EXECUTION COPY
NON-COMPETITION AND
COMMITMENT AGREEMENT
THIS NON-COMPETITION AND COMMITMENT
AGREEMENT (this “ Agreement ”), dated as
of April 25, 2005, is by and between PEC SOLUTIONS, INC., a
Delaware corporation (the “ Company ”),
and DAVID C. KARLGAARD, an individual residing at 3019 Chichester
Lane, Fairfax, VA 22031 (“ Executive ”).
Capitalized terms not defined herein have the meanings ascribed to
such terms in the Agreement and Plan of Merger dated of even date
herewith (as the same may be amended from time to time, the “
Merger Agreement ”), by and among the Company,
NORTEL NETWORKS INC., a Delaware corporation (“
Parent ”), and PS MERGER SUB, INC., a Delaware
corporation and wholly-owned subsidiary of Parent (“
Purchaser ”).
WHEREAS, Parent, Purchaser and the
Company propose to enter into the Merger Agreement which provides
for Purchaser to make a tender offer (the “
Offer ”) for the outstanding shares of Company
Common Stock and the merger of Purchaser with and into the Company
(the “ Merger ”), upon the terms and
subject to the conditions of the Merger Agreement;
WHEREAS, Executive is a founder and
senior executive of the Company, and Parent believes that
Executive’s continued service and loyalty to the Company
after the Merger is critical to preserving and assuring the value
of the business being acquired by Parent through the Merger
Agreement;
WHEREAS, Executive and certain
Affiliates of Executive own a substantial number of shares of
Company Common Stock and Company Stock Options and, by virtue of
such ownership, will be paid significant cash consideration
pursuant to the terms of the Merger Agreement upon completion of
the Offer and Merger;
WHEREAS, as a condition to its
willingness to enter into the Merger Agreement, Parent has required
that Executive agree, and, in order to induce Parent and Purchaser
to enter into the Merger Agreement and in recognition of the
significant consideration that will be paid to Executive and his
Affiliates in their capacity as stock and option holders of the
Company, Executive is willing to agree, to (a) certain
non-competition and other restrictive covenants, (b) continue
to serve as a regular full-time executive of the Company through
the second anniversary of the Closing Date, (c) forfeit
certain investment property to the Company as liquidated damages in
the event he fails to fulfill his employment commitment to the
Company, (d) utilize the cash payment he will receive in
connection with the cancellation of his vested Company Stock
Options pursuant to Section 3.3(a) of the Merger Agreement to
purchase certain marketable securities for deposit into an escrow
account to fund such liquidated damages obligation, (e) the
termination of his rights under the Company’s Key Executive
Severance Plan, and (f) such other matters as are set forth
herein, in each case as more fully described in this Agreement;
and
WHEREAS, prior to the date of this
Agreement, Executive and the Company entered into that certain
Employment Agreement dated January 1, 2000 (the “
Employment Agreement ”) and that certain
Employee Confidentiality and Inventions Agreement dated
October 1, 1985 (the “ Inventions
Agreement ,” and together with the Employment
Agreement, the “ Existing Agreements
”).
NOW, THEREFORE, in consideration of
the foregoing and the representations, warranties, covenants and
agreements set forth herein, the Company and Executive agree as
follows:
ARTICLE I
EFFECTIVENESS OF
AGREEMENT
This Agreement shall become effective
on the date hereof but shall be null and void ab
initio and of no further force and effect if the Merger
Agreement is terminated pursuant to Section 9.1 thereof prior
to the date Parent accepts for payment any shares of Company Common
Stock pursuant to the Offer.
ARTICLE II
EMPLOYMENT AGREEMENT;
KEY EXECUTIVE SEVERANCE PLAN
2.1 Ratification of Employment
Agreement . Executive confirms that Executive has executed and
delivered to the Company the Employment Agreement and the Invention
Agreement in the forms of Exhibits A and
B hereto, respectively, and that there have been no
oral or written modifications or amendments to, or waivers of, the
provisions of the Existing Agreements. Executive agrees with the
Company that the Existing Agreements shall continue in full force
and effect after the Merger with respect to Executive’s
employment with the Company. In the event of any inconsistency or
conflict between this Agreement and the Existing Agreements, the
provisions of this Agreement shall control.
2.2 Agreement to Continue Service
as a Company Executive . Except for Good Reason (as defined
below), Executive hereby agrees not to terminate his regular
full-time employment with the Company prior to the second
anniversary of the Closing Date. Executive, however, acknowledges
that this Agreement does not constitute a contract of employment;
and nothing in this Agreement shall limit the Company’s right
to terminate Executive’s employment at any time and for any
reason (subject only to the express terms of the Employment
Agreement).
2.3 Cross Default . Any breach
or failure to perform by Executive under this Agreement shall
constitute a breach or failure to perform by Executive under the
Employment Agreement.
2.4 Employment Programs; Changes
in Job Title and Reporting Lines . Executive understands and
agrees that, after completion of the Offer and the Merger, the
Company and Parent may commence the integration of some or all of
the Company’s existing compensation, benefits and other
employment plans, policies, programs and practices (“
Employment Programs ”) with those of Parent
and/or other Affiliates of the Company, and that the Company and
its Affiliates may make changes in their Employment Programs as it
or they deem appropriate subject to applicable legal requirements,
required corporate approvals and the terms of any applicable plans,
policies, programs and practices; and it is understood and agreed
that no such changes shall constitute a breach of the Employment
Agreement or this Agreement, be deemed to be a termination of
Executive’s employment without Good Cause (under this
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Agreement or the Employment
Agreement) or be deemed to give rise to Good Reason. Executive
further understands and agrees that the Offer and Merger will
result in changes in job titles, reporting lines and duties as a
result of the Company becoming a Subsidiary of Parent and the
subsequent evolution of the businesses of the Company, Parent and
their Affiliates, and that the Company and its Affiliates will be
entitled to change Executive’s reporting lines, job title(s)
and duties in the future to address business needs (including
changes that result in Executive holding a position or performing
duties for an Affiliate of the Company), so long as Executive
continues to be employed in an executive-level position; and it is
understood and agreed that no such changes shall constitute a
breach of the Employment Agreement or this Agreement, be deemed to
be a termination of Executive’s employment without Good Cause
(under this Agreement or the Employment Agreement) or be deemed to
give rise to Good Reason.
2.5 Termination of Key Executive
Severance Plan Rights . Effective as of the date of this
Agreement, all rights and entitlements of Executive under the
Company’s Key Executive Severance Plan and the Letter
Agreement dated July 23, 2003, between Executive and the
Company thereunder are hereby terminated and canceled; and
Executive shall hereafter cease to be a participant under such
plan. In addition, Executive agrees that, except for the severance
entitlements expressly provided for in the Employment Agreement, he
will not have any right or entitlement to severance or other
compensation following the termination of his employment with the
Company and its Affiliates.
2.6 No Payment for Shares; No
Increase in Compensation or Benefits . Executive and the
Company each hereby confirm and agree that all payments and other
obligations owing from the Company to Executive under the
Employment Agreement or otherwise are in respect of
Executive’s employment by the Company, and are in no way are
related to the purchase of shares of Company Common Stock pursuant
to the Offer. In the event any such payments are found by a court
of competent jurisdiction to represent payments in respect of
shares of Company Common Stock pursuant to the Offer, Executive
hereby agrees to waive any right to such payment and to reimburse
the Company for any such payment. For the avoidance of any doubt,
nothing in this Agreement is intended to cause the level of
compensation or benefits provided to Executive by the Company to be
increased, enhanced or improved in any way.
ARTICLE III
LIQUIDATED DAMAGES;
ESCROW OF FUNDS
3.1 Acknowledgements .
Executive acknowledges and understands that his continued service
and loyalty to the Company and its Affiliates after the Merger is,
in Parent’s and the Company’s view, critical to
preserving and assuring the value of the business being acquired by
Parent through the Merger Agreement, and that Parent would not
enter into the Merger Agreement or proceed with the Offer or Merger
absent Executive’s promise and commitment continuously to
serve as a regular full-time executive employee of the Company
through the second anniversary of the Closing Date. Executive
further acknowledges and agrees that (i) Parent, the Company
and their Affiliates will suffer substantial economic loss and
damages if Executive fails continuously to serve as a regular
full-time executive employee of the Company (and/or one or more
Affiliates of the Company) through the second anniversary of the
Closing Date, (ii) the amount of such loss and damages is and
would be incapable of precise estimation,
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(iii) the liquidated
damages specified in Section 3.2 below are, in
the view of the Company, Parent and Executive, reasonable estimates
of the amount of the actual loss and damages Parent and the Company
would suffer in the event Executive fails to so serve the Company
through such date, and are not disproportionate to such loss and
damages, and (iv) the liquidated damages specified in
Section 3.2 are not intended as and do not
constitute a penalty.
3.2 Liquidated Damages .
(a) In the event that
Executive’s employment with the Company (and all Affiliates
of the Company) is terminated prior to the first anniversary of the
Closing Date, by (i) the Company (or an Affiliate of the
Company) for Good Cause (as defined below) or (ii) Executive
without Good Reason, then, on the later to occur of the third (3
rd )
Business Day after the date Executive’s employment is
terminated or the Closing Date (the “ Payment
Date ”), Executive shall be obligated to pay,
transfer, deliver and forfeit to the Company, as liquidated
damages, all of the Escrowed Property (as defined below). In such
event, the Company shall be entitled, at any time on or after the
Payment Date, to direct and cause Escrow Agent (as defined below)
to transfer and deliver, on Executive’s behalf, all of the
Escrowed Property to the Company.
(b) In the event that
Executive’s employment with the Company (and all Affiliates
of the Company) is terminated on or after the first anniversary of
the Closing Date and prior to the second anniversary of the Closing
Date, by (i) the Company (or an Affiliate of the Company) for
Good Cause or (ii) Executive without Good Reason, then, on the
Payment Date, Executive shall be obligated to pay, transfer,
deliver and forfeit to the Company, as liquidated damages, all of
the Escrowed Property then held by Escrow Agent. In such event, the
Company shall be entitled, at any time on or after the Payment
Date, to direct and cause Escrow Agent to transfer and deliver, on
Executive’s behalf, all of the Escrowed Property to the
Company.
(c) In the event that
Executive’s employment with the Company (and all Affiliates
of the Company) is terminated by the Company without Good Cause or
as a result of Executive’s death or Total and Permanent
Disability (as defined in the Employment Agreement) or Executive
resigns his employment with the Company for Good Reason,
(i) Executive shall have no obligation to pay or deliver
liquidated damages to the Company under this
Section 3.2 , and (ii) immediately after
such termination or resignation, Executive shall be entitled to
direct and cause Escrow Agent to transfer and deliver to Executive
all the Escrowed Property then held by Escrow Agent.
(d) In the event that Executive
remains a regular full-time executive employee of the Company or an
Affiliate of the Company on the first anniversary of the Closing
Date, Executive shall be immediately entitled to direct and cause
Escrow Agent to transfer and deliver to Executive fifty percent
(50%) of the Escrowed Property then held by Escrow Agent (measured
in accordance with its then-current fair market value); and the
remainder of the Escrowed Property shall remain subject to
Sections 3.2(b) and 3.2(c) .
(e) In the event that Executive
serves as a regular full-time executive employee of the Company or
an Affiliate of the Company through and including the second
anniversary of the Closing Date, then at any time on or after such
second anniversary date, Executive shall be
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entitled to direct and
cause Escrow Agent to transfer and deliver to Executive all of the
Escrowed Property then held by Escrow Agent.
3.3 Escrow Account .
(a) The
parties hereby agree that J.P. Morgan, Branch Banking & Trust
or any other bank mutually agreeable to the parties will serve as
escrow agent hereunder (the “ Escrow Agent
”). Prior to the Closing Date, the Company, Escrow Agent and
the Executive shall execute an escrow agreement substantially in
the form attached hereto as Exhibit C , subject
to any changes proposed by Escrow Agent which are reasonably
acceptable to Parent, the Company and Executive (the “
Escrow Agreement ”).
(b) On
the Closing Date, immediately after Executive receives the cash
payment from the Company in connection with the cancellation of his
vested Company Stock Options pursuant to Section 3.3(a) of the
Merger Agreement (less any deduction by the Company for required
withholding of Taxes pursuant to Section 3.3(b) of the Merger
Agreement) (the “ After Tax Option Proceeds
”), Executive shall apply and utilize the After Tax Option
Proceeds to purchase from the Company, and the Company shall sell
to Executive, free and clear of all Liens, marketable obligations
issued or guaranteed by the U.S. Government, its agencies or
instrumentalities with maturities of two years or less having an
aggregate fair market value equal to U.S. $8,700,000 (the “
Escrow Securities ”). The purchase price for
the Escrow Securities shall be U.S. $8,700,000 and shall be payable
in full by Executive on the Closing Date, in cash by wire transfer
of immediately available funds to the bank account designated by
the Company at least two (2) business days prior to the
Closing Date.
(c) On
the Closing Date, immediately after purchasing the Escrow
Securities from the Company pursuant to
Section 3.3(b) and in accordance with the terms
of the Escrow Agreement, Executive shall deliver to, and deposit
with, Escrow Agent, free and clear of all Liens, all of the Escrow
Securities for disbursement in accordance with the terms of the
Escrow Agreement and this Agreement (the Escrow Securities,
together with all proceeds and reinvestments thereof and all
interest and income earned thereon, being referred to herein as the
“ Escrowed Property ”). The Escrowed
Property shall be available, in accordance with the terms of the
Escrow Agreement and this Agreement, to satisfy Executive’s
liquidated damages obligations under Section 3.2
.
(d) Executive
shall timely file an election pursuant to Section 83(b) of the Code
with respect to the transactions described in
Sections 3.3(b) and 3.3(c) .
3.4 Exclusive Remedy . The
liquidated damages specified in Section 3.2
shall be the sole and exclusive remedy for the Company and its
Affiliates in connection with any failure of Executive continuously
to serve as a regular full-time executive employee of the Company
(and/or an Affiliate of the Company) through the second anniversary
of the Closing Date. Notwithstanding the preceding sentence,
neither the provisions of this Article III nor
any payment of liquidated damages by Executive hereunder shall
limit the legal or equitable remedies available to the Company and
its Affiliates to redress any breach by Executive of his
obligations under the Existing Agreements or this Agreement
(excluding any breach solely arising from an election by Executive
to resign or otherwise terminate his employment with the
5
Company for other than Good
Reason) even if such breach directly or indirectly resulted in the
termination of his employment with the Company (or an Affiliate of
the Company).
3.5 Good Cause . For purposes
of this Agreement, “Good Cause” shall have the meaning
given to such term in the Employment Agreement except that the
phrase “which involves personal profit” set forth in
clause (C) of such definition shall be omitted.
3.6 Good Reason . For purposes
of this Agreement, “ Good Reason ” means,
as of a given date, the occurrence not more than sixty
(60) days prior to such date of any of the following:
(a) relocation of Executive’s principal work location by
more than fifty (50) miles from the Company’s current
location in Fairfax, Virginia; provided , however ,
that any relocation of Executive’s principal work location to
his residence shall not constitute Good Reason; (b) a
reduction in the base salary paid to Executive by the Company after
the Merger from Executive’s base salary in effect on
April 1, 2005; (c) a fundamental change in
Executive’s position that results in Executive ceasing to be
employed at an executive-level or the assignment of duties and
responsibilities to Executive that are not, in the aggregate,
consistent with those of an executive level position; or (d) a
material breach by the Company of its obligations under the
Employment Agreement, unless Executive in writing consents to such
relocation, reduction, change or waives such breach;
provided , however , that the occurrences described
above shall not constitute Good Reason if they occur prior to the
Effective Time or if the Company or an Affiliate of the Company
cures such occurrences within thirty (30) Business Days from
receipt by Parent and the Company of written notice thereof from
Executive; and provided , further , that the
occurrence described in clause (c) of this sentence shall not
be deemed to have occurred by reason of Executive’s position,
duties or responsibilities no longer being consistent with
Executive’s current position of Chief Executive Officer or
being performed for Company and/or its Affiliates, which are part
of a larger organization on or after the Closing Date.
ARTICLE IV
NON-COMPETITION AND
NON-SOLICITATION
4.1 Acknowledgments .
(a) Executive
acknowledges that the Company and its Affiliates have expended and
shall continue to expend substantial amounts of time, money and
effort to develop business strategies, employee and customer
relationships, relationships and goodwill and build an effective
organization. Executive acknowledges that during Executive’s
prior employment and association with the Company, Executive has
become familiar with the Company’s and its Affiliates’
Confidential Information (as defined below), including trade
secrets, and that following the consummation of the Offer and
Merger, Executive will become familiar with further Confidential
Information of the Company and its Affiliates, including trade
secrets, and that Executive’s services are of special, unique
and extraordinary value to the Company and its Affiliates.
Executive acknowledges that the Company and its Affiliates have a
legitimate business interest and right in protecting such
Confidential Information, goodwill, employee and customer
relationships, and that the Company and its Affiliates would be
seriously damaged by the disclosure of such Confidential
Information and the loss or deterioration of their relationships
with customers, employees, consultants, contractors, subcontractors
or agents. Executive further
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acknowledges that the
Company and its Affiliates and their respective successors are
entitled to protect and preserve the going concern value of the
Company and its Affiliates to the fullest extent permitted by law
and that Parent and Purchaser would not have entered into the
Merger Agreement without Executive’
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