Exhibit 10.1
AAIPHARMA INC.
KEY EMPLOYEE RETENTION PLAN AND SEVERANCE PLAN

1.   Establishment and Purpose of Plan. aaiPharma Inc. (the “Company”) hereby
establishes the Retention and Severance Plan (the “Plan”). The purpose of the
Plan is to help retain the valuable services of the Company’s key employees by
providing an incentive to Eligible Employees to remain employed by the Company
until the completion of critical duties and responsibilities in anticipation of,
or in connection with, a sale of all or substantially all of the Company’s
Pharmaceutical assets (a “Sale”) and consummation of the Company’s Chapter 11
reorganization.

2.   Term. The Plan shall continue in effect until the first anniversary of the
Sale Date.

3.   Retention, Incentive and Severance Benefits. The following benefits
(excluding benefits described in Section 3.1(b)) shall be in lieu of any
administrative expense claims of an Eligible Employee for retention, incentive,
bonus or severance awards or benefits arising from any pre-petition employment
contract or agreement.

  3.1.   Retention Payments.

  (a)   Upon the Sale Payment Date (as defined in Section 3.4 hereof), the
Company shall pay to each Retention-Eligible Employee who is actively employed
by the Company on the Sale Date a lump sum cash bonus in an amount to be
determined by the Compensation Committee equal to a portion of the aggregate
amount set forth on Schedule A (the “Aggregate Retention Amount”), provided that
the Retention-Eligible Employee continues to provide such Post-Closing Services
as the Company may require or request during the period from the Sale Date to
the Sale Payment Date.     (b)   The CEO or his designee (the “Awarding
Officer”) shall have the authority and discretion to make awards to selected
participants from the pool of Eligible Employees (excluding members of Groups
I-III), based on a determination that the selected employee’s continued service
is critical to achieving the consummation of the Plan of Reorganization;
provided that the aggregate amount of such awards shall not exceed $400,000. As
provided in the applicable Retention Agreement, a portion of such award shall be
paid at any time prior to the Emergence Date, if the Eligible Employee is
actively employed on such date, which portion must be repaid to the Company if
the Eligible Employee terminates employment with the Company prior to the
Emergence Date, and a portion of such award shall be paid on the Emergence Date,
or, if later, five days after the effective date of the release described in
Section 3.5 of this Plan, if the Eligible Employee is actively employed on the
Emergence Date.

 

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  3.2.   Incentive Payments. On the Sale Payment Date, the Company shall pay to
each Incentive-Eligible Employee who is actively employed by the Company on the
Sale Date a lump sum incentive payment in an amount to be determined by the
Compensation Committee equal to a portion of the aggregate amount set forth on
Schedule A (the “Aggregate Incentive Amount”), provided that the
Incentive-Eligible Employee continues to provide such Post-Closing Services as
the Company may require or request during the period from the Sale Date to the
Sale Payment Date, and the Sale is a Sale on Higher and Better Terms.     3.3.  
Severance Benefits.

  (a)   Payments and Benefits in the Event of Certain Terminations.

  (i)   Notwithstanding any provisions to the contrary in any employment
agreement between the Group I Employee and the Company, if after the Effective
Date and before the forty-fifth day following the Sale Date, a Group I Employee
suffers a Termination without Cause and is not offered Comparable Employment,
then such Employee (or such Employee’s beneficiary or estate representative, as
the case may be) shall be entitled to receive severance pay equal to eight
(8) weeks of base salary at the rate in effect as of the Effective Date (the
“Group I Severance Amount”).     (ii)   If after the Effective Date and before
the forty-fifth day following the Sale Date, a Group II Employee suffers a
Termination Without Cause and is not offered Comparable Employment, then such
Employee (or such Employee’s beneficiary or estate representative, as the case
may be) shall be entitled to receive severance pay equal to eight (8) weeks of
base salary at the rate in effect as of the Effective Date (the “Group II
Severance Amount”).     (iii)   If, after the Effective Date and before the
forty-fifth day following the Sale Date, a Group III Employee suffers a
Termination Without Cause and is not offered Comparable Employment, such
Employee (or such Employee’s beneficiary or estate representative, as the case
may be) shall be entitled to receive severance pay equal to eight (8) weeks of
base salary at the rate in effect as of the Effective Date (the “Group III
Severance Amount”).

  (b)   Mitigation. Except as provided in a Retention Agreement, and except with
respect to an offer of Comparable Employment, an Eligible Employee shall not be
required to mitigate the amount of any payment provided for in this Section 3.3
by seeking other employment or otherwise and no such payment shall be offset or
reduced by the amount of any compensation or benefits provided to such Eligible
Employee in any subsequent employment.

  3.4.   Sale Payment Date. Any payment provided for in this Section 3
(excluding payments described in Section 3.1(b), which shall be paid as
described in Section 3.1(b)) shall

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      be payable by the Company in a lump sum in cash (a) within forty-five
(45) days after the Sale Date, or (b) if later, five days after the effective
date of the release described in Section 3.5 of this Plan (the “Sale Payment
Date”).     3.5.   Release. Any payment provided for in this Section 3 shall be
subject to the Eligible Employee’s execution of a general release in a form
provided by the Company; provided, that only the second payment described in
Section 3.1(b) shall be subject to the Eligible Employee’s execution of a
general release in a form provided by the Company.

4.   Notice of Termination. Any purported termination of employment by the
Company (other than by reason of the Eligible Employee’s death) shall be
communicated by a written notice (a “Notice of Termination”) to the Eligible
Employee. For the purposes of this Plan (and only this Plan), no such purported
termination by the Company shall be effective without a Notice of Termination.  
5.   Definitions. The capitalized terms used in this Plan shall have the
following meanings:

  5.1.   “Cause” means, with respect to any Eligible Employee, any of the
following events or contingencies:

  (a)   The Eligible Employee materially breaches, materially repudiates or
otherwise materially fails to comply with or perform any of the terms of any
employment agreement entered into with the Company, any duties of the Eligible
Employee in connection with his or her employment by the Company or any of the
Company’s policies or procedures, or deliberately interferes with the compliance
by any other employee of the Company with any of the foregoing and such act or
omission (if correctable) is not corrected within 30 days after notice from the
Company;     (b)   The conviction of the Eligible Employee of a felony or the
pleading by the Eligible Employee of no contest (or similar plea) to any felony
(other than a crime for which vicarious liability is imposed upon the Eligible
Employee solely by reason of the Eligible Employee’s position with the Company,
and not by reason of the Eligible Employee’s act or omission);     (c)   Any act
or omission by the Eligible Employee constituting fraud, gross negligence or
willful misconduct or breach of fiduciary duty in connection with the Eligible
Employee’s employment by the Company and, if correctable, is not corrected
within 30 days after notice from the Company; or     (d)   Any other act,
omission, event or condition constituting cause for the discharge of an employee
under the laws of North Carolina (or the laws of such other jurisdiction in
which the employee is employed), and, if correctable, is not corrected within
30 days after notice from the Company.

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  5.2.   “Comparable Employment” means employment by either the Company or its
successors or the purchaser of all or substantially all of the Company’s
Pharmaceutical assets, on terms no less favorable than those in effect
immediately prior to the Sale Date. For purposes of this definition, the annual
base salary provided by such employment shall be deemed to be “no less
favorable” than the Eligible Employee’s base salary in effect immediately prior
to the Sale Date if the annual base salary provided by such employment is not
less than ninety percent (90%) of the Eligible Employee’s base salary in effect
immediately prior to the Sale Date.     5.3.   “Compensation Committee” means
the Compensation Committee of the Board of Directors of the Company.     5.4.  
“Effective Date” means the date set forth in Section 6.9.     5.5.   “Eligible
Employee” means an individual employed by the Company on the Effective Date.    
5.6.   “Emergence Date” means the date on which the Plan of Reorganization is
consummated.     5.7.   “Group I, II or III Employee” means an Eligible Employee
who has been designated by the Compensation Committee as a member of either
Group I, II, or III.     5.8.   “Incentive-Eligible Employee” means a Group I or
III employee who has been designated by the Compensation Committee as being
eligible to receive an Incentive Payment and who is a party to a Retention
Agreement.     5.9.   “Plan of Reorganization” means the plan of reorganization
of the Company and all of its wholly-owned U.S. subsidiaries which each filed a
voluntary petition for relief with the United States Bankruptcy Court for the
District of Delaware (the “Court”) on May 10, 2005 as filed with the Court (and
as it may be amended from time to time).     5.10.   “Post-Closing Services”
means post-closing services including, but not limited to: Medicaid rebate
accounting; processing of returns; management of third party logistics;
coordinating the transfer of manufacturing activities, customer accounts, trade
and retail related activities, and assets; and contract analysis,
interpretation, termination, and amendment.     5.11.   “Retention Agreement”
means the written agreement entered into between the Company and an Eligible
Employee (which written agreement shall be entered into on or before the Sale
Date, except in the case of an Eligible Employee receiving a payment described
in Section 3.1(b), in which case such written agreement shall be entered into
prior to the date such payment is to be made) that sets forth the amounts of any
retention, incentive, and/or severance payments to which such employee is
entitled pursuant to the terms of this Plan.

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  5.12.   “Retention-Eligible Employee” means a Group I, II or III employee who
is a party to a Retention Agreement.     5.13.   “Sale Date” means the closing
date of a sale of all or substantially all of the Company’s Pharmaceutical
assets to a purchaser, either in a single transaction or a series of related
transactions.     5.14.   “Sale on Higher and Better Terms” means a Sale
generating net cash proceeds of $3,500,000 over and above the amount offered by
Xanodyne Pharmaceuticals, Inc., as set forth in the Asset Purchase Agreement by
and between the Company and Xanodyne Pharmaceuticals, Inc., dated May 6, 2005
(the “Asset Purchase Agreement”), after payment of breakup fees and expense
reimbursement, as required by the Asset Purchase Agreement.     5.15.  
“Termination Without Cause” means a termination due to the death of the Eligible
Employee, or by the Company or its successors for reasons other than Cause.

6.   Miscellaneous.

  6.1.   Successors and Assigns.

  (a)   The obligations and liabilities of the Company hereunder and set forth
in any Retention Agreement shall be binding upon any Company or other entity
acquiring all or substantially all the assets of the Company, whether by
operation of law or otherwise, and the rights of the Company hereunder and set
forth in any Retention Agreement shall inure to the benefit of any such Company
or other entity.     (b)   An Eligible Employee’s rights and interests hereunder
and under any Retention Agreement are not assignable or transferable except by
will or by the laws of descent and distribution, except that the benefits so
provided may inure to an Eligible Employee’s legal personal representative(s).

  6.2.   Governing Law. This Plan and the rights of all persons claiming
hereunder or under any Retention Agreement shall be construed and enforced in
accordance with the laws of the State of North Carolina without giving effect to
the conflict of law principles thereof.     6.3.   Arbitration. Any controversy
or claim arising out of or relating to this Plan that cannot be resolved by the
covered Eligible Employee and the Company, including any dispute as to the
entitlement to or the calculation of benefits, shall, at the instance of either
the Eligible Employee or the Company, be submitted to arbitration in the City of
Wilmington, North Carolina in accordance with the procedures of the American
Arbitration Association then in effect. The determination of the arbitrator(s)
shall be conclusive and binding on the Company and the Eligible Employee, and
judgment may be entered on the arbitrator(s)’ award in any court having
jurisdiction.

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  6.4.   Validity and Severability. The invalidity or unenforceability of any
provision of the Plan or a Retention Agreement shall not affect the validity or
enforceability of any other provision in such documents, which each shall remain
in full force and effect, and any prohibition or unenforceability in any
jurisdiction shall not invalidate or render unenforceable such provision in any
other jurisdiction.     6.5.   Withholding. All benefits and payments made
pursuant to this Plan shall be subject to all applicable taxes and other amounts
required to be withheld pursuant to federal, state or local law or otherwise.  
  6.6.   Non-Exclusivity of Rights. Except as otherwise provided in this Plan,
nothing in this Plan shall prevent or limit an Eligible Employee’s future
participation in any benefit, bonus, incentive or other plan or program provided
by the Company for which he or she may qualify, nor shall anything herein limit
or reduce such rights (other than to assert an administrative expense claim for
retention, incentive, bonus or severance awards or benefits) as he or she may
have under any other agreements with the Company. Amounts which are vested
benefits under any agreement, plan, program, policy or practice of the Company
shall be payable in accordance with such agreement, plan, program, policy or
practice. No additional compensation provided to an Eligible Employee under any
agreement, benefit or compensation plans of the Company shall be deemed to
modify or otherwise affect the terms or any of his or her entitlements
hereunder. Notwithstanding the foregoing or any other Plan provision to the
contrary, no Eligible Employee shall be entitled to any duplication of benefits
by virtue of the adoption of this Plan.     6.7.   Notice. For the purposes of
this Plan, notices and all other communications provided for in this Plan
(including the Notice of Termination) shall be in writing and shall be deemed to
have been duly given when personally delivered or sent by certified mail, return
receipt requested, postage prepaid, addressed to the respective addresses last
given by each party to the other, provided that all notices to aaiPharma Inc.,
2320 Scientific Park Drive, Wilmington, NC 28405, Attention: Rose-Marie Nelson
and John W. Harrington. All notices and communications shall be deemed to have
been received on the earlier of the date of delivery thereof or on the third
business day after the mailing thereof, except that notice of change of address
shall be effective only upon receipt.     6.8.   Administration. The Company has
full power and authority, in its sole discretion, to construe, interpret and
administer this Plan. Decisions of the Company shall be final, conclusive and
binding on all parties.     6.9.   Court Approval. Notwithstanding anything to
the contrary, this Plan shall only become effective upon the entry of an order
by the Court authorizing the Company to adopt the Plan, which date of adoption
shall be the “Effective Date” for all purposes under the Plan.     6.10.  
Section 409A. If the Eligible Employee is a “specified employee” for purposes of
Section 409A of the Internal Revenue Code of 1986, as amended, and the
regulations

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      thereunder, any payments required to be made pursuant to this Plan or any
Retention Agreement which are subject to Section 409A shall not commence until
six months from the date of termination.

APPROVED BY THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS ON AUGUST 3,
2005
APPROVED BY THE U.S. BANKRUPTCY COURT ON JULY 18, 2005

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SCHEDULE A

                    Aggregate Retention Amount     Aggregate Incentive Amount  
 
 
             
$591,878
      $202,292      

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