Document:

Exhibit
10.1

Execution Copy

SEPARATION
AGREEMENT AND GENERAL RELEASE

Roger K. Deromedi (“Mr. Deromedi”) was previously
employed by Kraft Foods Inc. (“Kraft”) as Chief Executive Officer in
Northfield, Illinois.  Mr. Deromedi’s
employment relationship with Kraft has ended and Kraft has offered Mr. Deromedi
benefits as set forth in this Agreement, certain of which benefits are greater
than what Mr. Deromedi is entitled to receive, and Mr. Deromedi has decided to
accept Kraft’s offer.  Therefore, Mr.
Deromedi and Kraft both agree and promise as follows:

1.             (a)           Mr.
Deromedi’s last day of employment was June 26, 2006 (the “Termination Date”).  Commencing on the date of this Agreement and
for so long as Mr. Deromedi  complies
with Section 7 of this Agreement, and complies in all material respects with
all other provisions of this Agreement, including Sections 9 and 11 hereof, Mr.
Deromedi will be paid by Kraft on a salary continuation basis (the “Separation
Payments”), at his bi-weekly base salary in effect on the Termination Date,
subject to the terms of this Agreement, until February 23, 2007 (the “Salary
Continuation Period”).  During the Salary
Continuation Period, Mr. Deromedi will be eligible to receive Kraft medical,
dental, life, long-term disability and personal accident insurance coverage
pursuant to the terms of these Kraft benefit plans as if he were an
employee.  During the Salary Continuation
Period, Mr. Deromedi will be eligible to participate in the Kraft Thrift and
Retirement Plans (both qualified and non-qualified, basic and supplemental)
pursuant to the terms of those plans, provided that for purposes of the
Thrift Plan, any Separation Payments received by Mr. Deromedi after January 1,
2007 will not be considered 

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“eligible compensation” and provided further,
that for purposes of the Retirement Plans, Mr. Deromedi will be credited with
service through the final day of the Salary Continuation Period.  Mr. Deromedi will not be eligible to receive
Kraft short-term disability insurance coverage or business travel accident
coverage after the Termination Date. 
Following the Salary Continuation Period, Mr. Deromedi will be eligible
to receive medical, dental and life insurance benefits from Kraft to the extent
provided in the letter, dated March 27, 1989, from Philip Morris Companies Inc.
to Mr. Deromedi. (the “1989 Letter”)

(b)                  Promptly following the end of
the Salary Continuation Period, Mr. Deromedi will receive a lump sum payment
from Kraft (the “Lump Sum Payment”) in an amount equal to the salary that he
would have received, at the rate of salary in effect for him on the Termination
Date, had his employment continued during the period between the end of the
Salary Continuation Period and June 26, 2008.

(c)                  If Mr. Deromedi were to die
prior to his receipt of the Lump Sum Payment, Kraft agrees to pay Mr. Deromedi’s
surviving spouse (or estate if no surviving spouse) any Separation Payments
earned but not yet received, the Lump Sum Payment, and the payments described
in Sections 2 and 3 below in a lump sum, provided that if the amount of
the payments described in Section 2 have not yet been determined at the time of
Mr. Deromedi’s death, such payments will be made at such time as their amount
has been determined.

2.             Provided that Mr. Deromedi complies with Section 7 of
this Agreement, and complies in all material respects with all other provisions
of this Agreement, including Sections 9

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and 11 hereof, Mr. Deromedi will receive a payment in
respect of his 2006 annual incentive award under the Kraft Management Incentive
Plan (“MIP”) to be pro-rated for the period from January 1, 2006 through June
30, 2006 and paid on the basis of Mr. Deromedi’s individual target percentage
and the actual business unit rating for Kraft for full fiscal 2006, as
determined by the Compensation Committee of Kraft’s Board of Directors (the “Committee”).  This payment, less required deductions, will
be made no later than December 31, 2006. 
In addition, Mr. Deromedi will, provided that he complies with Section 7
of this Agreement, and complies in all material respects with all other
provisions of this Agreement, including Sections 9 and 11 hereof, receive a
payment in respect of his 2004-2006 Long-Term Incentive Plan (“LTIP”) award to
be pro-rated from January 1, 2004 through June 30, 2006 and paid on the basis
of Mr. Deromedi’s individual target percentage and the actual Kraft LTIP
rating, as determined by the Committee. 
This payment, less required deductions, will be made at such time as
LTIP payments in respect of the 2004-2006 performance period are made to Kraft’s
senior executives.

3.              Mr. Deromedi will become vested, as of the effective
date of this Agreement,  in the number of
shares of restricted stock indicated below:

2004
Grant                             —             
66,667 shares

Special
2004 Grant                —             
25,000 shares

2005
Grant                             —             
50,030 shares

Total                                       —            141,697 shares

On the vesting date, Kraft will deduct the number of
shares having an approximate aggregate value equal to the amount of withholding
taxes due from the total number of shares vesting.  Shares deducted in satisfaction of actual
withholding tax requirements will be valued at the Fair

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Market Value on the date of vesting.  Mr. Deromedi will forfeit the balance of
unvested restricted stock held outstanding as of the date of this Agreement.

4.             Mr. Deromedi will be eligible for continued financial
counseling in accordance with current practice through the end of the Salary
Continuation Period.  In addition, Mr.
Deromedi will be eligible to continue participating in the Kraft executive car
policy through the Salary Continuation Period. 
Following the Salary Continuation Period, Mr. Deromedi will have the
choice of purchasing the car based on 100% of the wholesale value plus all
applicable taxes, license fees and any administrative fees charged by the leasing
company, or returning the car to Kraft’s Northfield location or another
mutually agreed upon location.  During
the Salary Continuation Period, Kraft will continue to be responsible for
paying all normal repair, normal maintenance and monitoring fees associated
with Mr. Deromedi’s home security system; thereafter, Mr. Deromedi will be
responsible for paying such repair, maintenance and monitoring fees.  At his request, Mr. Deromedi will also be
eligible to receive executive outplacement for a period of up to two years from
the Termination Date, which will include office and secretarial support.  Kraft will reimburse Mr. Deromedi for his
reasonable professional fees incurred by him in connection with the negotiation
and documentation of this Agreement, provided, however, that Kraft’s obligation
to pay for outplacement services and professional fees, combined, will not
exceed a maximum of $100,000.

5.             Mr. Deromedi will be entitled to exercise any vested
stock options that he holds in Altria Group, Inc. (formerly Philip Morris
Companies Inc.) and Kraft Foods Inc. stock pursuant to the terms of the
applicable option grant.  For purposes of
his outstanding vested stock options,

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Mr. Deromedi will be treated as a retiree as of the
Termination Date and accordingly all of such vested stock options  will be exercisable for the remainder of
their original term.

6.             Consistent with a previous agreement between Mr.
Deromedi and Kraft, a benefit recognizing Mr. Deromedi’s Kraft earnings for the
purpose of calculating his General Foods pension benefit and, in addition,
recognizing his 11 years of service with General Foods (i.e., added to his
Kraft service) for the purpose of determining early retirement eligibility is
payable under Kraft Foods Global, Inc. Supplemental Benefits Plan II.  Mr. Deromedi’s nonqualified retirement plan
benefits will be paid subject to the terms of the Employee Grantor Trust
Enrollment Agreement between Mr. Deromedi and Altria Group, Inc. (formerly
Philip Morris Companies Inc.) dated August 5, 1999 or any successor agreement
and will be subject to offset in accordance with such agreement for amounts
paid to Mr. Deromedi from the grantor trust established by him pursuant to such
agreement.

7.             As consideration for Kraft’s promises to provide the payments
and other benefits described herein, Mr. Deromedi agrees that he will not
engage in Prohibited Conduct from the date of this Agreement through June 26,
2007.  Prohibited Conduct will be: (1)
working for, or providing
services, directly or indirectly (whether as an employee, consultant, officer, director, partner, joint venturer,
manager, member, principal, agent, or independent contractor, individually, in
concert with others, or in any other manner), to any of the companies
listed below, or of an entity that has a controlling equity interest or
management control of any such company, without the written consent of
Kraft’s Executive Vice President Global Human Resources, or designee, such consent to be provided by Kraft in its
sole and absolute discretion; or (2) soliciting, directly or indirectly,
any employee of Kraft to leave Kraft and to work for any other entity, whether
as an employee, independent contractor or in any other capacity.  It will not

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be a violation of this Section 7 for Mr. Deromedi to
provide services to any entity that provides goods or services to any of the
companies listed below, or to any entity that has a controlling equity interest
or management control of any such company, provided that during the period
ending June 26, 2007 he is not himself, directly or indirectly, providing goods
or services to such listed companies or such entities that have controlling
equity interests or management control of such listed companies.

The companies are: 
Cadbury Schweppes plc, Campbell Soup Company, The Coca-Cola Company,
ConAgra Foods, Inc., General Mills, Inc., Groupe Danone, H.J. Heinz Company,
Hershey Foods Corporation, Kellogg Company, Nestlé S.A., PepsiCo, Inc., The
Procter & Gamble Company, Sara Lee Corporation, and Unilever N.V., or any
subsidiaries, affiliates or subsequent parent or merger partner if any of these
companies are acquired or merge.  For
purposes of this Agreement, “affiliate” of a specified person or entity means a
person or entity that directly or indirectly controls, is controlled by, or is
under common control with, the person or entity specified.

Should Mr. Deromedi engage in Prohibited Conduct at
any time prior to June 26, 2007, he will be obligated to pay back to Kraft all payments (including any
Separation Payments, the Lump Sum Payment and the payments described in
paragraph 2 herein) received pursuant to this Agreement.  This will be in addition to any other remedy
that Kraft may have in respect of such Prohibited Conduct.  Kraft and Mr. Deromedi acknowledge and agree
that Kraft will or would suffer irreparable injury in the event of a breach or
violation or threatened breach or violation of the provisions set forth in
Sections 7, 9 and 11 and agree that in the event of an actual or threatened
breach or violation of such provisions Kraft will be awarded injunctive relief
in the federal or state courts located in Illinois to prohibit any such
violation or breach or threatened

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violation or breach,
without necessity of posting any bond or security, and that such right to
injunctive relief will be in addition to any other rights available under this
Agreement.

8.             Except as otherwise communicated to Kraft by Mr.
Deromedi, Kraft and Mr. Deromedi acknowledge that Mr. Deromedi has returned all
company property in his possession, including documents, manuals, handbooks,
notes, keys and any other articles he has used in the course of his employment.

9.             Mr. Deromedi acknowledges that during the course of his
employment with Kraft, he was entrusted with certain marketing, financial,
product, manufacturing, technical and other proprietary information and
material which are the property of Kraft. 
Mr. Deromedi agrees that, from the date of this Agreement and
thereafter, he will not communicate or disclose to any third party, or use for
his own account, without the written consent of Kraft, any of the
aforementioned information or material, unless and until such information or
material becomes generally available to the public (which includes the trades
and industries in which Kraft operates) through no fault of Mr. Deromedi.  Nothing herein will preclude Mr. Deromedi
from using his general knowledge and expertise to fulfill job responsibilities
with a new employer.  Anything herein to
the contrary notwithstanding, this Section 9 will not apply (i) when disclosure
is required by law or by any court, arbitrator, mediator or administrative or
legislative body (including any committee thereof) with actual or apparent
jurisdiction to order Mr. Deromedi to disclose or make accessible any information,
provided that Mr. Deromedi will request confidential treatment with respect to
such information and/or request matters with respect to such information be
sealed, or (ii) when disclosure in an arbitration or litigation pursuant to
Section 13 is necessary, in the reasonable opinion of Mr. Deromedi based on the
advice of counsel,  to the assertion of
Mr. Deromedi’s entitlements (including any defense with respect to

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any claim), provided that Mr. Deromedi will request
confidential treatment with respect to such information and/or request matters
with respect to such information be sealed; provided, however, that Mr.
Deromedi will also provide Kraft with written notice within a reasonable time
prior to such disclosure of his intention to disclose to a party to such
arbitration or litigation other than Kraft.

10.           Mr. Deromedi will not be entitled to
receive any additional compensation or benefits, which are not the subject
matter of this Agreement.  Mr. Deromedi
understands that the arrangements provided for in this Agreement exceed those
to which he would be entitled under Kraft’s existing policies.

11.            Mr. Deromedi agrees not to knowingly
make any public statement that would disparage Kraft and its affiliates or
persons who are officers and directors of Kraft and its affiliates as of the
date of this Agreement.  Kraft agrees
that neither Kraft nor its senior officers and directors will knowingly make
any public statement that would disparage Mr. Deromedi.  Notwithstanding the foregoing, nothing in this
Section 11 will prevent any person from (a) responding publicly to incorrect,
disparaging or derogatory public statements to the extent reasonably necessary
to correct or refute such public statement or (b) making any truthful statement
to the extent (i) necessary with respect to any litigation, arbitration or
mediation involving this Agreement, including, but not limited to, the
enforcement of this Agreement or (ii) required by law or by any court,
arbitrator, mediator or administrative or legislative body (including any
committee thereof) with apparent jurisdiction to order such person to disclose
or make accessible such information. 
Each of the parties agrees to notify the other of any statement that is
required to be made as provided in clause (b)(ii) of the preceding
sentence.  Such notice will be given as
much in advance of the making of such statement as is reasonably possible.

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12.           Mr. Deromedi will make himself
available to Kraft to assist Kraft and its affiliates, as may be requested by
Kraft, at mutually convenient times and places, with respect to pending and
future litigations, arbitrations, governmental investigations or other dispute
resolutions relating to or in connection with matters in which Mr. Deromedi was
personally involved, directly or indirectly, during his employment with Kraft,
provided that in no event will Mr. Deromedi be required to provide any
cooperation if such cooperation is materially adverse to his legal
interests.  To the extent possible, Kraft
will try to limit Mr. Deromedi’s cooperation to regular business hours.  In any event, (i) in any matter subject to
this Section 12, Mr. Deromedi will not be required to act against the best
interests of any new employer or new business venture in which he is an
employee, partner or active participant and (ii) any request for such
cooperation will take into account Mr. Deromedi’s other personal and business
commitments.  Kraft agrees to provide Mr.
Deromedi reasonable notice in the event his assistance is required.  Kraft will pay or reimburse Mr. Deromedi for
all reasonable expenses and costs he may incur as a result of providing such
assistance, including travel costs and legal fees, provided Kraft receives
proper documentation with respect to all claimed expenses and costs.  Kraft will only be obligated to reimburse Mr.
Deromedi’s legal fees if Kraft is provided with a written statement, by counsel
reasonably acceptable to Kraft, that separate legal representation is
warranted.  Reimbursement will be made
within thirty (30) days after Kraft has been provided with a detailed, itemized
statement of services rendered by Mr. Deromedi’s attorney.  Mr. Deromedi’s entitlement to reimbursement
of expenses and costs, including legal fees pursuant to this Section 12, will
in no way affect his rights to be indemnified and/or to have his expenses paid
or reimbursed pursuant to paragraph 15 of this Agreement.  Mr. Deromedi will be entitled to an hourly
fee (which fee will be mutually determined by Kraft and Mr. Deromedi prior to
Mr. Deromedi’s providing any

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cooperation pursuant hereto, it being agreed that such
fee will be fair and reasonable in light of his compensation history) for
furnishing such cooperation (including, without limitation, for time taken in
travel undertaken in connection with such cooperation), such fee to be paid
promptly following his submission of a statement setting forth the number of
hours spent

13.           Any controversy, dispute or claim
arising out of or relating to this Agreement, any other agreement or
arrangement between Mr. Deromedi and Kraft, Mr. Deromedi’s employment with
Kraft, or the termination thereof (collectively, “Covered Claims”) will be
resolved by binding arbitration, to be held in Chicago, Illinois, in accordance
with the Commercial Arbitration Rules (and not the National Rules for the
Resolution of Employment Disputes) of the American Arbitration Association and
this Section 13.  Judgment upon the award
rendered by the arbitrator may be entered in any court having jurisdiction
thereof.  Each party will pay its own
costs of arbitration or litigation, including without limitation attorneys’
fees.  If either Mr. Deromedi or Kraft
believes that a breach of this Agreement has occurred, the party asserting such
breach will notify the other in writing. 
The parties will attempt to settle any such dispute through consultation
and negotiation in good faith and in a spirit of mutual cooperation.   If any such alleged breach is susceptible of
cure and is cured by the breaching party within a reasonable period of time after
notice has been served, such alleged breach shall not give rise to damages or
any other remedy under this Agreement. 
If the matter is not resolved to the parties’ satisfaction  within thirty (30) days  after notice has been served, or within such
longer time period as may be agreed to by the parties, the dispute will be
submitted to binding arbitration pursuant to this paragraph.  If, pursuant to this paragraph, the
arbitrator determines that Mr. Deromedi has breached the terms of this
Agreement, Mr. Deromedi will repay to Kraft the amounts that Kraft paid to him
under paragraphs 1 and 2 of this Agreement plus interest at the rate of the
then

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current published federal short-term rate.    If at the time any alleged breach of this
Agreement by Mr. Deromedi has occurred, all payments due Mr. Deromedi under
this Agreement have not yet been made, Kraft will make no further payments
due.  Notwithstanding the foregoing, if
such alleged breach is susceptible of cure and is cured by Mr. Deromedi within
a reasonable period of time after notice has been served, or if, pursuant to
this paragraph, the arbitrator determines that Mr. Deromedi has not breached
the terms of this Agreement, Kraft will resume payments to Mr. Deromedi in
accordance with the terms of this Agreement. 
Mr. Deromedi and Kraft agree that the prevailing party with respect to
any particular issue(s) in any arbitration of any Covered Claim will be
reimbursed by the non-prevailing party his/its attorneys’ fees and costs, up to
a maximum of $150,000, relating to such particular issue(s) before the
arbitrator.

14.           Mr. Deromedi is aware of his legal
rights concerning his employment with Kraft. 
In consideration for the benefits being provided to Mr. Deromedi
hereunder, Mr. Deromedi (for himself, his heirs, legal representatives and
assigns) hereby waives, and generally releases Kraft, its affiliated companies
and their officers, directors, agents, and employees from, and agrees not to
sue them for, any claims or causes of action existing on the date of this
Agreement arising out of his employment relationship with Kraft or the
termination of that employment.  This
includes, but is not limited to, all claims under Title VII of the Civil Rights
Act of 1964, the Age Discrimination in Employment Act, the Older Workers
Benefit Protection Act, the Employee Retirement Income Security Act, or any
other federal, state or local law dealing with employment discrimination, and
claims for breach of contract and wrongful discharge; provided, however,
nothing herein will release Kraft from any claims or damages based on (i) any
right Mr. Deromedi may have to enforce this Agreement, (ii) any right or claim
that arises after the date of this Agreement, (iii) any right Mr. Deromedi may
have to benefits or entitlements under

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any applicable plan, agreement, program, award, policy
or arrangement of Kraft or its affiliates, (iv) Mr. Deromedi’s eligibility for
indemnification in accordance with applicable laws or the certificate of
incorporation and by-laws of Kraft or its affiliates, or any applicable
insurance policy, with respect to any liability Mr. Deromedi incurs or incurred
as an employee or officer of Kraft or its affiliates or (v) any right Mr.
Deromedi may have to obtain contribution as permitted by law in the event of entry
of judgment against Mr. Deromedi as a result of any act or failure to act for
which Mr. Deromedi and Kraft are jointly liable.  In consideration for the above release,
Kraft, on behalf of itself and its affiliated companies, and their officers,
directors, agents and employees, hereby waives, and generally releases Mr.
Deromedi and his heirs and representatives from, and agrees not to sue him, for
any claims or causes of action existing on the date of this Agreement arising
out of his employment relationship with Kraft or the termination of that
employment.

15.     (a) 
Kraft agrees that if Mr. Deromedi is presently a party, is made a party
or is threatened to be made a party, to any action, suit or proceeding, whether
civil, criminal, administrative or investigative (a “Proceeding”), by reason of
the fact that he is or was a director, officer or employee of Kraft or is or
was a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, including service with respect to
employee benefit plans, at the request of Kraft whether or not the basis of
such Proceeding is Mr. Deromedi’s alleged action in an official capacity while
serving as such director, officer, employee or agent, Mr. Deromedi will be
indemnified and held harmless by Kraft to the fullest extent legally permitted
or authorized by Kraft’s articles of incorporation or bylaws or resolutions of
Kraft’s Board of Directors or, if greater, by the laws of the State of
Virginia,

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against all cost, expense, liability and loss
(including, without limitation, attorneys’ fees, judgments, fines, ERISA excise
taxes or penalties and amounts paid or to be paid in settlement) reasonably
incurred or suffered by Mr. Deromedi in connection therewith, and such indemnification
will inure to the benefit of Mr. Deromedi’s heirs and legal
representatives.  Kraft will pay or
reimburse Mr. Deromedi for all reasonable costs and expenses incurred by him in
connection with a Proceeding within thirty (30) days after Mr. Deromedi
delivers to Kraft  proper documentation
thereof; provided, however, that Kraft will only be obligated to pay or
reimburse Mr. Deromedi’s legal fees if Kraft is provided with (a) a written
statement, by counsel reasonably acceptable to Kraft, that separate legal
representation is warranted and (b) a detailed, itemized statement of services
rendered by Mr. Deromedi’s attorneys.

(b)           Kraft agrees to continue and maintain
directors’ and officers’ liability insurance covering Mr. Deromedi which is no
less favorable and no more favorable than the coverage Kraft provides for its
directors and other senior officers.

16.           In the event that the aggregate of
all payments or benefits made or provided to Mr. Deromedi under this Agreement
and under all other plans and programs of the Company (the “Aggregate Payment”)
is determined to constitute a Parachute Payment, as such term is defined in
Section 280G(b)(2) of the Internal Revenue Code of 1986, as amended (the “Code”),
Kraft will pay to Mr. Deromedi, prior to the time any excise tax imposed by
Section 4999 of the Code (“Excise Tax”) is payable with respect to such
Aggregate Payment, an additional amount which, after the imposition of all
income and excise taxes thereon, including any interest and penalties, is equal
to the Excise Tax on the Aggregate Payment; provided, however, that Kraft will
only be

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obligated to make the additional payments under this
paragraph if (a) the Aggregate Payment is determined to constitute a Parachute
Payment and (b) Kraft has made or agreed to make Parachute Payments to its
senior officers and has agreed to pay them such additional payments.

17.     (a) 
Mr. Deromedi is a participant in various plans operated by Kraft that
may or do provide non-qualified deferred compensation.  If any compensation or benefits provided for
by this Agreement may result in the application of Section 409A of the Code,
Kraft will, in agreement with Mr. Deromedi, modify the Agreement in the least
restrictive manner necessary in order, where applicable, (i) to exclude such
compensation from the definition of “deferred compensation” within the meaning
of said Section 409A, or (ii) to comply with the provisions of said Section
409A, other applicable provisions of the Code and/or any rules, regulations or
other regulatory guidance issued under such statutory provisions and to make
such modification, in each case, without any diminution in the value of the
payments to be paid or provided to Mr. Deromedi pursuant to paragraphs 1, 2, 3,
4, and 5 of this Agreement.  To the
extent required in order to comply with Section 409A of the Code, amounts or
benefits to be paid or provided to Mr. Deromedi pursuant to this Agreement will
be delayed to the first business day on which such amounts and benefits may be
paid to Mr. Deromedi in compliance with said Section 409A.  To the extent that a delay impacts Mr.
Deromedi’s welfare benefit coverage, Mr. Deromedi will be covered under the
welfare benefits described in the 1989 Letter.

(b)           If Mr. Deromedi is subject to
additional tax liability under said Section 409A (which for purposes hereof
will be deemed to include a deemed interest charge and the 20% additional tax),
as a result of the breach by Kraft of any of the provisions of this Agreement,
Kraft agrees to pay to Mr. Deromedi, prior to the time such additional tax
liability is payable by

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him, an additional amount which, after the imposition
of all income and excise taxes thereon, including any interest and penalties,
is equal to such additional tax liability. 
Mr. Deromedi agrees that he will cooperate with Kraft in challenging the
assessment of such additional tax liability. 
For the avoidance of doubt, Mr. Deromedi will be entitled to receive the
gross-up payment provided for in this clause (b) only in the specific
circumstances provided for herein.

(c)           Kraft agrees that if deferral of a
payment or benefit is required for more than one (1) year pursuant to clause
(a) above in order to comply with Section 409A(a)(v)(B)(i), it will provide
such payment  plus interest at the rate
of the then current published federal short-term rate.

18.           In no event will Mr. Deromedi be
obligated to seek other employment or take any other action by way of
mitigation of the amounts payable under this Agreement.  There will be no offset by Kraft against Mr.
Deromedi’s entitlements under this Agreement for any compensation or other
amounts that he earns from subsequent employment or engagement of his services
or on account of any claim that Kraft may have against him.  In no event will Kraft have a right of offset
against any account that Mr. Deromedi maintains with Kraft on account of any
claims arising under this Agreement.

19.           This Agreement constitutes the entire
agreement of the parties with respect to the subject matter hereof and will
supersede all prior agreements, whether written or oral, with respect
thereto.  In the event of any
inconsistency  between  the terms of this Agreement  and the terms of any other Kraft plan,
policy, equity grant, arrangement or agreement Mr. Deromedi,  the provisions most favorable to Mr. Deromedi
will govern.

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20.           This Agreement will be governed by
and construed in accordance with the laws of the State of Illinois without
reference to principles of conflict of laws.

21.           If any provision of this Agreement is
held to be invalid, illegal or unenforceable (in whole or part), such provision
will be deemed modified to the extent, but only to the extent, of such
invalidity, illegality or unenforceability and the remaining provisions will
not be affected thereby.  If at any time
any provision of this Agreement is or becomes illegal, invalid or unenforceable
in any respect under the law of any jurisdiction, neither (i) the legality,
validity or enforceability in that jurisdiction of any other provisions of this
Agreement nor (ii) the legality, validity or enforceability under the law of
any other jurisdiction of that or any other provisions of this Agreement, will
be affected or impaired.

22.           Except as otherwise expressly
provided herein, this Agreement will be binding upon and inure to the benefit
of the parties and their respective successors, heirs (in Mr. Deromedi’s case),
legal representatives (in Mr. Deromedi’s case) or assigns.  Kraft will require any successor (whether
direct or indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of Kraft to assume and agree to
perform this Agreement in the same manner and to the same extent that Kraft
would be required to perform it if no such succession had taken place.  As used in this Agreement, “Kraft” will mean
Kraft as defined above and any successor to its business and/or assets which
assumes and agrees to perform this Agreement by operation of law or
otherwise.  In the event of Mr. Deromedi’s
death or a judicial determination of his incompetence, with respect to any
payments, entitlements or benefits payable or due hereunder, references in this
Agreement to Mr. Deromedi will be deemed to refer, where appropriate, to his
legal representatives or his beneficiary or beneficiaries.  Anything herein to the contrary
notwithstanding, Kraft may not assign this Agreement except to 

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a successor to Kraft, and any such assignment by Kraft
will not relieve it of its obligations hereunder.  None of Mr. Deromedi’s rights or obligations
under this Agreement may be assigned or transferred by him other than his
rights to compensation and benefits, which may be transferred only by will or
operation of law, except as otherwise specifically provided in this Agreement
or other applicable plans or agreements of Kraft.

23.           For the purpose of this Agreement,
notices, demands and all other communications provided for in this Agreement
will be in writing and will be sent by messenger or overnight courier (provided
in each case confirmation of receipt is obtained), certified or registered
mail, postage prepaid and return receipt requested, or by facsimile
transmission to the parties at their respective addresses and fax numbers set
forth below or to such other address or fax number as to which notice is given.

	
  If to Mr. Deromedi:

  	
   

  	
  At the last address and fax number on file at Kraft

  
	
   

  	
   

  	
   

  
	
  With a copy to:

  	
   

  	
  Joseph E.
  Bachelder, Esq.

  
	
   

  	
   

  	
  780 Third
  Avenue, 29th Floor

  
	
   

  	
   

  	
  New York, NY
  10017

  
	
   

  	
   

  	
  Fax: (212)
  319-3070

  
	
   

  	
   

  	
   

  
	
  If to Kraft:

  	
   

  	
  Karen May

  
	
   

  	
   

  	
  Executive Vice President

  
	
   

  	
   

  	
  Kraft Foods Global, Inc.

  
	
   

  	
   

  	
  Three Lakes Drive

  
	
   

  	
   

  	
  Northfield, IL 60093

  
	
   

  	
   

  	
  Fax: (847) 646-7101

  

 

 17
 

 

 

	
  

  	
   

  	
   

  
	
  With a copy to:

  	
   

  	
  Marc Firestone

  
	
   

  	
   

  	
  Executive Vice
  President and General Counsel

  
	
   

  	
   

  	
  Kraft Foods
  Global, Inc.

  
	
   

  	
   

  	
  Three Lakes
  Drive

  
	
   

  	
   

  	
  Northfield, IL
  60093

  
	
   

  	
   

  	
  Fax: (847)
  646-2950

  

 

Notices, demands and
other communications will be deemed given on delivery thereof.

24.           This Agreement may not be amended
except by mutual written agreement of Mr. Deromedi and an authorized officer of
Kraft.  No waiver by any party to this
Agreement at any time of any breach by the other party of, or compliance with,
any condition or provision of this Agreement to be performed by such other
party will be deemed a waiver of similar or dissimilar provisions or conditions
at the same or at any prior or subsequent time. 
Any waiver to be effective must be in writing and signed by the party
against whom it is being enforced.

25.           This Agreement may be executed in one
or more counterparts, each of which will be deemed to be an original but all of
which together will constitute one and the same instrument.  This Agreement may be executed by a signature
delivered by facsimile or in pdf format, which will be deemed to be an original
signature.

26.           Kraft represents and warrants that
(i) the execution, delivery and performance of this Agreement by Kraft has
been fully and validly authorized by all necessary corporate action,
(ii) the officer signing this Agreement on behalf of Kraft is duly
authorized to do so, (iii) the execution, delivery and performance of this
Agreement does not violate any applicable law,

 18
 

 

regulation, order,
judgment or decree or any agreement, plan or corporate governance document to
which Kraft is a party or by which it is bound and (iv) upon execution and
delivery of this agreement by the parties, it will be a valid and binding
obligation of Kraft enforceable against it in accordance with its terms, except
to the extent that enforceability may be limited by applicable bankruptcy,
insolvency or similar laws affecting the enforcement of creditors’ rights
generally.

27.           By signing below Mr. Deromedi
acknowledges that he has thoroughly read this Agreement.  He also acknowledges that he has been advised
to consult an attorney prior to executing this Agreement and that he has 21
days to review this Agreement before signing it, and an additional 7 days after
its becoming effective upon signing it to revoke it.  In addition, Mr. Deromedi agrees that he has
full understanding and knowledge of the terms and conditions of this Agreement,
and that he understands that these terms will be final and binding upon Mr.

Deromedi and upon Kraft
and no longer subject to revocation 7 days from the execution of this
Agreement.

	
  /s/ ROGER K. DEROMEDI

  	
   

  	
  Date: August 31, 2006

  
	
  ROGER K. DEROMEDI

  	
   

  	
   

  

 

The undersigned hereby
certifies that Roger K. Deromedi appeared before me and signed this document
and verified that he signed this Agreement voluntarily.

	
  /s/ YOLANDA KOZICZ

  	
   

  	
  Date: August 31, 2006

  
	
  Notary Public

  	
   

  	
   

  

 

	
  My Commission Expires:

  	
  October 17, 2007

  	
   

  
	
   

  	
   

  	
  [Official Seal
  of Notary]

  

 19
 

 

 

	
  ACCEPTED FOR KRAFT FOODS
  INC.

  	
   

  
	
   

  	
   

  
	
  By:

  	
  /s/ KAREN MAY

  	
   

  
	
   

  	
   

  	
   

  
	
  Name:

  	
  Karen May

  	
   

  
	
   

  	
   

  	
   

  
	
  Title:

  	
  EVP HR

  	
   

  
	
   

  	
   

  	
   

  
	
  Date:

  	
  August 31, 2006

  	
   

  

 

 20Exhibit 10.1

WATSON PHARMACEUTICALS, INC.

KEY EMPLOYEE AGREEMENT

This
Key Employee Agreement (“Agreement”) is entered into as of September 5, 2006
(the “Effective Date”), by and between Thomas R. Russillo (“Executive”) and
Watson Pharmaceuticals, Inc. (the “Company”), a Nevada corporation.

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.  Executive’s employment under this
Agreement shall commence on the Effective Date and end on December 31, 2009,
unless earlier terminated in accordance with the provisions hereof (the “Employment
Term”).  Subject to terms set forth
herein, the Company agrees to employ Executive in the position of Executive
Vice President of the Company and President of the Company’s U.S. Generics
Division 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”).  During the
Employment Term, 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.  In the event a successor President of the
Company’s U.S. Generics Division is appointed during the Employment Term,
Executive agrees (a) to remain employed with the Company through the end of the
Employment Term to assist with transitioning, (b) to assume a different title
and/or role, and (c) that the foregoing shall not constitute a Good Reason (as
defined below) event.  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 for adjustments in base salary in 

 1
 

 

accordance with Company
policy and the terms of this Agreement and subject to review and approval by
the CEO and/or the Designated Officer, as appropriate.

2.2          Bonus.  Executive shall be eligible to participate in
the Company’s bonus plan at the executive level throughout the Employment Term.  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 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, except as set forth in Section 2 of Exhibit A attached
hereto.  Any bonus is subject to the
approval of the CEO and/or the Designated Officer, 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 required by the applicable bonus plan as adopted by the Company
from time to time.  The target level of
such bonus is set forth in Section 2 of Exhibit A attached hereto.

2.3          Long
Term Incentive Awards.  Subject to
the approval of the Board of Directors (the “Board”) of the Company or the
Compensation Committee of the Board, as appropriate, Executive shall receive
the long term incentive awards set forth in Section 3 of Exhibit A, and such additional
long term incentive awards as may from time to time be granted, pursuant to the
terms and conditions set forth in the applicable award agreement and plan
documents, copies of which will be made available upon Executive’s
request.  For the purposes of this
Agreement, all long term incentive awards (e.g., stock
options, restricted stock and restricted stock units) granted to Executive by
the Company hereunder or granted in the future shall be referred to hereinafter
as the “Awards.”

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 (including without limitation,
a car allowance and financial planning in accordance with the terms of the
Company’s plans, policy or arrangement in effect from time to time).

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.

 2
 

 

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 the Employment Term
publicly 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 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.

 3
 

 

(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 Designated Officer.

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.  For the avoidance of doubt, in the event
Executive’s employment is terminated on the expiration of the Employment Term,
Executive shall not be entitled to any severance benefits.  Further, for the avoidance of doubt,
Executive shall be eligible for a bonus for 2009, and shall be eligible to
receive any Awards that vest as of December 31, 2009, if he remains employed by
the Company through December 31, 2009.

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
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.

(a)           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 in Control (as defined in Section 7.1) any reduction of
the Executive’s then existing annual base salary, except to the extent the
annual base salary of all other executive officers at levels similar to
Executive is similarly reduced (provided such reduction does not exceed fifteen
percent (15%) of Executive’s then existing annual base salary); (ii) after a
Change in 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 at levels similar to Executive are
similarly reduced; (iii) after a Change in 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) after a Change in Control, a 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; (v) any
material breach by the Company of its obligations under this Agreement; or (vi)
any failure by 

 4
 

 

the Company to obtain the
assumption of this Agreement by any successor or assign of the Company.

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 CEO or the Designated
Officer, 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

 5
 

 

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 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.

 6
 

 

(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
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 

 7
 

 

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 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.

 8
 

 

(g)           The
Gross-Up Payments provided for in this Section 7.3 shall be paid to Executive
as soon as practicable after the Accountants have determined the amount of such
payments, but not earlier than the date the severance benefits are due to
Executive under Section 4.4 of the Compensation and Severance Terms Schedule,
attached hereto as Exhibit A and in no event later than the later of (i) the
end of the calendar year following the date of termination and (ii) the third
calendar month following the date of termination, as permitted under Code
Section 409(A); provided, however, that if the
amounts of such Gross-Up Payments cannot be finally determined by the
Accountants before the end of this period, the Company shall pay to Executive
as of the last day of the period described above an estimate, as determined in
good faith by the Company, of the amount of such Gross-Up Payments.  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 into and execute a release substantially in the form
attached hereto as Exhibit B, as may be revised and updated as determined to be
appropriate by the Company (the “Release”). 
Unless the Release is executed by Executive following termination of
employment, delivered to the Company within twenty-one (21) days after the
Release has been provided to Executive (or forty-five (45) days following
Executive’s receipt of the informational package required in the event of a
group termination), and not revoked, Executive shall not receive any severance
benefits provided under this Agreement, any vesting acceleration of Executive’s
Awards as provided in this Agreement shall not apply, and Executive’s Awards in
such event shall vest or, in the case of stock options, be exercisable
following the date of Executive’s termination only to the extent provided under
their original terms in accordance with the applicable plan and Award 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 

 9
 

 

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.

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
 

 

10.10      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.

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: 

  	
  Chairman, CEO & President

  
	
   

  
	
   

  	
   

  
	
  EXECUTIVE:

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
  /s/ Thomas R.
  Russillo

  	
   

  
	
  Name: Thomas R.
  Russillo

  	
   

  
				

 

 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
$700,000, payable in accordance with the Company’s standard payroll practices,
and subject to adjustments as set forth in the Agreement.

2.             BONUS

For 2006, Executive shall receive (i) a $75,000
sign-on bonus (less appropriate withholding of taxes) within thirty (30) days
of the Effective Date, subject to Executive’s execution of a reimbursement
agreement in a form approved by the Company, (ii) and a guaranteed bonus of
$60,000 (less appropriate withholding of taxes), payable within fifteen (15)
days after March 1, 2007.

Beginning January 2007 and each year thereafter through
2009, Executive’s annual bonus, if granted, shall be at a target level of 50%
of Executive’s then current base salary. 
Executive’s annual bonus shall be based on the following factors:

·      the
Company’s actual performance against certain financial targets approved by the
Compensation Committee;

·      U.S.
Generics Division’s actual performance against certain financial targets
approved by the Compensation Committee

·      individual performance goals
approved by the Compensation Committee

Beginning January 2007 and each year thereafter
through 2009, Executive shall also be eligible for an additional bonus of 15%
of Executive’s then current base salary upon the attainment of certain
strategic initiatives approved by the Compensation Committee.

For the avoidance of doubt, Executive shall be
eligible for a bonus for 2009 if he remains employed by the Company through December
31, 2009.

3.             LONG TERM INCENTIVE AWARDS

As of the date of approval by the Compensation
Committee (“Approval Date”), Executive shall receive a stock option grant (“Option”)
to purchase 60,000 shares of Company common stock (“Shares”), with an exercise
price equal to the closing price of the Company common stock immediately prior
to the Approval Date.  The Shares subject
to the Option shall vest as follows:

·      25% of the Shares shall vest
on the first anniversary of the Approval Date

 1
 

 

·      additional
25% of the Shares shall vest on the second anniversary of the Approval Date

·      remaining 50% of the Shares
shall vest on December 31, 2009

As of the Approval Date, Executive shall be awarded 20,000
Shares of Restricted Stock in the Company. 
The Shares of Restricted Stock shall vest as follows:

·      50%
of the Shares shall vest on the second anniversary of the Approval Date

·      remaining 50% of the Shares
shall vest on December 31, 2009

The terms of the stock option and restricted stock
award shall be set forth in the applicable award agreements.

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 the
following:

(a)           A
lump sum severance payment, subject to standard withholdings or deductions, in
an amount equal to the sum of:

(i)            if
Executive’s employment is terminated before 2009: (x) twelve (12) months of
Executive’s then base salary; (y) Executive’s target bonus to be earned for the
year in which termination occurs; and (z) Executive’s prorated bonus for the
year in which the termination occurs.

(ii)           if
Executive’s employment is terminated in 2009: (x) Executive’s then base salary
for the remainder of the Employment Term, (y) Executive’s target bonus to be
earned for the year in which termination occurs, and (z) the Company (or one of
its subsidiaries) and Executive will, simultaneous with the termination of
employment, establish a consulting relationship on mutually agreeable terms and
rates, pursuant to which Executive will provide consulting services to the
Company (or one of its subsidiaries) for the remainder of 2009, and any
unvested Awards then held by Executive shall continue to vest through December
31, 2009.

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.

 2
 

 

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 Awards held by
Executive shall have their vesting accelerated in full so as to become one
hundred percent (100%) vested and, in the case of stock options, immediately
exercisable in full, as of the date of such termination.

4.4          Delayed
Payments.  Notwithstanding anything
in this Section 4 to the contrary, if the Company determines in good faith that
any payment or benefit under this Section 4, that is payable to Executive on
account of a termination of employment with the Company, constitutes a “deferral
of compensation” under Section 409A of the Internal Revenue Code of 1986, as
amended (the “Code”) (as set forth in IRS Notice 2005-1, or successor Temporary
or Final Treasury Regulations), and that Executive is a “specified employee”
within the meaning of  Code Section 409A(a)(2)(B)(i), then
the Company shall delay commencement of any such payment or benefit until six
months after the Effective Date of the Release attached hereto as Exhibit B (as
“Effective Date” is defined in the Release) (the “409A Suspension Period”).  With respect to any benefits to be provided
by the Company (such as continued health care benefits, if any), Executive
shall pay for such benefits directly during the 409A Suspension Period.  Within 15 calendar days after the end of the
409A Suspension Period, the Company shall pay to Executive a lump sum payment
in cash equal to any payments and benefits (including interest on any such
payments and benefits, at an interest rate of not less the prime interest rate,
as published in the Wall Street Journal, for the 409A Suspension Period)  that the Company would otherwise have been
required to provide under this Section 4 but for the imposition of the 409A Suspension
Period.  Thereafter, Executive shall
receive any remaining payments and benefits due under this Section 4 in
accordance with the terms of this Section 4 (as if there had not been any
suspension period).

 3

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                             ,
2006, 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 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 Employee Proprietary Information and Invention 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 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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