Exhibit 10.5

 

SECOND SEVERANCE AND

CHANGE OF CONTROL AGREEMENT

 

This Second Amended and Restated Severance and Change of Control Agreement
(“Agreement”) is effective as of August 4, 2011, between Kratos Defense &
Security Solutions, Inc. (the “Company” or “Kratos”) and Laura Siegal
(“Siegal”), as approved by the Company’s Board Compensation Committee.

 

A.                                   The Company and Siegal entered into the
original Severance and Change of Control Agreement, dated as of July 12, 2007 to
(i) provide for the payment of severance compensation to Siegal upon a
termination without Cause, or (ii) in the event of a Change of Control, as
defined herein, which original agreement was amended and restated on August 4,
2008 (the original agreement together with any and all prior amendments is
hereinafter referred to as the “Original Agreement”).

 

B.                                     As consideration for Siegal’s agreement
to continue her duties and responsibilities in her role as Vice President &
Controller, the Company and Siegal desire to amend the Original Agreement to
make certain corrective and conforming changes to comply with Section 409A of
the Code.

 

Therefore, in consideration of the promises and the mutual covenants contained
below, and for other good and valuable consideration, receipt of which is hereby
acknowledged, the parties agree as follows:

 

1.                                       Position.  Siegal presently is employed
as Vice President, Corporate Controller, and Treasurer of the Company.  The
Company shall not change Siegal’s job duties and responsibilities after the
Change of Control (as that term is defined in section 4(a) below), if, when
considered in their totality as a whole, such a change results in the nature of
Siegal’s job duties being substantially different than the nature of the job
duties Siegal performed immediately prior to the Change of Control.

 

2.                                       Vesting Upon Change of Control.  Upon
the occurrence of a Change of Control, the vesting of 100% of all stock options,
stock appreciation rights, restricted stock units and any other equity awards
granted to Siegal under the Company’s equity incentive plans that as of the date
of such Change of Control remain unvested shall accelerate, to the extent
permissible by law, notwithstanding and in addition to any existing vesting
provisions set forth in the applicable equity award agreement and/or the Company
equity incentive plan.

 

3.                                       Severance Payments.

 

(a)                                  If Siegal is (x) terminated without Cause
(as defined in section 4(c) below) or (y) terminates as a result of a Change in
Control (as defined by section 4(a) below) followed by a Triggering Event (as
defined in section 4(b) below), then Siegal will be entitled to receive in
satisfaction of all obligations (other than as provided in section 2 above) that
the Company may have to Siegal: (i) in the case of clause (x) hereof, severance
compensation equal to nine (9) months of her base salary then in effect; or in
the case of clause (y) hereof, severance

 

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compensation equal to nine (9) months of her base salary plus her maximum
potential bonus amount for nine (9) months; in either case, less applicable
taxes and withholding paid in a lump sum on the 60th day following Siegal’s
termination of employment; and, in the case of either clause (x) or (y), if
needed by Siegal, (ii) her then-current health insurance coverage, at the then
current employee cost, during the nine (9) month period following a termination
in the case of clause (x) or during the nine (9) month period following a
resignation in the case of clause (y).  Such benefits will be provided for the
nine (9) month period following the date of Siegal’s termination.  In addition,
in the event that Siegal is terminated without Cause, the vesting of 100% of all
stock options, stock appreciation rights, restricted stock units and any other
equity awards granted to Siegal under the Company’s equity incentive plans that
as of the date of such termination remain unvested shall accelerate, to the
extent permissible by law, notwithstanding and in addition to any existing
vesting provisions set forth in the applicable equity award agreement and/or the
Company equity incentive plan.  The receipt of the foregoing severance
compensation, health insurance coverage and acceleration of vesting pursuant to
this Section 3 will be subject to Siegal signing and not revoking a release of
claims agreement in a form reasonably acceptable to the Company, and such
release becoming effective within forty-five (45) days of Siegal’s termination
and not thereafter being revoked.  To the extent that any of the health
insurance coverage benefits provided in this section 3(a) would result in
unintended tax consequences under Code Section 105(h) or its analog in the
Patient Protection and Affordable Care Act of 2010, Company shall in lieu of
providing such benefits provide Siegal with a lump sum payment equal to nine (9)
months of COBRA continuation coverage on the 55th day following Siegal’s
termination of employment.

 

(b)                                 For the sake of clarity, no severance
benefit that is paid on account of Siegal’s termination of employment will be
paid unless and until Siegal incurs a “separation from service” under the
default rules of Section 409A of the Internal Revenue Code of 1986, as amended
(the “Code”).  Notwithstanding any other provision of this Agreement to the
contrary, if Siegal is a “specified employee” within the meaning of Section 409A
of the Code and the related guidance (“Section 409A”) at the time of Siegal’s
separation from service, then only that portion of the severance and benefits
set forth in section 3(a) above, together with any other severance payments or
benefits, that may be considered deferred compensation under Section 409A, which
(when considered together) do not exceed the Section 409A Limit (as defined
below) and which qualify as separation pay under Treasury Regulation Section
1.409A-1(b)(9)(iii), may be paid within the first six (6) months following
Siegal’s separation from service in accordance with section 3(a) above or (for
payments or benefits not provided under this Agreement) with the payment
schedule applicable to each such other payment or benefit.  Otherwise, the
portion of the severance and benefits provided under this Agreement, together
with any other severance payments or benefits that may be considered deferred
compensation under Section 409A, that would otherwise be payable within the six
(6) month period following Siegal’s separation from service will accrue during
such six (6) month period and will be paid in a lump sum on the date six (6)
months and one (1) day following the date of Siegal’s separation from service
(or the next business day if such date is not business day).  All remaining
severance payments and benefits will be payable in accordance with the payment
schedule applicable to such payments or benefits.  For purposes of this
Agreement, “Section 409A Limit” means the lesser of two (2) times: (i) the sum
of Siegal’s annualized compensation based upon the annual rate of pay for
services provided to the Company for the taxable year of Siegal preceding the
taxable year of Siegal’s separation from service from the Company as determined
under

 

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Treasury Regulation Section 1.409A-1(b)(9)(iii)(A)(1) and any related Internal
Revenue Service guidance; or (ii) the maximum amount that may be taken into
account under a qualified plan pursuant to Section 401(a)(17) of the Code for
the year in which such separation from service occurs.

 

(c)                                  Additional Election Upon Certain Changes of
Control.  If Kratos enters into a definitive agreement (“Definitive Agreement”)
that would result in a Change of Control as defined herein, Siegal shall have
the following options in connection with the consummation of the Change of
Control, but only to the extent that the Definitive Agreement so provides:  (a)
to the extent that Kratos is the surviving entity in the Change of Control,
Siegal may elect to retain, immediately after the consummation of the Change of
Control, ownership of Kratos equity with a fair market value immediately after
the consummation of the Change of Control that is equal to no less than 50% of
the fair market value of her equity interests in Kratos (including stock options
and restricted stock) immediately prior to the consummation of the Change of
Control, or (b) in the event that Kratos is not the surviving entity in a Change
of Control, Siegal may elect to require that no less than 50% of her equity
interests in Kratos (including stock options and restricted stock) be converted
into the same form of equity interest (i.e., common stock, stock options,
restricted stock, etc.) of the surviving entity or its parent such that the fair
market value of her ownership in the surviving entity immediately following the
Change of Control is no less than the fair market value of her converted
ownership interest in Kratos immediately prior to the consummation of the Change
of Control. A Definitive Agreement may contain other or no options and Kratos
shall have no obligation to ensure that a Definitive Agreement provides for any
of the foregoing options and shall not be responsible for ensuring any
particular tax treatment.  Kratos’ compliance with the foregoing shall be
determined without regard to the tax effect of the transaction resulting in a
Change of Control.

 

4.                                       Definition of Change of Control and
Triggering Event.

 

(a)                                  A Change of Control means the occurrence of
one of the following after the date of this Agreement:

 

(i)                                     Acquisition of Controlling Interest. 
Any person (other than persons who are employed by Kratos or its affiliates at
any time more than one year before a transaction) (“Buyer”) becomes the
“beneficial owner” within the meaning of Rule 13d-3 of the Securities Exchange
Act of 1934, as amended, directly or indirectly, of Kratos securities
representing 50% or more of the combined voting power of Kratos’
then-outstanding securities, but only to the extent that such ownership
constitutes a “change in the ownership” of Kratos within the meaning of U.S.
Treasury Regulation Section 1.409A-3(i)(5)(v).

 

(ii)                                  Change in Board Control.  During any
consecutive one-year period commencing after the date of this Agreement,
individuals who constituted Kratos’ Board of Directors (“Board”) at the
beginning of such period or their approved replacements, as defined in the next
sentence (“Beginning Board”) cease for any reason to constitute a majority of
the Board. An individual is an “approved replacement” Board member if the Board
members then in office who are Beginning Board members approved his or her
election (or nomination for election) by majority votes, but in either case
excluding any Board member whose initial assumption of office occurred as a
result of an actual or threatened solicitation of proxies or consents by or on

 

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behalf of any person other than the Board, but only to the extent that such
acquisition constitutes a “change in the effective control” of Kratos within the
meaning of Treasury Regulation Section 1.409A-3(i)(5)(vi).

 

(iii)                               Merger.  Kratos consummates a merger or
consolidation of Kratos with any other corporation unless: (a) the voting
securities of Kratos outstanding immediately before the merger or consolidation
would continue to represent (either by remaining outstanding or by being
converted into voting securities of the surviving entity) at least 50% of the
combined voting power of the voting securities of Kratos or such surviving
entity outstanding immediately after such merger or consolidation; and (b) no
Buyer becomes the “beneficial owner,” directly or indirectly, of Kratos
securities representing 50% or more of the combined voting power of Kratos’ then
outstanding securities, but only to the extent that such ownership constitutes a
“change in the ownership” of Kratos within the meaning of U.S. Treasury
Regulation Section 1.409A-3(i)(5)(v).

 

(iv)                              Sale of Assets.  Any Buyer acquires all, or
substantially all, of Kratos’ assets, but only to the extent that such
acquisition results in a “change in the ownership of a substantial portion” of
Kratos’ assets within the meaning of U.S. Treasury Regulation Section
1.409A-3(i)(5)(vii).

 

(b)                                 A Triggering Event means (i) Siegal’s
termination from employment by the Company without Cause; (ii) a material change
in the nature of Siegal’s role or job responsibilities so that Siegal’s job
duties and responsibilities after the Change of Control, when considered in
their totality as a whole, are substantially diminished in nature from the job
duties Siegal performed immediately prior to the Change of Control; (ii) the
relocation of Siegal’s principal place of work to a location of more than thirty
(30) miles from the location Siegal was assigned to immediately prior to the
Change of Control and such relocation results in Siegal’s one-way commute to
work increasing by more than thirty (30) miles based on Siegal’s principal place
of residence immediately before such relocation was announced ; or (iii) the
Company materially breaches this Agreement; provided, however, in the case of a
Triggering Event described in clause (i), (ii) or (iii) hereof, such condition
shall not exist unless Siegal provides written notice to the Company within
ninety (90) days of its initial existence and the Company does not cure such
condition within thirty (30) days from the date it receives such notice from
Siegal.  In addition, no Triggering Event will be deemed to have occurred unless
Siegal separates from service within twelve (12) months from the date such
Triggering Event initially occurs.

 

(c)                                  “Cause” means (i) acts or omissions
constituting gross negligence, recklessness or willful misconduct on the part of
Siegal with respect to Siegal’s obligations or otherwise relating to the
business of the Company; (ii) Siegal’s material breach of this Agreement or the
Company’s standard form of confidentiality agreement; (iii) Siegal’s conviction
or entry of a plea of nolo contendere for fraud, misappropriation or
embezzlement, or any felony or crime of moral turpitude; (iv) Siegal’s failure
to perform her duties and responsibilities as Vice President and Corporate
Controller to the reasonable satisfaction of the Board after being provided with
notice thereof and thirty (30) days opportunity to remedy such failure; and (v)
Siegal’s willful neglect of duties or poor performance. Notwithstanding the
foregoing, a termination under subsection (v) shall not constitute a termination
for “Cause” unless the Company has first given Siegal written notice of the
offending conduct (such notice

 

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shall include a description of remedial actions that the Company reasonably
deems appropriate to cure such offending conduct) and a thirty (30) day
opportunity to cure such offending conduct. In the event the Company terminates
Siegal’s employment under subsection (v), the Company agrees to participate in
binding arbitration, if requested by Siegal, to determine whether the cause for
termination was willful neglect of duties or poor performance as opposed to some
other reason that does not constitute Cause under this Agreement.

 

5.                                       General Provisions.  Except as set
forth in this Agreement, the terms of the Offer Letter remain unchanged. Nothing
in this Agreement is intended to change the at-will nature of Siegal’s
employment with the Company. This Agreement and the Offer Letter, including the
Additional Terms and Conditions attached thereto and the Proprietary Information
and Innovations Agreement signed by Siegal, constitute the entire agreement
between Siegal and the Company with respect to Siegal’s employment with the
Company, and supersedes and replaces the Original Agreement in its entirety.  No
amendment or modification of the terms or conditions of this Agreement shall be
valid unless in writing and signed by the parties.

 

6.                                       Compliance with Section 409A of the
Code.  This Agreement is intended to comply with Section 409A of the Code (or
any regulations or rulings thereunder), and shall be construed and interpreted
in accordance with such intent. Notwithstanding anything to the contrary in this
Agreement, the Company, in the exercise of its sole discretion and without the
consent of Siegal, may amend or modify this Agreement in any manner in order to
meet the requirements of Section 409A of the Code as amplified by any Internal
Revenue Service or U.S. Treasury Department guidance.  Any provision of this
Agreement that would cause the payment of any benefit to fail to satisfy Section
409A of the Code shall have no force and effect until amended to comply with
Code Section 409A (which amendment may be retroactive to the extent permitted by
the Code or any regulations or rulings thereunder).  Siegal is encouraged to
consult a tax adviser regarding the potential impact of Section 409A of the
Code.

 

7.                                       Parachute Payment Excise Tax.

 

(a)                                  In the event that any payment or benefit
(within the meaning of Section 280G(b)(2) of the Code) to Siegal for Siegal’s
benefit, paid or payable or distributed or distributable pursuant to the terms
of this Agreement or otherwise in connection with, or arising out of, the
Siegal’s employment with the Company or a Change of Control (a “Payment” or
“Payments”), would be subject to the excise tax imposed by Code Section 4999, or
any interest or penalties are incurred by Siegal with respect to such excise tax
(such excise tax, together with any such interest and penalties, are hereinafter
collectively referred to as the “Excise Tax”), then Siegal will be entitled to
receive an additional payment (a “Gross-Up Payment”) in an amount such that
after payment by Siegal of all taxes (including any interest or penalties (other
than interest and penalties imposed by reason of Siegal’s failure to file timely
a tax return or pay taxes shown due on Siegal’s return) imposed with respect to
such taxes and the Excise Tax), including any Excise Tax imposed upon the
Gross-Up Payment, Siegal retains an amount of the Gross-Up Payment equal to the
Excise Tax imposed upon the Payments.

 

(b)                                 An initial determination as to whether a
Gross-Up Payment is required pursuant to this Agreement and the amount of such
Gross-Up Payment shall be made by the Company.  the Company shall provide its
determination (the “Determination”), together with

 

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detailed supporting calculations and documentation, to Siegal within fifteen
(15) days of the date of Siegal’s termination, if applicable, or such other time
as requested by Siegal (provided Siegal reasonably believes that any of the
Payments may be subject to the Excise Tax).  If requested by the Siegal, the
Company shall furnish Siegal, at the Company’s expense, with an opinion
reasonably acceptable to Siegal from the Company’s accounting firm (or an
accounting firm of equivalent stature reasonably acceptable to Siegal) that
there is a reasonable basis for the Determination.  Any Gross-Up Payment
determined pursuant to this section 7 shall be paid by the Company to Siegal
within five (5) days of receipt of the Determination.

 

(c)                                  As a result of the uncertainty in the
application of Sections 4999 and 280G of the Code, it is possible that a
Gross-Up Payment (or a portion thereof) will be paid which should not have been
paid (an “Excess Payment”) or a Gross-Up Payment (or a portion thereof) which
should have been paid will not have been paid (an “Underpayment”).

 

(d)                                 An Underpayment shall be deemed to have
occurred (A) upon notice (formal or informal) to Siegal from any governmental
taxing authority that Siegal’s tax liability (whether in respect of Siegal’s
current taxable year or in respect of any prior taxable year) may be increased
by reason of the imposition of the Excise Tax on a Payment or Payments with
respect to which the Company has failed to make a sufficient Gross-Up Payment,
(B) upon a determination by a court, or (C) by reason of determination by the
Company (which shall include the position taken by the Company, together with
its consolidated group, on its federal income tax return).  If an Underpayment
occurs, Siegal shall promptly notify the Company and the Company shall promptly,
but in any event at least five (5) days prior to the date on which the
applicable government taxing authority has requested payment, pay to Siegal an
additional Gross-Up Payment equal to the amount of the Underpayment plus any
interest and penalties (other than interest and penalties imposed by reason of
Siegal’s failure to file timely a tax return or pay taxes shown due on Siegal’s
return) imposed on the Underpayment.

 

(e)                                  An Excess Payment shall be deemed to have
occurred upon a Final Determination (as hereinafter defined) that the Excise Tax
shall not be imposed upon a Payment or Payments (or portion thereof) with
respect to which Siegal had previously received a Gross-Up Payment.  A “Final
Determination” shall be deemed to have occurred when Siegal has received from
the applicable government taxing authority a refund of taxes or other reduction
in Siegal’s tax liability by reason of the Excise Payment and upon either (A)
the date a determination is made by, or an agreement is entered into with, the
applicable governmental taxing authority which finally and conclusively binds
Siegal and such taxing authority, or in the event that a claim is brought before
a court of competent jurisdiction, the date upon which a final determination has
been made by such court and either all appeals have been taken and finally
resolved or the time for all appeals has expired or (B) the statute of
limitations with respect to Siegal’s applicable tax return has expired.  If an
Excess Payment is determined to have been made, the amount of the Excess Payment
shall be repaid by Siegal to the Company unless, and only to the extent that,
the repayment would either reduce the amount on which Siegal is subject to tax
under Code Section 4999 or generate a refund of tax imposed under Code Section
4999.

 

(f)                                    Notwithstanding anything contained in
this Agreement to the contrary, in the event that, according to the
Determination, an Excise Tax will be imposed on any Payment or Payments, the
Company shall pay to the applicable government taxing authorities, as Excise Tax

 

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withholding, the amount of the Excise Tax that the Company has actually withheld
from the Payment or Payments.

 

 

 

Laura Siegal

 

 

 

 

 

/s/ Laura Siegal

Dated: August 4, 2011

Laura Siegal

 

 

 

 

 

Kratos Defense & Security Solutions, Inc.

 

 

 

 

 

 

 

 

Dated:August 4, 2011

By:

/s/ Eric DeMarco

 

 

Eric DeMarco, Chief Executive Officer

 

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