Document:

Exhibit 10.1

 

WATSON PHARMACEUTICALS, INC.

 

KEY EMPLOYEE AGREEMENT

 

 

This Key Employee Agreement
(“Agreement”) is entered into as of May 5, 2003 (the “Effective Date”), by and
between Charles Slacik (“Executive”) and Watson Pharmaceuticals, Inc., a Nevada
corporation (the “Company”).

 

WHEREAS, the Company desires to employ Executive to
provide personal services to the Company, and wishes to provide Executive with
certain compensation and benefits in return for his services; and

 

WHEREAS, Executive wishes to be employed by the
Company and provide personal services to the Company in return for certain
compensation and benefits, including the benefits provided under this
Agreement;

 

NOW,
THEREFORE, in
consideration of the mutual promises and covenants contained herein, it is
hereby agreed by and between the parties hereto as follows:

 

1.                                      EMPLOYMENT BY THE COMPANY. 
Subject to terms set forth herein, the Company agrees to employ
Executive in the position of Executive Vice President and Chief Financial
Officer, and Executive hereby accepts employment effective as of the Effective
Date.  In this position, Executive shall
perform such duties as are assigned from time to time by the Chief Executive
Officer (“CEO”) of the Company or such other officer of the Company or one of
its subsidiaries that the CEO in his discretion may from time to time designate
(the “Designated Officer”), consistent with the Bylaws of the Company and as
may be required by the Company’s Board of Directors (the “Board”).  During his employment with the Company,
Executive will devote his best efforts and substantially all of his business
time and attention (except for vacation periods as set forth herein and
reasonable periods of illness or other incapacity permitted by the Company’s
general employment policies) to the business of the Company.  Executive shall abide by the general
employment policies and procedures of the Company, except that wherever the
terms of this Agreement may differ from or are in conflict with the Company’s
general employment policies or procedures, this Agreement shall control.

 

2.                                      COMPENSATION.

 

2.1                               Salary.  For
services to be rendered hereunder, Executive shall receive a base salary as set
forth in Section 1 of the Compensation and Severance Terms Schedule,
attached hereto as Exhibit A.  Executive
will be considered annually for increases in base salary in accordance with
Company policy and subject to review and approval by the CEO, Designated
Officer, or the Compensation Committee of the Board, as appropriate.

 

2.2                               Bonus. 
Executive shall be eligible to participate in the Company’s bonus plan
at the executive level throughout the duration of Executive’s employment with
the Company.  The Company shall have the
sole discretion to determine whether Executive is entitled to any such bonus
and to determine the amount of the bonus. 
The amount of Executive’s bonus may be determined in part based on
Executive’s performance with respect to certain goals

 

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established by
the Company and attainment by the Company of its planned financial objectives
for the bonus period.  Notwithstanding
the foregoing, no bonus is guaranteed to Executive.  Any bonus is subject to the approval of the CEO, Designated
Officer, or the Compensation Committee of the Board, as appropriate.  The Company retains the authority to review,
grant, deny or revise any bonus in its sole discretion.  To be eligible to receive a bonus, Executive
must remain in employment with the Company throughout the entire fiscal year or
as otherwise set forth in the applicable bonus plan.  The target level of such bonus is set forth in Section 2 of
Exhibit A attached hereto.

 

2.3                               Stock Options.  Subject to approval of the Board or the Compensation Committee of
the Board, as appropriate, Executive will receive the stock option grants (if
any) set forth in Section 3 of Exhibit A, and such additional grants of stock
options as may from time to time be granted, pursuant to the terms and
conditions set forth in the applicable stock option agreement and plan
documents, copies of which will be made available upon Executive’s
request.  For the purposes of this
Agreement, all stock options granted to Executive
by the Company hereunder, or granted in the future, shall be referred to
hereinafter as the “Options.”

 

2.4                               Paid Time Off.  Executive shall be eligible to accrue paid time off (“PTO”)
during the term of this Agreement, in accordance with the Company’s standard
policy regarding PTO and in an amount commensurate with other employees at a
level similar to that of the Executive.

 

2.5                               Standard Company Benefits.  Executive shall be entitled to all rights and
benefits for which he is eligible under the terms and conditions of the
standard Company benefits plans (e.g., health and disability insurance, 401(k)
retirement plan, etc.) and other benefits and incentives which may be in effect
from time to time and provided by the Company to employees at levels similar to
the Executive.

 

3.                                      PROPRIETARY INFORMATION AND
INVENTIONS.

 

Executive
agrees to execute and abide by the Employee Proprietary Information and
Inventions Agreement attached hereto as Exhibit C and made a part hereof by
this reference.

 

4.                                      OUTSIDE ACTIVITIES.

 

4.1                               Activities.  Except
with the prior written consent of the CEO or the Board, as appropriate,
Executive will not during his employment with the Company undertake or engage
in any other employment, occupation or business enterprise, other than ones in
which Executive is a passive investor. 
Executive may engage in civic and not-for-profit activities so long as
such activities do not materially interfere with the performance of his duties
hereunder.  Executive will not during
his employment with the Company publicly or privately disparage the Company or
any of its subsidiaries, or their respective past or present products,
officers, directors, employees or agents.

 

4.2                               Investments and Interests.  During
his employment by the Company, Executive agrees not to acquire, assume or
participate in, directly or indirectly, any position, investment or interest
known by him to be adverse to or in conflict with the interest of the Company,
its business or prospects, financial or otherwise.  By way of clarification, nothing

 

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contained in
this Agreement shall prevent Executive from holding, for investment purposes
only, no more than one percent (1%) of the capital stock of any publicly traded
company.

 

4.3                               Non-Competition.  During his
employment by the Company, except on behalf of the Company, Executive will not
directly or indirectly, whether as an officer, director, stockholder, partner,
proprietor, associate, representative, consultant, or in any capacity
whatsoever engage in, become financially interested in, be employed by or have
any business connection with any other person, corporation, firm, partnership
or other entity whatsoever known by him to compete directly with the Company,
anywhere in the world, in any line of business engaged in (or planned to be
engaged in) by the Company.

 

5.                                      Other Agreements.

 

Executive
represents and warrants that his employment by the Company will not conflict
with and will not be constrained by any prior agreement or relationship with
any third party.  Executive represents
and warrants that he will not disclose to the Company or use on behalf of the
Company any confidential information governed by any agreement with any third
party except in accordance with an agreement between the Company and any such
third party.  During Executive’s
employment by the Company, Executive may use, in the performance of his duties,
all information generally known and used by persons with training and
experience comparable to his own and all information which is common knowledge
in the industry or otherwise legally in the public domain.

 

6.                                      TERMINATION OF EMPLOYMENT.

 

6.1                               At-Will Employment.  Executive’s
relationship with the Company is at-will. 
The Company shall have the right to terminate Executive’s employment
with the Company at any time with or without Cause and with or without notice.

 

6.2                               Termination by Company for Cause.  If the Company terminates
Executive’s employment at any time for Cause, Executive’s salary shall cease on
the date of termination; and Executive will not be entitled to severance pay,
pay in lieu of notice or any other such compensation.

 

(a)                        Definition of “Cause.”  For
purposes of this Agreement, “Cause” shall mean (i) Executive’s conviction of
any felony; or, (ii) Executive’s gross misconduct, material violation of
Company policy, or material breach of Executive’s duties to the Company, which
Executive fails to correct within thirty (30) days after Executive is given
written notice by the CEO or the Board, as appropriate.

 

6.3                               Termination by Company Without Cause.  If
the Company terminates Executive’s employment at any time without Cause,
Executive shall be entitled to severance benefits as set forth in Section 4.1
of the Compensation and Severance Terms Schedule, attached hereto as Exhibit A.

 

6.4                               Executive’s Voluntary Resignation.  Executive
may terminate his employment with the Company at any time, with or without Good
Reason, and with or without notice.  In
the event Executive voluntarily terminates his employment other than for Good

 

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Reason, he will not be entitled to severance
pay, pay in lieu of notice or any other such compensation.

 

6.5                               Executive’s Resignation for Good Reason.  Executive
may resign his employment for Good Reason so long as Executive tenders his
resignation to the Company within sixty (60) days after the occurrence of the
event which forms the basis for his termination for Good Reason.  If Executive terminates his employment for
Good Reason, Executive shall be eligible for severance benefits as set forth in
Section 4.2 of Exhibit A, attached hereto.

 

(b)                        Definition of “Good Reason.”  For
purposes of this Agreement, “Good Reason” shall mean any one of the following
events which occurs on or after the Effective Date: (i) after a Change of
Control, any material reduction of the Executive’s then existing annual base
salary, except to the extent the annual base salary of all other executive
officers of the Company is similarly reduced (provided such reduction does not
exceed fifteen percent (15%) of Executive’s then existing annual base salary); (ii)
after a Change of Control, any material reduction in the package of benefits
and incentives, taken as a whole, provided to the Executive (except that
employee contributions may be raised to the extent of any cost increases
imposed by third parties) or any action by the Company which would materially
and adversely affect the Executive’s participation or reduce the Executive’s
benefits under any such plans, except to the extent that such benefits and
incentives of all other executive officers of the Company are similarly
reduced; (iii) after a Change of Control, any material diminution of the
Executive’s duties and responsibilities, taken as a whole, excluding for this
purpose an isolated, insubstantial or inadvertent action not taken in bad faith
which is remedied by the Company immediately after notice thereof is given by
the Executive; (iv) any material breach by the Company of its obligations under
this Agreement; (v) any failure by the Company to obtain the assumption of this
Agreement by any successor or assign of the Company; or (vi) any requirement
that the Executive relocate to a work site that would increase the Executive’s
one-way commute distance by more than thirty-five (35) miles from his then
principal residence, unless the required relocation is to the Company’s New
Jersey offices, or the Executive otherwise accepts such relocation opportunity.

 

6.6                               Termination for Death or Disability.  Executive’s
employment with the Company will be terminated in the event of Executive’s
death, or any illness, disability or other incapacity in such a manner that
Executive is physically rendered unable regularly to perform his duties
hereunder for a period in excess of one hundred eighty (180) consecutive days
or more than one hundred eighty (180) days in any consecutive twelve (12) month
period.  The determination regarding
whether Executive is physically unable regularly to perform his duties shall be
made by the Board.  Executive’s
inability to be physically present on the Company’s premises shall not constitute
a presumption that Executive is unable to perform such duties.  In the event that Executive’s employment
with the Company is terminated for death or disability as described in this
Section 6.6, Executive or Executive’s heirs, successors, and assigns shall not
receive any compensation or benefits other than payment of accrued salary and
PTO and such other benefits as expressly required in such event by applicable
law or the terms of applicable benefit plans.

 

6.7                               Cessation.  If Executive violates
any provision of Section 8 of this Agreement or the Employee Proprietary
Information and Inventions Agreement and Executive

 

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fails to correct such violation within ten (10) days after Executive is
given written notice by the CEO or the Board, as appropriate, then any
severance payments or other benefits being provided to Executive will cease
immediately, and Executive will not be entitled to any further compensation
from the Company.

 

7.                                      CHANGE OF CONTROL.

 

7.1                               Definition.  For purposes of this Agreement, Change of Control means the
occurrence of any of the following:

 

(a)               a sale of assets
representing fifty percent (50%) or more of the net book value and of the fair
market value of the Company’s consolidated assets (in a single transaction or
in a series of related transactions);

 

(b)               a
liquidation or dissolution of the Company;

 

(c)               a merger or
consolidation involving the Company or any subsidiary of the Company after the
completion of which: (i) in the case of a merger (other than a triangular
merger) or a consolidation involving the Company, the shareholders of the
Company immediately prior to the completion of such merger or consolidation
beneficially own (within the meaning of Rule 13d-3 promulgated under the Securities
Exchange Act of 1934, as amended (the “Exchange Act”), or comparable successor
rules), directly or indirectly, outstanding voting securities representing less
than fifty percent (50%) of the combined voting power of the surviving entity
in such merger or consolidation, and (ii) in the case of a triangular merger
involving the Company or a subsidiary of the Company, the shareholders of the
Company immediately prior to the completion of such merger beneficially own
(within the meaning of Rule 13d-3 promulgated under the Exchange Act, or
comparable successor rules), directly or indirectly, outstanding voting
securities representing less than fifty percent (50%) of the combined voting
power of the surviving entity in such merger and less than fifty percent (50%)
of the combined voting power of the parent of the surviving entity in such
merger;

 

(d)               an acquisition by
any person, entity or “group” (within the meaning of Section 13(d) or 14(d) of
the Exchange Act or any comparable successor provisions), other than any
employee benefit plan, or related trust, sponsored or maintained by the Company
or an affiliate of the Company and other than in a merger or consolidation of
the type referred to in clause “(c)” of this sentence, of beneficial ownership
(within the meaning of Rule 13d-3 promulgated under the Exchange Act, or
comparable successor rules) of outstanding voting securities of the Company
representing more than fifty percent (50%) of the combined voting power of the
Company (in a single transaction or series of related transactions); or

 

(e)               in the event that
the individuals who, as of the Effective Date, are members of the Board (the
“Incumbent Board”), cease for any reason to constitute at least fifty percent
(50%) of the Board.  (If the election, or
nomination for election by the Company’s shareholders, of any new member of the
Board is approved by a vote of at least fifty percent (50%) of the Incumbent
Board, such new member of the Board shall be considered as a member of the
Incumbent Board.)

 

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7.2                               Termination After a Change
of Control.  In
the event Executive’s employment with the Company is terminated without Cause,
or Executive resigns for Good Reason, within ninety (90) days prior to or
twenty-four (24) months following a Change of Control (a “Change of Control
Termination”), then Executive shall be eligible for severance benefits as set
forth in Section 4.3 of Exhibit A, attached hereto.

 

7.3                               Parachute Payments.  In the event that it shall be determined
under this Section 7.3 that any payment or benefit to Executive or for the
benefit of Executive or on Executive’s behalf (whether paid or payable or
distributed or distributable) pursuant to the terms of this Agreement or any
other agreement, arrangement or plan with the Company or any Affiliate (as
defined below) (including, without limitation, the severance benefits as set
forth in Section 4.3 of Exhibit A, attached hereto) (individually, a “Payment”
and collectively, the “Payments”) would be subject to the excise tax imposed by
Section 4999 of the Internal Revenue Code of 1986, as amended (the “Code”), or
any successor provision thereto (the “Excise Tax”), then Executive shall be
entitled to receive from the Company one or more additional payments
(individually, a “Gross-Up Payment” and collectively, the “Gross-Up Payments”)
in an aggregate amount such that the net amount of the Payments and the
Gross-Up Payments retained by Executive after the payment of all Excise Taxes
(and any interest and penalties imposed with respect to such Excise Taxes) on
the Payments and all federal, state and local income tax, employment taxes and
Excise Taxes (including any interest and penalties imposed with respect to such
taxes and Excise Taxes) on the Gross-Up Payments provided for in this Section
7.3, and taking into account any lost or reduced tax deductions on account of
the Gross-Up Payments, shall be equal to the Payments.  For purposes of this Section 7.3, an
“Affiliate” shall mean any successor to all or substantially all of the
business and/or assets of the Company, any person acquiring ownership or
effective control of the Company or ownership of a substantial portion of the
assets of the Company’s assets, or any other person whose relationship to the
Company, such successor or such person acquiring ownership or control is such
as to require attribution between the parties under Section 318(a) of the Code.

 

(a)                        All determinations required to be made under
this Section 7.3, including whether and when any Gross-Up Payment is required
and the amount of such Gross-Up Payment, and the assumptions to be utilized in
arriving at such determinations, shall be made by the Accountants (as defined
below), which shall provide Executive and the Company with detailed supporting
calculations with respect to such Gross-Up Payment within thirty (30) days of
the receipt of notice from Executive or the Company that Executive has received
or will receive a Payment.  For the
purposes of this Section 7.3, the “Accountants” shall mean the Company’s
independent certified public accounting firm serving immediately prior to the
Change of Control (or other change in ownership or effective control, or change
in ownership of a substantial portion of the assets, of a corporation, as
defined in Section 280G of the Code) with respect to which such
determination is being made.  In the
event that the Accountants are also serving as the accountants, auditors or
consultants for the individual, entity or group effecting the Change of Control
(or other change in ownership or effective control, or change in ownership of a
substantial portion of the assets, of a corporation, as defined in Section 280G
of the Code), the Company shall appoint another nationally recognized
independent certified public accounting firm, reasonably acceptable to
Executive, to make the determinations required hereunder (which accounting firm
shall then be referred to as the “Accountants” hereunder).  All fees and expenses of the Accountants
shall be borne solely by the Company.

 

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(b)                        For the
purposes of determining whether any of the Payments will be subject to the
Excise Tax and the amount of such Excise Tax, such Payments will be treated as
“parachute payments” within the meaning of section 280G of the Code, and
all “parachute payments” in excess of the “base amount” (as defined under
Section 280G(b)(3) of the Code) of Executive shall be treated as subject
to the Excise Tax, unless and except to the extent that, in the opinion of the
Accountants, such Payments (in whole or in part) either do not constitute
“parachute payments” or represent reasonable compensation for services actually
rendered (within the meaning of section 280G(b)(4) of the Code) in excess
of the “base amount,” or such “parachute payments” are otherwise not subject to
such Excise Tax.

 

(c)                        For
purposes of determining the amount of the Gross-Up Payment, Executive shall be
deemed to pay federal income taxes at the highest applicable marginal rate of
federal income taxation for the calendar year in which the Gross-Up Payment is
to be made and to pay any applicable state and local income taxes at the
highest applicable marginal rate of taxation for the calendar year in which the
Gross-Up Payment is to be made, net of the maximum reduction in federal income
taxes which could be obtained from the deduction of such state or local taxes
if paid in such year (determined without regard to limitations on deductions
based upon the amount of Executive’s adjusted gross income); and to have
otherwise allowable deductions for federal, state and local income tax purposes at least equal to those
disallowed because of the inclusion of the Gross-Up Payment in Executive’s
adjusted gross income.

 

(d)                        Any
determination by the Accountants shall be binding upon the Company and
Executive.  As a result of uncertainty
in the application of Section 4999 of the Code at the time of the initial
determination by the Accountants hereunder, it is possible that the Gross-Up
Payment made will have been an amount less than the Company should have paid
pursuant to this Section 7.3 (the “Underpayment”).  In the event that the Company exhausts its remedies pursuant to
Section 7.3(f) and Executive is required to make a payment of any Excise Tax,
the Underpayment shall be promptly paid by the Company to or for Executive’s
benefit.

 

(e)                        Executive
shall notify the Company in writing of any claim by the Internal Revenue
Service or other taxing authority that, if successful, would require the
payment by the Company of a Gross-Up Payment. 
Such notification shall be given as soon as practicable after Executive
is informed in writing of such claim and shall apprise the Company of the
nature of such claim and the date on which such claim is requested to be
paid.  Executive shall not pay such
claim prior to the expiration of the 30-day period following the date on which
Executive gives such notice to the Company (or such shorter period ending on
the date that any payment of taxes, interest and/or penalties with respect to
such claim is due).  If the Company
notifies Executive in writing prior to the expiration of such period that the
Company desires to contest such claim, Executive shall: (i) give the Company
any information reasonably requested by the Company relating to such claim;
(ii) take such action in connection with contesting such claim as the Company
shall reasonably request in writing from time to time, including, without
limitation, engaging legal representation with respect to such claim by an
attorney selected by the Company and reasonably acceptable to Executive; (iii)
cooperate with the Company in good faith in order to effectively contest such
claim; and (iv) permit the Company to participate in any proceedings relating
to such  claims; provided, however, that the Company shall
bear and pay directly all costs and expenses, including attorneys’ fees
(including additional interest and penalties) incurred in

 

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connection
with such contest and shall indemnify Executive for and hold Executive harmless
from, on an after-tax basis, any Excise Tax or income, employment or other
taxes (including interest and penalties with respect thereto) imposed as a
result of such representation and payment of all related costs and expenses.

 

(f)                          Without
limiting the foregoing provisions of this Section 7.3, the Company shall
control all proceedings taken in connection with such contest and, at the
Company’s sole option, may pursue or forgo any and all administrative appeals,
proceedings, hearings and conferences with the Internal Revenue Service or
other taxing authority in respect of such claim and may, at the Company’s sole
option, either direct Executive to pay the amount claimed and sue for a refund
or contest the claim in any permissible manner, and Executive agrees to
prosecute such contest to a determination before any administrative tribunal,
in a court of initial jurisdiction and in one or more appellate courts, as the
Company shall determine; provided, however,
that if the Company directs Executive to pay such claim and sue for a refund,
the Company shall advance the amount of such payment to Executive, on an
interest-free basis, and shall indemnify Executive for and hold Executive
harmless from, on an after-tax basis, any Excise Tax or income, employment or
other taxes (including interest or penalties with respect thereto) imposed with
respect to such advance or with respect to any imputed income with respect to
such advance (including as a result of any forgiveness by the Company of such
advance); provided, further, that
any extension of the statute of limitations relating to the payment of taxes,
interest and penalties for the taxable year of Executive with respect to which
such contested amount is claimed to be due shall be limited solely to such
contested amount.  Furthermore, the
Company’s control of the contest shall be limited to issues with respect to
which a Gross-Up Payment would be payable hereunder and Executive shall be entitled
to settle or contest, as the case may be, any other issue raised by the
Internal Revenue Service or any other taxing authority.

 

(g)                       The
Gross-Up Payments provided for in this Section 7.3 shall be paid to Executive
not later than the date upon which the severance benefits payable to Executive
under Section  4.3 of Exhibit A,
attached hereto, are  due; provided, however, that if the amounts
of such Gross-Up Payments cannot be finally determined by the Accountants on or
before such day, the Company shall pay to Executive on such day an estimate, as
determined in good faith by the Company, of the minimum amount of such Gross-Up
Payments and shall pay the remainder of such Gross-Up Payments (together with
interest at the rate provided in Section 1274(b)(2)(B) of the Code) not later
than 30 days after the amount thereof can be determined by the
Accountants.  In the event that the
amount of the estimated payments exceeds the amount subsequently determined by
the Accountants to have been due to the Executive, such excess shall constitute
a loan by the Company to Executive, payable not later than 30 days after such
determination and demand by the Company (together with interest at the rate
provided in Section 1274(b)(2)(B) of the Code).

 

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8.                                      NONSOLICITATION.  While employed
by the Company, and for one (1) year following the termination of Executive’s
employment with the Company, Executive agrees not to solicit, attempt to
solicit, induce, or otherwise cause any employee or independent contractor of
the Company to terminate his or her employment or contractual relationship in
order to become an employee or independent contractor to or for Executive or
any other person or entity.

 

9.                                      RELEASE.  In exchange for the
severance compensation and benefits provided under this Agreement to which
Executive would not otherwise be entitled, Executive shall enter into and
execute a release substantially in the form attached hereto as Exhibit B (the
“Release”) upon Executive’s termination of employment.  Unless the Release is executed by Executive
and delivered to the Company within twenty-one (21) days (forty-five (45) days
in the event of a group termination) after the termination of Executive’s
employment with the Company, Executive shall not receive any severance benefits
provided under this Agreement, acceleration, if any, of Executive’s Options as
provided in this Agreement shall not apply and Executive’s Options in such
event may be exercised following the date of Executive’s termination only to
the extent provided under their original terms in accordance with the
applicable stock option plan and option agreements.

 

10.                               GENERAL PROVISIONS.

 

10.1                        Notices.  Any notices provided
hereunder must be in writing and shall be deemed effective upon personal
delivery (including, personal delivery by facsimile transmission) or the third
day after mailing by first class mail, to the Company at its primary office
location and to Executive at his address as listed on the Company payroll
(which address may be changed by written notice).

 

10.2                        Severability.  Whenever possible, each provision of this Agreement will be
interpreted in such manner as to be effective and valid under applicable law,
but if any provision of this Agreement is held to be invalid or unenforceable
in any respect under any applicable law or rule in any jurisdiction, such
invalidity or unenforceability will not affect any other provision or any other
jurisdiction, and such invalid or unenforceable provision shall be reformed,
construed and enforced in such jurisdiction so as to render it valid and
enforceable consistent with the intent of the parties insofar as possible.

 

10.3                        Waiver.  If either party should
waive any breach of any provisions of this Agreement, he or it shall not
thereby be deemed to have waived any preceding or succeeding breach of the same
or any other provision of this Agreement.

 

10.4                        Entire Agreement.  This Agreement, together with the Employee Proprietary
Information and Inventions Agreement, constitute the final, complete, and
exclusive embodiment of the entire agreement between Executive and the Company
regarding the subject matter hereof and supersede any prior agreement, promise,
representation, or statement, written or otherwise, between Executive and the
Company with regard to this subject matter. 
This Agreement is entered into without reliance on any promise,
representation, statement or agreement other than those expressly contained or
incorporated herein, and it cannot be modified or amended except in a writing
signed by Executive and a duly authorized officer of the Company.

 

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10.5                        Counterparts.  This Agreement may
be executed in separate counterparts, any one of which need not contain
signatures of more than one party, but all of which taken together will
constitute one and the same Agreement.

 

10.6                        Headings.  The headings of the
sections hereof are inserted for convenience only and shall not be deemed to
constitute a part hereof nor to affect the meaning thereof.

 

10.7                        Successors and Assigns.  This
Agreement is intended to bind and inure to the benefit of and be enforceable by
Executive, the Company and their respective successors, assigns, heirs,
executors and administrators, except that Executive may not assign any of his
duties hereunder and he may not assign any of his rights hereunder without the
written consent of the Company, which shall not be withheld unreasonably.

 

10.8                        Attorneys’ Fees.  If either party
hereto brings any action to enforce his or its rights hereunder, the prevailing
party in any such action shall be entitled to recover his or its reasonable
attorneys’ fees and costs incurred in connection with such action.

 

10.9                        Arbitration.  To provide a
mechanism for rapid and economical dispute resolution, Executive and the Company
agree that any and all disputes, claims, or causes of action, in law or equity,
arising from or relating to this Agreement (including the Release) or its
enforcement, performance, breach, or interpretation, will be resolved, to the
fullest extent permitted by law, by final, binding, and confidential
arbitration held in Orange County, California and conducted by Judicial
Arbitration & Mediation Services/Endispute (“JAMS”), under its
then-existing Rules and Procedures. 
Nothing in this Section 10.9 or in this Agreement is intended to prevent
either Executive or the Company from obtaining injunctive relief in court to
prevent irreparable harm pending the conclusion of any such arbitration.

 

10.10                 Remedies.  Executive’s duties
under Section 8 and the Employee Proprietary Information and Inventions
Agreement shall survive termination of Executive’s employment with the
Company.  Executive acknowledges that a
remedy at law for any breach or threatened breach by Executive of the
provisions of these sections and the Employee Proprietary Information and
Inventions Agreement would be inadequate, and that such a breach would cause
irreparable harm to the Company; and Executive therefore agrees that the
Company shall be entitled to injunctive relief in case of any such breach or
threatened breach.

 

10.11                 Governing Law.  All questions
concerning the construction, validity and interpretation of this Agreement will
be governed by the law of the State of California as applied to contracts made
and to be performed entirely within California.

 

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IN WITNESS
WHEREOF, the parties
have executed this Agreement effective as of the Effective Date above written.

 

	
  WATSON PHARMACEUTICALS, INC.

  
	
   

  
	
   

  
	
  By:

  	
  /s/ Allen Chao

  	
   

  
	
   

  	
  Name:  Allen
  Chao

  
	
   

  	
  Title:  CEO
  & Chairman

  
	
   

  
	
   

  
	
  EXECUTIVE:

  
	
   

  
	
   

  
	
  /s/ Charles
  Slacik

  	
   

  
	
  Name:

  	
   

  	
   

  
				

 

11

 

EXHIBIT A

 

COMPENSATION
AND SEVERANCE TERMS SCHEDULE

 

1.                                     BASE SALARY

 

For services to be rendered
under this Agreement, Executive shall receive an initial base salary at an
annualized rate of $450,000, payable in accordance with the Company’s standard
payroll practices, and subject to increases as set forth in the Agreement.

 

2.                                     BONUS

 

Executive’s annual bonus, if
granted, shall be at a target level of 40% of the Executive’s then current base
salary.

 

3.                                     STOCK OPTIONS

 

Within thirty days of the
Effective Date, Executive shall receive an Option grant of 100,000 shares of
Company common stock.  Such Option grant
shall be subject to the terms and conditions of the Company’s 2001 Incentive
Award Plan.

 

4.                                     SEVERANCE BENEFITS

 

4.1                               Termination By Company
without Cause.  If
the Company terminates Executive’s employment at any time without Cause, the
Company shall provide to Executive, within thirty (30) days after the Effective
Date of the Release attached hereto as Exhibit B (as “Effective Date” is
defined in the Release), as the only severance compensation and benefits all of
the following:

 

(a)                                  A lump sum severance payment, subject to standard
withholdings or deductions, in an amount equal to the sum of: (i) twenty-four
(24) months of Executive’s then base salary; (ii) two times Executive’s target
bonus to be earned for the year in which termination occurs or two times the
bonus amount paid to the Executive in the prior year, whichever is greater; and
(iii) Executive’s prorated bonus for the year in which the termination occurs,
at the Company’s discretion.

 

(b)                                 Continued group health insurance benefits
(e.g., medical, dental, vision, etc.) for Executive and Executive’s eligible
dependents for a period of up to eighteen (18) months under COBRA, and if
Executive is not covered under the Company’s group health insurance plan at the
end of eighteen (18) months, the Company shall use its best efforts to provide
Executive and Executive’s eligible dependents with comparable health insurance
coverage for an additional period of up six (6) months, but the Company shall
not be obligated to pay more than one hundred fifty percent (150%) of the cost
of COBRA coverage for such comparable coverage; provided, however, that in any
event the Company’s obligation to provide any health benefits pursuant to this
sentence ends when Executive becomes eligible for health insurance with a new

 

1

 

employer (and Executive
agrees to promptly notify the Company in writing of any such event of
eligibility).

 

(c)                                  Outplacement services for one year with a
nationally recognized service selected by the Company.

 

4.2                               Executive’s Resignation for
Good Reason.  If
Executive terminates his employment with the Company for Good Reason, the
Company shall provide to Executive, within thirty (30) days after the Effective
Date of the Release attached hereto as Exhibit B (as “Effective Date” is
defined in the Release), as the only severance compensation and benefits, the
same severance compensation and benefits provided in Section 4.1 hereof.

 

4.3                               Change of Control
Termination.  In
the event of a Change of Control Termination, the Company shall provide to
Executive, within thirty (30) days after the Effective Date of the Release
attached hereto as Exhibit B (as “Effective Date” is defined in the Release),
as the only severance compensation and benefits, (a) the same severance
compensation and benefits provided in Section 4.1 hereof and, (b) any unvested
Options held by Executive shall have their vesting accelerated in full so as to
become one hundred percent (100%) vested and immediately exercisable in full as
of the date of such termination.

 

5.                                     Relocation.

 

Executive shall relocate his principal residence within the thirty days
following the Effective Date to a location in the Corona, California, vicinity
and shall report to the Company’s facility in Corona, California as his
principal place of business.  Executive
shall be eligible to receive such relocation assistance as offered generally by
the Company to its executives pursuant to the Company’s then existing policies
as of the Effective Date; provided however, that should Executive’s employment
with the Company terminate (other than by the Company without Cause) within 1
(one) year of the Effective Date, Executive will reimburse the Company for such
relocation expenses incurred by the Company in accordance with the terms of the
Reimbursement Agreement executed by Executive concurrently with the execution
of this Agreement.

 

2

 

regarding my former duties
and responsibilities.  Effective as of
the Separation Date, I resign any and all offices and directorships with the
Company and any of its affiliates, and will execute all documents reasonably
requested by the Company or its affiliates to effectuate such
resignations.  Further, I agree that I
will not hereafter disparage the Company or any of the Releasees, either orally
or in writing, to any person or entity. 
The Company agrees that its officers and directors will not disparage
me, either orally or in writing, to any person or entity.

 

	
  Agreed:

  	
   

  
	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Date

  	
  [Employee]

  
	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Date

  	
  WATSON PHARMACEUTICALS,
  INC.

  

 

3

 

EXHIBIT C

 

EMPLOYEE
PROPRIETARY INFORMATION AND INVENTION AGREEMENTEXHIBIT 10.2

 

WATSON PHARMACEUTICALS, INC.

 

KEY EMPLOYEE AGREEMENT

 

 

This Key
Employee Agreement (“Agreement”) is entered into as of June 16, 2003 (the
“Effective Date”), by and between Ian McInnes (“Executive”) and Watson
Pharmaceuticals, Inc., a Nevada corporation (the “Company”).

 

WHEREAS, the Company desires to employ Executive to
provide personal services to the Company, and wishes to provide Executive with
certain compensation and benefits in return for  his services; and

 

WHEREAS, Executive wishes to be employed by the
Company and provide personal services to the Company in return for certain
compensation and benefits, including the benefits provided under this
Agreement;

 

NOW,
THEREFORE, in
consideration of the mutual promises and covenants contained herein, it is
hereby agreed by and between the parties hereto as follows:

 

1.                                      EMPLOYMENT BY THE  COMPANY.  Subject to terms set forth herein, the
Company agrees to employ Executive in the position of Executive Vice President,
Supply Chain, and Executive hereby accepts employment effective as of the
Effective Date.  In this position,
Executive shall perform such duties as are assigned from time to time by the
Chief Executive Officer (“CEO”) of the Company or such other officer of the
Company or one of its subsidiaries that the CEO in his discretion may from time
to time designate (the “Designated Officer”), consistent with the Bylaws of the
Company and as may be required by the Company’s Board of Directors (the
“Board”).  During his employment with
the Company, Executive will devote his best efforts and substantially all of
his business time and attention (except for vacation periods as set forth
herein and reasonable periods of illness or other incapacity permitted by the
Company’s general employment policies) to the business of the Company.  Executive shall abide by the general
employment policies and procedures of the Company, except that wherever the
terms of this Agreement may differ from or  are
in conflict with the Company’s general employment policies or procedures, this
Agreement shall control.

 

2.                                      COMPENSATION.

 

2.1                               Salary.  For
services to be rendered hereunder, Executive shall receive a base salary as set
forth in Section 1 of the Compensation and Severance Terms Schedule, attached
hereto as Exhibit A.  Executive will be
considered annually for increases in base salary in accordance with Company
policy and subject to review and approval by the CEO, Designated Officer, or
the Compensation Committee of the Board, as appropriate.

 

2.2                               Bonus. 
Executive shall be eligible to participate in the Company’s bonus plan
at the executive level throughout the duration of Executive’s employment with
the Company.  The Company shall have the
sole discretion to determine whether Executive is entitled to any such bonus and
to determine the amount of the bonus. 
The amount of Executive’s bonus may be determined in part based on
Executive’s performance with respect to certain goals

 

1

 

established by the Company and attainment by
the Company of its planned financial objectives for the bonus period.  Notwithstanding the foregoing, no bonus is
guaranteed to Executive.  Any bonus is
subject to the approval of the CEO, Designated Officer, or the Compensation
Committee of the Board, as appropriate. 
The Company retains the authority to review, grant, deny or revise any
bonus in its sole discretion.  To be
eligible to receive a bonus, Executive must remain in employment with the
Company throughout the entire fiscal year or as otherwise set forth in the
applicable bonus plan.  The target level
of such bonus is set forth in Section 2 of Exhibit A attached hereto.

 

2.3                               Stock
Options.  Subject to approval of the
Board or the Compensation Committee of the Board, as appropriate, Executive will
receive the stock option grants (if any) set forth in Section 3 of Exhibit A,
and such additional grants of stock options as may from time to time be
granted, pursuant to the terms and conditions set forth in the applicable stock
option agreement and plan documents, copies of which will be made available
upon Executive’s request.  For the
purposes of this Agreement, all stock options granted to Executive by the
Company hereunder, or granted in the future, shall be referred to hereinafter
as the “Options.”

 

2.4                               Paid
Time Off.  Executive shall be
eligible to accrue paid time off (“PTO”) during the term of this Agreement, in
accordance with the Company’s standard policy regarding PTO and in an amount
commensurate with other employees at a level similar to that of the Executive.

 

2.5                               Standard
Company Benefits.  Executive shall
be entitled to all rights and benefits for which he is eligible under the terms
and conditions of the standard Company benefits plans (e.g., health and
disability insurance, 401(k) retirement plan, etc.) and other benefits and
incentives which may be in effect from time to time and provided by the Company
to employees at levels similar to the Executive.

 

3.                                      PROPRIETARY INFORMATION AND
INVENTIONS.

 

Executive
agrees to execute and abide by the Employee Proprietary Information and
Inventions Agreement attached hereto as Exhibit C and made a part hereof by
this reference.

 

4.                                      OUTSIDE
ACTIVITIES.

 

4.1                               Activities.  Except with the prior written consent of the
CEO or the Board, as appropriate, Executive will not during his employment with
the Company undertake or engage in any other employment, occupation or business
enterprise, other than ones in which Executive is a passive investor.  Executive may engage in civic and
not-for-profit activities so long as such activities do not materially
interfere with the performance of his duties hereunder.  Executive will not during his employment
with the Company publicly or privately disparage the Company or any of its
subsidiaries, or their respective past or present products, officers,
directors, employees or agents.

 

4.2                               Investments
and Interests.  During his
employment by the Company, Executive agrees not to acquire, assume or
participate in, directly or indirectly, any position, investment or interest known
by him to be adverse to or in conflict with the interest of the Company, its
business or prospects, financial or otherwise. 
By way of clarification, nothing

 

2

 

contained in this Agreement shall prevent
Executive from holding, for investment purposes only, no more than one percent
(1%) of the capital stock of any publicly traded company.

 

4.3                               Non-Competition.  During his employment by the Company, except
on behalf of the Company, Executive will not directly or indirectly, whether as
an officer, director, stockholder, partner, proprietor, associate,
representative, consultant, or in any capacity whatsoever engage in, become
financially interested in, be employed by or have any business connection with
any other person, corporation, firm, partnership or other entity whatsoever
known by him to compete directly with the Company, anywhere in the world, in
any line of business engaged in (or planned to be engaged in) by the Company.

 

5.                                      Other Agreements.

 

Executive
represents and warrants that his employment by the Company will not conflict
with and will not be constrained by any prior agreement or relationship with
any third party.  Executive represents
and warrants that he will not disclose to the Company or use on behalf of the
Company any confidential information governed by any agreement with any third
party except in accordance with an agreement between the Company and any such
third party.  During Executive’s employment
by the Company, Executive may use, in the performance of his duties, all
information generally known and used by persons with training and experience
comparable to his own and all information which is common knowledge in the
industry or otherwise legally in the public domain.

 

6.                                      TERMINATION
OF EMPLOYMENT.

 

6.1                               At-Will
Employment.  Executive’s
relationship with the Company is at-will. 
The Company shall have the right to terminate Executive’s employment
with the Company at any time with or without Cause and with or without notice.

 

6.2                               Termination
by Company for Cause.  If the
Company terminates Executive’s employment at any time for Cause, Executive’s
salary shall cease on the date of termination; and Executive will not be
entitled to severance pay, pay in lieu of notice or any other such compensation.

 

(a)                        Definition
of “Cause.”  For purposes of this
Agreement, “Cause” shall mean (i) Executive’s conviction of any felony; or,
(ii) Executive’s gross misconduct, material violation of Company policy, or
material breach of Executive’s duties to the Company, which Executive fails to
correct within thirty (30) days after Executive is given written notice by the
CEO or the Board, as appropriate.

 

6.3                               Termination
by Company Without Cause.  If the
Company terminates Executive’s employment at any time without Cause, Executive
shall be entitled to severance benefits as set forth in Section 4.1 of the
Compensation and Severance Terms Schedule, attached hereto as Exhibit A.

 

6.4                               Executive’s
Voluntary Resignation.  Executive
may terminate his employment with the Company at any time, with or without Good
Reason, and with or without notice.  In
the event Executive voluntarily terminates his employment other than for Good

 

3

 

Reason, he will not be entitled to severance pay, pay in lieu of notice
or any other such compensation.

 

6.5                               Executive’s Resignation for
Good Reason.  Executive may resign his employment for Good
Reason so long as Executive tenders his resignation to the Company within sixty
(60) days after the occurrence of the event which forms the basis for his
termination for Good Reason.  If
Executive terminates his employment for Good Reason, Executive shall be
eligible for severance benefits as set forth in Section 4.2 of Exhibit A,
attached hereto.

 

(b)                        Definition of “Good Reason.”  For
purposes of this Agreement, “Good Reason” shall mean any one of the following
events which occurs on or after the Effective Date:  (i) after a Change of Control, any material reduction of
the Executive’s then existing annual base salary, except to the extent the
annual base salary of all other executive officers of the Company is similarly
reduced (provided such reduction does not exceed fifteen percent (15%) of
Executive’s then existing annual base salary); (ii) after a Change of Control,
any material reduction in the package of benefits and incentives, taken as a
whole, provided to the Executive (except that employee contributions may be
raised to the extent of any cost increases imposed by third parties) or any
action by the Company which would materially and adversely affect the
Executive’s participation or reduce the Executive’s benefits under any such
plans, except to the extent that such benefits and incentives of all other
executive officers of the Company are similarly reduced; (iii) after a Change
of Control, any material diminution of the Executive’s duties and
responsibilities, taken as a whole, excluding for this purpose an isolated,
insubstantial or inadvertent action not taken in bad faith which is remedied by
the Company immediately after notice thereof is given by the Executive; (iv)
any material breach by the Company of its obligations under this Agreement; (v)
any failure by the Company to obtain the assumption of this Agreement by any
successor or assign of the Company; or (vi) any requirement that the Executive
relocate to a work site that would increase the Executive’s one-way commute
distance by more than thirty-five (35) miles from his then principal residence,
unless the Executive accepts such relocation opportunity.

 

6.6                               Termination for Death or
Disability.  Executive’s employment with the Company will
be terminated in the event of Executive’s death, or any illness, disability or
other incapacity in such a manner that Executive is physically rendered unable
regularly to perform his duties hereunder for a period in excess of one hundred
eighty (180) consecutive days or more than one hundred eighty (180) days in any
consecutive twelve (12) month period. 
The determination regarding whether Executive is physically unable
regularly to perform his duties shall be made by the Board.  Executive’s inability to be physically
present on the Company’s premises shall not constitute a presumption that
Executive is unable to perform such duties. 
In the event that Executive’s employment with the Company is terminated
for death or disability as described in this Section 6.6, Executive or
Executive’s heirs, successors, and assigns shall not receive any compensation
or benefits other than payment of accrued salary and PTO and such other
benefits as expressly required in such event by applicable law or the terms of
applicable benefit plans.

 

6.7                               Cessation.  If
Executive violates any provision of Section 8 of this Agreement or the Employee
Proprietary Information and Inventions Agreement and Executive fails to correct
such violation within ten (10) days after Executive is given written notice by
the

 

4

 

CEO or the Board, as appropriate, then any
severance payments or other benefits being provided to Executive will cease
immediately, and Executive will not be entitled to any further compensation
from the Company.

 

7.                                      CHANGE
OF CONTROL.

 

7.1                               Definition.  For
purposes of this Agreement, Change of Control means the  occurrence of any of the following:

 

(a)                        a sale of assets representing
fifty percent (50%) or more of the net book value and of the fair market value
of the Company’s consolidated assets (in a single transaction or in a series of
related transactions);

 

(b)                        a liquidation or dissolution of
the Company;

 

(c)                        a merger or consolidation
involving the Company or any subsidiary of the Company after the completion of
which: (i) in the case of a merger (other than a triangular merger) or a
consolidation involving the Company, the shareholders of the Company
immediately prior to the completion of such merger or consolidation
beneficially own (within the meaning of Rule 13d-3 promulgated under the
Securities Exchange Act of 1934, as amended (the “Exchange Act”), or comparable
successor rules), directly or indirectly, outstanding voting securities
representing less than fifty percent (50%) of the combined voting power of the
surviving entity in such merger or consolidation, and (ii) in the case of a
triangular merger involving the Company or a subsidiary of the Company, the
shareholders of the Company immediately prior to the completion of such merger
beneficially own (within the meaning of Rule 13d-3 promulgated under the
Exchange Act, or comparable successor rules), directly or indirectly,
outstanding voting securities representing less than fifty percent (50%) of the
combined voting power of the surviving entity in such merger and less than
fifty percent (50%) of the combined voting power of the parent of the surviving
entity in such merger;

 

(d)                        an acquisition by any person,
entity or “group” (within the meaning of Section 13(d) or 14(d) of the Exchange
Act or any comparable successor provisions), other than any employee benefit
plan, or related trust, sponsored or maintained by the Company or an affiliate
of the Company and other than in a merger or consolidation of the type referred
to in clause “(c)” of this
sentence, of beneficial ownership (within the meaning of Rule 13d-3 promulgated
under the Exchange Act, or comparable successor rules) of outstanding voting
securities of the Company representing more than fifty percent (50%) of the
combined voting power of the Company (in a single transaction or series of
related transactions); or

 

(e)                        in the event that the
individuals who, as of the Effective Date, are members of the Board (the
“Incumbent Board”), cease for any reason to constitute at least fifty percent
(50%) of the Board.  (If the election,
or nomination for election by the Company’s shareholders, of any new member of
the Board is approved by a vote of at least fifty percent (50%) of the
Incumbent Board, such new member of the Board shall be considered as a member
of the Incumbent Board.)

 

7.2                               Termination
After a Change of Control.  In the
event Executive’s employment with the Company is terminated without Cause, or
Executive resigns for Good

 

5

 

Reason, within ninety (90)
days prior to or twenty-four (24) months following a Change of Control (a
“Change of Control Termination”), then Executive shall be eligible for
severance benefits as set forth in Section 4.3 of Exhibit A, attached hereto.

 

7.3                               Parachute  Payments.  In the event that it shall be determined
under this Section 7.3 that any payment or benefit to Executive or for the benefit
of Executive or on Executive’s behalf (whether paid or payable or distributed
or distributable) pursuant to the terms of this Agreement or any other
agreement, arrangement or plan with the Company or any Affiliate (as defined
below) (including, without limitation, the severance benefits as set forth in
Section 4.3 of Exhibit A, attached hereto) (individually, a “Payment” and
collectively, the “Payments”) would be subject to the excise tax imposed by
Section 4999 of the Internal Revenue Code of 1986, as amended (the “Code”), or
any successor provision thereto (the “Excise Tax”), then Executive shall be
entitled to receive from the Company one or more additional payments
(individually, a “Gross-Up Payment” and collectively, the “Gross-Up Payments”)
in an aggregate amount such that the net amount of the Payments and the
Gross-Up Payments retained by Executive after the payment of all Excise Taxes
(and any interest and penalties imposed with respect to such Excise Taxes) on
the Payments and all federal, state and local income tax, employment taxes and
Excise Taxes (including any interest and penalties imposed with respect to such
taxes and Excise Taxes) on the Gross-Up Payments provided for in this Section
7.3, and taking into account any lost or reduced tax deductions on account of
the Gross-Up Payments, shall be equal to the Payments.  For purposes of this Section 7.3, an
“Affiliate” shall mean any successor to all or substantially all of the
business and/or assets of the Company, any person acquiring ownership or
effective control of the Company or ownership of a substantial portion of the
assets of the Company’s assets, or any other person whose relationship to the
Company, such successor or such person acquiring ownership or control is such
as to require attribution between the parties under Section 3l8(a) of the Code.

 

(a)                                  All determinations required to be made under
this Section 7.3, including whether and when any Gross-Up Payment is required
and the amount of such Gross-Up Payment, and the assumptions to be utilized in
arriving at such determinations, shall be made by the Accountants (as defined
below), which shall provide Executive and the Company with detailed supporting
calculations with respect to such Gross-Up Payment within thirty (30) days of
the receipt of notice from Executive or the Company that Executive has received
or will receive a Payment.  For the
purposes of this Section 7.3, the “Accountants” shall mean the Company’s
independent certified public accounting firm serving immediately prior to the
Change of Control (or other change in ownership or effective control, or change
in ownership of a substantial portion of the assets, of a corporation, as
defined in Section 280G of the Code) with respect to which such determination
is being made.  In the event that the
Accountants are also serving as the accountants, auditors or consultants for
the individual, entity or group effecting the Change of Control (or other
change in ownership or effective control, or change in ownership of a
substantial portion of the assets, of a corporation, as defined in Section 280G
of the Code), the Company shall appoint another nationally recognized
independent certified public accounting firm, reasonably acceptable to
Executive, to make the determinations required hereunder (which accounting firm
shall then be referred to as the “Accountants” hereunder).  All fees and expenses of the Accountants
shall be borne solely by the Company.

 

(b)                                  For the purposes of determining whether any
of the Payments will be subject to the Excise Tax and the amount of such Excise
Tax, such Payments will be treated as “parachute payments” within the meaning
of section 280G of the Code, and all “parachute

 

6

 

payments” in excess of the “base amount” (as defined under Section
280G(b)(3) of the Code) of Executive shall be treated as subject to the Excise
Tax, unless and except to the extent that, in the opinion of the Accountants,
such Payments (in whole or in part) either do not constitute “parachute
payments” or represent reasonable compensation for services actually rendered
(within the meaning of section 280G(b)(4) of the Code) in excess of the “base
amount,” or such “parachute payments” are otherwise not subject to such Excise
Tax.

 

(c)                                  For purposes of determining the amount of the
Gross-Up Payment, Executive shall be deemed to pay federal income taxes at the
highest applicable marginal rate of federal income taxation for the calendar
year in which the Gross-Up Payment is to be made and to pay any applicable
state and local income taxes at the highest applicable marginal rate of
taxation for the calendar year in which the Gross-Up Payment is to be made, net
of the maximum reduction in federal income taxes which could be obtained from
the deduction of such state or local taxes if paid in such year (determined
without regard to limitations on deductions based upon the amount of
Executive’s adjusted gross income);  and
to have otherwise allowable deductions for federal, state and local income tax
purposes at least equal to those disallowed because of the inclusion of the
Gross-Up Payment in Executive’s adjusted gross income.

 

(d)                                  Any determination by the Accountants shall be
binding upon the Company and Executive. 
As a result of uncertainty in the application of Section 4999 of the
Code at the time of the initial determination by the Accountants hereunder, it
is possible that the Gross-Up Payment made will have been an amount less than
the Company should have paid pursuant to this Section 7.3 (the “Underpayment”).  In the event that the Company exhausts its
remedies pursuant to Section 7.3(f) and Executive is required to make a payment
of any Excise Tax, the Underpayment shall be promptly paid by the Company to or
for Executive’s benefit.

 

(e)                                  Executive shall notify the Company in writing
of any claim by the Internal Revenue Service or other taxing authority that, if
successful, would require the payment by the Company of a Gross-Up
Payment.  Such notification shall be
given as soon as practicable after Executive is informed in writing of such
claim and shall apprise the Company of the nature of such claim and the date on
which such claim is requested to be paid. 
Executive shall not pay such claim prior to the expiration of the 30-day
period following the date on which Executive gives such notice to the Company
(or such shorter period ending on the date that any payment of taxes, interest
and/or penalties with respect to such claim is due).  If the Company notifies Executive in writing prior to the expiration
of such period that the Company desires to contest such claim, Executive
shall:  (i) give the Company any
information reasonably requested by the Company relating to such claim; (ii)
take such action in connection with contesting such claim as the Company shall
reasonably request in writing from time to time, including, without limitation,
engaging legal representation with respect to such claim by an attorney
selected by the Company and reasonably acceptable to Executive; (iii) cooperate
with the Company in good faith in order to effectively contest such claim; and
(iv) permit the Company to participate in any proceedings relating to such
claims; provided, however, that
the Company shall bear and pay directly all costs and expenses, including
attorneys’ fees (including additional interest and penalties) incurred in
connection with such contest and shall indemnify Executive for and hold
Executive harmless from, on an after-tax basis, any Excise Tax or income,
employment or other taxes (including

 

7

 

interest and penalties with respect thereto) imposed as a result of
such representation and payment of all related costs and expenses.

 

(f)                                    Without limiting the foregoing provisions of
this Section 7.3, the Company shall control all proceedings taken in connection
with such contest and, at the Company’s sole option, may pursue or forgo any
and all administrative appeals, proceedings, hearings and conferences with the
Internal Revenue Service or other taxing authority in respect of such claim and
may, at the Company’s sole option, either direct Executive to pay the amount
claimed and sue for a refund or contest the claim in any permissible manner,
and Executive agrees to prosecute such contest to a determination before any
administrative tribunal, in a court of initial jurisdiction and in one or more
appellate courts, as the Company shall determine;  provided, however,
that if the Company directs Executive to pay such claim and sue for a refund,
the Company shall advance the amount of such payment to Executive, on an
interest-free basis, and shall indemnify Executive for and hold Executive
harmless from, on an after-tax basis, any Excise Tax or income, employment or
other taxes (including interest or penalties with respect thereto) imposed with
respect to such advance or with respect to any imputed income with respect to
such advance (including as a result of any forgiveness by the Company of such
advance); provided, further, that
any extension of the statute of limitations relating to the payment of taxes,
interest and penalties for the taxable year of Executive with respect to which
such contested amount is claimed to be due shall be limited solely to such
contested amount.  Furthermore, the
Company’s control of the contest shall be limited to issues with respect to
which a Gross-Up Payment would be payable hereunder and Executive shall be
entitled to settle or contest, as the case may be, any other issue raised by
the Internal Revenue Service or any other taxing authority.

 

(g)                                 The Gross-Up Payments provided for in this
Section 7.3 shall be paid to Executive not later than the date upon which the
severance benefits payable to Executive under Section 4.3 of Exhibit A,
attached hereto, are due; provided, however,
that if the amounts of such Gross-Up Payments cannot be finally determined by
the Accountants on or before such day, the Company shall pay to Executive on
such day an estimate, as determined in good faith by the Company, of the
minimum amount of such Gross-Up Payments and shall pay the remainder of such
Gross-Up Payments (together with interest at the rate provided in Section
1274(b)(2)(B) of the Code) not later than 30 days after the amount thereof can
be determined by the Accountants.  In
the event that the amount of the estimated payments exceeds the amount
subsequently determined by the Accountants to have been due to the Executive,
such excess shall constitute a loan by the Company to Executive, payable not
later than 30 days after such determination and demand by the Company (together
with interest at the rate provided in Section 1274(b)(2)(B) of the Code).

 

8.                                      NONSOLICITATION. 
While employed by the Company, and for one (1) year following the
termination of Executive’s employment with the Company, Executive agrees not to
solicit, attempt to solicit, induce, or otherwise cause any employee or
independent contractor of the Company to terminate his or her employment or
contractual relationship in order to become an employee or independent
contractor to or for Executive or any other person or entity.

 

9.                                      RELEASE.  In
exchange for the severance compensation and benefits provided under this
Agreement to which Executive would not otherwise be entitled, Executive shall
enter

 

8

 

into and execute a release substantially in
the form attached hereto as Exhibit B (the “Release”) upon Executive’s
termination of employment.  Unless the
Release is executed by Executive and delivered to the Company within twenty-one
(21) days (forty-five (45) days in the event of a group termination) after the
termination of Executive’s employment with the Company, Executive shall not
receive any severance benefits provided under this Agreement, acceleration, if
any, of Executive’s Options as provided in this Agreement shall not apply and
Executive’s Options in such event may be exercised following the date of
Executive’s termination only to the extent provided under their original terms
in accordance with the applicable stock option plan and option agreements.

 

10.                               GENERAL PROVISIONS.

 

10.1                        Notices.  Any notices provided hereunder must be in
writing and shall be deemed effective upon personal delivery (including,
personal delivery by facsimile transmission) or the third day after mailing by
first class mail, to the Company at its primary office location and to
Executive at his address as listed on the Company payroll (which address may be
changed by written notice).

 

10.2                        Severability.  Whenever
possible, each provision of this Agreement will be interpreted in such manner
as to be effective and valid under applicable law, but if any provision of this
Agreement is held to be invalid or unenforceable in any respect under any
applicable law or rule in any jurisdiction, such invalidity or unenforceability
will not affect any other provision or any other jurisdiction, and such invalid
or unenforceable provision shall be reformed, construed and enforced in such
jurisdiction so as to render it valid and enforceable consistent with the
intent of the parties insofar as possible.

 

10.3                        Waiver.  If either
party should waive any breach of any provisions of this Agreement, he or it
shall not thereby be deemed to have waived any preceding or succeeding breach
of the same or any other provision of this Agreement.

 

10.4                        Entire Agreement.  This
Agreement, together with the Employee Proprietary Information and Inventions
Agreement, constitute the final, complete, and exclusive embodiment of the
entire agreement between Executive and the Company regarding the subject matter
hereof and supersede any prior agreement, promise, representation, or
statement, written or otherwise, between Executive and the Company with regard
to this subject matter.  This Agreement
is entered into without reliance on any promise, representation, statement or
agreement other than those expressly contained or incorporated herein, and it
cannot be modified or amended except in a writing signed by Executive and a
duly authorized officer of the Company.

 

10.5                        Counterparts.  This
Agreement may be executed in separate counterparts, any one of which need not
contain signatures of more than one party, but all of which taken together will
constitute one and the same Agreement.

 

10.6                        Headings.  The headings
of the sections hereof are inserted for convenience only and shall not be
deemed to constitute a part hereof nor to affect the meaning thereof.

 

9

 

10.7                        Successors and Assigns.  This
Agreement is intended to bind and inure to the benefit of and be enforceable by
Executive, the Company and their respective successors, assigns, heirs,
executors and administrators, except that Executive may not assign any of his
duties hereunder and he may not assign any of his rights hereunder without the
written consent of the Company, which shall not be withheld unreasonably.

 

10.8                        Attorneys’ Fees.  If either party hereto brings
any action to enforce his or its rights hereunder, the prevailing party in any
such action shall be entitled to recover his or its reasonable attorneys’ fees and costs incurred in connection
with such action.

 

10.9                        Arbitration.  To
provide a mechanism for rapid and economical dispute resolution, Executive and
the Company agree that any and all disputes, claims, or causes of action, in
law or equity, arising from or relating to this Agreement (including the
Release) or its enforcement, performance, breach, or interpretation, will be
resolved, to the fullest extent permitted by law, by final, binding, and
confidential arbitration held in Orange County, California and conducted by
Judicial Arbitration & Mediation Services/Endispute (“JAMS”), under its
then-existing Rules and Procedures. 
Nothing in this Section 10.9 or in this Agreement is intended to prevent
either Executive or the Company from obtaining injunctive relief in court to
prevent irreparable harm pending the conclusion of any such arbitration.

 

10.10                 Remedies.  Executive’s duties under Section 8 and the Employee
Proprietary Information and Inventions Agreement shall survive termination of Executive’s
employment with the Company.  Executive
acknowledges that a remedy at law for any breach or threatened breach by
Executive of the provisions of these sections and the Employee Proprietary
Information and Inventions Agreement would be inadequate, and that such a
breach would cause irreparable harm to the Company; and Executive therefore
agrees that the Company shall be entitled to injunctive relief in case of any
such breach or threatened breach.

 

10.11                 Governing Law.  All
questions concerning the construction, validity and interpretation of this
Agreement will be governed by the law of the State of California as applied to
contracts made and to be performed entirely within California.

 

10

 

IN WITNESS
WHEREOF, the parties
have executed this Agreement effective as of the Effective Date above written.

 

	
  WATSON
  PHARMACEUTICALS, INC.

  
	
   

  
	
   

  
	
  By:

  	
  /s/ Susan K. Skara

  	
   

  
	
   

  	
  Name:

  	
  Susan K. Skara

  	
   

  
	
   

  	
  Title:

  	
  SVP, Human Resources

  	
   

  
	
   

  
	
   

  
	
  EXECUTIVE:

  
	
   

  
	
   

  
	
  /s/ Ian A. T. McInnes

  	
   

  
	
  Name:

  

 

11

 

EXHIBIT A

 

COMPENSATION AND SEVERANCE TERMS SCHEDULE

 

1.                                  BASE SALARY

 

For services to be rendered
under this Agreement, Executive shall receive an initial base salary at an
annualized rate of $450,000, payable in accordance with the Company’s standard
payroll practices, and subject to increases as set forth in the Agreement.

 

2.                                 BONUS

 

Executive’s annual bonus, if
granted, shall be at a target level of 40% of the Executive’s then current base
salary.

 

3.                                  STOCK OPTIONS

 

Within thirty days of the
Effective Date, Executive shall receive an Option grant of 75,000 shares of
Company common stock.  Such Option grant
shall be subject to the terms and conditions of the Company’s 2001 Incentive
Award Plan.

 

4.                                  SEVERANCE BENEFITS

 

4.1                            Termination By Company
without  Cause. 
If the Company terminates Executive’s employment at any time without
Cause, the Company shall provide to Executive, within thirty (30) days after
the Effective Date of the Release attached hereto as Exhibit B (as “Effective
Date” is defined in the Release), as the only severance compensation and
benefits all of the following:

 

(a)                             A lump sum severance payment, subject to
standard withholdings or deductions, in an amount equal to the sum of: (i)
twenty-four (24) months of Executive’s then base salary; (ii) two times
Executive’s target bonus to be earned for the year in which termination occurs
or two times the bonus amount paid to the Executive in the prior year,
whichever is greater; and (iii) Executive’s prorated bonus for the year in
which the termination occurs, at the Company’s discretion.

 

(b)                                Continued group health insurance benefits
(e.g., medical, dental, vision, etc.) for Executive and Executive’s eligible
dependents for a period of up to eighteen (18) months under COBRA, and if
Executive is not covered under the Company’s group health insurance plan at the
end of eighteen (18) months, the Company shall use its best efforts to provide
Executive and Executive’s eligible dependents with comparable health insurance
coverage for an additional period of up six (6) months, but the Company shall
not be obligated to pay more than one hundred fifty percent (150%) of the cost
of COBRA coverage for such comparable coverage; provided, however, that in any
event the Company’s obligation to provide any health benefits pursuant to this
sentence ends when Executive becomes eligible for health insurance with a new

 

1

 

employer (and Executive agrees to promptly notify the Company in
writing of any such event of eligibility).

 

(c)                           Outplacement services for one year with a
nationally recognized service selected by the Company.

 

4.2                         Executive’s Resignation for
Good Reason.  If Executive terminates his employment with
the Company for Good Reason, the Company shall provide to Executive, within
thirty (30) days after the Effective Date of the Release attached hereto as
Exhibit B (as “Effective Date” is defined in the Release), as the only
severance compensation and benefits, the same severance compensation and
benefits provided in Section 4.1 hereof.

 

4.3                         Change of Control
Termination.  In the event of a Change of Control
Termination, the Company shall provide to Executive, within thirty (30) days
after the Effective Date of the Release attached hereto as Exhibit B (as
“Effective Date” is defined in the Release), as the only severance compensation
and benefits, (a) the same severance compensation and benefits provided in
Section 4.1 hereof and, (b) any unvested Options held by Executive shall have
their vesting accelerated in full so as to become one hundred percent (100%)
vested and immediately exercisable in full as of the date of such termination.

 

5.                                   Sign-On Bonus. 
Executive shall receive a sign-on bonus of fifty thousand dollars
($50,000.00), less appropriate withholding of taxes, payable in installments as
follows:  $25,000 within thirty (30)
days of the Effective Date; $25,000 on the first regularly scheduled payroll
day at least six (6) months after the Effective Date.  Executive’s eligibility to receive the sign-on bonus is
contingent on Executive’s execution of a reimbursement agreement in a form
acceptable to the Company.

 

2

 

EXHIBIT B

 

RELEASE AGREEMENT

 

I
understand that my position with Watson Pharmaceuticals, Inc. (the “Company”)
terminated effective
                          
(the “Separation Date”).  The Company
has agreed that if I choose to sign this Release, the Company will, within
thirty (30) days after the Effective Date of this Release, pay me certain
severance benefits (minus the standard withholdings and deductions) pursuant to
the terms of the Key Employee Agreement (the “Agreement”) entered into as of
                                     
, between myself and the Company, and any agreements incorporated therein by
reference.  I understand that I am not
entitled to such severance benefits unless I sign this Release.  I further understand that, regardless of
whether I sign this Release, the Company will pay me all of my accrued salary
and paid time off through the Separation Date, to which I am entitled by law.

 

In consideration  for the severance benefits I am receiving
under the Agreement, I hereby release the Company and its officers, directors,
agents, attorneys, employees, shareholders, parents, subsidiaries, and
affiliates (“Releasees”) from any and all claims, liabilities, demands, causes
of action, attorneys’ fees, damages, or obligations of every kind and nature,
whether they are now known or unknown, arising at any time prior to the date I
sign this Release.  This general release
includes, but is not limited to:  all
federal and state statutory and common law claims, claims related to my
employment or the termination of my employment or related to breach of
contract, tort, wrongful termination, discrimination, harassment, defamation,
fraud, wages or benefits, or claims for any form of equity or
compensation.  Notwithstanding the
release in the preceding sentence, I am not releasing any right of
indemnification I may have for any liabilities and costs of defense (including
without limitation reasonable attorneys’ fees) arising from my actions within
the course and scope of my employment with the Company.

 

In releasing claims unknown
to me at present, I am waiving all rights and benefits under Section 1542 of
the California Civil Code, and any law or legal principle of similar effect in
any jurisdiction: “A general release does not
extend to claims which the creditor does not know or suspect to exist in his
favor at the time of executing the release, which if known by him must have
materially affected his settlement with the debtor.”

 

If I am forty (40) years of
age or older as of the Separation Date,  I
acknowledge that I am knowingly and voluntarily waiving and releasing any
rights I may have under the federal Age Discrimination in Employment Act of
1967, as amended (“ADEA”).  I also
acknowledge that the consideration given for the waiver in the above paragraph
is in addition to anything of value to which I was already entitled.  I have been advised by this writing, as
required by the ADEA that: (a) my waiver and release do not apply to any claims
that may arise after my signing of this Release; (b) I should consult with an
attorney prior to executing this Release; (c) I have twenty-one (21) days
(forty-five (45) days in the event of a group termination) within which to
consider this Release (although I may choose to voluntarily execute this
Release earlier); (d) I have seven (7) days following the execution of this
release to revoke the Release: and (e) this Release will not be effective until
the eighth day after this Release has been signed both by me and by the Company
(“Effective Date”).

 

I
acknowledge that I remain bound by the Invention Assignment and Confidential
Nondisclosure Agreement which I signed in connection with my employment
(“Invention Agreement”) and that the provisions of the Invention Agreement
shall remain in full force and effect.  In
accordance with my existing and continuing obligations under the Invention
Agreement, I have returned to the Company all materials required to be returned
pursuant to the Invention Agreement, as well as any other Company property in
my possession.  In consideration for the
severance benefits I am receiving hereunder, I agree that I will reasonably
cooperate with the Company for ninety (90) days after the Separation Date to
assure the smooth transition of pending matters and to answer questions which
may arise from

 

 

time to time regarding my
former duties and responsibilities. 
Effective as of the Separation Date, I resign any and all offices and
directorships with the Company and any of its affiliates, and will execute all
documents reasonably requested by the Company or its affiliates to effectuate
such resignations.  Further, I agree
that I will  not hereafter
disparage the Company or any of the Releasees, either orally or  in writing, to any person or entity.  The Company agrees that its officers and
directors will not disparage me, either orally or in writing, to any person or
entity.

 

	
  Agreed:

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Date

  	
  [Employee]

  
	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Date

  	
  WATSON PHARMACEUTICALS,
  INC.

  

 

2

 

EXHIBIT C

 

EMPLOYEE PROPRIETARY INFORMATION AND INVENTIONS AGREEMENT

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