Document:

exv10w1

Exhibit
10.1

EXECUTION

AMENDMENT NO. 2 TO ABL CREDIT AGREEMENT 

     AMENDMENT NO. 2 TO ABL CREDIT AGREEMENT, dated as of September 8, 2011 (this “Amendment No.
2”), is by and among Wells Fargo Bank, National Association successor by merger to Wells Fargo
Retail Finance, LLC, in its capacity as administrative and collateral agent for the Lenders (as
hereinafter defined) pursuant to the Credit Agreement defined below (in such capacity,
“Administrative Agent”), the parties to the Credit Agreement as lenders (individually, each a
“Lender” and collectively, “Lenders”), Amscan Inc., a New York corporation (“Amscan Inc.”), Anagram
International, Inc., a Minnesota corporation (“International”), Am-Source, LLC, a Rhode Island
limited liability company (“Am-Source”), Factory Card Outlet of America Ltd., an Illinois
corporation (“Factory”), Gags and Games, Inc., a Michigan corporation (“Gags and Games”), PA
Acquisition Corp., a Delaware corporation (“PA Acquisition”), Party City Corporation, a Delaware
corporation (“Party City”), Party City Franchise Group, LLC, a Delaware limited liability company
(“PCFG” and together with Amscan Inc., International, Am-Source, Factory, Gags and Games, PA
Acquisition and Party City, each individually a “Borrower” and collectively, “Borrowers”), Party
City Holdings Inc., formerly known as AAH Holdings Corporation, a Delaware corporation
(“Holdings”), Amscan Holdings, Inc., a Delaware corporation (“Amscan”), JCS Packaging, Inc., a New
York corporation (“JCS”), M&D Industries, Inc., a Delaware corporation (“M&D”), SSY Realty Corp., a
New York corporation (“SSY”), Trisar, Inc., a California corporation (“Trisar”), Anagram Eden
Prairie Property Holdings LLC, a Delaware limited liability company (“Eden Prairie”), Anagram
International, LLC, a Nevada limited liability company (“AIL”), Anagram International Holdings,
Inc., a Minnesota corporation (“AIHI”), Factory Card & Party Outlet Corp., a Delaware corporation
(“Outlet”), Party America Franchising, Inc., a Minnesota corporation (“Franchising”), Party City
Franchise Group Holdings, LLC, a Delaware limited liability company (“PCFG Holdings” and, together
with Holdings, Amscan, JCS, M&D, SSY, Trisar, Eden Prairie, AIL, AIHI, Outlet and Franchising, each
individually a “Guarantor” and collectively, “Guarantors”).

W I T N E S S E T H:

     WHEREAS, Administrative Agent, Lenders, Borrowers and Guarantors have entered into financing
arrangements pursuant to which Lenders (or Administrative Agent on behalf of Lenders) have made and
may make loans and advances and provide other financial accommodations to Borrowers as set forth in
the ABL Credit Agreement dated August 13, 2010, by and among Administrative Agent, Lenders,
Borrowers and Guarantors, as amended by Amendment No. 1 to ABL Credit Agreement dated December 2,
2010 (as from time to time amended, modified, supplemented, extended, renewed, restated or
replaced, the “Credit Agreement”, and together with all agreements, documents and instruments at
any time executed and/or delivered in connection therewith or related thereto, as from time to time
amended, modified, supplemented, extended, renewed, restated, or replaced, collectively, the “Loan
Documents”);

 

 

     WHEREAS, Borrowers and Guarantors desire to amend certain provisions of the Credit Agreement
as set forth herein, and Administrative Agent and Lenders are willing to agree to such amendments
on the terms and subject to the conditions set forth herein;

     WHEREAS, by this Amendment No. 2, Administrative Agent, Lenders, Borrowers and Guarantors
desire and intend to evidence such amendments;

     NOW THEREFORE, in consideration of the foregoing and the mutual agreements and covenants
contained herein, and other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the parties hereto agree as follows:

     1. Definitions.

     (a) Additional Definitions. As used herein or in the Credit Agreement or any of the
other Loan Documents, the following terms shall have the meanings given to them below and the
Credit Agreement and the other Loan Documents shall be deemed and are hereby amended to include, in
addition and not in limitation, the following definitions:

     (i) “Amendment No. 2” shall mean Amendment No. 2 to ABL Credit Agreement, dated as of
September 8, 2011 by and among Administrative Agent, Lenders, Borrowers and Guarantors, as the same
now exists or may hereafter be amended, modified, supplemented, extended, renewed, restated or
replaced.

     (ii) “Qualifying IPO” means the issuance and sale by Holdings or any direct or indirect parent
of Holdings of its common Capital Stock in an underwritten primary public offering (other than a
public offering pursuant to a registration statement on Form S-4, S-8 or similar limited purpose
form) pursuant to an effective registration statement filed with the SEC in accordance with the
Securities Act (whether alone or in connection with a secondary public offering) for aggregate
gross proceeds of $150,000,000 or more.

     (b) Amendments to Definitions.

     (i) The definition of “Change of Control” set forth in Section 1.01 of the Credit Agreement is
hereby amended by deleting such definition in its entirety and replacing it with the following:

“Change of Control” means the earliest to occur of (a) at any time
prior to the consummation of a Qualifying IPO, the Sponsors ceasing
to be “beneficial owners” (as defined in Rules 13(d)-3 and 13(d)-5
under the Exchange Act), in the aggregate, directly or indirectly,
of at least fifty percent (50%) of the aggregate voting power
represented by the issued and outstanding Capital Stock of Holdings,
(b) at any time upon or after the consummation of a Qualifying IPO,
(i) (A) any Person (other than one or more

2

 

Sponsors) or (B) Persons (other than one or more Sponsors)
constituting a “group” (as such term is used in Sections 13(d) and
14(d) of the Exchange Act, but excluding any employee benefit plan
of such person and its subsidiaries, and any person or entity acting
in its capacity as trustee, agent or other fiduciary or
administrator of any such plan), become the “beneficial owner”,
directly or indirectly, of Capital Stock representing more than
thirty-five percent (35%) of the aggregate voting power represented
by the issued and outstanding Capital Stock of Holdings and the
percentage of aggregate voting power so held is not less than the
percentage of the aggregate voting power represented by the Capital
Stock of Holdings beneficially owned, directly or indirectly, in the
aggregate by the Sponsors or (ii) during any period of twelve (12)
consecutive months, the majority of the board of directors of
Holdings shall cease to be Persons who either (A) were members of
the board of directors of Holdings on the Closing Date or (B) were
elected or nominated for election by a majority of the board of
directors of Holdings, who were either (1) directors on the Closing
Date or (2) whose election or nomination for election was approved
by a majority of such directors or by any Sponsor; (c) Holdings
shall cease to own 100% of the Capital Stock of Amscan or (d) there
shall occur any “change of control” or similar event under the
Senior Subordinated Note Indenture (or any agreement or instrument
evidencing or related to any Refinancing Indebtedness with respect
thereto with an outstanding aggregate principal amount in excess of
the Threshold Amount).

     (ii) The definition of “Fixed Charges” set forth in Section 1.01 of the Credit Agreement is
hereby amended by deleting the period at the end of such definition and replacing it with the
following:

“; provided, that, prepayments or refinancings of
Subordinated Indebtedness permitted by clauses (iv) or (vii) of
Section 6.05(b) shall not be “Fixed Charges”.”.

     (iii) The definition of “Prime Rate” set forth in Section 1.01 of the Credit Agreement is
hereby amended by replacing each reference to “Wells Fargo” contained therein with “Wells Fargo
Bank”.

     (iv) The definition of “Sponsors” set forth in Section 1.01 of the Credit Agreement is hereby
amended by deleting such definition in its entirety and replacing it with the following:

““Sponsors” means collectively Advent, Berkshire, Weston and any of
their respective individual or joint Affiliates and funds or
partnerships managed or advised by any of them or any of their

3

 

respective Affiliates, but not including any of their respective
portfolio companies.”

     (c) Interpretation. For purposes of this Amendment No. 2, all terms used herein which
are not otherwise defined herein, including but not limited to, those terms used in the recitals
hereto, shall have the respective meanings assigned thereto in the Credit Agreement as amended by
this Amendment No. 2.

     2. Refinancing Indebtedness. Section 6.01(p)(i) of the Credit Agreement is hereby
amended by deleting the comma at the end of such Section and replacing it with the following:

“except (A) by an amount equal to unpaid accrued interest and
premium (including tender premiums) thereon plus other reasonable
and customary fees and expenses (including upfront fees and original
issue discount) reasonably incurred in connection with such
refinancing or replacement and (B) by an amount equal to any
existing commitments unutilized thereunder,”.

     3. Restricted Junior Payments. Section 6.05(a)(ii)(A) of the Credit Agreement is
hereby amended by deleting such Section in its entirety and replacing it with the following:

“(X) at any time prior to the consummation of a Qualifying IPO, in
an aggregate amount not to exceed $500,000 in any Fiscal Year, to
the extent necessary to permit Holdings to pay general
administrative costs and expenses and (Y) at any time upon or after
the consummation of a Qualifying IPO, to the extent the proceeds of
which shall be used by Holdings (or any direct or indirect parent
thereof) to pay operating expenses in the ordinary course of
business and other corporate overhead costs and expenses (including
administrative, legal, accounting and similar expenses provided by
third parties) incurred by Amscan or any of the Loan Parties, which
are reasonable and customary and incurred in the ordinary course of
business, plus any reasonable and customary indemnification claims
made by directors or officers of Holdings (or any direct or indirect
parent thereof) attributable to the ownership or operations of
Holdings or any of the Loan Parties and”

     4. Restricted Junior Payments. Section 6.05(a) of the Credit Agreement is hereby
amended by deleting the “and” at the end of clause (v) of such Section and adding a new clause
(vii) immediately following clause (vi) of such Section to read as follows:

“and (vii) Amscan may make Restricted Junior Payments (and Holdings may
itself make Restricted Junior Payments with any such Restricted Junior
Payments received by it from Amscan) that are Restricted Debt Payments (or
are in respect of Restricted Debt Payments) permitted pursuant to clauses
(iv) or (vii) of Section 6.05(b).”.

4

 

     5. Restricted Debt Payments. Section 6.05(b)(vii) of the Credit Agreement is hereby
amended by deleting such Section in its entirety and replacing it with the following:

“payments of Indebtedness in exchange for or with proceeds of any issuance
of Qualified Capital Stock or capital contribution in respect of Qualified
Capital Stock of Holdings, in each case made within forty-five (45) days of
the date of such issuance or capital contribution, and payments of
Indebtedness by the conversion of all or any portion thereof into Qualified
Capital Stock of Holdings, and payments of interest in respect of
Indebtedness in the form of payment-in-kind interest with respect to such
Indebtedness permitted under Section 6.01(y);”.

     6. Representations and Warranties. Borrowers and Guarantors, jointly and severally,
represent and warrant with and to Administrative Agent and Lenders as follows, which
representations and warranties shall survive the execution and delivery hereof:

     (a) no Default or Event of Default has occurred and is continuing as of the date of this
Amendment No. 2;

     (b) this Amendment No. 2 and each other agreement to be executed and delivered by Borrowers
and Guarantors in connection herewith (collectively, together with this Amendment No. 2, the
“Amendment Documents”) has been duly authorized, executed and delivered by all necessary action on
the part of each Borrower and Guarantor which is a party hereto and, if necessary, their respective
equity holders and is in full force and effect as of the date hereof, as the case may be, and the
agreements and obligations of each of the Borrowers and Guarantors, as the case may be, contained
herein and therein constitute legal, valid and binding obligations of each of the Borrowers and
Guarantors, enforceable against them in accordance with their terms, except as enforceability is
limited by bankruptcy, insolvency, reorganization, moratorium or other laws relating to or
affecting generally the enforcement of creditors’ rights and except to the extent that availability
of the remedy of specific performance or injunctive relief is subject to the discretion of the
court before which any proceeding therefor may be brought;

     (c) the execution, delivery and performance of each Amendment Document (i) are all within each
Borrower’s and Guarantor’s corporate or limited liability company powers and (ii) are not in
contravention of law or the terms of any Borrower’s or Guarantor’s certificate or articles of
incorporation, by laws, or other organizational documentation, or any indenture, agreement or
undertaking to which any Borrower or Guarantor is a party or by which any Borrower or Guarantor or
its property are bound;

     (d) the resolutions of the Board of Directors or Managers of each Borrower and Guarantor
delivered to Administrative Agent by such Borrower or Guarantor on the date of the effectiveness of
the Credit Agreement have not been revoked and are in full force and effect; and

     (e) all of the representations and warranties set forth in the Credit Agreement

5

 

and the other Loan Documents, each as amended hereby, are true and correct in all material
respects on and as of the date hereof, as if made on the date hereof; provided,
that, (i) to the extent that a representation and warranty specifically refers to an
earlier date, it shall be true and correct in all material respects as of such earlier date and
(ii) any representation and warranty that is qualified as to “materiality,” “Material Adverse
Effect” or similar language shall be true and correct (after giving effect to any qualification
therein) in all respects on such respective dates with such effect.

     7. Conditions Precedent. The amendments contained herein shall only be effective upon
the satisfaction of each of the following conditions precedent in a manner satisfactory to
Administrative Agent:

     (a) Administrative Agent shall have received counterparts of this Amendment No. 2, duly
authorized, executed and delivered by Borrowers, Guarantors and the Required Lenders;

     (b) Administrative Agent shall have received a true and correct copy of each consent, waiver
or approval (if any) to or of this Amendment No. 2, which Borrowers and Guarantors are required to
obtain from any other Person, and such consent, approval or waiver (if any) shall be in form and
substance reasonably satisfactory to Administrative Agent; and

     (c) No Default or Event of Default shall have occurred and be continuing.

     8. Effect of Amendment No. 2. Except as expressly set forth herein, no other
amendments, changes or modifications to the Loan Documents are intended or implied, and in all
other respects the Loan Documents are hereby specifically ratified, restated and confirmed by all
parties hereto as of the effective date hereof and Borrowers and Guarantors shall not be entitled
to any other or further amendment by virtue of the provisions of this Amendment No. 2 or with
respect to the subject matter of this Amendment No. 2. To the extent of conflict between the terms
of this Amendment No. 2 and the other Loan Documents, the terms of this Amendment No. 2 shall
control. The Credit Agreement and this Amendment No. 2 shall be read and construed as one
agreement.

     9. Governing Law. The validity, interpretation and enforcement of this Amendment No.
2 and any dispute arising out of the relationship between the parties hereto whether in contract,
tort, equity or otherwise, shall be governed by the internal laws of the State of New York.

     10. Jury Trial Waiver. BORROWERS, GUARANTORS, ADMINISTRATIVE AGENT AND LENDERS EACH
HEREBY WAIVES ANY RIGHT TO TRIAL BY JURY OF ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION ARISING
UNDER THIS AMENDMENT NO. 2 OR ANY OF THE OTHER LOAN DOCUMENTS OR IN ANY WAY CONNECTED WITH OR
RELATED OR INCIDENTAL TO THE DEALINGS OF THE PARTIES HERETO IN RESPECT OF THIS AMENDMENT NO. 2 OR
ANY OF THE OTHER LOAN DOCUMENTS OR THE TRANSACTIONS RELATED HERETO OR THERETO IN EACH CASE WHETHER
NOW EXISTING OR HEREAFTER ARISING, AND WHETHER

6

 

IN CONTRACT, TORT, EQUITY OR OTHERWISE. BORROWERS, GUARANTORS, ADMINISTRATIVE AGENT AND
LENDERS EACH HEREBY AGREES AND CONSENTS THAT ANY SUCH CLAIM, DEMAND, ACTION OR CAUSE OF ACTION
SHALL BE DECIDED BY COURT TRIAL WITHOUT A JURY AND THAT BORROWERS, GUARANTORS, ADMINISTRATIVE AGENT
OR ANY LENDER MAY FILE AN ORIGINAL COUNTERPART OF A COPY OF THIS AMENDMENT NO. 2 WITH ANY COURT AS
WRITTEN EVIDENCE OF THE CONSENT OF THE PARTIES HERETO TO THE WAIVER OF THEIR RIGHT TO TRIAL BY
JURY.

     11. Binding Effect. This Amendment No. 2 shall be binding upon and inure to the
benefit of each of the parties hereto and their respective successors and assigns.

     12. Waiver, Modification, Etc. No provision or term of this Amendment No. 2 may be
modified, altered, waived, discharged or terminated orally, but only by an instrument in writing
executed by the party against whom such modification, alteration, waiver, discharge or termination
is sought to be enforced.

     13. Further Assurances. Borrowers and Guarantors shall execute and deliver such
additional documents and take such additional action as may be reasonably requested by
Administrative Agent to effectuate the provisions and purposes of this Amendment No. 2.

     14. Entire Agreement. This Amendment No. 2 represents the entire agreement and
understanding concerning the subject matter hereof among the parties hereto, and supersedes all
other prior agreements, understandings, negotiations and discussions, representations, warranties,
commitments, proposals, offers and contracts concerning the subject matter hereof, whether oral or
written.

     15. Headings. The headings listed herein are for convenience only and do not
constitute matters to be construed in interpreting this Amendment No. 2.

     16. Counterparts. This Amendment No. 2 may be executed in any number of counterparts,
each of which shall be an original, but all of which taken together shall constitute one and the
same agreement. Delivery of an executed counterpart of this Amendment No. 2 by telefacsimile or
other electronic method of transmission shall have the same force and effect as delivery of an
original executed counterpart of this Amendment No. 2. Any party delivering an executed
counterpart of this Amendment No. 2 by telefacsimile or other electronic method of transmission
shall also deliver an original executed counterpart of this Amendment No. 2, but the failure to do
so shall not affect the validity, enforceability, and binding effect of this Amendment No. 2.

[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]

7

 

     IN WITNESS WHEREOF, the parties hereto have caused this Amendment No. 2 to be duly executed
and delivered by their authorized officers as of the day and year first above written.

	 	 	 	 	 
	 	AMSCAN HOLDINGS, INC.

 	 
	 	By:  	 	 
	 	 	Name:  	Michael A. Correale 	 
	 	 	Title:  	Chief Financial Officer 	 
	 

	 	 	 	 	 
	 	PARTY CITY HOLDINGS INC., formerly known

as AAH Holdings Corporation

FACTORY CARD & PARTY OUTLET

CORP.

 	 

	 	 	 	 	 
	 	 	 
	 	By:  	
 	 
	 	 	Name:  	Michael A. Correale 	 
	 	 	Title:  	Chief Financial Officer 	 
	 

	 	 	 	 	 
	 	AMSCAN INC.

GAGS AND GAMES, INC.

PA ACQUISITION CORP.

PARTY AMERICA FRANCHISING, INC. PARTY

CITY CORPORATION 	 
	 

	 	 	 	 	 
	 	 	 
	 	By:  	
 	 
	 	 	Name:  	Michael A. Correale 	 
	 	 	Title:  	Vice President and Treasurer 	 
	 

	 	 	 	 	 
	 	ANAGRAM INTERNATIONAL HOLDINGS, INC.

ANAGRAM INTERNATIONAL, INC.

JCS PACKAGING, INC.

M&D INDUSTRIES, INC.

SSY REALTY CORP.

TRISAR, INC.

 	 
	 

	 	 	 	 	 
	 	 	 
	 	By:  	
 	 
	 	 	Name:  	Michael A. Correale 	 
	 	 	Title:  	Assistant Treasurer 	 
	 

[SIGNATURES CONTINUED ON NEXT PAGE]

 

 

[SIGNATURES CONTINUED FROM PREVIOUS PAGE]

AM-SOURCE, LLC

ANAGRAM EDEN PRAIRIE PROPERTY
HOLDINGS LLC

By: Amscan Holdings, Inc., sole Member 

	 	 	 	 	 
	 	By:  	
 	 
	 	 	Name:  	Michael A. Correale 	 
	 	 	Title:  	Chief Financial Officer 	 
	 

	 	 	 	 	 
	 	ANAGRAM INTERNATIONAL, LLC

 	 
	 	By:  	 	 
	 	 	Name:  	Michael A. Correale 	 
	 	 	Title:  	Manager 	 
	 

	 	 	 	 	 
	 	FACTORY CARD OUTLET OF AMERICA
LTD.
PARTY CITY FRANCHISE GROUP HOLDINGS, LLC

PARTY CITY FRANCHISE GROUP, LLC

 	 
	 	By:  	 	 
	 	 	Name:  	Michael A. Correale	 
	 	 	Title:  	Authorized Signatory	 
	 

[SIGNATURES CONTINUED ON NEXT PAGE]

 

 

[SIGNATURES CONTINUED FROM PREVIOUS PAGE]

	 	 	 	 	 
	 	WELLS FARGO BANK, NATIONAL ASSOCIATION,

successor by merger to Wells Fargo

Retail Finance, LLC, as Administrative Agent

 	 
	 	By:  	 	 
	 	 	Name:  	 	 
	 	 	Title:  	 	 

	 	 	 	 	 
	 	WELLS FARGO BANK, NATIONAL ASSOCIATION,
successor by
merger to Wells Fargo Retail Finance, LLC

 	 

	 	 	 	 	 
	 	By:  	 	 
	 	 	Name:  	 	 
	 	 	Title:  	 	 

 

 

	 	 	 	 	 

	 	 	 	 	 
	 	BANK OF AMERICA, N.A.

 	 
	 	By:  	 	 
	 	 	Name:  	 	 
	 	 	Title:  	 	 

 

 

	 	 	 	 	 

	 	 	 	 	 
	 	RBS BUSINESS CAPITAL, a division of

RBS Asset Finance, Inc., a subsidiary of RBS

Citizens, NA

 	 
	 	By:  	 	 
	 	 	Name:  	 	 
	 	 	Title:  	 	 

13

 

	 	 	 	 	 

	 	 	 	 	 
	 	TD BANK, N.A., individually, as a Co-Documentation

Agent and as a Lender

 	 
	 	By:  	 	 
	 	 	Name:  	 	 
	 	 	Title:  	 	 

 

 

	 	 	 	 	 

	 	 	 	 	 
	 	SUNTRUST BANK, individually, as a Co-Documentation

Agent and as a Lender

 	 
	 	By:  	 	 
	 	 	Name:  	 	 
	 	 	Title:  	 	 

 

 

	 	 	 	 	 

	 	 	 	 	 
	 	U.S. BANK NATIONAL ASSOCIATION, individually and as a

Lender

 	 
	 	By:  	 	 
	 	 	Name:  	 	 
	 	 	Title:  	 	 

 

 

	 	 	 	 	 

	 	 	 	 	 
	 	CAPITAL ONE LEVERAGE FINANCE CORP., individually and

as a Lender

 	 
	 	By:  	 	 
	 	 	Name:  	 	 
	 	 	Title:  	 	 

 

 

	 	 	 	 	 

	 	 	 	 	 
	 	CREDIT SUISSE AG, CAYMAN ISLANDS BRANCH, individually

and as a Lender

 	 
	 	By:  	 	 
	 	 	Name:  	 	 
	 	 	Title:  	 	 

 

	 	 	 	 	 

	 	 	 	 	 
	 	CIT BANK, individually and as a Lender

 	 
	 	By:  	 	 
	 	 	Name:  	 	 
	 	 	Title:Exhibit 10.1

Exhibit 10.1

CHANGE IN CONTROL

SEVERANCE AGREEMENT

 

 

TABLE OF CONTENTS

	 	 	 	 	 
	1. Purpose
	 	 	3	 
	2. Your Agreement
	 	 	3	 
	3. Events That Trigger Severance Benefits
	 	 	3	 
	a. Termination After a Change in Control
	 	 	3	 
	b. Termination After a Potential Change in Control
	 	 	3	 
	c. Successor Fails to Assume This Agreement
	 	 	3	 
	4. Events That Do Not Trigger Severance Benefits
	 	 	4	 
	5. Termination Procedures
	 	 	4	 
	6. Severance Benefits
	 	 	4	 
	a. In General
	 	 	4	 
	b. Lump-Sum Payment in Lieu of Future Compensation
	 	 	4	 
	c. Incentive Compensation and Options
	 	 	5	 
	d. Group Insurance Benefit Continuation
	 	 	5	 
	e. Group Benefit Continuation
	 	 	5	 
	f. Officer Benefits
	 	 	5	 
	g. Medical Benefits
	 	 	5	 
	7. Time for Payment
	 	 	6	 
	8. Payment Explanation
	 	 	6	 
	9. Potential Limitations
	 	 	6	 
	a. Golden Parachute Limitation
	 	 	6	 
	b. Section 162(m) Limitation
	 	 	6	 
	10. Disability
	 	 	7	 
	11. Effect of Reemployment
	 	 	7	 
	12. Successors
	 	 	7	 
	a. Assumption Required
	 	 	7	 
	b. Heirs and Assigns
	 	 	7	 
	13. Amendments
	 	 	7	 
	14. Governing Law
	 	 	7	 
	15. Claims
	 	 	7	 
	a. When Required; Attorneys’ Fees
	 	 	7	 
	b. Initial Claim
	 	 	8	 
	c. Claim Decision
	 	 	8	 
	d. Appeal of Denied Claims
	 	 	8	 
	e. Appeal Decision
	 	 	8	 
	f. Procedures
	 	 	8	 
	g. Arbitration
	 	 	8	 
	16. Limitation on Employee Rights
	 	 	9	 
	17. Validity
	 	 	9	 
	18. Counterparts
	 	 	9	 
	19. Giving Notice
	 	 	10	 
	a. To the Company
	 	 	10	 
	b. To You
	 	 	10	 

 

- i -

 

	 	 	 	 	 
	20. Definitions
	 	 	10	 
	a. Agreement
	 	 	10	 
	b. Beneficial Owner
	 	 	10	 
	c. Board
	 	 	10	 
	d. Cause
	 	 	10	 
	e. Change in Control
	 	 	10	 
	(1) Acquisition of Controlling Interest
	 	 	10	 
	(2) Change in Board Control
	 	 	11	 
	(3) Merger Approved
	 	 	11	 
	(4) Sale of Assets
	 	 	11	 
	(5) Liquidation or Dissolution
	 	 	11	 
	(6) Private Transaction
	 	 	11	 
	f. Code
	 	 	11	 
	g. Company
	 	 	11	 
	h. Disability
	 	 	11	 
	i. Exchange Act
	 	 	12	 
	j. Good Reason
	 	 	12	 
	(1) Demotion
	 	 	12	 
	(2) Pay Cut
	 	 	12	 
	(3) Relocation
	 	 	12	 
	(4) Breach of Contract
	 	 	12	 
	(5) Improper Termination
	 	 	12	 
	k. Incentive Compensation
	 	 	13	 
	l. Management Action
	 	 	13	 
	m. Person
	 	 	13	 
	n. Potential Change in Control
	 	 	13	 
	(1) Agreement Signed
	 	 	13	 
	(2) Notice of Intent to Seek Change in Control
	 	 	13	 
	(3) Board Declaration
	 	 	13	 
	o. Separation from Service
	 	 	13	 
	p. Severance Benefits
	 	 	13	 
	q. Term of this Agreement
	 	 	14	 
	(2) Change in Control
	 	 	14	 
	21. Section 409A
	 	 	14	 

 

- ii -

 

CHANGE IN CONTROL

SEVERANCE AGREEMENT

This Agreement between Cynthia A. Downes (“you”) and VERSAR, INC. (“Company”) has been entered into
as of September 8, 2011. This Agreement promises you severance benefits if, following a Change of
Control, you are terminated without Cause or resign for Good Reason during the Term of this
Agreement. Capitalized terms are defined in the last section of this Agreement.

	1.	 	Purpose

The Company considers a sound and vital management team to be essential. Management
personnel who become concerned about the possibility that the Company may undergo a Change
in Control may terminate employment or become distracted. Accordingly, the Board has
determined that appropriate steps should be taken to minimize the distraction certain
executives may suffer from the possibility of a Change in Control. One step is to enter into
this Agreement with you while you hold the position as Executive Vice President, Chief
Financial Officer and Treasurer. Once you no longer hold this position, except following or
in connection with the triggering of severance benefits as set forth in Section 3 below,
this Severance Agreement shall immediately terminate and be null and void as set forth in
Section 20q hereof.

	2.	 	Your Agreement

If one or more Potential Changes in Control occur during the Term of this Agreement, you
agree not to resign for at least six full calendar months after a Potential Change in
Control occurs, except as follows: (a) you may resign after a Change in Control occurs; (b)
you may resign if you are given Good Reason to do so; and (c) you may terminate employment
on account of retirement on or after age 65 or because you become unable to work due to
serious illness or injury.

	3.	 	Events That Trigger Severance Benefits

	 	a.	 	Termination After a Change in Control

You will receive Severance Benefits under this Agreement if, during the Term of this
Agreement and after a Change in Control has occurred, your employment is terminated
by the Company without Cause (other than on account of your Disability or death) or
you resign for Good Reason.

	 	b.	 	Termination After a Potential Change in Control

You also will receive Severance Benefits under this Agreement if, during the Term of
this Agreement and after a Potential Change in Control has occurred but before a
Change in Control actually occurs, your employment is terminated by the Company
without Cause or you resign for Good Reason, but only if either: (i) you are
terminated at the direction of a Person who has entered into an agreement with the
Company that will result in a Change in Control; or (ii) the event constituting Good
Reason occurs at the direction of such Person.

	 	c.	 	Successor Fails to Assume This Agreement

You also will receive Severance Benefits under this Agreement if, during the Term of
this Agreement, a successor to the Company fails to assume this Agreement, as
provided in Section 12(a).

 

 - 3 - 

 

	4.	 	Events That Do Not Trigger Severance Benefits

You will not be entitled to Severance Benefits if your employment ends because you are
terminated for Cause or on account of Disability or because you resign without Good Reason,
retire, or die. Except as provided in Section 3(c), you will not be entitled to Severance
Benefits while you remain protected by this Agreement and remain employed by the Company,
its affiliates, or their successors.

	5.	 	Termination Procedures

If you are terminated by the Company after a Change in Control and during the Term of this
Agreement, the Company shall provide you with 30 days’ advance written notice of your
termination, unless you are being terminated for Cause. The notice will indicate why you are
being terminated and will set forth in reasonable detail the facts and circumstances claimed
to provide a basis for your termination. If you are being terminated for Cause, your notice
of termination will include a copy of a resolution duly adopted by the affirmative vote of
not less than 51 % of the entire membership of the Board (at a meeting of the Board called
and held for the purpose of considering your termination (after reasonable notice to you and
an opportunity for you and your counsel to be heard before the Board)) finding that, in the
good faith opinion of the Board, Cause for your termination exists and specifying the basis
for that opinion in detail. If you are purportedly terminated without the notice required by
this Section, your termination shall not be effective.

	6.	 	Severance Benefits

	 	a.	 	In General

If you become entitled to Severance Benefits under this Agreement, you will receive
all of the Severance Benefits described in this Section.

	 	b.	 	Lump-Sum Payment in Lieu of Future Compensation

In lieu of any further cash compensation for periods after your employment ends,
other than cash compensation paid pursuant to any agreement governing the terms of a
Change in Control payable to all similarly situated persons, you will be paid a cash
lump sum equal to 2 times your annual base salary in effect when your employment
ends or, if higher, in effect immediately before the Change in Control, Potential
Change in Control, or Good Reason event for which you terminate employment. In
addition, and without duplication, you will be paid a cash lump sum equal to 2 times
the higher of the amounts paid to you (if any) under any existing bonus or incentive
plans in the calendar year preceding the calendar year in which your employment ends
or in the calendar year preceding the calendar year in which the Change in Control
occurred (or in which the Potential Change in Control occurred, if benefits are
payable under Section 3(b) hereof).

 

 - 4 - 

 

	 	c.	 	Incentive Compensation and Options

The Company will pay you a cash lump sum equal to any unpaid incentive compensation
(that is not otherwise paid to you) that you have been allocated or awarded under
any existing bonus or incentive plans for measuring periods completed before you
became entitled to Severance Benefits under this Agreement. All unvested options to
purchase Company common stock will immediately vest and remain exercisable for the
longest period of time permitted under the applicable stock option plan. All
unvested restricted stock awards awarded to you will immediately vest.

	 	d.	 	Group Insurance Benefit Continuation

During the period that begins when you become entitled to Severance Benefits under
this Agreement and ends on the last day of the 18th calendar month beginning
thereafter, the Company shall provide, at no cost to you or your spouse or
dependents, health and dental insurance benefits (or substantially similar benefits)
it was providing to you and your spouse and dependents immediately before you became
entitled to Severance Benefits under this Agreement. The Company subsidized health
and dental insurance coverage shall be treated as satisfying the Company’s COBRA
obligations. After this subsidized coverage ends, you, your spouse and dependents
may continue any remaining COBRA coverage at your sole cost and expense.

	 	e.	 	Group Benefit Continuation

During the period that begins when you become entitled to Severance Benefits under
this Agreement and ends on the last day of the 24th calendar month
beginning thereafter, the Company shall provide, at no cost to you or your spouse or
dependents, the life, disability and accident benefits (or substantially similar
benefits) it was providing to you and your spouse and dependents before you became
entitled to Severance Benefits under this Agreement (or immediately before a benefit
reduction that constitutes Good Reason, if you terminate employment for that Good
Reason).

	 	f.	 	Officer Benefits

In lieu of the medical and tax accounting benefits available to the Company’s
officers, you will be entitled to a lump sum payment of $16,000.00.

	 	g.	 	Medical Benefits

The Company provides certain medical benefits to retired CEO’s and Vice Presidents.
If you become entitled to Severance Benefits under this Agreement, then you are
deemed to have retired for purposes of this benefit and the Company shall provide,
at no cost to you, continued medical benefits it was providing you and your spouse
and dependents immediately before you became entitled to Severance Benefits under
this Agreement.

 

 - 5 - 

 

	7.	 	Time for Payment

Subject to the provisions of Section 21 hereof, you will be paid your cash Severance
Benefits within five days after you become entitled to Severance Benefits under this
Agreement (e.g., within five days following your termination of employment). If the
amount you are due cannot be finally determined within that period, you will receive the
minimum amount to which you are clearly entitled, as estimated in good faith by the Company.
The Company will pay the balance you are due (together with interest at the rate provided in
Internal Revenue Code Section 1274(b) (2) (B)) as soon as the amount can be determined, but
in no event later than 30 days after you terminate employment. If your estimated payment
exceeds the amount you are due, the excess will be a loan to you, which you must repay to
the Company within five business days after demand by the Company (together with interest at
the rate provided in Code Section 1274(b)(2)(B)). In no event will any cash Severance
Benefits be paid to you later than March 15 of the calendar year following the calendar year
in which you become entitled to such Severance Benefits.

	8.	 	Payment Explanation

When payments are made to you, the Company will provide you with a written statement
explaining how your payments were calculated and the basis for the calculations. This
statement will include any opinions or other advice the Company has received from auditors
or consultants as to the calculation of your benefits. If your benefit is affected by the
golden parachute limitation in Section 9, the Company will provide you with calculations
relating to that limitation and any supporting materials you reasonably need to permit you
to evaluate those calculations.

	9.	 	Potential Limitations

	 	a.	 	Golden Parachute Limitation

Your aggregate payments and benefits under this Agreement and all other contracts,
arrangements, or programs shall not exceed the maximum amount that may be paid
without triggering golden parachute penalties under Section 280G and related
provisions of the Internal Revenue Code, as determined in good faith by the
Company’s independent auditors. The preceding sentence shall not apply to the extent
the shareholder approval requirements of Code Section 280G (b) (5) are satisfied. If
your benefits must be reduced to avoid triggering such penalties, the Company shall
reduce your benefits that are not considered deferred compensation subject to Code
Section 409A before it reduces any benefits that are considered deferred
compensation subject to Code Section 409A. If an amount in excess of the limit set
forth in this Section is paid to you, you must repay the excess amount to the
Company on demand, with interest at the rate provided in Code Section 1274(b)(2)(B).
You and the Company agree to cooperate with each other reasonably in connection with
any administrative or judicial proceedings concerning the existence or amount of
golden parachute penalties on payments or benefits you receive.

	 	b.	 	Section 162(m) Limitation

To the extent payments or benefits under this Agreement would not be deductible
under Code Section 162(m) if made or provided when otherwise due under this
Agreement, they shall be made or provided later, immediately after Section 162(m)
ceases to preclude their deduction, with interest thereon at the rate provided in
Code Section 1274(b)(2)(B).

 

 - 6 - 

 

	10.	 	Disability

Following a Change in Control, while you are absent from work as a result of physical or
mental illness, the Company will continue to pay you your full salary and provide you all
other compensation and benefits payable to you under the Company’s compensation or benefit
plans, programs, or arrangements. These payments will stop if and when your employment is
terminated by the Company for Disability as described in Section 20(h) hereof or at the end
of the Term of this Agreement, whichever is earlier. Severance Benefits under this Agreement
are not payable if you are terminated on account of your Disability.

	11.	 	Effect of Reemployment

Your Severance Benefits will not be reduced by any other compensation you earn or could have
earned from another source.

	12.	 	Successors

	 	a.	 	Assumption Required

In addition to obligations imposed by law on a successor to the Company, during the
Term of this Agreement the Company will require any successor to all or
substantially all of the business or assets of the Company expressly to assume and
to agree to perform this Agreement in the same manner and to the same extent that
the Company was required to perform. If the Company fails to obtain such an
assumption and agreement before the effective date of a succession, you will be
entitled to Severance Benefits as if you were terminated by the Company without
Cause on the effective date of that succession.

	 	b.	 	Heirs and Assigns

This Agreement will inure to the benefit of, and be enforceable by, your personal or
legal representatives, executors, administrators, successors, heirs, distributees,
devisees, and legatees. If you die while any amount is still payable to you under
this Agreement, that amount will be paid to the executor, personal representative,
or administrator of your estate.

	13.	 	Amendments

This Agreement may be modified only by a written agreement executed by you and an authorized
officer of the Company.

	14.	 	Governing Law

This Agreement creates a “top hat” employee benefit plan subject to the Employee Retirement
Income Security Act of 1974, and it shall be interpreted, administered, and enforced in
accordance with that law; the Company is the “plan administrator.” To the extent that state
law is applicable, the statutes and common law of the State of Virginia (excluding its
choice of laws statutes or common law) shall apply.

	15.	 	Claims

	 	a.	 	When Required; Attorneys’ Fees

You do not need to present a formal claim to receive benefits payable under this
Agreement. However, if you believe that your rights under this Agreement are being
violated, you must file a formal claim with the Company in accordance with
the procedures set forth in this Section. The Company will pay your reasonable
attorneys’ fees and related costs in enforcing your rights under this Agreement.

 

 - 7 - 

 

	 	b.	 	Initial Claim

Your claim must be presented to the Company in writing. Within 30 days after
receiving the claim, a claims official appointed by the Company will consider your
claim and issue his or her determination thereon in writing. With your consent, the
initial claim determination period can be extended further. If you can establish
that the claims official failed to respond to your claim in a timely manner, you may
treat the claim as having been denied by the claims official.

	 	c.	 	Claim Decision

If your claim is granted, the benefits or relief you are seeking will be provided.
If your claim is wholly or partially denied, the claims official shall, within three
days, provide you with written notice of the denial, setting forth, in a manner
calculated to be understood by you: (i) the specific reason or reasons for the
denial; (ii) specific references to the provisions on which the denial is based;
(iii) a description of any additional material or information necessary for you to
perfect your claim, together with an explanation of why the material or information
is necessary; and (iv) an explanation of the procedures for appealing denied claims.
If you establish that the claims official has failed to respond to your claim in a
timely manner, you may treat the claim as having been denied by the claims official.

	 	d.	 	Appeal of Denied Claims

You may appeal the claims official’s denial of your claim in writing to an appeals
official designated by the Company (which may be a person, committee, or other
entity) for a full and fair appeal. You must appeal a denied claim within five days
after your receipt of written notice denying your claim, or within 60 days after
such written notice was due, if the written notice was not sent. In connection with
the appeals proceeding, you (or your duly authorized representative) may review
pertinent documents and may submit issues and comments in writing. You may only
present evidence and theories during the appeal that you presented during the
initial claims stage, except for information the claims official requested you to
provide to perfect the claim. You will irrevocably waive any theories you do not in
good faith pursue through the appeal stage, such as by failing to file a timely
appeal request.

	 	e.	 	Appeal Decision

The decision by the appeals official will be made within 60 days after your appeal
request, unless special circumstances require an extension of time, in which case
the decision will be rendered as soon as possible, but not later than ten days after
your appeal request, unless you agree to a greater extension of that deadline. The
appeal decision will be in writing, set forth in a manner calculated to be
understood by you; it will include specific reasons for the decision, as well as
specific references to the pertinent provisions of this Agreement on which the
decision is based.

 

 - 8 - 

 

	 	f.	 	Procedures

The Company will adopt procedures by which initial claims and appeals will be
considered and resolved; different procedures may be established for different
claims. All procedures will be designed to afford you full and fair consideration of
your claim.

	 	g.	 	Arbitration

In the event that any dispute arises, following satisfaction of the claim procedures
outlined in this Section 15, related to the validity, interpretation, enforcement or
performance of this Agreement, the dispute shall be submitted to binding arbitration
in accordance with the Employment Rules of the American Arbitration Association.
The aggrieved party must give written notice of any claim to the other party no
later than the expiration of the statute of limitations (deadline for filing) that
the law prescribes for the claim. Otherwise, the claim shall be void and deemed
waived. The arbitrator may award any remedy that would otherwise be available to a
court of competent jurisdiction. The decision of the arbitrator shall be final and
binding and shall be fully enforceable in any court having jurisdiction and venue
over the parties. The arbitrator shall have no power to alter, modify, ignore, or
otherwise deviate from the express terms of this Agreement, and the arbitrator shall
be bound by controlling law. The arbitrator’s decision shall be provided to the
parties in writing and shall succinctly set forth the arbitrator’s findings of fact,
conclusions of law, and remedy, if any. The cost of such arbitration shall be paid
by the Company, except you shall pay an administrative fee equivalent to the filing
fee to initiate a similar claim in the local court of general jurisdiction if you
are the party initiating the claim. The parties hereto agree that any action to
compel arbitration pursuant to this Agreement may be brought in the appropriate
Virginia state court, and in connection with such action to compel, the laws of
Virginia shall control. Application may also be made to such court for confirmation
of any decision or award of the arbitrator, for an order of enforcement and for any
other remedies which may be necessary to effectuate such decision or award. The
parties hereto hereby consent to the jurisdiction of the arbitrator and of such
court and waive any objection to the jurisdiction of such arbitrator and court.

	16.	 	Limitation on Employee Rights

This Agreement does not give you the right to be retained in the service of the Company.

	17.	 	Validity

The invalidity or unenforceability of any provision of this Agreement shall not affect the
validity or enforceability of any other provision of this Agreement.

	18.	 	Counterparts

This Agreement may be executed in several counterparts, each of which will be deemed an
original, but all of which will constitute one and the same instrument.

 

 - 9 - 

 

	19.	 	Giving Notice

	 	a.	 	To the Company

All communications from you to the Company relating to this Agreement must be sent
to the Company to its principal business office in Springfield, Virginia, in
writing, by registered or certified mail, or delivered personally.

	 	b.	 	To You

All communications from the Company to you relating to this Agreement must be sent
to you in writing, by registered or certified mail, or delivered personally,
addressed as indicated at the end of this Agreement.

	20.	 	Definitions

	 	a.	 	Agreement

	 
	 	 	 	“Agreement” means this contract, as amended.

	 
	 	b.	 	Beneficial Owner

	 
	 	 	 	“Beneficial Owner” has the meaning set “forth in Rule 13d-3 under the Exchange Act.

	 
	 	c.	 	Board

	 
	 	 	 	“Board” means the Board of Directors of the Company.

	 
	 	d.	 	Cause

	 
	 	 	 	“Cause” means any of the following:

	 	(1)	 	you fail to carry out assigned duties after being given prior
warning and an opportunity to remedy the failure,

	 
	 	(2)	 	you breach any material term of any employment agreement with
the Company,

	 
	 	(3)	 	you engage in fraud, dishonesty, willful misconduct, gross
negligence, or breach of fiduciary duty (including without limitation any
failure to disclose a conflict of interest)in the performance of your duties
for the Company, or

	 
	 	(4)	 	you are convicted of a felony or crime involving moral
turpitude.

	 	e.	 	Change in Control

“Change in Control” means the first of the following to occur after the date of this
Agreement:

	 	(1)	 	Acquisition of Controlling Interest

	 
	 	 	 	Any Person becomes the Beneficial Owner, directly or indirectly, of securities
of the Company representing 25% or more of the combined voting power of the
Company’s then outstanding securities. In applying the preceding sentence,
securities acquired directly from the Company or its affiliates with the
company’s approval by or for the Person shall not be taken into account.

 

 - 10 - 

 

	 	(2)	 	Change in Board Control

	 
	 	 	 	During the term of this Agreement, individuals who constituted the Board as of
the date of this Agreement (or their approved replacements, as defined in the
next sentence) cease for any reason to constitute a majority of the
Board. A new director shall be considered an “approved replacement” director if his or
her election (or nomination for election) was approved by a vote of at least
two-thirds of the directors then still in office who either were directors at
the beginning of the period or were themselves approved replacement directors;
provided that any individual whose initial assumption of office occurs as a
result of an actual or threatened election contest (as the term is used in Rule
14a-11 of Regulation 14A issued under the Exchange Act) or other actual or
threatened solicitation of proxies or consents by or on behalf of a Person other
than the Board shall not be considered an “approved replacement”.

	 
	 	(3)	 	Merger Approved

	 
	 	 	 	The shareholders of the Company approve a merger or consolidation of the Company
with any other corporation unless: (a) the voting securities of the 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 75% of the combined voting power of
the voting securities of the Company or such surviving entity outstanding
immediately after such merger or consolidation; and (b) no Person acquires more
than 25% of the combined voting power of the Company’s then outstanding
securities.

	 
	 	(4)	 	Sale of Assets

	 
	 	 	 	The shareholders of the Company approve an agreement for the sale or disposition
by the Company of all or substantially all of the Company’s assets.

	 
	 	(5)	 	Liquidation or Dissolution

	 
	 	 	 	A complete liquidation or dissolution of the Company.

	 
	 	(6)	 	Private Transaction

	 
	 	 	 	Any transaction or series of transactions not covered in paragraphs (1) through
(5) above the result of which is the suspension of the Company’s duty to file
reports under the Exchange Act as a result of the remaining number of holders of
the Company’s common stock following such transaction or series of transactions.

	 	f.	 	Code

	 
	 	 	 	“Code” means the Internal Revenue Code of 1986, as amended.

	 
	 	g.	 	Company

	 
	 	 	 	“Company” means Versar, Inc. and any successor to its business or assets that (by
operation of law, or otherwise) assumes and agrees to perform this Agreement.
However, for purposes of determining whether a Change in Control has occurred in
connection with such a succession, the successor shall not be considered to be the
Company.

	 
	 	h.	 	Disability

	 
	 	 	 	“Disability” means that, due to physical or mental illness which is determined to be
total and permanent by a physician selected by the Company or its insurer and
acceptable to you or your legal representative: (i) you have been absent on a
full-time basis from your duties with the Company for 180 consecutive
business days; (ii) the Company has notified you more than 30 days prior to your intended
termination date that it intends to terminate you on account of Disability; and
(iii) you do not resume the full-time performance of your duties within 30 days
after receiving notice of your intended termination on account of Disability.
Following the expiration of the 30 day period specified above, unless you have
resumed full-time performance of your duties, your employment with the Company
shall terminate immediately.

 

 - 11 - 

 

	 	i.	 	Exchange Act

	 
	 	 	 	“Exchange Act” means the Securities Exchange Act of 1934, as amended.

	 
	 	j.	 	Good Reason

	 
	 	 	 	“Good Reason” means the occurrence of any of the following events arising without
your consent:

	 	(1)	 	Demotion

	 
	 	 	 	Your duties and responsibilities are materially and adversely altered from those
in effect immediately before the Change in Control (or, with respect to Section
3(b), the Potential Change in Control), or there is a material and adverse
change in your reporting responsibilities or in the size of the budget you
administer in effect immediately before the Change in Control (or, with respect
to Section 3(b), the Potential Change in Control), provided that no demotion
will be deemed to occur solely as a result of the Company ceasing to be a public
company, a change in your title, or your transfer to an affiliate.

	 
	 	(2)	 	Pay Cut

	 
	 	 	 	Your annual base salary is materially reduced.

	 
	 	(3)	 	Relocation

	 
	 	 	 	Your principal office is materially relocated, which increases your one-way
commute to work by more than 50 miles, based on your residence when the transfer
was announced.

	 
	 	(4)	 	Breach of Contract

	 
	 	 	 	The Company materially breaches this Agreement, your employment agreement or any
other agreement between you and the Company pursuant to which you perform
services for the Company or compensation and benefits are provided to you.

	 
	 	(5)	 	Improper Termination

	 
	 	 	 	The Company terminates your employment, other than pursuant to a notice of
termination satisfying the requirements of Section 5 hereof.

However, an event that is or would constitute Good Reason shall cease to be Good Reason if:
(a) you fail to provide written notice to the Company within 90 days following the initial
existence of the event described in paragraphs (1) through (4) above; (b) the Company
reverses or otherwise cures the event within 30 days of receiving such notice; (c) you do
not terminate employment within 180 days after the event occurs; or (d) you were a primary
instigator of the Good Reason event and the circumstances make it inappropriate for you to
receive benefits under this Agreement (e.g., you agree temporarily to relinquish your
position on the occurrence of a merger transaction you
negotiate). If you have Good Reason to terminate employment, you may do so even if you are
on a leave of absence due to physical or mental illness or any other reason.

 

 - 12 - 

 

	 	k.	 	Incentive Compensation

	 
	 	 	 	“Incentive Compensation” means the amount of cash and/or securities paid to you
under all bonus, incentive or other programs for performance adopted by the Company
for its executive officers and other key employees.

	 
	 	l.	 	Management Action

	 
	 	 	 	“Management Action” means any event, circumstance, or transaction occurring during
the six-month period following a Potential Change in Control that results from the
action of a Management Group.

	 
	 	m.	 	Person

	 
	 	 	 	“Person” has the meaning given in Section 3(a)(9) of the Exchange Act, as modified
and used in Section 13(d) of that Act, and shall include a “group,” as defined in
Rule 13d-5 promulgated thereunder. However, a Person shall not include: (i) the
Company or any of its subsidiaries; (ii) a trustee or other fiduciary holding
securities under an employee benefit plan of the Company or any of its subsidiaries;
(iii) an underwriter temporarily holding securities pursuant to an offering of such
securities; or (iv) a corporation owned, directly or indirectly, by the stockholders
of the Company in substantially the same proportions as their ownership of stock of
the Company.

	 
	 	n.	 	Potential Change in Control

	 
	 	 	 	“Potential Change in Control” means that any of the following has occurred during
the term of this Agreement, excluding any event that is Management Action:

	 	(1)	 	Agreement Signed

	 
	 	 	 	The Company enters into an agreement that will result in a Change in Control.

	 
	 	(2)	 	Notice of Intent to Seek Change in Control

	 
	 	 	 	The Company or any Person publicly announces an intention to take or to consider
taking actions that will result in a Change in Control.

	 
	 	(3)	 	Board Declaration

	 
	 	 	 	With respect to this Agreement, the Board adopts a resolution declaring that a
Potential Change in Control has occurred.

	 	o.	 	Separation from Service

	 
	 	 	 	“Separation from Service” shall have the meaning set forth in Treas. Reg. §
1.409A-1(h).

	 
	 	p.	 	Severance Benefits

	 
	 	 	 	“Severance Benefits” means your benefits under Section 6 of this Agreement.

 

 - 13 - 

 

	 	q.	 	Term of this Agreement

	 
	 	 	 	“Term of this Agreement” means the period that commences on the date of this
Agreement and ends on the

	 	(1)	 	earlier of:

	 	a.	 	September 7, 2013; or

	 
	 	b.	 	Your ceasing to serve in the position of
Executive Vice President, Chief Financial Officer and Treasurer prior
to the occurrence of a Potential Change in Control or Change in
Control; or

	 	(2)	 	Change in Control

	 
	 	 	 	The last day of the 24th calendar month beginning after the calendar month in
which a Change in Control occurred during the Term of this Agreement. After a
Change in Control occurs, the end of the Term of this Agreement shall solely be
determined under this Section 20 (q) (2).

	21.	 	Section 409A

	 	a.	 	Notwithstanding anything in this Agreement to the contrary, if any amounts that
become due under this Agreement on account of your termination of employment constitute
“nonqualified deferred compensation” within the meaning of Code Section 409A, payment
of such amounts shall not commence until you incur a Separation from Service.

	 
	 	b.	 	Notwithstanding any provision to the contrary in this Agreement (other than
Section 21(c) below) no payments to which you become entitled under this Agreement
shall be made or paid to you prior to the earlier of (1) the expiration of the
six-month period measured from the date of your Separation from Service with the
Company or (2) the date of your death, if you are deemed at the time of the Separation
from Service a “specified employee” within the meaning of Code Section 409A, and such
delayed commencement is otherwise required in order to avoid a prohibited distribution
under Code Section 409A(a)(2). Upon expiration of the applicable deferral period, all
payments deferred pursuant to this Section 21(b) shall be paid to you in a lump sum,
and any remaining payments due under this Agreement shall be paid in accordance with
the remaining payment dates specified herein.

	 
	 	c.	 	The six-month holdback set forth in Section 21(b) above shall not be applicable
to any cash Severance Benefits under Section 6 that are paid to you by March 15 of the
calendar year following the calendar year in which you become entitled to Severance
Benefits.

IN WITNESS WHEREOF, the parties have executed this Agreement as if the date set forth above.

	 	 	 	 	 	 	 
	Date 9/8/2011

	 	By:
	 	Versar, Inc.
	 	 
	 
	 

	 	/s/ Anthony L. Otten	 	 
	 

	 	 	 	 
	 

	 	Anthony L. Otten, Chief Executive Officer	 	 
	 
	 	 	 	 	 	 
	Date 9/8/2011	 	/s/ Cynthia A. Downes	 	 
	 	 	 	 	 
	 	 	Cynthia A. Downes	 	 

 

 - 14 - 

 

Company notices to you shall be addressed as follows (or in any other manner you notify the Company
to use):

	 	 	 	 	 
	 

	 	3600 S. 14th Street
	 	 
	 

	 	#124	 	 
	 

	 	Alexandria, VA 22302	 	 

 

 - 15 -

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