SEVERANCEAND NON-COMPETITION AGREEMENT

        This  SEVERANCE AND NON-COMPETITION AGREEMENT (“Agreement”) is made and entered into by and between Argyle Security, Inc., a Delaware corporation (the “Company”), and Mr. Matthew A. Kepke, an individual (the “Employee”), effective as of February 1, 2009 (the “Effective Date”).  Capitalized terms not otherwise defined shall have the meaning ascribed to such terms in Schedule I.

 

        A.           Whereas, the Company is a corporation organized under the laws of the State of Delaware and is conducting business in San Antonio, Bexar County, Texas and New York City, New York County, New York.

 

        B.           Whereas, the Company and the Employee desire to establish certain terms and conditions related to their employment relationship on the terms set forth in this Agreement.

 

        NOW, THEREFORE, in consideration of (i) the mutual covenants herein contained (ii) Employee’s current and ongoing exposure to Confidential Information  (as defined in Section 2.1 of this Agreement) of the Company, (iii) employment of Employee upon the terms, conditions and covenants set forth between Company and Employee and each act performed pursuant hereto, and (iv) other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Company and Employee agree as follows:

            (a)           Change of Control/Termination Without Cause or for Good Reason.  In the event the Employee’s employment with the Company is terminated within the two (2) year period immediately following the occurrence of a Change of Control, either (i) by the Company without Cause, or (ii) by the Employee for Good Reason, then the Employee shall, subject to Employee’s execution of a separation and release agreement provided by the Company (the “Separation Agreement”), and subject further to the applicable requirements of Section 1.2(i):

            (i)  receive a lump sum payment in the amount of (a) 2 times (Employee’s base salary in effect on the date of termination (“Salary”) plus Employee’s target bonus (“Bonus”)) plus (b) Employee’s current year bonus earned up through the date of termination (calculated by taking Employee’s annual target bonus times a fraction, the numerator of which is the number of days Employee was employed during the year of termination and the denominator of which is 365), with such target bonus and current year bonus determined in accordance with the Company’s  bonus plan then in effect which is applicable to Employee.   The lump sum payment to be paid under this clause (i) shall be paid within thirty (30) days following the date of Employee’s termination; and

            (ii)  receive a lump sum payment equal to 24 times the monthly premium cost (determined as of the date of termination) for Employee’s medical insurance under the Company’s benefit plans then in effect, with such amount to be paid within thirty (30) days following the date of Employee’s termination;

            (b)           Termination Without Cause or for Good Reason.  In the event Employee’s employment with the Company is terminated before the occurrence of a Change of Control or more than two (2) years after the occurrence of a Change of Control, either (i) by the Company without Cause , or (ii) by the Employee for Good Reason , then the Employee shall, subject to Employee’s execution of a Separation Agreement:

            (i)  receive an amount of (a) 1 times (Employee’s Salary plus Employee’s target bonus) plus (b) Employee’s current year bonus earned up through the date of termination (calculated by taking Employee’s annual target bonus times a fraction, the numerator of which is the number of days Employee was employed during the year of termination and the denominator of which is 365), with such target bonus and current year bonus determined in accordance with the Company’s  bonus plan then in effect which is applicable to Employee. All such amounts to be paid hereunder shall be paid in equal monthly installments beginning on the thirtieth (30th) day following the date of Employee’s termination and continuing on the same day in each subsequent month for a period of 11 months thereafter; and

            (ii)  receive monthly payments in the amount necessary to continue Employee’s medical benefits coverage in effect at the time of termination with such amounts to be paid out in monthly installments at the same times as the payments in (b) (i) above for a period of 12 months following the date of such termination;

            (c)           Death.  If Employee dies during the term of employment, Employee’s employment and this Agreement shall automatically terminate as of the date of Employee’s death. Upon such termination, the Company shall have no further obligation to Employee or his estate, except to pay to the estate any accrued, but unpaid, Salary up through the date of such termination, plus Bonus, plus those benefits payable in accordance with (b) (i) above.

            (d)           Disability.  If, during the term of employment, Employee is prevented from performing his duties for Company by reason of becoming totally disabled, then the Company, on prior notice to Employee, may terminate Employee’s employment and this Agreement.  For purposes of this Agreement, Employee shall be deemed to have become totally disabled when (i) he receives “total disability benefits” under the Company’s disability plan (whether funded with insurance or self-funded by the Company), if such a plan is maintained by the Company, or (ii) the Company’s  Board (exclusive of Employee if he sits on the Board), upon the written report of a qualified physician (after complete examination of Employee) designated by the Board, determines that Employee has become physically and/or mentally incapable of performing his duties under this Agreement on a permanent basis.  In the event of termination of Employee under this subsection (d), the Company shall pay Employee any accrued but unpaid Salary, as of the date on which such permanent disability is determined, but then remains unpaid, plus those benefits payable in accordance with (b) (i) and (ii) above.. The provisions of the preceding sentence shall not affect Employee’s rights to receive payments under the Company’s disability insurance plan, if any, or under any individual disability insurance plan that the Employee may have in place.

            (e)           Notwithstanding anything to the contrary contained in this Section 1.2, to the extent that the Employee is determined to be a "key employee" (as defined in Section 416(i) of the Code but without regard to paragraph (5) thereof), the payment or payments under this Section 1.2 which constitute "nonqualified deferred compensation" under Section 409A of the Code shall be made to the Employee no earlier than the earlier of the last day of the sixth complete calendar month following the termination of the Employee's employment with the Company, or (ii) the date of the Employee's death, consistent with the requirements of Section 409A of the Code. Any payment or payments delayed by reason of the immediately preceding sentence shall be paid to the Employee in a single lump sum on the first day following the last day of the sixth complete calendar month following the date of the termination of the Employee's employment with the Company, in order to catch up to the original payment schedule. Notwithstanding the immediately preceding 2 sentences, no delay shall be required to the extent that such payments (i) are payable during the short-term deferral period set forth in Treasury Regulation Section 1.409A-1(b)(4), and/or (ii) do not exceed an amount equivalent to 200% of the lesser of (A) the Employee's annualized compensation from the Company for the Employee's taxable year immediately preceding his or her taxable year in which the Employee's termination of employment with the Company occurs, or (B) the maximum amount of compensation that may be taken into account under tax-qualified retirement plans pursuant to Section 401(a)(17) of the Code, for the calendar year in which the termination of the Employee's employment with Company occurs.

            (f)           Excess Parachute Payments.  (i) If it is determined that any amount, right or benefit paid or payable (or otherwise provided or to be provided) to the Employee by the Company or any of its affiliates under this Agreement or any other plan, program or arrangement under which Employee participates or is a party, other than amounts payable under this Section 1.2(f) (collectively, the “Payments”), would constitute an “excess parachute payment” within the meaning of Section 280G of the Code, subject to the excise tax imposed by Section 4999 of the Code, as amended from time to time (the “Excise Tax”), and the present value of such Payments (calculated in a manner consistent with that set forth in the applicable regulations promulgated under Section 280G of the Code) is equal to or less than $25,000.00 greater than the threshold at which such amount becomes an “excess parachute payment,” then the amount of the Payments payable to the Employee under this Agreement shall be reduced (a “Reduction”) to the extent necessary so that no portion of such Payments payable to the Employee is subject to the Excise Tax.

            (ii) In the event it shall be determined that the amount of the Payments payable to the Employee is more than $25,000.00 greater than the threshold at which such amount becomes an “excess parachute payment,” then the Employee shall be entitled to receive an additional payment from the Company (a “Gross-Up Payment”) in an amount such that, after payment by the Employee of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income and employment taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment (and any interest and penalties imposed with respect thereto), the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax (including any interest and penalties imposed with respect thereto) imposed upon the Payments.

            (iii) All determinations required to be made under Section 1.2(f), including whether and when a Gross-Up Payment or a Reduction is required, the amount of such Gross-Up Payment or Reduction and the assumptions to be utilized in arriving at such determination, shall be made by an independent, nationally recognized accounting firm mutually acceptable to the Company and the Employee (the “Auditor”); provided that in the event a Reduction is determined to be required, the Employee may determine which Payments shall be reduced in order to comply with the provisions of Section 1.2 (f). The Auditor shall promptly provide detailed supporting calculations to both the Company and Employee following any determination that a Reduction or Gross-Up Payment is necessary. All fees and expenses of the Auditor shall be paid by the Company. Any Gross-Up Payment, as determined pursuant to Section 1.2(f), shall be paid by the Company to the Employee within five (5) days of the receipt of the Auditor’s determination. All determinations made by the Auditor shall be binding upon the Company and the Employee; provided that if, notwithstanding the Auditor’s initial determination, the Internal Revenue Service (or other applicable taxing authority) determines that an additional Excise Tax is due with respect to the Payments, then the Auditor shall recalculate the amount of the Gross-Up Payment or Reduction Amount, if applicable, based upon the determinations made by the Internal Revenue Service (or other applicable taxing authority) after taking into account any additional interest and penalties (the “Recalculated Amount”) and the Company shall pay to the Employee the excess of the Recalculated Amount over the Gross-Up Payment initially paid to the Employee or the amount of the Payments after the Reduction, as applicable, within five (5) days of the receipt of the Auditor’s recalculation the Gross-Up Payment.

(i)  the public announcement by the Company or any person (other than the Company, any subsidiary of the Company or any employee benefit plan of the Company or of any subsidiary of the Company) (“Person”) that such Person, who or which, together with all “affiliates” and “associates” (within the meanings of such terms under Rule 12b-2 of the Exchange Act) of such Person, shall be the beneficial owner of (fifty percent (50%) or more of the Company’s voting stock then outstanding;

 

(ii)  the commencement of, or after the first public announcement of any Person to commence, a tender or exchange offer the consummation of which would result in any Person becoming the beneficial owner of the Company’s voting stock aggregating fifty percent (50%) or more of the Company’s then outstanding voting stock;

 

(iii)  the announcement of any transaction relating to the Company required to be described pursuant to the requirements of Item 6(e) of Schedule 14A of Regulation 14A of the Securities and Exchange Commission under the Exchange Act;

 

(iv)  a proposed change in the constituency of the Company’s Board of Directors (the “Board”) such that, during any period of two (2) consecutive years, individuals who at the beginning of such period constitute the Board cease for any reason to constitute at least a majority thereof, unless the election or nomination for election by the shareholders of the Company of each new director was approved by a vote of at least two-thirds (2/3) of the directors then still in office who were members of the Board at the beginning of the period;

                (i)  fraud, misappropriation or embezzlement by Employee in connection with the Company as determined by the affirmative vote of at least a majority of the Board (exclusive of Employee if he sits on the Board), or any other act of personal dishonesty, fraud or misrepresentation taken by Employee which was intended to result in substantial gain or personal enrichment for Employee at the expense of the Company;