[FORM OF] CHANGE
IN CONTROL SEVERANCE AGREEMENT (this “ Agreement
”) dated as of [ • ], between Kos
Pharmaceuticals, Inc., a Florida corporation (the “
Company ”), and [NAME] (the “ Executive
”).
WHEREAS
the Executive is a skilled and dedicated employee of the Company
who has important management responsibilities and talents that
benefit the Company;
WHEREAS
the Board of Directors of the Company (the “ Board
”) considers it essential to the best interests of the
Company and its shareholders to assure that the Company and its
subsidiaries will have the continued dedication of the Executive,
notwithstanding the possibility, threat or occurrence of a Change
in Control (as defined below); and
WHEREAS
the Board believes that it is imperative to diminish the
distraction of the Executive by virtue of the uncertainties and
risks created by the circumstances surrounding a Change in Control
and to ensure the Executive’s full attention to the Company
and its subsidiaries during such a period of
uncertainty;
NOW,
THEREFORE, in consideration of the mutual agreements, provisions
and covenants contained herein, and intending to be legally bound
hereby, the parties hereto agree as follows:
SECTION
1. Definitions. For purposes of this Agreement, the
following terms shall have the meanings set forth below:
(a) “
280G Gross-Up Payment ” shall have the meaning set
forth in Section 5(a).
(b) “
Accounting Firm ” shall have the meaning set forth in
Section 5(b).
(c) “
Accrued Rights ” shall have the meaning set forth in
Section 4(a)(v).
(d) “
Affiliate(s) ” means, with respect to any specified
Person, any other Person that, directly or indirectly, through one
or more intermediaries, controls, is controlled by, or is under
common control with such specified Person.
(e) “
Annual Base Salary ” shall mean the Executive’s
annual rate of base salary in effect immediately prior to the
Termination Date.
(f) “
Annual Bonus ” means 110% of the average of the
regular annual cash bonuses (excluding special or one-time bonuses)
actually paid to the Executive in
each of the two
full years prior to the year in which the Termination Date occurs,
provided that, in the event that the Executive has not been
employed for a sufficient period of time to have been eligible for
two such bonuses (whether or not any bonus was actually paid),
“Annual Bonus” shall be calculated on the basis of the
average of the regular annual cash bonuses (excluding special or
one-time bonuses) actually paid to other officers of similar
position in each of the two full years prior to the year in which
the Termination Date occurs.
(g) “
Cause ” means the occurrence of any one of the
following:
(i)
the Executive is convicted of, or pleads guilty or nolo
contendere to, (A) a misdemeanor that involves moral
turpitude or that involves misappropriation of the assets of the
Company or a Subsidiary or (B) a felony;
(ii)
the Executive commits one or more acts or omissions constituting
fraud or other willful misconduct that have a materially
detrimental effect on the Company;
(iii)
the Executive continually and willfully fails, for at least
14 days following written notice from the Company, to perform
substantially the Executive’s employment duties (other than
as a result of incapacity due to physical or mental illness or
after delivery by the Executive of a Notice of Termination for Good
Reason); or
(iv)
the Executive commits a violation of any of the Company’s
policies (including the Company’s Code of Business Conduct
and Ethics, as in effect from time to time) that is materially
detrimental to the best interests of the Company.
(h) “
Change in Control ” means any corporation or other
entity or group (within the meaning of Section 13(d)(3) or
14(d)(2) of the Exchange Act) other than the Controlling
Shareholders becomes the beneficial owner, directly or indirectly,
of all of the outstanding shares of common stock of the
Company.
(i) “
Change in Control Date ” means the date on which a
Change in Control occurs (if any).
(j) “
Code ” means the Internal Revenue Code of 1986, as
amended from time to time, and the regulations promulgated
thereunder.
(k) “
Controlling Shareholders ” means, collectively, the
group of shareholders set forth in the Schedule 13D filed with
the Securities and Exchange Commission on September 12, 2006,
consisting of Michael Jaharis, Mary Jaharis, Wilson Point Holdings,
LP, Cubs Management, LLC, Kos Investments, Inc., Kos Holdings,
Inc., Kathryn Jaharis, Steven Jaharis and Jaharis Holdings, Inc,
LLC.
(l) “
Disability ” shall have the meaning set forth in
Section 4(b)(ii).
(m) “
Effective Date ” shall have the meaning set forth in
Section 2.
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(n) “
Exchange Act ” means the Securities Exchange Act of
1934, as amended from time to time, or any successor statute
thereto.
(o) “
Excise Tax ” means the excise tax imposed by
Section 4999 of the Code, together with any interest or
penalties imposed with respect to such tax.
(p) “
Good Reason ” means, without the Executive’s
express written consent, the occurrence of any one or more of the
following:
(i) any
reduction in the authority, duties, titles or responsibilities held
by the Executive immediately prior to the Change in Control Date or
any assignment to the Executive of duties or responsibilities that
are inconsistent with the Executive’s status, offices, titles
and reporting relationships as in effect immediately prior to the
Change in Control Date, but excluding for this purpose a reduction
or assignment that is remedied by the Company within 30 business
days after receipt of notice thereof given by the
Executive;
(ii) any
reduction in the annual base salary, annual bonus, annual incentive
opportunity, long term incentive opportunity or other compensation
or benefits of the Executive as in effect immediately prior to the
Change in Control Date, other than a reduction that is remedied by
the Company within 30 business days after receipt of notice thereof
given by the Executive;
(iii) any
change of the Executive’s principal place of employment to a
location more than 50 miles from the Executive’s principal
place of employment immediately prior to the Change in Control Date
(other than a change that is remedied within 30 business days after
receipt of notice thereof given by the Executive);
(iv) any
failure of the Company to pay the Executive any compensation when
due (other than a failure that is remedied within 30 business days
after receipt of written notice thereof given by the
Executive);
(v) delivery
by the Company or any Subsidiary of a written notice to the
Executive of the intent to terminate the Executive’s
employment for any reason, other than Cause or Disability, in each
case in accordance with this Agreement, regardless of whether such
termination is intended to become effective during or after the
Protection Period; or
(vi) any
failure by the Company to comply with and satisfy the requirements
of Section 10(c) (other than a failure that is remedied within 30
business days after receipt of written notice thereof given by the
Executive).
The
Executive’s right to terminate employment for Good Reason
shall not be affected by the Executive’s incapacity due to
physical or mental illness. A termination of employment by the
Executive for Good Reason for purposes of this Agreement shall be
effectuated by giving the Company written notice (“ Notice
of Termination for Good Reason ”) of the termination
setting forth in reasonable detail the specific conduct of the
Company that constitutes Good Reason and the specific provisions of
this Agreement on
3
which the
Executive relied. Unless the parties agree otherwise, a termination
of employment by the Executive for Good Reason shall be effective
on the 30th day following the date when the Notice of Termination
for Good Reason is given, unless the Company elects to treat such
termination as effective as of an earlier date; provided ,
however , that so long as an event that constitutes Good
Reason occurs during the Protection Period, for purposes of the
payments, benefits and other entitlements set forth herein, the
termination of the Executive’s employment pursuant thereto
shall be deemed to occur during the Protection Period. If the
Executive continues to provide services to the Company after one of
the events giving rise to Good Reason has occurred, the Executive
shall not be deemed to have consented to such event or to have
waived the Executive’s right to terminate his or her
employment for Good Reason in connection with such event. In all
cases, the Executive shall give the Company five days written
notice after the occurrence of any event that constitutes Good
Reason.
(q) “
Notice of Termination for Good Reason ” shall have the
meaning set forth in Section 1(p).
(r) “
Payment ” means any payment, benefit or distribution
(or combination thereof) by the Company, any of its Affiliates or
any trust established by the Company or its Affiliates, to or for
the benefit of the Executive, whether paid, payable, distributed,
distributable or provided pursuant to this Agreement or otherwise,
including any payment, benefit or other right that constitutes a
“parachute payment” within the meaning of
Section 280G of the Code.
(s) “
Person ” means a “person” (as such term is
used in Section 13(d) of the Exchange Act.
(t) “
Protection Period ” means the period commencing on the
Change in Control Date and ending on the first anniversary
thereof.
(u) “
Qualifying Termination ” means any termination of the
Executive’s employment (i) by the Company, other than for
Cause, death or Disability, that is effective (or with respect to
which the Executive is given written notice) during the Protection
Period or (ii) by the Executive for Good Reason during the
Protection Period.
(v) “
Section 409A Tax ” shall have the meaning set
forth in Section 6.
(w) “
Subsidiary ” means any entity in which the Company,
directly or indirectly, possesses 50% or more of the total combined
voting power of all classes of its stock.
(x) “
Successor ” shall have the meaning set forth in
Section 10(c).
(y) “
Termination Date ” means the date (if any) on which
the termination of the Executive’s employment, in accordance
with the terms of this Agreement, is effective.
(z) “
Underpayment ” shall have the meaning set forth in
Section 5(b).
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SECTION
2. Effectiveness and Term. This Agreement shall become
effective as of the date hereof (the “ Effective Date
”) and shall remain in effect until the second anniversary of
the Effective Date. Notwithstanding the foregoing, in the event of
a Change in Control during the term of this Agreement, this
Agreement shall not thereafter terminate, and the term hereof shall
be extended, until the Company and its Subsidiaries have performed
all their obligations hereunder with no future performance being
possible; provided , however , that this Agreement
shall only be effective with respect to the first Change in Control
that occurs during the term of this Agreement.
SECTION
3. Impact of a Change in Control on Equity Compensation
Awards. Effective as of any Change in Control Date during the
term of this Agreement, notwithstanding any provision to the
contrary in any of the Company’s equity-based, equity-related
or other long-term incentive compensation plans, practices,
policies and programs (including the Company’s 1996 Stock
Option Plan and 2006 Incentive Plan) or any award agreements
thereunder, (a) all outstanding stock options, stock
appreciation rights, restricted shares and similar rights and
awards then held by the Executive that are unexercisable or
otherwise unvested shall automatically become fully vested and
immediately exercisable, as the case may be, (b) all
outstanding equity-based, equity-related and other long-term
incentive awards then held by the Executive that are subject to
performance-based vesting criteria shall automatically become fully
vested and earned at a deemed performance level equal to the
maximum performance level with respect to such awards and
(c) all other outstanding equity-based, equity-related and
long-term incentive awards, to the extent not covered by the
foregoing clause (a) or (b), then held by the Executive that
are unvested or subject to restrictions or forfeiture shall
automatically become fully vested and all restrictions and
forfeiture provisions related thereto shall lapse.
SECTION
4. Termination of Employment. (a) Qualifying
Termination. Subject to Section 4(a)(vi), in the event of
a Qualifying Termination, the Executive shall be entitled to the
following payments and benefits:
(i)
Severance Pay. The Company shall pay the Executive an amount
equal to [MULTIPLE] (the “ Multiple ”) times the
sum of (A) the Executive’s Annual Base Salary (without
regard to any reduction giving rise to Good Reason) and
(B) the Executive’s Annual Bonus, in a lump-sum payment
payable on the tenth business day after the date the release
described in Section 4(a)(vi) becomes effective and
irrevocable (the “ Release Effective Date ”);
provided , however , that such amount shall be paid
in lieu of, and the Executive hereby waives the right to receive,
any other cash severance payment relating to salary or bonus
continuation, or any other severance payments or benefits, the
Executive is otherwise eligible to receive upon termination of
employment under any severance plan, practice, policy or program of
the Company or any Subsidiary or under any agreement between the
Company and the Executive.
(ii)
Prorated Annual Bonus. The Company shall pay the Executive
an amount equal to the product of (A) the Executive’s
target annual bonus for the year in which the Termination Date
occurs (assuming all individual and business criteria are met at
target levels) and (B) a fraction, the numerator of which is
the number of days in the
5
current fiscal
year through the Termination Date, and the denominator of which is
365, in a lump-sum payment on the tenth business day after the
Release Effective Date.
(iii)
Continued Welfare Benefits. The Company shall continue to
provide for a number of years equal to the Multiple health, welfare
and fringe benefits to the Executive and the Executive’s
spouse and dependents (in each case, provided in an applicable
plan) at least equal to the levels of benefits provided by the
Company and its Subsidiaries immediately prior to the Change in
Control Date. Nothing in this Section 4(a)(iii) shall operate
to reduce, or be construed as reducing, the Executive’s group
health plan continuation rights under the Consolidated Omnibus
Budget Reconciliation Act of 1985, as amended, in any
manner.
(iv)
Outplacement Counseling. The Company shall make available to
the Executive executive level outplacement services,
provided that the cost of such services shall not exceed
$50,000.
(v)
Accrued Rights. The Executive shall be entitled to
(A) payments of any unpaid annual base salary or other amount
earned or accrued through the Termination Date and for
reimbursement of any unreimbursed business expenses incurred
through the Termination Date, (B) the full amount of
Executive’s annual bonus for the fiscal year immediately
prior to the fiscal year in which the Termination Date occurs in
the event that the annual bonus for such prior fiscal year has not
been paid to the Executive by the Termination Date, and
(C) any vested payments or benefits explicitly set forth in
any other written agreements or benefit plans in which the
Executive participates (except for other severance payments and
benefits waived under Section 4(a)(i)) (the rights to such
payments, the “ Accrued Rights ”).
(vi)
Release of Claims. Notwithstanding any provision of this
Agreement to the contrary, the Company shall not be obligated to
make any payments or provide any benefits described in this
Section 4(a), other than payments or benefits in respect of
the Accrued Rights, unless and until such time as the Executive has
executed and delivered a Separation Agreement and Release
substantially in the form of Exhibit A hereto, which may be
modified to comply with applicable laws to the extent necessary to
obtain a general release of claims, except that no such
modification may affect the Executive’s rights to any
payments or benefits under this Agreement or impose any additional
restriction or limitation on the activities of the Executive
following termination of employment beyond the general release of
claims, and such release has become effective and irrevocable in
accordance with its terms.
(b)
Non-Qualifying Termination. (i) In the event of any
termination of Executive’s employment other than a Qualifying
Termination (including a termination of employment as a result of
death or Disability), the Executive shall not be entitled to any
additional payments or benefits from the Company under this
Section 4, other than payments or benefits with respect to the
Accrued Rights.
(ii) For
purposes of this Agreement, the Executive shall be deemed to have a
“ Disability ” in the event of the
Executive’s absence for a period of 180
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consecutive
business days as a result of incapacity due to a physical or mental
condition, illness or injury which is determined to be total and
permanent by a physician mutually acceptable to the Company and the
Executive or the Executive’s legal representative (such
acceptance not to be unreasonably withheld) after such physician
has completed an examination of the Executive. The Executive agrees
to make himself available for such examination upon the reasonable
request of the Company, and the Company shall be responsible for
the cost of such examination.
SECTION
5. Certain Additional Payments by the Company.
(a) Notwithstanding anything in this Agreement to the contrary
and except as set forth below, in the event it shall be determined
that any Payment that is paid or payable to or for the benefit of
the Executive during the term of this Agreement would be subject to
the Excise Tax, the Executive shall be entitled to receive an
additional payment (a “ 280G Gross-Up Payment ”)
in an amount such that, after payment by the Executive of all taxes
(and any interest or penalties imposed with respect to such taxes),
including any income and employment taxes and Excise Taxes imposed
upon the 280G Gross-Up Payment, the Executive retains an amount of
the 280G Gross-Up Payment equal to the Excise Tax imposed upon such
Payments. The Company’s obligation to make 280G Gross-Up
Payments under this Section 5 shall not be conditioned upon
the Executive’s termination of employment and shall survive
and apply after the Executive’s termination of employment. At
the time of any Payment during the period of this Agreement’s
effectiveness, the Company shall provide the Executive a written
description of the application of the Excise Tax (if any) to such
Payment.
(b) Subject
to the provisions of Section 5(c), all determinations required
to be made under this Section 5, including whether and when a
280G Gross-Up Payment is required, the amount of such 280G Gross-Up
Payment and the assumptions to be utilized in arriving at such
determination, shall be made in accordance with the terms of this
Section 5 by a nationally recognized certified public
accounting firm that shall be designated by the Company (other than
the Company’s regular auditor) (the “ Accounting
Firm ”). The Accounting Firm shall provide detailed
supporting calculations both to the Company and the Executive
within 15 business days of the receipt of notice from the Executive
that there has been a Payment or such earlier time as is requested
by the Company. For purposes of determining the amount of any 280G
Gross-Up Payment, the Executive shall be deemed to pay Federal
income tax at the highest marginal rate applicable to individuals
in the calendar year in which any such 280G Gross-Up Payment is to
be made and deemed to pay state and local income taxes at the
highest marginal rates applicable to individuals in the
jurisdictions in which the Executive is subject to tax in the
calendar year in which any such 280G Gross-Up Payment is to be
made, net of the maximum reduction in Federal income taxes that can
be obtained from deduction of state and local taxes, taking into
account limitations applicable to individuals subject to Federal
income tax at the highest marginal rate. All fees and expenses of
the Accounting Firm shall be borne solely by the Company. Any 280G
Gross-Up Payment, as determined pursuant to this Section 5,
shall be paid by the Company to the Executive within five business
days of the receipt of the Accounting Firm’s determination.
If the Accounting Firm determines that no Excise Tax is payable by
the Executive, it shall so indicate to the Executive in writing.
Any determination by the Accounting Firm shall be
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binding upon
the Company and the Executive. As a result of the uncertainty in
the application of the Excise Tax, at the time of the initial
determination by the Accounting Firm hereunder, it is possible that
the amount of the 280G Gross-Up Payment determined by the
Accounting Firm to be due to the Executive, consistent with the
calculations required to be made hereunder, will be lower than the
amount actually due, including any interest and penalties (an
“ Underpayment ”). In the event the Company
exhausts its remedies pursuant to
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