Exhibit 10.3

 

EXECUTIVE EMPLOYMENT AGREEMENT

 

Second Amended and Restated as of August 4, 2011

 

This Executive Employment Agreement (“Agreement”) was made effective
November 14, 2003 (“Effective Date”), by and between Kratos Defense & Security
Solutions, Inc. (“Company” or “Kratos”) and Eric DeMarco (“Executive”), was
amended and restated as of August 4, 2008 and is hereby amended and restated as
of August 4, 2011.

 

The parties agree as follows:

 

1.                                       Employment. Company hereby employs
Executive, and Executive hereby accepts such employment, upon the terms and
conditions set forth herein.

 

2.                                       Duties.

 

2.1                                 Position. Executive currently is employed as
the Company’s Chief Executive Officer (“CEO”), having the duties and
responsibilities assigned by Company’s Board of Directors (“Board of
Directors”); provided, however, the Company shall not change Executive’s job
duties and responsibilities after the Change of Control (as that term is defined
below), if, when considered in their totality as a whole, such a change results
in the nature of Executive’s job duties being substantially different than the
nature of the job duties Executive performed immediately prior to the Change of
Control.  Executive also holds a seat on Company’s Board of Directors.

 

2.2                                 Best Efforts/Full-time. Executive will
expend his best efforts on behalf of Company, and will abide by all policies and
decisions made by Company, as well as all applicable federal, state and local
laws, regulations or ordinances. Executive will act in the best interest of
Company at all times. Executive shall devote his full business time and efforts
to the performance of his assigned duties for Company, unless Executive notifies
the Board of Directors in advance of his intent to engage in other paid work and
receives the Board of Directors’ express written consent to do so.

 

3.                                       At-will Employment Relationship.
Executive’s employment with Company is at-will and not for any specified period
and may be terminated by either Executive or Company at any time, with or
without cause. In addition, Company reserves the right to modify Executive’s
position or duties to meet business needs and to use discretion in deciding on
appropriate discipline. No representative of Company, other than the Board of
Directors, has the authority to alter the at-will employment relationship
between Executive and Company. Any change to the at-will employment relationship
must be by specific, written agreement signed by Executive and the Board of
Directors. Nothing in this Agreement is intended to or should be construed to
contradict, modify or alter this at-will relationship.

 

4.                                       Compensation.

 

4.1                                 Base Salary. As compensation for Executive’s
performance of his duties hereunder, Company shall pay to Executive a base
salary of $575,000 per year (the “Base Salary”), payable in accordance with the
normal payroll practices of Company, less required

 

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deductions for state and federal withholding tax, social security and all other
employment taxes and payroll deductions. In the event Executive’s employment
under this Agreement is terminated by either party, for any reason, Executive
will earn the Base Salary prorated to the date of termination.

 

4.2                                 Incentive Compensation. Executive will be
eligible to earn an annual performance bonus, up to a maximum amount of 100% of
his Base Salary, based upon the achievement of certain goals and objectives to
be mutually determined by Executive and Company.

 

4.3                                 Stock Options. Executive will be eligible to
receive stock options or other equity-based incentives based upon his
performance as determined by Company in its sole and absolute discretion.

 

4.4                                 Performance and Salary Review. The Board of
Directors will periodically review Executive’s performance on no less than an
annual basis. Adjustments to Base Salary or other compensation, if any, will be
made by the Board of Directors in its sole and absolute discretion.

 

5.                                       Customary Fringe Benefits. Executive
will be eligible for all customary and usual fringe benefits generally available
to executives of Company subject to the terms and conditions of Company’s
benefit plan documents. Company reserves the right to change or eliminate the
fringe benefits on a prospective, company-wide basis, at any time, effective
upon notice to Executive.

 

6.                                       Business Expenses. Executive will be
reimbursed for all reasonable, out-of-pocket business expenses incurred in the
performance of his duties on behalf of Company. To obtain reimbursement,
expenses must be submitted promptly with appropriate supporting documentation in
accordance with Company’s policies.

 

7.                                       Termination of Executive’s Employment.

 

7.1                                 Termination for Cause by Company. Although
Company anticipates a mutually rewarding employment relationship with Executive,
Company may terminate Executive’s employment immediately at any time for Cause.
For purposes of this Agreement, “Cause” is defined as: (a) acts or omissions
constituting gross negligence, recklessness or willful misconduct on the part of
Executive with respect to Executive’s obligations or otherwise relating to the
business of Company; (b) Executive’s material breach of this Agreement or
Company’s standard form of confidentiality agreement; (c) Executive’s conviction
or entry of a plea of nolo contendere for fraud, misappropriation or
embezzlement, or any felony or crime of moral turpitude; or (d) Executive’s
willful neglect of duties or poor performance. Notwithstanding the foregoing, a
termination under subsection 7.1(d) above shall not constitute a termination for
“Cause” unless Company has first given Executive written notice of the offending
conduct (such notice shall include a description of remedial actions that
Company reasonably deems appropriate to cure such offending conduct) and a
thirty (30) day opportunity to cure such offending conduct. In the event Company
terminates Executive’s employment under subsection 7.1(d) above, Company agrees
to participate in binding arbitration, if requested by Executive, to

 

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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. In the event Executive’s employment is terminated in
accordance with this subsection 7.1, Executive shall be entitled to receive only
the Base Salary then in effect, prorated to the date of termination and any
accrued but unpaid vacation (the “Standard Entitlements”). All other Company
obligations to Executive pursuant to this Agreement will become automatically
terminated and completely extinguished. In addition, Executive will not be
entitled to receive the Severance Package described in subsection 7.2 below.

 

7.2                                 Termination Without Cause by
Company/Severance. Company may terminate Executive’s employment under this
Agreement without Cause at any time on thirty (30) days’ advance written notice
to Executive. In the event of such termination, or upon the occurrence of a
“Change in Control” followed by a “Triggering Event,” as hereinafter defined,
Executive will receive the Standard Entitlements and the “Severance Package”
described in subsection 7.2(a) below, provided that Executive agrees to comply
with all of the conditions set forth in subsection 7.2(b) below. All other
Company obligations to Executive pursuant to this Agreement will be
automatically terminated and completely extinguished. For purposes of this
subsection 7.2, a “Triggering Event” shall mean: (i) Executive’s termination
from employment by the Company without Cause; (ii) a material change in the
nature of Executive’s role or job responsibilities so that Executive’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 Executive performed immediately prior to the Change of Control; (iii) the
relocation of Executive’s principal place of work to a location more than thirty
(30) miles from the location Executive was assigned to immediately prior to the
Change of Control and such relocation results in Executive’s one-way commute to
work increasing by more than 30 miles based on Executive’s principal place of
residence immediately before such relocation was announced; or (iv) the Company
materially breaches this Agreement; provided, however, in the case of a
Triggering Event described in clause (i), (ii), (iii) or (iv) hereof, such
condition shall not exist unless Executive provides written notice to Company
within ninety (90) days of its initial existence and Company does not cure such
condition within thirty (30) days from the date it receives such notice from
Executive.  In addition, no Triggering Event will be deemed to have occurred
unless Executive separates from service within twelve (12) months from the date
such Triggering Event initially occurs.

 

(a)                                  Severance Package. The Severance Package
will consist of the following:

 

(i)                                     a “Severance Payment” equivalent to the
sum of three (3) years of Executive’s Base Salary then in effect on the date of
termination plus three (3) times Executive’s maximum bonus potential for the
year in which Executive was terminated, less (x) any bonus amounts already
received by Executive which applied to Executive’s performance in the year of
termination and (y) applicable taxes and withholdings, all payable in a lump sum
on the 55th day following such termination; provided, however, that to the
extent that doing so would not result in adverse tax consequences under Code
Section 409A, such amounts shall instead be payable, if sooner, on the day on
which Executive satisfies the release requirement set forth in subsection
(b)(ii), below;

 

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(ii)                                  accelerated vesting of any and all of
Executive’s stock options, restricted stock units and any other outstanding
equity awards that remain unvested as of the date of termination; and

 

(iii)                               continuation of Executive’s group health
insurance benefits on the same terms as during his employment until the sooner
of three (3) years following the Separation Date or Executive’s procurement of
health care coverage through another employer (the “Benefits Continuation
Period”), provided Company’s insurance carrier allows for such benefits
continuation. In the event Company’s insurance carrier does not allow for such
coverage continuation, Company agrees to pay the premiums required to continue
Executive’s group health care coverage during the Benefits Continuation Period,
under the applicable provisions of the Consolidated Omnibus Budget
Reconciliation Act of 1985 (“COBRA”), provided that Executive elects to continue
and remains eligible for these benefits under COBRA.  To the extent that any of
the benefits provided under this section 7.2(a)(iii) would result in unintended
tax consequences under Internal Revenue 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 Executive with a lump sum payment equal to 24
months of COBRA continuation coverage on the 55th day following Executive’s
termination of employment.

 

(b)                                 Conditions to Receive Severance Package.
Executive will receive the Severance Package described above only if he meets
all of the following conditions:

 

(i)                                     complies with all surviving provisions
of this Agreement as specified in subsection 13.8 below; and

 

(ii)                                  executes a full general release, in a form
acceptable to Company, releasing all claims, known or unknown, that Executive
may have against Company, and any parent, subsidiary or related entity, their
officers, directors, employees and agents, arising out of or any way related to
Employee’s employment or termination of employment with Company (the
“Release”).  The Release must become effective within forty-five (45) days of
Executive’s termination of employment and must not thereafter be revoked.

 

(c)                                  For the sake of clarity, no severance
benefit that is paid on account of Executive’s termination of employment will be
paid unless and until Executive 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 Executive is a “specified employee” within the meaning of
Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”) and
the related guidance (“Section 409A”) at the time of Executive’s separation from
service, then only that portion of the Severance Package, 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 Executive’s separation from service in accordance
with section 7.2(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 Package, together with any
other severance payments or benefits that may be considered deferred

 

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compensation under Section 409A, that would otherwise be payable within the six
(6) month period following Executive’s separation from service will be paid in a
lump sum on the date six (6) months and one (1) day following the date of
Executive’s separation from service (or the next business day if such date is
not business day).  For purposes of this Agreement, “Section 409A Limit” means
the lesser of two (2) times: (i) the sum of Executive’s annualized compensation
based upon the annual rate of pay for services provided to Company for the
taxable year of Executive preceding the taxable year of Executive’s separation
from service from Company as determined under 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..

 

7.3                                 Resignation by Executive Without Good
Reason. Executive may resign Executive’s position with Company for any reason,
at any time on thirty (30) days’ advance written notice. In the event of
Executive’s resignation, Executive will be entitled to receive only the Standard
Entitlements and no other amount.  All other Company obligations to Executive
pursuant to this Agreement will become automatically terminated and completely
extinguished. In addition, Executive will not be entitled to receive the
Severance Package described in subsection 7.2 above.

 

7.4                                 Termination Upon A Change Of Control.

 

(a)                                  Accelerated Vesting Upon A Change Of
Control. Upon the occurrence of a Change of Control, Company shall immediately
accelerate vesting of 100% of any portion of the Option and 100% of the portion
of any other outstanding equity awards that remain unvested.

 

(b)                                 Continued Validity of Severance Package
After A Change Of Control. In the event of a Change of Control, the termination
provisions described in section 7 above shall remain in full force and effect
and Executive shall continue to be entitled to receive the Severance Package
described in subsection 7.2(a) above, provided Executive complies with all of
the conditions described in subsection 7.2(b) above.

 

(c)                                  Change of Control.  “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 the Company 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 Company securities
representing 50% or more of the combined voting power of Company’s
then-outstanding securities, but only to the extent that such ownership
constitutes a “change in the ownership” of Company within the meaning of U.S.
Treasury Regulation Section 1.409A-3(i)(5)(v).

 

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(ii)                                  Change in Board Control.  During any
consecutive one-year period commencing after the date of this Agreement,
individuals who constituted Company’s 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
behalf of any person other than the Board, but only to the extent that such
acquisition constitutes a “change in the effective control” of Company within
the meaning of Treasury Regulation Section 1.409A-3(i)(5)(vi).

 

(iii)                               Merger.  Company consummates a merger or
consolidation of Company with any other corporation unless: (a) the voting
securities of Company 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 Company or such surviving
entity outstanding immediately after such merger or consolidation; and (b) no
Buyer becomes the “beneficial owner,” directly or indirectly, of Company
securities representing 50% or more of the combined voting power of Company’s
then outstanding securities, but only to the extent that such ownership
constitutes a “change in the ownership” of Company 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 Company’s assets, but only to the extent that such
acquisition results in a “change in the ownership of a substantial portion” of
Company’s assets within the meaning of U.S. Treasury Regulation
Section 1.409A-3(i)(5)(vii).

 

(d)                                 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, Executive 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, Executive 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 his 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, Executive may elect to require that
no less than 50% of his 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 his ownership in the surviving
entity immediately following the Change of Control is no less than the fair
market value of his 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

 

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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.

 

7.5                                 Termination Due to Death or Disability. This
Agreement will immediately terminate upon Executive’s death or Disability (as
defined below). In the event of Executive’s death or Disability, Executive, or
Executive’s heirs, personal representatives or estate, as the case may be, will
be entitled to receive only the Standard Entitlements and those benefits
available under any applicable Company plan or insurance policy, subject to such
plan or policy requirements. All other Company obligations to Executive pursuant
to this Agreement will become automatically terminated and completely
extinguished. In addition, neither Executive nor Executive’s heirs, personal
representatives or estate will be entitled to receive the Severance Package
described in subsection 7.2. For purposes of this Agreement, “Disability” shall
be defined as Executive’s inability to engage in any substantial gainful
activity by reason of any medically determinable physical or mental impairment
that can be expected to result in death or can be expected to last for a
continuous period of not less than twelve (12) months; (ii) he is, by reason of
any medically determinable physical or mental impairment that can be expected to
result in death or can be expected to last for a continuous period of not less
than twelve (12) months, receiving income replacement benefits for a period of
not less than three (3) months under an accident and health plan covering
employees of Company; or (iii) Executive is determined to be totally disabled by
the Social Security Administration or state equivalent.  For purposes of this
Section 7.5, whether Executive’s condition satisfies the definition of
Disability shall be determined in good faith by the Board of Directors of
Company.

 

7.6                                 Parachute Payment Excise Tax.

 

(e)                                  In the event that any payment or benefit
(within the meaning of Section 280G(b)(2) of the Code) to Executive for
Executive’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 Executive’s employment with 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 Executive 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 Executive will
be entitled to receive an additional payment (a “Gross-Up Payment”) in an amount
such that after payment by Executive of all taxes (including any interest or
penalties (other than interest and penalties imposed by reason of Executive’s
failure to file timely a tax return or pay taxes shown due on Executive’s
return) imposed with respect to such taxes and the Excise Tax), including any
Excise Tax imposed upon the Gross-Up Payment, Executive retains an amount of the
Gross-Up Payment equal to the Excise Tax imposed upon the Payments.

 

(f)                                    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 Company.  Company shall provide its
determination (the “Determination”), together with detailed supporting
calculations and documentation, to Executive within fifteen (15) days of the
date of Executive’s termination, if applicable, or such other time as requested
by Executive (provided Executive reasonably believes that any of the Payments
may be subject to the Excise Tax).  If requested by the Executive, Company shall
furnish Executive, at Company’s expense,

 

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with an opinion reasonably acceptable to Executive from Company’s accounting
firm (or an accounting firm of equivalent stature reasonably acceptable to
Executive) that there is a reasonable basis for the Determination.  Any Gross-Up
Payment determined pursuant to this section 6 shall be paid by Company to
Executive within five (5) days of receipt of the Determination.

 

(g)                                 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”).

 

(h)                                 An Underpayment shall be deemed to have
occurred (A) upon notice (formal or informal) to Executive from any governmental
taxing authority that Executive’s tax liability (whether in respect of
Executive’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 Company has failed to make a sufficient Gross-Up Payment,
(B) upon a determination by a court, or (C) by reason of determination by
Company (which shall include the position taken by Company, together with its
consolidated group, on its federal income tax return).  If an Underpayment
occurs, Executive shall promptly notify Company and 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 Executive 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
Executive’s failure to file timely a tax return or pay taxes shown due on
Executive’s return) imposed on the Underpayment.

 

(i)                                     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 Executive had previously received a Gross-Up Payment.  A
“Final Determination” shall be deemed to have occurred when Executive has
received from the applicable government taxing authority a refund of taxes or
other reduction in Executive’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 Executive 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 Executive’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 Executive to Company unless, and only to
the extent that, the repayment would either reduce the amount on which Executive
is subject to tax under Code Section 4999 or generate a refund of tax imposed
under Code Section 4999.

 

(j)                                     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, Company
shall pay to the applicable government taxing authorities, as Excise Tax
withholding, the amount of the Excise Tax that Company has actually withheld
from the Payment or Payments.

 

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8.                                       No Conflict of Interest. During
Executive’s employment with Company and during any period Executive is receiving
payments from Company pursuant to this Agreement, Executive must not engage in
any work, paid or unpaid, that creates an actual conflict of interest with
Company. Such work shall include, but is not limited to, directly or indirectly
competing with Company in any way, or acting as an officer, director, employee,
consultant, stockholder, volunteer, lender, or agent of any business enterprise
of the same nature as, or which is in direct competition with, the business in
which Company is now engaged or in which Company becomes engaged during
Executive’s employment with Company, as may be determined by the Board of
Directors in its sole discretion. If the Board of Directors believes such a
conflict exists during Executive’s employment, the Board of Directors may ask
Executive to choose to discontinue the other work or resign employment with
Company. If the Board of Directors believes such a conflict exists during any
period in which Executive is receiving payments pursuant to this Agreement, the
Board of Directors may ask Executive to choose to discontinue the other work or
forfeit the remaining severance payments. In addition, Executive agrees not to
refer any client or potential client of Company to competitors of Company,
without obtaining Company’s prior written consent, during Executive’s employment
and during any period in which Executive is receiving payments from Company
pursuant to this Agreement.

 

9.                                       Confidentiality and Proprietary Rights.
Executive agrees to read, sign and abide by Company’s standard form of
confidentiality agreement, which is provided with this Agreement and
incorporated herein by reference.

 

10.                                 Nonsolicitation. Executive understands and
agrees that Company’s employees and customers and any information regarding
Company employees and/or customers is confidential and constitutes trade
secrets. Accordingly, Executive agrees that during his employment and
thereafter, Executive will not, either directly or indirectly, separately or in
association with others: (a) use Company trade secret or confidential
information to interfere with, impair, disrupt or damage Company’s relationship
with any of its customers or customer prospects by soliciting or encouraging
others to solicit any of them for the purpose of diverting or taking away
business from Company; or (b) directly or indirectly, separately or in
association with others, interfere with, impair, disrupt or damage Company’s
business by soliciting, encouraging or attempting to hire any of Company’s
employees or causing others to solicit or encourage any of Company’s employees
to discontinue their employment with Company. Executive’s obligations under
clause (b), however, shall lapse on the one-year anniversary of his termination
of employment.

 

11.                                 Injunctive Relief. Executive acknowledges
that his breach of the covenants contained in sections 8-10 would cause
irreparable injury to Company and agrees that in the event of any such breach,
Company shall be entitled to seek temporary, preliminary and permanent
injunctive relief, to the extent allowed under the California Arbitration Act,
without the necessity of proving actual damages or posting any bond or other
security.

 

12.                                 Agreement to Arbitrate.

 

12.1                           Scope. To the fullest extent permitted by law,
Executive and Company agree to arbitrate any controversy, claim or dispute
between them arising out of or in any way related to this Agreement, the
employment relationship between Company and Executive and

 

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any disputes upon termination of employment, including but not limited to breach
of contract, tort, discrimination, harassment, wrongful termination, demotion,
discipline, failure to accommodate, family and medical leave, compensation or
benefits claims, constitutional claims; and any claims for violation of any
local, state or federal law, statute, regulation or ordinance or common law. For
the purpose of this agreement to arbitrate, references to “Company” include all
parent, subsidiary or related entities and their employees, supervisors,
officers, directors, agents, pension or benefit plans, pension or benefit plan
sponsors, fiduciaries, administrators, affiliates and all successors and assigns
of any of them, and this agreement to arbitrate shall apply to them to the
extent Executive’s claims arise out of or relate to their actions on behalf of
Company.

 

12.2                           Arbitration Procedure. Either party may exercise
the right to arbitrate by providing the other party with written notice of any
and all claims forming the basis of such right in sufficient detail to inform
the other party of the substance of such claims. In no event shall the request
for arbitration be made after the date when institution of legal or equitable
proceedings based on such claims would be barred by the applicable statute of
limitations. The arbitration will be conducted in San Diego, California by a
single neutral arbitrator and in accordance with the then current rules for
resolution of employment disputes of the American Arbitration Association
(“AAA”). The parties are entitled to representation by an attorney or other
representative of their choosing. The arbitrator shall have the power to enter
any award that could be entered by a judge of the trial court of the State of
California, and only such power, and shall follow the law. The parties agree to
abide by and perform any award rendered by the arbitrator. The arbitrator shall
issue the award in writing and therein state the essential findings and
conclusions on which the award is based. Judgment on the award may be entered in
any court having jurisdiction thereof. Company shall bear the costs of the
arbitration filing and hearing fees and the cost of the arbitrator.

 

13.                                 General Provisions.

 

13.1                           Successors and Assigns. The rights and
obligations of Company under this Agreement shall inure to the benefit of and
shall be binding upon the successors and assigns of Company. Executive shall not
be entitled to assign any of Executive’s rights or obligations under this
Agreement.

 

13.2                           Waiver. Either party’s failure to enforce any
provision of this Agreement shall not in any way be construed as a waiver of any
such provision, or prevent that party thereafter from enforcing each and every
other provision of this Agreement.

 

13.3                           Attorneys’ Fees. Each side will bear its own
attorneys’ fees in any dispute unless a statutory section at issue, if any,
authorizes the award of attorneys’ fees to the prevailing party.

 

13.4                           Severability. In the event any provision of this
Agreement is found to be unenforceable by an arbitrator or court of competent
jurisdiction, such provision shall be deemed modified to the extent necessary to
allow enforceability of the provision as so limited, it being intended that the
parties shall receive the benefit contemplated herein to the fullest extent
permitted by law. If a deemed modification is not satisfactory in the judgment
of such arbitrator

 

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or court, the unenforceable provision shall be deemed deleted, and the validity
and enforceability of the remaining provisions shall not be affected thereby.

 

13.5                           Interpretation; Construction. The headings set
forth in this Agreement are for convenience only and shall not be used in
interpreting this Agreement. This Agreement has been drafted by legal counsel
representing Company, but Executive has participated in the negotiation of its
terms. Furthermore, Executive acknowledges that Executive has had an opportunity
to review and revise the Agreement and have it reviewed by legal counsel, if
desired, and, therefore, the normal rule of construction to the effect that any
ambiguities are to be resolved against the drafting party shall not be employed
in the interpretation of this Agreement.

 

13.6                           Governing Law. This Agreement will be governed by
and construed in accordance with the laws of the United States and the State of
California. Each party consents to the jurisdiction and venue of the state or
federal courts in San Diego, California, if applicable, in any action, suit, or
proceeding arising out of or relating to this Agreement.

 

13.7                           Notices. Any notice required or permitted by this
Agreement shall be in writing and shall be delivered as follows with notice
deemed given as indicated: (a) by personal delivery when delivered personally;
(b) by overnight courier upon written verification of receipt; (c) by telecopy
or facsimile transmission upon acknowledgment of receipt of electronic
transmission; or (d) by certified or registered mail, return receipt requested,
upon verification of receipt. Notice shall be sent to the addresses set forth
below, or such other address as either party may specify in writing.

 

13.8                           Survival. Sections 8 (“No Conflict of Interest”),
9 (“Confidentiality and Proprietary Rights”), 10 (“Nonsolicitation”), 11
(“Injunctive Relief”), 12 (“Agreement to Arbitrate”), 13 (“General Provisions”)
and 14 (“Entire Agreement”) of this Agreement shall survive Executive’s
employment by Company.

 

13.9                           Code Section 409A.  This Agreement is intended to
comply with Code Section 409A (as amplified by any Internal Revenue Service or
U.S. Treasury Department guidance), and shall be construed and interpreted in
accordance with such intent.  Executive and Company acknowledge that Executive
and Company intend that the compensation arrangements set forth in this
Agreement are in compliance with Section 409A, and Executive and Company agree
to cooperate with one another, to the extent reasonably requested by the other
party, to restructure any compensation set forth in this Agreement in a manner,
if possible and without any increase in cost to Company, such that no earlier
and/or additional taxes to Executive or Company will arise under Section 409A. 
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).

 

14.                                 Entire Agreement. This Agreement, including
Company’s standard form of confidentiality agreement incorporated herein by
reference and Company’s 1999 Equity Incentive Plan and related option documents
described in subsection 4.3 of this Agreement, constitutes the entire agreement
between the parties relating to this subject matter and supersedes all prior or
simultaneous representations, discussions, negotiations, and agreements, whether

 

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written or oral. This Agreement may be amended or modified only with the written
consent of Executive and the Board of Directors of Company. No oral waiver,
amendment or modification will be effective under any circumstances whatsoever.

 

THE PARTIES TO THIS AGREEMENT HAVE READ THE FOREGOING AGREEMENT AND FULLY
UNDERSTAND EACH AND EVERY PROVISION CONTAINED HEREIN. WHEREFORE, THE PARTIES
HAVE EXECUTED THIS AGREEMENT ON THE DATES SHOWN BELOW.

 

 

 

Eric DeMarco

 

 

 

Dated:

 

 

August 4, 2011

/s/ Eric DeMarco

 

Eric DeMarco

 

 

 

 

 

Kratos Defense & Security Solutions, Inc.

 

 

 

 

 

 

Dated:

By:

/s/ Deanna H. Lund

August 4, 2011

 

 

 

 

Deanna H. Lund

 

 

Executive Vice President & Chief Financial Officer

 

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