenses			52,619		27.9			44,707	22.7
Acquisition and transition expense			6,459		3.4			10,892	5.5
Amortization of intangibles and depreciation expense			104,920		55.7			75,670	38.5
Other charges			3,050		1.6			2,000	1.0

Operating income (loss)		$	(39,750	)	(21.1	)%	$	10,701	5.4	%

2000 Compared to 1999. We had a net decrease of 62,112 customers in the first two quarters of 2000 as compared to a net increase of 50,717 customers in the first two quarters of 1999. The average customer base for the first six months of 2000 and 1999 was 1,173,586 and 1,221,406 respectively, or a decrease of 47,820 customers. The decrease in customers is primarily attributable to the significant decrease in the number of accounts being purchased from dealers which has not yet been offset by growth from our other customer acquisition strategies. We do not expect our customer acquisitions to replace all accounts lost through attrition at least through the remainder of 2000. Accordingly, our total customer base is likely to decline based upon historical rates of attrition which is likely to result in declining revenues. Our current focus remains on the completion of our current infrastructure projects, the development of cost effective marketing programs and the generation of positive cash flow, all of which we believe will build the foundation for future growth.

The following table shows the change in the North America customer account base:

	Six Months Ended(1) June 30,
	2000		1999
Beginning Balance, January 1,	1,204,642		1,196,047
Additions	24,988		142,631
Customer losses not guaranteed with holdback put backs	(76,612	)	(83,239	)
Customer losses guaranteed with holdback put backs	(10,488	)	(8,675	)

Ending Balance	1,142,530		1,246,764

Annualized attrition	13.1	%	13.6	%

(1): See "Attrition" for discussion of possible adjustment.

Monitoring and related service revenues decreased approximately $8.1 million in the first six months of 2000 as compared to the first six months of 1999 primarily due to the decline in our customer base. An additional factor was the issuance of more customer credits during the first six months of 2000 as compared to 1999. A significant portion of these credits were goodwill credits issued to customers in the first quarter as a result of billing problems encountered when we implemented a new billing and collections system in our Beaverton monitoring station late in 1999. The problems with this system have been corrected and the issuance of credits for this purpose has decreased.

Installation and rental revenues consist primarily of revenues generated from our internal installations of new alarm systems. These revenues decreased by approximately $0.34 million or 4.6% from the first half of 1999.

Cost of monitoring and related services revenues for the first six months of 2000 increased by $9.4 million, or 20.5%, to $55.3 million from $45.9 million for the first six months of 1999. Compensation costs for the monitoring stations increased by approximately $3.6 million due primarily to an increase in personnel. The increase in employees is a direct result of our efforts to improve the level of customer service. In addition, parts and materials costs increased by $2.5 million, telecom costs increased $1.0 million and vehicle costs increased $0.7 million

Cost of installation and rental revenues was $1.2 million or 16.8% less than in the first half of 1999. These costs as a percentage of installation and rental revenues were approximately 81% for the first half of 2000, as compared to approximately 93% for the first half of 1999. Parts and materials decreased by $1.5 million.

Selling, general and administrative expenses increased $7.9 million from $44.7 million in the first half of 1999 to $52.6 million in the first half of 2000. Bad debt and collection expenses increased

approximately $3.4 million as a result of an increased focus on collecting aged trade receivables. Subcontract expense for outside information technology support increased approximately $2.6 million due primarily to work performed in connection with the implementation of our new billing and collection software which started in November 1999. Sales commission expense increased $0.6 million as a result of the expansion of our internal commissioned sales force. In addition, telecom costs increased $1.0 million.

Acquisition expenses decreased $4.4 million in the first half of 2000 from $10.9 million in the first half of 1999 to $6.5 million. During these respective periods for 2000 and 1999, third party monitoring costs decreased by $2.4 million, signs and decals expense decreased by $1.8 million, printing expense decreased by $0.9 million and compensation expense decreased by $0.8 million. These decreases are a direct result of the significant decline in the number of new accounts acquired from 142,631 in the first six months of 1999 to 24,988 accounts acquired in the first six months of 2000. This decline is primarily due to the restructuring of our dealer program. Partially offsetting these decreases in 2000 were $1.6 million in costs related to winding down the old dealer program, along with an increase of $0.5 million in reprogramming expense. The decrease in third party monitoring expense and associated increase in reprogramming expense are a result of our concentrated effort in late 1999 to move such accounts to our own monitoring stations.

Amortization of intangibles and depreciation expense for the first half of 2000 increased by $29.2 million, or 38.6%, to $104.9 million from $75.7 million in the first half of 1999. As discussed in our 1999 Annual Report on Form 10-K/A-2, we changed the amortization method on most of our customer base from a 10-year straight line method to a 10-year declining balance method as of the third quarter in 1999. Therefore, the amortization expense on these accounts for the first half of 1999 was calculated using a straight line method whereas the amortization expense for the first half of 2000 is calculated using the declining balance method. This change does not include our Westinghouse customer pool for which we adopted an 8-year accelerated amortization method from the date of the WSS acquisition. See Note 2 of the Consolidated Financial Statements. Subscriber amortization for these periods increased from $59.2 million for the first half of 1999, to $69.2 million for the first half of 2000.

As discussed above, we also changed our estimate of the useful life of goodwill from 40 years to 20 years. As a result, our amortization expense increased $10.2 million from $10.6 million in the first half of 1999, to $20.8 million for the first half of 2000. Additionally, in the first half of 2000, depreciation expense increased $9.2 million from $5.7 million for the first half of 1999 to $14.9 million. This increase is due to accelerated depreciation of the general ledger and accounts receivable systems installed in 1999. We have decided to move to another general ledger and accounts receivable system in 2000 which we believe is better suited to our needs.

Other charges for the first half of 1999 consisted of officer's severance costs of $2.0 million. For the first half of 2000, these charges consist of $1.5 million for officer's severance and $1.55 million for expenses relating to the sale of the European operations.

Interest expense, net for the first six months of 2000 and 1999 was $32.2 million and $35.9 million, respectively. During the first half of 1999, borrowings under the Senior Credit Facility increased from $42.4 million to $172.0 million with interest rates ranging from 6.19% to 7.75%. During the first half of 2000, borrowings under the Senior Credit Facility decreased from $225.0 million to $70.0 million at interest rates ranging from 7.8% to 8.9%. In the first half of 1999, we accrued interest charges on the $350 million Senior Subordinated Notes at 8.125%, however, since we have not completed the required exchange offer, the interest rate relating to this debt increased to 8.625% in June 1999. Total debt decreased during the first half of 2000 from $1.1 billion to $664 million, a decrease of $446 million.

Multifamily Segment

We present the table below for comparison of the Multifamily operating results for the periods presented. Next to each period's results of operations, we provide the relevant percentage of total revenues so that you can make comparisons about the relative change in revenues and expenses.

		Six Months Ended June 30,
		2000				1999
		(dollars in thousands)
Revenues:
	Monitoring and related services	$	17,379	88.7	%	$	16,982	88.3	%
	Installation and rental		2,212	11.3			2,249	11.7

	Total revenues		19,591	100.0			19,231	100.0
Cost of revenues:
	Monitoring and related services		3,911	20.0			3,438	17.9
	Installation and rental		2,112	10.8			1,785	9.3

	Total cost of revenues		6,023	30.8			5,223	27.2

	Gross profit		13,568	69.2			14,008	72.8
Selling, general and administrative expenses			5,331	27.2			5,550	28.8
Acquisition and transition expense			—	—			313	1.6
Amortization of intangibles and depreciation expense			7,719	39.4			4,615	24.0

Operating income		$	518	2.6	%	$	3,530	18.4	%

2000 Compared to 1999 We increased our customer base a total of 6,188 customers from June 30, 1999 to June 30, 2000. The average customer base is 295,649 for the first half of 2000 compared to 288,052 for the first half of 1999. The change in Multifamily's customer base for the period is shown below.

	Six Months Ended June 30,
	2000		1999
Beginning Balance, January 1,	294,960		285,954
Additions	19,120		14,782
Customer losses	(17,742	)	(10,586	)

Ending Balance	296,338		290,150

Annualized attrition	12.0	%	7.4	%

The increase in the attrition rate for Multifamily for the six months ended June 30, 2000 is due to nonpayment of approximately 7,000 subscribers related to one developer. Had these accounts not attrited, the annualized attrition would have been approximately 7.2%. The Company is pursuing contractual remedies for nonpayment of these accounts.

Monitoring and related services revenues for the first half of 2000 increased by $0.4 million, or 2.3%, to $17.4 million from $17.0 million for the first half of 1999 due primarily to the larger customer base in 2000.

Cost of monitoring and related revenues for the first half of 2000 increased by $.5 million, or 13.8% to $3.9 million from $3.4 million for the first half of 1999. Monitoring and related service expenses, as a percentage of monitoring and related service revenues, increased to 22.5% for the first six months of 2000 from 20.2% for the first six months of 1999. This increase is primarily related to higher

employment costs resulting from the current competitive labor market and an increase in claims experience on our self funded medical insurance plan.

Cost of installation and rental revenues increased by $.3 million or 18.3% to $2.1 million from $1.8 million in 1999. Installation and rental cost of revenues, as a percentage of installation and rental revenues, increased to 95.5% in the first six months of 2000 from 79.4% in the first six months of 1999. This increase is primarily due to the significant number of installations in 1999 which used less sophisticated monitoring equipment than Multifamily's standard contracts, combined with the increased use in 2000 of wireless systems, which are more expensive but expected to reduce future service costs.

Selling, general and administrative expense decreased 4.0% or $.2 million in 2000 to $5.3 million from $5.5 million as a result of a temporary decline in the sales force.

Amortization of intangibles and depreciation expense for the first half of 2000 increased by $3.1 million, or 67.3% from $4.6 million in 1999 to $7.7 million in 2000. This increase is primarily due to the change in estimate of goodwill life from 40 years to 20 years resulting in an increase in goodwill amortization expense of $2.3 million. Subscriber amortization increased by $0.8 million due to the increasing customer base being amortized.

Three Months Ended June 30, 2000 Compared to Three Months Ended June 30, 1999

North America Segment

We present the table below for comparison of the North America operating results for the periods presented. Next to each period's results of operations, we provide the relevant percentage of total revenues so that you can make comparisons about the relative change in revenues and expenses.

		Three Months Ended June 30,
		2000					1999
		(dollars in thousands) RESTATED
Revenues:
	Monitoring and related services	$	88,124		96.0	%	$	95,132	96.2	%
	Installation and rental		3,653		4.0			3,738	3.8

	Total revenues		91,777		100.0			98,870	100.0
Cost of revenues:
	Monitoring and related services		27,240		29.7			22,872	23.1
	Installation and rental		2,569		2.8			3,413	3.5

	Total cost of revenues		29,809		32.5			26,285	26.6

	Gross profit		61,968		67.5			72,585	73.4
Selling, general and administrative expenses			25,791		28.1			23,056	23.3
Acquisition and transition expense			2,880		3.1			6,173	6.2
Amortization of intangibles and depreciation expense			52,666		57.4			39,050	39.5

Operating income (loss)		$	(19,369	)	(21.1	)%	$	4,306	4.4	%

2000 Compared to 1999. We had a net decrease of 35,866 customers in the second quarter of 2000 as compared to a net increase of 18,350 customers in the second quarter of 1999. The average customer base for the second quarters of 2000 and 1999 was 1,160,463 and 1,237,589, respectively, or a decrease of 77,126 customers. The decrease in customers is primarily attributable to the significant decrease in the number of accounts being purchased from dealers which has not yet been offset by growth from our other customer acquisition strategies. We do not expect our customer acquisitions to

replace customers lost through attrition at least through the remainder of 2000. Accordingly, our total customer base is likely to decline based upon historical rates of attrition which is likely to result in declining revenues. Our current focus remains on the completion of our current infrastructure projects, the development of cost effective marketing programs, and the generation of positive cash flow, all of which we believe will build the foundation for future growth.

The following table shows the change in the North America customer account base:

	Three Months Ended(1) June 30
	2000		1999
Beginning Balance, April 1	1,178,396		1,228,414
Additions	11,259		72,498
Customer losses not guaranteed with holdback putbacks	(41,086	)	(49,337	)
Customer losses guaranteed with holdback putbacks	(6,039	)	(4,811	)

Ending Balance	1,142,530		1,246,764

Annualized quarterly attrition	14.2	%	15.9	%

(1): See "Attrition" for discussion of possible adjustment.

Monitoring and related service revenues decreased approximately $7.0 million in the second quarter of 2000 as compared to the second quarter of 1999 primarily due to the decline in our customer base. An additional factor was the issuance of more customer credits during the second quarter of 2000 compared to 1999.

Cost of monitoring and related services revenues for the second quarter of 2000 increased by $4.4 million, or 19.1%, to $27.2 million from $22.9 million for the second quarter of 1999. Compensation costs for the monitoring stations increased by approximately $1.4 million due primarily to an increase in personnel. The increase in employees is a direct result of our efforts to improve the level of customer service. In addition, parts and materials costs increased by $1.8 million and telecom costs increased $0.6 million.

Cost of installation and rental revenues was $0.84 million or 24.7% less than in the second quarter of 1999. These costs as a percentage of installation and rental revenues were approximately 70% for the second quarter of 2000 as compared to approximately 91% for the second quarter of 1999. Parts and materials decreased by $1.2 million. Partially offsetting this decrease, compensation and subcontract labor costs increased approximately $0.3 million.

Selling, general and administrative expenses increased $2.7 million from $23.1 million in the second quarter of 1999 to $25.8 million in the second quarter of 2000. Bad debt and collection expenses increased $1.3 million as a result of an increased focus on collecting aged receivables. Subcontract expense related to outside information technology support increased approximately $1.0 million due primarily to work performed in connection with the implementation of our new billing and collection software. Sales commission expense increased $0.9 million as a result of the expansion of our internal commissioned sales force.

Acquisition expenses decreased $3.3 million in the second quarter of 2000 from $6.2 million in the second quarter of 1999 to $2.9 million. During these respective periods for 2000 and 1999, third party monitoring costs decreased by $1.3 million, signs and decals expense decreased by $1.3 million, printing expense decreased by $0.7 million and compensation expense decreased by $0.3 million. These decreases are a direct result of the significant decline in the number of new accounts acquired from 72,498 in the three months ended June 30, 1999 to 11,259 accounts acquired in the three months ended June 30, 2000. This decline is primarily due to the restructuring of our dealer program. Partially offsetting these decreases in 2000, were $0.2 million in costs related to winding down the old dealer program, along with an increase of $0.4 million in reprogramming expense. The decrease in third party monitoring expense and associated increase in reprogramming expense are a result of our concentrated effort in late 1999 to move such accounts to our own monitoring stations.

Amortization of intangibles and depreciation expense for the second quarter of 2000 increased by $13.7 million, or 35.1%, to $52.7 million from $39.0 million in the second quarter of 1999. As discussed in our 1999 Annual Report on Form 10-K/A-2, we changed the amortization method on most of our customer base from a 10-year straight line method to a 10-year declining balance method effective in the third quarter in 1999. Therefore, the amortization expense on these accounts for the second quarter of 1999 was calculated using a straight line method whereas the amortization expense for the second quarter of 2000 is calculated using the declining balance method. This change does not include our Westinghouse customer pool for which we adopted an 8-year accelerated amortization method from the date of the WSS acquisition. See Note 2 of the Consolidated Financial Statements. Subscriber amortization for these periods increased from $30.8 million for the second quarter of 1999 to $34.6 million for the second quarter of 2000.

As discussed above, we also changed our estimate of the useful life of goodwill from 40 years to 20 years. As a result, amortization expense increased $5.5 million from $4.9 million in the second quarter of 1999 to $10.4 million for the second quarter of 2000. Additionally, in the second quarter of 2000 depreciation expense increased $4.5 million from $3.1 million for the second quarter of 1999 to $7.6 million in the second quarter of 2000. This increase is due to accelerated depreciation of the general ledger and accounts receivable systems installed in 1999. We have decided to move to another general ledger and accounts receivable system in 2000 which we believe is better suited to our needs.

Interest expense, net for the second quarter was $13.6 million and $18.8 million for 2000 and 1999, respectively. During the second quarter of 1999, borrowings under the Senior Credit Facility rose from $124.0 million to $172.0 million with interest rates ranging from 6.19% to 7.75%. During the second quarter of 2000, the Senior Credit Facility increased from $37.0 million to $70.0 million at interest rates ranging from 8.4% to 8.9%. For most of the second quarter of 1999, we accrued interest charges on the $350 million Senior Subordinated Notes at 8.125%, however, since we have not completed the required exchange offer, the interest rate relating to this debt increased to 8.625% in June 1999. Total debt decreased by $38.3 million during the second quarter of 2000 from $702.4 million to $664.1 million.

Multifamily Segment

		Three Months Ended June 30,
		2000				1999
		(dollars in thousands)
Revenues:
	Monitoring and related services	$	8,691	92.0	%	$	8,402	91.0	%
	Installation and rental		760	8.0			833	9.0

	Total revenues		9,451	100.0			9,235	100.0
Cost of revenues:
	Monitoring and related services		1,976	20.9			1,761	19.1
	Installation and rental		730	7.8			768	8.3

	Total cost of revenues		2,706	28.7			2,529	27.4

	Gross profit		6,745	71.3			6,706	72.6
Selling, general and administrative expenses			2,629	27.8			2,846	30.8
Acquisition and transition expense			—	—			313	3.4
Amortization of intangibles and depreciation expense			3,885	41.1			2,318	25.1

Operating income		$	231	2.4	%	$	1,229	13.3	%

2000 Compared to 1999. We increased our customer base a total of 6,188 customers, or 2.1%, from June 30, 1999 to June 30, 2000. The average customer base was 296,671 for the second quarter of 2000 compared to 290,217 for the second quarter of 1999. The change in Multifamily's customer base for the period is shown below.

	Three Months Ended June 30,
	2000		1999
Beginning Balance, April 1,	297,003		290,284
Additions	11,252		6,933
Customer losses	(11,917	)	(7,067	)

Ending Balance	296,338		290,150

Annualized quarterly attrition	16.1	%	9.7	%

The increase in the attrition rate for Multifamily for the three months ended June 30, 2000, is due to nonpayment of approximately 7,000 subscribers related to one developer. Had these accounts not attrited, the annualized quarterly attrition would have been approximately 6.6%. The Company is pursuing contractual remedies for nonpayment of these accounts.

Monitoring and related services revenues for the second quarter of 2000 increased by $0.3 million, or 3.4%, to $8.7 million from $8.4 million for the second quarter of 1999 due primarily to the larger customer base in 2000.

Cost of monitoring and related revenues for the quarter ending June 30, 2000 increased by $.2 million, or 12.2% to $2.0 million from $1.8 million for the second quarter of 1999. Monitoring and related service expenses as a percentage of monitoring and related service revenues increased to 22.7%

for the quarter ended June 30, 2000 from 21.0% for the quarter ended June 30, 1999. This is primarily due to increased employment costs resulting from the current competitive labor market and increased claims experience on our self funded medical insurance plan.

Cost of installation and rental revenues decreased by $0.04 million or 4.9% to $0.73 million in the second quarter of 2000 from $0.77 million in the second quarter of 1999.

Amortization of intangibles and depreciation expense for the second quarter in 2000 increased by $1.6 million, or 67.6% from $2.3 million in 1999 to $3.9 million in 2000. This increase is primarily due to the change in estimate of goodwill life from 40 to 20 years resulting in an increase in goodwill amortization expense of $1.1 million. Subscriber amortization increased by $0.4 million due to the increasing customer base being amortized.

Liquidity and Capital Resources

We believe we currently maintain the ability to generate sufficient cash to fund future operations of the business. Generally, cash will be generated from a combination of our existing $115.0 million Senior Credit Facility, which had approximately $45 million of availability at June 30, 2000, subject to compliance with the provisions of the debt covenants in the agreement, as well as revenue from our security monitoring customer base which generated $76.4 million of positive EBITDA from the North America and Multifamily operations in the first six months of 2000. EBITDA does not represent cash flow from operations as defined by generally accepted accounting principles, should not be construed as an alternative to operating income and is indicative neither of operating performance nor cash flows available to fund our cash needs. Items excluded from EBITDA are significant components in understanding and assessing our financial performance. We believe that presentation of EBITDA enhances an understanding of our financial condition, results of operations and cash flows because EBITDA is used to satisfy our debt service obligations and our capital expenditure and other operational needs as well as to provide funds for growth. In addition, EBITDA is used by senior lenders and subordinated creditors and the investment community to determine the current borrowing capacity and to estimate the long-term value of companies with recurring cash flows from operations. Our computation of EBITDA may not be comparable to other similarly titled measures of other companies.

The Senior Credit Facility matures on January 2, 2001. As of July 31, 2000, we had borrowed $70.0 million from this facility. We intend to renew or refinance the Senior Credit Facility prior to the maturity date. Since the Senior Credit Facility was last renewed, interest rates have increased and market conditions for comparable borrowers have become more difficult. There is no assurance we will be able to renew the facility or obtain new financing on similar terms with no disruption to our operations or liquidity, or at all.

Operating Cash Flows for the Six Months Ended June 30, 2000. Our operating activities provided net cash flows of $33.5 million, a decrease of $38.4 million from the comparable period for 1999, primarily due to a decrease in EBITDA of $37.1 million from $120.0 million for the first six months of 1999 to $82.9 million for the first six months of 2000.

Investing Cash Flows for the Six Months Ended June 30, 2000. Our investing activities provided net cash flows of $154.5 million in the first six months of 2000 compared to a use of cash of $192.3 million in the first six months of 1999. This increase is due to the sale of the European operations and certain other investments to Westar Capital for $183.0 million in cash along with $61.0 million in other consideration. We also reduced the purchases of customer accounts and fixed assets by $145.6 million from $174.1 million in the first six months of 1999 to $28.5 million in the first six months of 2000.

Financing Cash Flows for the Six Months Ended June 30, 2000. We decreased our net borrowings under our Senior Credit Facility by $155.0 million during the first six months of 2000. We paid down

$183.0 million as a result of the sale of our European operations to Westar Capital. Excluding this transaction, we had net borrowings of $28.0 million under our Senior Credit Facility during the first six months of 2000. We also repurchased certain of our outstanding debt securities with cash outlays totaling $46.4 million during this period. At June 30, 2000, the Senior Credit Facility had a weighted average interest rate of 8.9% and outstanding borrowings of $70.0 million.

During the second quarter of 2000 we purchased 423,500 shares of our outstanding common stock for a total of $0.8 million. These shares are reflected in our equity section of the balance sheet as treasury stock, at cost. We may continue to acquire additional shares of our common stock based upon market conditions and other factors.

We may also continue to acquire additional debt securities in the open market or through negotiated transactions based upon market conditions and other factors. We expect that we would also realize an extraordinary gain on extinguishment of debt on any such purchases.

Material Commitments

We have future, material, long-term commitments made in the past several years in connection with our growth. We believe these commitments will be met through a combination of borrowings under our Senior Credit Facility, refinancings and positive operating cash flows. The following reflects these commitments as of June 30, 2000 and as of June 30, 1999.

Debt Security	Maturity Date	June 30, 2000		June 30, 1999(b)
		(in thousands)		(in thousands)
Convertible Senior Subordinated Notes(a)	September 2003	$	28,185	$	103,500
Senior Subordinated Discount Notes	June 2005		49,826		107,900
Senior Unsecured Notes	August 2005		250,000		250,000
Senior Subordinated Notes	January 2009		262,040		350,000
Senior Credit Facility	January 2001		70,000		172,000

		$	660,051	$	983,400

(a): These notes are convertible into Protection One common stock at a price of $11.19 per share, which is currently above the price at which our shares are traded in the public stock markets.
(b): Excludes the debt of our European segment which was sold to Westar Capital on February 29, 2000.

We are in compliance with the financial covenants under the amended Senior Credit Facility and the indentures for the second quarter ended June 30, 2000.

In March 2000, Moody's, S & P and Fitch downgraded their ratings on our outstanding securities with outlook remaining negative. As of August 3, 2000, these ratings were as follows:

	Senior Unsecured Debt	Senior Subordinated Unsecured Debt
S & P	B+	B-
Moody's	B2	Caa1
Fitch	B+	B-

Capital Expenditures

We anticipate making capital expenditures of approximately $55 million in 2000. Of such amount, we believe we will invest approximately $35 million to acquire customer accounts, $10 million to complete the development and installation of our new software platforms, $5 million for replacement of vehicles, and $5 million for other capital items. Capital expenditures for 2001 and 2002 are expected to be approximately $123 million each year of which approximately $108 million would be to acquire accounts and $15 million for vehicles and other capital items. These estimates are prepared for planning purposes and may be revised. Actual expenditures for these and possibly other items not presently anticipated may vary from these estimates during the course of the years presented.

Tax Matters

Protection One is consolidated into income tax returns filed by its parent, Western Resources. The two parties have entered into a tax sharing agreement whereby Western Resources will make cash payments to us for current tax benefits utilized for income tax return purposes and which will require cash payments from us for current tax expenses incurred for income tax return purposes. This arrangement has allowed us to provide a current tax benefit for the year ended December 31, 1999, as well as for the six months ended June 30, 2000. If the Company did not file its taxes on a consolidated basis with Western Resources, the Company's deferred tax assets might not be realizable and the Company might not be in a position to record a tax benefit for losses incurred.

In the future, if and when we generate income for tax return purposes, we will proportionately over time utilize existing net operating loss carryforwards in amounts up to approximately $60 million. Currently, the deferred tax assets related to the net operating loss carryforwards are fully reserved due to uncertainty as to their future realizability. However, when net operating loss carryforwards are utilized, the relief of the corresponding reserve will not create a benefit, but, as required by generally accepted accounting principles, will reduce our goodwill balances. The net financial statement effect of this treatment will cause us to recognize deferred tax expense we might otherwise not recognize.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company has not experienced any significant changes in its exposure to market risk since December 31, 1999. For additional information on the Company's market risk, see the Form 10-K/A-2 for the year ended December 31, 1999.

PART II

OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

Information relating to legal proceedings is set forth in Note 7 of the Notes to Consolidated Financial Statements included in Part I of this report, which information is incorporated herein by reference.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS.

The 2000 annual meeting of Protection One, Inc.'s stockholders (the "Annual Meeting") was held on May 23, 2000. All directors nominated were elected at the Annual Meeting. For the election of directors, the results were as follows:

Nominee	Votes For	Votes Withheld
John B. Dicus	124,123,953	43,356
Howard A. Christensen	124,118,240	49,069
Maria de Lourdes Duke	124,117,495	49,814
Ben M. Enis	124,118,940	48,369
Donald A. Johnston	124,119,350	47,959
John H. Robinson, Jr.	124,122,950	44,359
Carl M.Koupal, Jr.	123,105,488	1,061,821
Douglas T. Lake	123,106,733	1,060,576
Annette M. Beck	124,116,998	50,311
Anthony D. Somma	124,122,940	44,369
James Q. Wilson	124,124,043	43,266

ITEM 5. OTHER INFORMATION.

None.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.

(a) Exhibits. The following exhibit is filed with this Current Report on Form 10-Q or incorporated by reference.

Exhibit Number		Exhibit Description
27.1		Restated Financial Data Schedule.

(b) During the quarter ended June 30, 2000, the Company filed one Current Report on Form 8-K dated May 9, 2000, which reported on a presentation to analysts in New York, New York.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrants have duly caused this report to be signed on their behalf by the undersigned thereunto duly authorized.