SECURITIES AND EXCHANGE
COMMISSION
WASHINGTON, DC 20549
SCHEDULE 14D-9
(RULE 14d-101)
SOLICITATION/RECOMMENDATION STATEMENT
UNDER SECTION 14(d)(4) OF THE SECURITIES EXCHANGE ACT OF 1934
(Amendment No. 3)
PROTECTION
ONE, INC.
(Name of Subject Company)
PROTECTION ONE, INC.
(Names of Person(s) Filing Statement)
Common Stock,
par value $0.01 per share
(Title of Class of Securities)
743663403
(CUSIP Number of Class of Securities)
J. Eric
Griffin
Vice President, General Counsel and Secretary
1035 N. 3rd Street
Lawrence, Kansas 66044
(785) 856-5500
(Name, address and telephone number(s) of person authorized to receive
notice and communications on behalf of the person(s) filing statement)
Copies To:
R. Scott Falk, P.C.
Roger D. Rhoten
Kirkland & Ellis LLP
300 North LaSalle
Chicago, Illinois 60654
(312) 862-2000
¨
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Check the box if the filing relates solely to preliminary communications made before the commencement of a tender offer.
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This Amendment No. 3 (this
Amendment No. 3
) amends and
supplements Items 2, 3, 4, 8 and 9 in the Solicitation/Recommendation Statement on Schedule 14D-9 filed with the U.S. Securities and Exchange Commission on May 3, 2010, by Protection One, Inc., a Delaware corporation, as amended or
supplemented from time to time (the
Schedule 14D-9
). The Schedule 14D-9 relates to the tender offer by Protection Acquisition Sub, Inc., a Delaware corporation and indirect, wholly owned subsidiary of Protection Holdings, LLC, a
Delaware limited liability company, to purchase all of Protection One, Inc.s outstanding Shares for $15.50 per Share, net to the seller in cash, without interest thereon and less any applicable withholding taxes, upon the terms and subject to
the conditions set forth in Protection Acquisition Sub, Inc.s Offer to Purchase dated May 3, 2010, and in the related Letter of Transmittal, as each may be amended or supplemented from time to time.
Except as otherwise set forth below, the information set forth in the Schedule 14D-9 remains unchanged and is incorporated herein by
reference as relevant to items in this Amendment No. 3. Capitalized terms used but not otherwise defined herein have the meanings ascribed to such terms in the Schedule 14D-9.
Item 2.
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Identity and Background of Filing Person
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Item 2 of the Schedule 14D-9 is hereby amended and supplemented by replacing the second paragraph under the heading Tender Offer with the
following paragraph:
The Tender Offer is being made pursuant to an Agreement and Plan of Merger, dated as of
April 26, 2010, among Parent, Acquisition Sub and the Company (as amended or supplemented, the
Merger Agreement
). The parties entered into Amendment No. 1 to Agreement and Plan of Merger on May 21, 2010
(
Merger Agreement Amendment No. 1
). The Merger Agreement provides, among other things, that after consummation of the Tender Offer, Acquisition Sub will merge with and into the Company (the
Merger
), with
the Company continuing as the surviving corporation and an indirect wholly-owned subsidiary of Parent (
Surviving Corporation
). At the effective time of the Merger (the
Effective Time
), each outstanding Share
(other than Shares owned by Parent, Acquisition Sub, the Company and its subsidiaries and Shares with respect to which dissenters rights are properly demanded and perfected) will be converted into the right to receive the Offer Price. A copy of the
Merger Agreement is filed as Exhibit (e)(1) to this Schedule 14D-9 and is incorporated herein by reference, and a copy of Merger Agreement Amendment No. 1 is filed as Exhibit (e)(8) to this Amendment No. 3 and is incorporated herein
by reference.
Item 3.
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Past Contracts, Transactions, Negotiations and Agreements
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Item 3(b) of the Schedule 14D-9 is hereby amended and supplemented by adding the following paragraphs as new second and third paragraphs under the
heading Arrangements with Principal Stockholders:
Quadrangle and Monarch each have designees on the Board
of Directors, and the Board (including directors designated by Quadrangle and Monarch) determined on November 25, 2009 that it would be advisable to explore various strategic alternatives for the Company. Quadrangle and Monarch each believed
that exploring such strategic alternatives at that time would be prudent and could potentially result in an ability to achieve a value for the Shares that was more reflective of the fair value of the Shares than the November 25, 2009 closing
Share price of $6.50 per Share. On January 20, 2010, the Company publicly announced that management and the Board had begun a process to explore and evaluate strategic alternatives. At the completion of this process, the Board of Directors
unanimously determined on April 25, 2010 that the terms of the Merger Agreement and the transactions contemplated thereby, including the Offer and the Merger, are fair to and in the best interests of Protection One and the Shareholders, and the
Board unanimously approved and declared advisable the Merger Agreement and the transactions contemplated thereby, including the Offer and the Merger. Following the Board of Directors approval and in light of the auction process leading up to
the Merger Agreement, the recommendation of the Board, the significant premium of the Offer Price to the trading price of the Shares (particularly as compared to the Share price prior to the public announcement of the Companys exploration of
strategic alternatives in January 2010) and the fact that the transaction was structured in a manner requiring Quadrangle and Monarch to enter into the Tender and Support Agreements described below, Quadrangle and
Monarch determined that the transactions contemplated by the Merger Agreement, including the Offer and the Merger, were advisable, and entered into the Tender and Support Agreements described
below.
In assessing the premium represented by the Offer Price, stockholders should consider that the majority ownership of
the Companys stock by Quadrangle and Monarch and the limited liquidity of the market for the Companys stock may have affected the stocks market price.
Item 4.
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The Solicitation or Recommendation
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Item 4 of the Schedule 14D-9 is hereby amended and supplemented by replacing the first sentence of the seventh paragraph under the heading
Background of the Offer; Reasons for Recommendation - Background of the Offer with the following sentence:
Beginning on January 20, 2010 and continuing through February 19, 2010, J.P.Morgan contacted 134 potential corporate and
financial buyers for Protection One soliciting cash-only bids for the Company.
Item 4 of the Schedule 14D-9 is hereby amended and
supplemented by replacing the tenth paragraph under the heading Background of the Offer; Reasons for Recommendation - Background of the Offer with the following paragraph:
On February 25, 2010, the Transactions Committee met with representatives of J.P.Morgan to review and assess the preliminary
indications of interest. Based on the value ranges and other proposed terms of a transaction included in each of the various indications of interest, the Transactions Committee determined to permit 9 of the 18 potential buyers to proceed in the
process (2 corporate buyers and 7 financial sponsors). The proposals from these 9 parties included offer prices that ranged from $9.50 per share to $15.22 per share. While there was a financial sponsor that submitted a preliminary offer range of up
to $17.25 per share, that party was not invited to proceed in the process because (i) in its preliminary indication of interest, it acknowledged that it did not have the financial capacity to finance a purchase of the Company on its own and
would need to partner with another financial sponsor and (ii) all three of the possible partners it named in its preliminary indication of interest had already been solicited by J.P.Morgan and had either bid at the very low end of the range of
preliminary offers received or declined to bid at all. Accordingly, the Transactions Committee concluded that this party did not have the financial capacity to make a meaningful second-round proposal or complete a transaction. The Transactions
Committee also considered whether J.P.Morgans affiliate, J.P. Morgan Chase Bank, N.A., should be permitted to arrange debt financing and provide specific financing guidance for an acquisition by any of the 9 selected bidders. In November 2009,
the Company completed a refinancing of its senior credit agreement first discussed by the Board in July 2009. The refinancing had been determined by management and the Board to be advisable in order to provide additional financial flexibility and
more assured liquidity in light of the state of the credit markets and the global economic downturn. The November 2009 refinancing, which was undertaken prior to the commencement of the Boards exploration of strategic alternatives and not in
connection with the Offer and the Merger or any other similar transaction (including any acquisition proposal previously received from GTCR), extended the maturity date of the Companys senior secured credit facility and increased the size of
the facility. The refinancing had no effect on the Term Loan in which Quadrangle and Monarch participate as lenders. The Transactions Committee took into account the fact that J.P.Morgan and its affiliates were retained by the Company to play a
leading role in the November 2009 refinancing and therefore had recent familiarity with the Companys business and confidence that it could again lead a successful financing. The Transactions Committee concluded that allowing J.P.Morgan to
provide acquisition financing would facilitate a transaction and therefore be in the best interests of the Company and its Shareholders, while recognizing that if a J.P.Morgan affiliate acted as a lender to the buyer of Protection One, the Company
would engage a different investment bank to provide an independent fairness opinion to the Board of Directors regarding the price to be paid in the transaction. Accordingly, the Transactions Committee authorized J.P.Morgan and its affiliates to
provide financing to any bidder that so requested, and J.P.Morgan subsequently assumed a leading role in GTCRs debt financing in respect of the Offer and the Merger and has committed to provide GTCR with 60% of a $390 million senior secured
term loan and a $25 million revolving loan, with Barclays Bank PLC committed to providing the remaining 40% of such senior secured term loan and revolving loan.
Item 4 of the Schedule 14D-9 is hereby amended and supplemented by adding the following sentence as a
new final sentence of the twenty-fifth paragraph under the heading Background of the Offer; Reasons for Recommendation - Background of the Offer:
Both the Transactions Committee and the Board of Directors were aware of, and took into account in making their final
recommendations and approvals of the Merger Agreement and the transactions contemplated thereby, the conflicts and potential conflicts of interest described in Lazards fairness opinion and concluded that such conflicts and potential conflicts
were not material and did not impair Lazards independence in any material respect.
Item 8.
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Additional Information
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Item 8 of
the Schedule 14D-9 is hereby amended and supplemented by replacing the second and third paragraphs under the heading Appraisal Rights with the following paragraphs:
Shareholders will not have appraisal rights in connection with the tender of Shares into the Offer. However, Shareholders may have
the right, pursuant to the provisions of Section 262 of the DGCL, to demand appraisal of their Shares at such time as the Merger is consummated. Shareholders immediately prior to the effective time of the Merger who (i) do not vote in
favor of the Merger (or consent thereto in writing) if such vote or consent is required, and (ii) perfect their appraisal rights by complying with the procedures set forth in Section 262 of the DGCL, will be entitled, under
Section 262 of the DGCL, to file a petition demanding a judicial determination of the fair value of their Shares (exclusive of any element of value arising from the accomplishment or expectation of the Merger) determined by the
Delaware Court of Chancery. The Company, Parent and Acquisition Sub have agreed that, if the Merger becomes effective without a meeting of stockholders of the Company in accordance with Section 253 of the DGCL, Shareholders entitled to
appraisal rights may demand those rights, in accordance with Section 262(d)(2) of the DGCL, within 30 days after the later of the Effective Time or the date of the mailing of the notice of appraisal rights required pursuant to
Section 262(d)(2) of the DGCL (rather than the twenty days from the date of the notice provided by the DGCL). Following such determination, the dissenting Shareholder will be entitled to receive a cash payment equal to such fair value from the
Surviving Corporation. In addition, such dissenting Shareholders will be entitled to receive payment of a fair rate of interest from the date of consummation of the Merger on the amount determined to be the fair value of their Shares. Any such
judicial determination of the fair value of the Shares could be based upon factors other than, or in addition to, the price per Share ultimately paid in the Offer or the Merger or the market value of the Shares. The value so determined could be more
or less than the price per Share paid in the Offer or the Merger.
Appraisal rights cannot be exercised at this time. If
appraisal rights become available at a future time, the Company will provide a notice of appraisal rights and additional information to the Shareholders concerning their appraisal rights and the procedures to be followed in order to perfect those
appraisal rights at least 30 days before any action has to be taken in connection with such rights.
Item 8 of the Schedule 14D-9
is hereby amended and supplemented by adding the following sentences to the end of the final paragraph under the heading Appraisal Rights:
The Company, Parent and Acquisition Sub have agreed that, if the Merger becomes effective without a meeting of stockholders of the
Company in accordance with Section 253 of the DGCL, Shareholders entitled to appraisal rights may demand those rights, in accordance with Section 262(d)(2) of the DGCL, within 30 days after the later of the Effective Time or the date of
the mailing of the notice of appraisal rights required pursuant to Section 262(d)(2) of the DGCL (rather than the twenty days from the date of the notice provided by the DGCL). For the avoidance of doubt, the Company, Parent and Acquisition Sub
have acknowledged and agreed that, in any appraisal proceeding described herein, the fair value of the Shares subject to the appraisal proceeding shall be determined in accordance with Section 262(h) of the DGCL without regard to the Top-Up
Option, any Shares issued upon the exercise of the Top-Up Option (the
Top-Up Option Shares
) or the Notes (as defined below).
Item 8 of the Schedule 14D-9 is hereby amended and supplemented by replacing the second paragraph under the heading Top-Up Option with
the following paragraph:
Acquisition Sub, which will be the owner of the Shares acquired in the Offer and the
Top-Up Option Shares as of the Effective Time, may pay the Company the aggregate price required to be paid for the Top-Up Option Shares by delivery of one or more unsecured, non-negotiable and non-transferable promissory notes, bearing interest at
10% per annum, compounded monthly, with principal and interest due one year after the purchase of the Top-Up Option Shares, prepayable in whole or in part without premium or penalty (the
Notes
). The Board did not value the
Notes, and did not request Lazard to, and Lazard did not, value the Notes.
Item 8 of the Schedule 14D-9 is hereby amended and
supplemented by adding the following paragraph immediately following the second paragraph under the heading Top-Up Option:
The Top-Up Option would enable Acquisition Sub to increase its ownership of the Companys outstanding stock from approximately
70% (assuming only the shares of Quadrangle and Monarch are tendered into the Offer, and assuming no other changes in the total shares outstanding prior to the completion of the Offer) to over 90%. The Company currently has approximately
120 million authorized but unissued Shares that are available for issuance upon the exercise of the Top-Up Option. If only Quadrangle and Monarch tendered their shares in the Offer, and assuming no other significant changes in the
Companys outstanding share capital prior to the exercise of the Top-Up Option, then it is expected that approximately 52 million Shares would be issued upon the exercise of the Top-Up Option.
Item 8 of the Schedule 14D-9 is hereby amended and supplemented by adding the following paragraph as a new final paragraph under the heading
Financial Projections:
In addition, Lazard included in its presentation to the Board on April 23, 2010
its calculation of projected unlevered free cash flow. Such information is set forth below, and is subject to all of the same limitations, qualifications and disclaimers (with references to Lazard deemed to be inserted along with the Company,
Acquisition Sub or Parent, as applicable) as described above with respect to the Companys financial projections.
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(in millions)
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2010
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2011
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2012
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2013
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2014
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Unlevered Free Cash Flow
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$
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52
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$
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54
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$
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55
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$
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60
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$
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65
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Item 8 of the Schedule 14D-9
is hereby amended and supplemented by adding the following sentence to the end of the second paragraph under the heading Opinion of the Companys Financial Advisor, Lazard Frères & Co. LLC:
The Board did not request Lazard to, and Lazards opinion and analysis did not, consider the effects of the Top-Up Option, the
Notes or the Top-Up Option Shares.
Item 8 of the Schedule 14D-9 is hereby amended and supplemented by replacing the paragraph
under the heading Opinion of the Companys Financial Advisor, Lazard Frères & Co. LLC - Financial Analyses - Discounted Cash Flow Analysis with the following paragraph:
Based on Protection One forecasts provided to Lazard by Protection Ones management (which were the same forecasts provided by
Protection One to the bidders in the auction process), Lazard performed a discounted cash flow analysis of the Company based on the present value of forecasted unlevered free cash flows for fiscal years ending December 31, 2010 through 2014.
Lazard discounted to present value the unlevered free cash flows using discount rates reflecting the estimated weighted average cost of capital based on industry comparables and ranging from 9.0% to 10.0% and a perpetuity growth rate of 1.5% to
2.5%. To determine the weighted average cost of capital, based on industry practice and in Lazards professional judgment, Lazard reviewed betas obtained through Barra of selected publicly traded diversified security companies, with a median
levered beta of 0.85, which was compared to the Protection One levered beta of 0.87, also obtained through Barra. The companies selected were Brinks Company, G4S plc, Garda World Security Corporation, Niscayah Group AB, Prosegur Compania de
Seguridad SA, Securitas AB and Tyco International, Ltd. Based upon the foregoing, Lazard calculated an implied enterprise value reference range for Protection One, resulting in a range of implied equity value per Share prices from $10.76 to $17.63.
Lazard also calculated an implied terminal value multiple for the industry metric recurring monthly revenue, or RMR, of 25x to 33x.
Item 8 of the Schedule 14D-9 is hereby amended and supplemented by replacing the number 15
in the second paragraph under the heading Opinion of the Companys Financial Advisor, Lazard Frères & Co. LLC - Financial Analyses - Precedent Transactions Analysis with the number 16.
Item 8 of the Schedule 14D-9 is hereby amended and supplemented by replacing the table of precedent transactions included immediately following the
third paragraph under the heading Opinion of the Companys Financial Advisor, Lazard Frères & Co. LLC - Financial Analyses - Precedent Transactions Analysis with the following table:
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Date Announced
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Acquiror
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Target
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January 2010
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Tyco International, Ltd.
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Brinks Home Security Holdings Inc.
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November 2009
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United Technologies Corporation
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GE Security, Inc.
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September 2009
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Golden Gate Capital
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Devcon International Corporation
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June 2008
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The Stanley Works
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Sonitrol Corporation
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April 2008
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ADT Security Services, Inc.
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FirstService Security
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November 2007
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ESML Intressenter AB
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Securitas Direct AB
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March 2007
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United Technologies Corporation
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Initial Electronic Security Group
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December 2006
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Protection One, Inc.
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Integrated Alarm Services Group, Inc.
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December 2006
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The Stanley Works
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HSM Electronic Protection Services, Inc.
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January 2006
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Koninklijke Philips Electronics N.V.
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Lifeline Systems, Inc.
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November 2005
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Devcon International Corporation
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Guardian International, Inc.
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June 2005
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Union Energy LP
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Protectron Inc.
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January 2005
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Devcon International Corporation
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Starpoint Limited
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October 2004
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Integrated Alarm Services Group, Inc.
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National Alarm Computer Center, Inc.
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December 2003
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Quadrangle Capital Partners LP
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Protection One, Inc.
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November 2003
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Integrated Alarm Services Group, Inc.
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Lane Security Inc.
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Item 8 of the Schedule 14D-9
is hereby amended and supplemented by adding the following sentence to the end of the final paragraph under the heading Opinion of the Companys Financial Advisor, Lazard Frères & Co. LLC - Financial Analyses - Precedent
Transactions Analysis:
Lazard noted that the LTM RMR multiple in the Brinks Home Security transaction was 42x,
which is the high end of its reference range.
Item 8 of the Schedule 14D-9 is hereby amended and supplemented by replacing the table of benchmark
multiples included immediately following the fourth paragraph under the heading Opinion of the Companys Financial Advisor, Lazard Frères & Co. LLC - Other Analyses and Reviews - Selected Public Company Benchmark
Analysis with the following table:
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Total
Enterprise
Value/
EBITDA
2010E
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Total
Enterprise
Value/
EBITDA
2011E
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Mean
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7.1x
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6.6x
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Median
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7.6x
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7.1x
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Item 8 of the Schedule
14D-9 is hereby amended and supplemented by replacing the paragraph under the heading Opinion of the Companys Financial Advisor, Lazard Frères & Co. LLC - Other Analyses and Reviews - 52-Week High/Low with the
following paragraph:
Lazard reviewed Share price data for the 52-week period ended January 19, 2010, the last
trading day prior to Protection Ones strategic alternatives announcement. Lazard observed that, during this period, the intra-day Share price ranged from $0.83 per Share to $7.37 per Share, and the closing Share price ranged from $1.20 per
Share to $7.10 per Share, each as compared to the Offer Price of $15.50 per Share.
Item 8 of the Schedule 14D-9 is hereby amended
and supplemented by adding the following paragraphs as the final paragraphs under the heading Litigation:
The three litigation actions described above shall collectively be referred to in this Schedule 14D-9 as the
Actions
. In an effort to minimize the cost and expense of litigation arising in connection with the Actions, on May 21, 2010, the defendants in the Actions (collectively, the
Defendants
) entered into a
Memorandum of Understanding with the plaintiffs in such Actions (the
MOU
) for the settlement of all claims asserted in the Actions.
The MOU provides, among other things, that: (i) the Company will amend the Schedule 14D-9 and Acquisition Sub will amend the Offer
to Purchase to provide enhanced disclosure in form and substance similar to the disclosure recommendations set forth in an exhibit to the MOU, (ii) the amount of time within which stockholders of the Company may seek appraisal will be extended
until 30 days after the later of the Effective Time or the mailing of the notice of appraisal rights, (iii) the Top-Up Option, all Top-Up Option Shares and the Notes will not be considered in any appraisal action, (iv) the Notes will be
payable by Acquisition Sub and will bear 10% interest, compounded monthly, (v) subject to completion of the Offer and the Merger and final court approval of the settlement contemplated by the MOU (including a complete release of the released
parties in the MOU), the surviving corporation will pay an aggregate amount of $3,250,000, to be distributed on a pro rata basis to holders of the Shares (other than the Defendants and their affiliates) as of the close of business on the day before
the expiration of the Offer, (vi) the Defendants and the plaintiffs will agree upon and execute a stipulation of settlement (the
Stipulation
), which will replace the MOU, and will submit the Stipulation to the appropriate
courts for review, (vii) the Stipulation will include a general release of all claims against the Defendants and others, and will include the Defendants denial that they have committed or aided and abetted in the commission of any
unlawful or wrongful acts alleged in the Actions and express assertion that they have diligently and scrupulously complied with any fiduciary duties and other legal duties and (viii) the MOU and the Stipulation will be conditioned upon class
certification and final approval by the appropriate court or courts. In addition, in connection with the settlement, and subject to court approval, the Company or its insurer will pay to plaintiffs counsel for their fees and expenses an amount
not to exceed (i) $1.4 million in connection with the Delaware actions, and (ii) $900,000 in connection with the Kansas action. These payments will not affect the amount of consideration to be paid to stockholders of the Company in
connection with the Offer or the Merger. Furthermore, any payment is also conditioned on the Offer and the Merger being consummated so the Companys stockholders will not indirectly bear such payment. The foregoing summary of the material terms
of the MOU is qualified in its entirety by reference to the MOU, which is filed as Exhibit (a)(13) hereto and incorporated in this Amendment No. 3 by reference.
Item 9 of the Schedule
14D-9 is hereby amended and supplemented by adding the following exhibits:
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Exhibit
No.
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Description
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(a)(13)
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Memorandum of Understanding, dated as of May 21, 2010
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(e)(8)
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Amendment No. 1 to Agreement and Plan of Merger, dated as of May 21, 2010, among Protection Holdings, LLC, Protection Acquisition Sub, Inc. and the Company
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SIGNATURE
After due inquiry and to the best of my knowledge and belief, I certify that the information set forth in this Statement is true,
complete and correct.
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PROTECTION ONE, INC.
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By:
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/
S
/ R
ICHARD
G
INSBURG
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Name:
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Richard Ginsburg
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Title:
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President and Chief Executive Officer
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Dated: May 21, 2010
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