Exhibit 10.13

 

SEVERANCE AND CHANGE OF CONTROL AGREEMENT

 

This SEVERANCE AND CHANGE OF CONTROL AGREEMENT (“Agreement”) is effective as of
August 2, 2010 by and between Kratos Defense & Security Solutions, Inc., (the
“Company”) and Deborah S. Butera (“Butera”), as approved by the Company’s Board
Compensation Committee.

 

A.            Butera is presently employed as General Counsel of the Company.

 

B.            As consideration for Butera’s agreement to continue her duties and
responsibilities, the Company desires to give Butera certain protection if she
is terminated from employment without Cause, or if there is a Change of Control
of the Company, as defined and more particularly set forth below.

 

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

 

1.              Vesting Upon Change of Control.  Upon the closing of a
transaction that constitutes a Change of Control (as defined in paragraph
3(a) below), the vesting of 50% of all stock options, stock appreciation rights,
restricted stock units and any other equity awards granted to Butera 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. 
On the one year anniversary of such Change of Control or upon a Triggering Event
(as defined in paragraph 3(b) below), whichever occurs sooner, the remaining
unvested portion of any outstanding equity awards shall immediately vest.

 

2.              Severance Payments.

 

(a)                                 If Butera (x) is terminated without Cause
(as defined in paragraph 3(c) below) prior to a Change of Control or (y) is
terminated as a result of a Triggering Event (as defined in paragraph
3(b) below) after a Change of Control (as defined in paragraph 3(a) below), then
Butera will be entitled to receive in satisfaction of all obligations (other
than as provided in paragraph 1 above) that the Company may have to Butera:
(i) in the case of clause (x) hereof, severance compensation equal to six
(6) months of her base salary then in effect; or in the case of clause
(y) hereof, severance compensation equal to six (6) months of her base salary
plus her maximum potential bonus amount for six (6) months; in either case, less
applicable taxes and withholding; and, if needed by Butera, (ii) her
then-current health insurance coverage, at the then current employee cost,
during the six (6) month period following a termination in the case of clause
(x) or during the six (6) month period following a resignation in the case of
clause (y).  Such benefits will be provided for the six (6) month period
following the date of Butera’s termination.  In addition in the event that
Butera 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 Butera 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

 

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and in addition to any existing vesting provisions set forth in the applicable
equity award agreement and/or the Company equity incentive plan.  The foregoing
severance compensation, health insurance coverage and acceleration of vesting
will be conditioned upon Butera’s execution of a separation agreement with a
release of claims reasonably satisfactory to the Company and such cash severance
compensation shall be paid in a single lump sum payment within thirty (30) days
following Butera’s execution of such separation agreement.

 

(b)                                 Notwithstanding any other provision of this
Agreement to the contrary, if Butera is a “specified employee” within the
meaning of Section 409A of the Internal Revenue Code (the “Code”) and the
related guidance (“Section 409A”) at the time of Butera’s separation from
service, then only that portion of the severance and benefits set forth in
paragraph 2(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 Butera’s separation from service in accordance with paragraph
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 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 Butera’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 Butera’s
separation from service (or the next business day if such date is not a 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 Butera’s annualized compensation based upon the annual
rate of pay for services provided to the Company for the taxable year of Butera
preceding the taxable year of Butera’s separation from service from the 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.

 

3.              Definition of Change of Control and Triggering Event.

 

(a)                                 A Change of Control means: (i) the
acquisition by an individual person or entity or a group of individuals or
entities acting in concert, directly or indirectly, through one transaction or a
series of transactions, of more than 50% of the outstanding voting securities of
the Company; (ii) a merger or consolidation of the Company with or into another
entity after which the stockholders of the Company immediately prior to such
transaction hold less than 50% of the voting securities of the surviving entity;
(iii) any action or event that results in the Board of Directors consisting of
fewer than a majority of Incumbent Directors (“Incumbent Directors” shall mean
directors who either (a) are directors of the Company as of the date hereof, or
(B) are elected or nominated for election, to the Board with affirmative votes
of at least a majority of the Incumbent Directors at the time of such election
or nomination); or (iv) a sale of all or substantially all of the assets of the
Company.

 

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(b)                                 A Triggering Event means (i) Butera’s
termination from employment by the Company without Cause; (ii) a material change
in the nature of Butera’s role or job responsibilities so that Butera’s duties
and responsibilities after the Change of Control, when considered in their
totality as a whole, are substantially different in nature from the job duties
Butera performed immediately prior to the Change of Control; or (iii) the
relocation of Butera’s principal place of work to a location of more than thirty
(30) miles from the location Butera was assigned to immediately prior to the
Change of Control and more than 30 miles farther from Butera’s principal
residence immediately prior to the Change of Control; provided, however, in the
case of a Triggering Event described in clause (ii) or (iii) hereof, such
condition shall not exist unless Butera 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 Butera.  In addition, no Triggering Event will be deemed to have occurred
unless Butera 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
Butera with respect to Butera’s obligations or otherwise relating to the
business of the Company; (ii) Butera’s material breach of this Agreement or the
Company’s standard form of confidentiality agreement; (iii) Butera’s conviction
or entry of a plea of nolo contendere for fraud, misappropriation or
embezzlement, or any felony or crime of moral turpitude; (iv) Butera’s failure
to perform her duties and responsibilities as General Counsel to the reasonable
satisfaction of the Board after being provided with notice thereof and thirty
(30) days opportunity to remedy such failure; and (v) Butera’s willful neglect
of duties or performance.  Notwithstanding the foregoing, a termination under
subsection (v) shall not constitute a termination for “Cause” unless the Company
has first given Butera written notice of the offending conduct (such notice
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
Butera’s employment under subsection (v), the Company agrees to participate in
binding arbitration, if requested by Butera, 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.

 

4.              General Provisions.  Nothing in this Agreement is intended to
change the at-will nature of Butera’s employment with the Company.  This
Agreement and Butera’s offer letter and the Proprietary Information and
Innovations Agreement signed by Butera, constitute the entire agreement between
Butera and the Company with respect to Butera’s employment with the Company.  No
amendment or modification of the terms or conditions of this Agreement shall be
valid unless in writing and signed by the parties.

 

5.              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
Butera, may amend or modify this Agreement in any manner in order to meet he
requirements of Section

 

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409A 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 shall have no force and effect until
amended to comply with Code Section 409A (which amendment shall be retroactive
to the extent permitted by the Code or any regulations or rulings thereunder). 
Butera is encouraged to consult a tax adviser regarding the potential impact of
Section 409A.

 

6.              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 Butera for Butera’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, Butera’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 Butera 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 Butera will be entitled to receive an
additional payment (a “Gross-Up Payment”) in an amount such that after payment
by Butera of all taxes (including any interest or penalties (other than interest
and penalties imposed by reason of Butera’s failure to file timely a tax return
or pay taxes shown due on Butera’s return) imposed with respect to such taxes
and the Excise Tax), including any Excise Tax imposed upon the Gross-Up Payment,
Butera 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 detailed supporting
calculations and documentation, to Butera within fifteen (15) days of the date
of Butera’s termination, if applicable, or such other time as requested by
Butera (provided Butera reasonably believes that any of the Payments may be
subject to the Excise Tax).  If requested by Butera, the Company shall furnish
Butera, at the Company’s expense, with an opinion reasonably acceptable to
Butera from the Company’s accounting firm (or an accounting firm of equivalent
stature reasonably acceptable to Butera) that there is a reasonable basis for
the Determination.  Any Gross-Up Payment determined pursuant to this paragraph 6
shall be paid by the Company to Butera 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 Butera from any governmental
taxing authority that Butera’s tax liability (whether in respect of Butera’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

 

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the position taken by the Company, together with its consolidated group, on its
federal income tax return).  If an Underpayment occurs, Butera 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 Butera 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 Butera’s failure to file timely
a tax return or pay taxes shown due on Butera’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 Butera had previously received a Gross-Up Payment.  A “Final
Determination” shall be deemed to have occurred when Butera has received from
the applicable government taxing authority a refund of taxes or other reduction
in Butera’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 Butera 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 o Butera’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 Butera to the Company unless, and only to the extent that,
the repayment would either reduce the amount on which Butera 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 withholding, the
amount of the Excise Tax that the Company has actually withheld from the Payment
or Payments.

 

 

Deborah S. Butera

 

 

Dated:

/s/ Deborah S. Butera

 

 

 

Kratos Defense & Security Solutions, Inc.

 

 

Dated:

/s/ Eric DeMarco

 

By: Eric DeMarco, President and CEO

 

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