Mail Stop 0407
April 29, 2005
Via U.S. Mail and Fax (785) 856-9910
Mr. Darius G. Nevin
Executive Vice President and Chief Financial Officer
Protection One, Inc.
Protection One Alarm Monitoring Inc.
1035 N. 3rd Street
Suite 101
Lawrence, Kansas 66044
RE: Protection One, Inc.
Protection One Alarm Monitoring Inc.
Form 10-K for the fiscal year ended December 31, 2004
Form 10-K/A for the fiscal year ended December 31, 2004
Filed March 17, 2005 and March 24, 2005, respectively
File Nos. 1-12181-01 and 1-12181, respectively
Dear Mr. Nevin:
We have reviewed the above referenced filings and have the
following comments. We have limited our review to only your
financial statements and related disclosures and will make no
further
review of your documents. As such, all persons who are
responsible
for the adequacy and accuracy of the disclosure are urged to be
certain that they have included all information required pursuant
to
the Securities Exchange Act of 1934. Please address the following
comments in future filings. If you disagree, we will consider
your
explanation as to why our comment is inapplicable or a future
revision is unnecessary. Please be as detailed as necessary in
your
explanation. In some of our comments, we may ask you to provide
us
with supplemental information so we may better understand your
disclosure. After reviewing this information, we may or may not
raise additional comments.
Please understand that the purpose of our review process is
to
assist you in your compliance with the applicable disclosure
requirements and to enhance the overall disclosure in your filing.
We look forward to working with you in these respects. We welcome
any questions you may have about our comments or on any other
aspect
of our review. Feel free to call us at the telephone numbers
listed
at the end of this letter.
Form 10-K for the year ended December 31, 2004
Item 1. Business, page 10
1. Provide us with more details of your agreement with BellSouth.
Tell us how you account for the upfront royalties and recurring
royalties and where they are classified in the income statement.
Refer to your basis in the accounting literature.
Attrition, page 32
2. Tell us what you mean by "our wholesale base and for accounts,
which are covered under a purchase price holdback and are "put"
back
to the seller. We reduce the gross accounts lost...by the amount
of
the guarantee provided for in the purchase agreements with
sellers."
Tell us how your calculated attrition rates impact your various
accounting policies.
Results of Operations
Protection One Consolidated, page 39
3. Tell us how you were able to reduce insurance costs despite
various claims and matters of litigation, including certain
settlements with participation by your insurance carriers.
Form 10-K/A for the year ended December 31, 2004
Consolidated Statements of Operations and Comprehensive Loss, page
5
4. As required by SAB Topic 11:B, revise your presentation to
either
1) reclassify the depreciation and amortization applicable to cost
of
revenues, or 2) remove the caption gross profit and indicate the
amount of applicable depreciation and amortization that is
excluded
from cost of revenue.
1. The Company, page 8
5. Provide us with an update of your analysis of SAB Topic 5:J.
(b) Revenue Recognition, Page 9
6. Tell us your basis in the accounting literature for deferring
revenues from system installation and equipment upgrades in
connection with residential monitoring service contracts. Provide
us
with your detailed analysis of EITF 00-21.
7. Specifically regarding your deferred expenses, or "deferred
customer acquisition costs:"
* Tell us the nature of these costs and why you believe it is
appropriate to defer these costs. Tell us why you believe they
are
directly related to the origination of a contract. Refer to your
basis in the accounting literature.
* Tell us why you believe it is appropriate to defer the "costs in
excess of the deferred revenue" over the initial contract term.
Demonstrate to us that such costs are recoverable over the initial
contract term.
8. Provide us with more details of what you mean by the statement,
"when the Company passes title to a system unaccompanied by a
service
agreement or the Company passes title at a price that it believes
is
unaffected by an accompanying but undelivered service, the Company
recognizes revenues and costs in the period incurred." Describe
your
accounting policy in more detail and refer to your basis in the
accounting literature. Also, tell us to which customers these
arrangements apply.
9. We note your statement that you defer revenues and direct costs
"in cases where the Company retains title to the system or prices
the
system lower than it otherwise would because of an accompanying
service agreement." Provide us with more details of what you mean
by
this statement and cite your basis in the accounting literature.
Tell us the circumstances where you retain title to the system.
10. Tell us how you determine the expected life of each of your
customers.
11. Citing the pertinent accounting literature, tell us why an
accelerated method of revenue recognition for residential and
commercial customers is appropriate in your circumstances.
Assuming
that attrition is greatest during the initial years of the
agreement,
are you able to recover the revenue amounts that had been
recognized
on an accelerated basis through the date of cancellation? Tell us
the pertinent terms of the agreement, including performance,
cancellation, termination, automatic renewal, or refund-type
provisions, that support your accounting treatment.
12. Tell us whether deferred costs, that are less than or equal to
deferred revenues, are amortized on a straight-line basis or an
accelerated basis. Also, tell us why you believe your
amortization
method is appropriate.
(g) Customer Accounts, page 10
13. Tell us the nature of the "amounts paid to dealers" included
in
customer accounts and why you believe it is appropriate to
capitalize
them.
5. Debt, page 14
Quadrangle Credit Facility, page 14
14. We note that in November 2004, you entered into an exchange
agreement with Quadrangle to restructure the debt under the credit
facility, subject to closing following the balance sheet date.
Please:
* Tell us in more detail your accounting for this restructuring of
debt and tell us how you evaluated whether it was a troubled debt
restructuring under SFAS 15.
* Tell us your basis for the valuation of the 16 million shares
issued.
* Provide us with the journal entries for this exchange.
6. Related Party Transactions
Additional Transactions with Westar, page 17
15. We note that you recorded a gain of $16.6 million in 2002 as a
result of your bond repurchase from Westar. Tell us how you
evaluated SAB Topic 5:T.
8. Income Taxes, page 20
16. Tell us the nature of the exception in your statement that
"the
tax sharing settlement also provided for a mutual general release,
except with respect to...certain alarm monitoring and other
service
agreements between the Company and Westar."
12. Commitments and Contingencies
Dealer Litigation, page 23
17. Please define, and tell us how you account for, dealer
holdbacks.
Tell us on what basis dealers can assert a claim, other than in
accordance with the terms of the contracts. Tell us why you
believe
that the aggregate impact of these potential disputes could be
material.
* * * *
Please respond to these comments within 10 business days or
tell us when you will provide us with a response. Please furnish
a
letter that keys your responses to our comments and provides any
requested supplemental information. Please file your response
letter
on EDGAR.
We urge all persons who are responsible for the accuracy and
adequacy of the disclosure in the filings reviewed by the staff to
be
certain that they have provided all information investors require
for
an informed decision. Since the company and its management are in
possession of all facts relating to a company`s disclosure, they
are
responsible for the accuracy and adequacy of the disclosures they
have made.
In connection with responding to our comments, please
provide,
in writing, a statement from the company acknowledging that
* the company is responsible for the adequacy and accuracy of the
disclosure in the filings;
* staff comments or changes to disclosure in response to staff
comments do not foreclose the Commission from taking any action
with
respect to the filings; and
* the company may not assert staff comments as a defense in any
proceeding initiated by the Commission or any person under the
federal securities laws of the United States.
In addition, please be advised that the Division of
Enforcement
has access to all information you provide to the staff of the
Division of Corporation Finance in our review of your filings or
in
response to our comments on your filings.
You may contact Kathryn Jacobson, Staff Accountant, at (202)
551-3365 or Kyle Moffatt, Branch Chief Accountant, at (202) 551-
3836
if you have questions regarding comments on the financial
statements
and related matters. Please contact me at (202) 551-3810 with any
other questions.
Sincerely,
Larry Spirgel
Assistant Director
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Mr. Darius G. Nevin
Protection One Inc.
Protection One Alarm Monitoring Inc.
April 29, 2005
Page 5
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
DIVISION OF
CORPORATION FINANCE