appa10q307ex1014.htm


    Exhibit
      10.14

    AMENDED
      AND RESTATED

     

    RETENTION
      AND NON-COMPETITION AGREEMENT

     

    A.P.
      Pharma, Inc. (the “Company” or “APP”), and Michael P.J. O’Connell (“Executive”)
      entered into a Retention and Non-Competition Agreement (the “Retention
      Agreement”), effective the 23rd day of March, 2005 (the “Effective Date”) in
      full substitution for the Retention and Non-Competition Agreement originally
      entered into between the parties effective May 12, 1999 and amended in its
      entirety effective August 1, 2000.  The Retention Agreement is
      hereby revised, effective August 23, 2007, so as to fully comply with the
      applicable provisions of Section 409A of the Internal Revenue Code of 1986,
      as
      amended, and the final treasury regulations and any guidance promulgated
      thereunder (“Section 409A”). The rights and obligations of Executive and the
      Company remain in full force and effect as set forth below.

     

    WHEREAS,
      the Company desires to retain the services of Executive as set forth in this
      Agreement and Executive desires to provide services to the Company, upon the
      terms and conditions set forth herein; and

     

    WHEREAS,
      the Company desires to ensure that Executive does not compete with and is
      available to provide services to the Company for the period of time set forth
      herein;

     

    NOW,
      THEREFORE, in consideration of the covenants and agreements hereinafter
      set forth, the parties hereto agree as follows:

     

    1.  Term
      of Agreement.  This Agreement shall commence on the Effective Date
      and shall end on (i) December 31, 2006, and shall be automatically
      renewed for additional one-year periods without any action required of either
      party unless not later than four months prior to the end of any calendar year
      either party gives to the other party notice in writing that it intends to
      terminate the Agreement at the end of the calendar year.  The Company
      and Executive agree that this Agreement shall govern the terms and conditions
      of
      Executive’s provision of services to the Company during the term of this
      Agreement.

     

    2.  Title
      and Responsibilities.  From and after the Effective Date until the
      commencement of any Supplemental  Employment Term (as defined in
      Section 6 of this Agreement) (the  “CEO Employment Period”), the
      Company shall employ Executive as the President and Chief Executive Officer
      of
      the Company reporting to the Board of Directors.  As President and
      Chief Executive Officer of the Company, Executive shall have the duties and
      responsibilities customarily associated with such position and as determined
      from time to time by the Board of Directors of the Company.  It is
      understood and agreed that Executive will be considered an employee of the
      Company for tax withholding purposes for the duration of both the CEO Employment
      Period and the Supplemental Employment Term.  Executive acknowledges
      that as a supplemental Employee he shall not have the power to bind the
      Company.

     

    3.  Obligations.  Executive
      agrees, during the CEO Employment Period, not to actively engage in any other
      employment, occupation or consulting activity for any direct or indirect
      remuneration without the prior approval of the Board; provided, however, that
      Executive may serve in any capacity with any civic, educational, or charitable
      organization.

     

    4.  Employee
      Benefits.  During the CEO Employment Period and Supplemental
      Employment Period, Executive shall be eligible to participate in (i) all
      employee benefit plans currently and hereafter maintained by the Company for
      senior management according to their terms, and (ii) such other employee
      benefits as are set forth in this Agreement.

     

    5.  CEO
      Employment Period Compensation.

     

    (a)  Base
      Salary.  During the CEO Employment Period, and during certain
      Supplemental Employment Terms, as specified in Section 6 hereof, the Company
      shall pay Executive as compensation for his services a base salary at an initial
      annualized rate recommended by the Compensation Committee of the Board and
      approved by the Board (which rate shall in no event be less than Executive’s
      base salary on the Effective Date as adjusted from time to time by the Board
      or
      its Compensation Committee (the “Base Salary”).  The Base Salary shall
      be paid periodically in accordance with normal Company payroll practices and
      subject to the usual required withholding.  Notwithstanding the
      foregoing, during the CEO Employment Period, Executive’s Base Salary shall be
      reviewed annually for possible adjustments in light of Executive’s performance
      of his duties, as determined by the Board or its Compensation
      Committee.

     

    (b)  Bonus.  During
      the CEO Employment Period and during Supplemental Employment Terms as specified
      in Section 6 hereof, Executive shall be eligible to receive bonuses as
      determined by the Board or its Compensation Committee.

     

    6.   Transition
      to Supplemental Employment.

     

    (a)  Supplemental
      Employment Term Definition; Obligations.  The periods of
      employment specified in this Section 6 shall be defined as the “Supplemental
      Employment Term” for the purposes of this Agreement.  During any
      Supplemental Employment Term, Executive shall be required to devote such time
      in
      rendering services to the Company as shall be reasonably agreed upon and
      acceptable to the Executive and the Company.  During the Supplemental
      Employment Term, Executive shall be free to serve as a director, employee,
      consultant or advisor to any other corporation or other business enterprise
      without the prior written consent of the Company so long as such activities
      do
      not interfere with his duties and obligations under this Agreement, including
      without limitation, Executive’s obligations under Section 8
      hereof.  In consideration of Executive’s not working for a “Drug
      Delivery Company” (as such term is defined in Section 8) and being available to
      provide the mutually agreed upon services required hereunder during the
      Supplemental Employment Term, the Executive shall receive the compensation
      specified in this Section 6.

     

    (b)  Termination
      of CEO Employment for Cause.  The Company may at any time
      terminate Executive’s employment hereunder for “Cause.”  For the
      purposes of this Agreement, “Cause” shall mean (i) Executive’s gross negligence
      or willful misconduct in connection with the performance of his duties, (ii)
      Executive’s conviction of, or plea of nolo contendere to, any felony in a court
      of competent jurisdiction, or (iii) Executive’s embezzlement or misappropriation
      of Company property.

     

    (c)  Termination
      of CEO Employment by Company Other than for Cause.  If the Company
      desires to terminate Executive’s CEO employment with the Company other than for
      Cause, then the Company shall provide Executive with written notice of such
      termination.  If the Executive’s CEO employment is terminated by the
      Company other than for Cause, then, subject to Executive entering into a
      Release, the Executive shall remain employed by the Company as a supplemental
      employee for a period of 24 months from the date upon which the Executive
      is given such written notice from the Company, after which period Executive’s
      employment with the Company shall terminate.

     

    In
      connection with the Supplemental Employment Term arising in connection with
      termination of Executive’s CEO employment by Company other than for Cause,
      Executive shall be paid (i) Base Salary, payable 50% at time of
      commencement of Supplemental Employment and the balance in accordance with
      the
      Company’s normal payroll practices and (ii) an annual bonus for the
      24-month period (prorated for any partial year) equal to the bonus paid to
      Executive during the immediately preceding 12-month period.

     

    (d)  Voluntary
      Termination of CEO Employment by Executive for Good Reason.  If
      Executive desires to voluntarily terminate his CEO employment with the Company
      for Good Reason, then Executive shall provide the Company with written notice
      of
      such termination within ninety (90) days of the occurrence of the event that
      provides Good Reason under this Agreement, provided however that Executive
      shall
      provide the Company the opportunity to remedy the event within 30 days after
      receipt of notice thereof given by the Executive.  Subject to
      Executive entering into a release in usual form of the Company and its directors
      and officers, the Executive shall remain employed by the Company as a
      supplemental employee for a period of 24 months from the date upon which
      the Company is given such written notice from Executive, after which period
      Executive’s employment with the Company shall terminate.  For the
      purposes of this Agreement, “Good Reason” shall mean, during the CEO Employment
      Period, the occurrence of one of the following events without the prior written
      consent of Executive: (i) a material reduction in Executive’s authority or
      responsibility which (x) is inconsistent with his position and/or title
      with the Company, or (y) diminishes or changes the Executive’s substantive
      authority or responsibility relative to Executive’s authority and responsibility
      immediately prior to such reduction, (ii) a material reduction in
      Executive’s Base Salary (a reduction of more than ten percent (10%) in any one
      year), (iii) a material reduction in the kind or level of employee benefits
      to which the Executive is entitled which is different from the level of benefits
      to which other similar employees are entitled or any action taken that
      materially and adversely affects the Executive’s participation in any employee
      benefit plan on a basis different from that applicable to other employees of
      similar rank, or (iv) Executive’s notification in writing from the Company
      that his principal place of work will be relocated by a distance of
      40 miles or more from the Company’s present headquarters.

     

    The
      Parties acknowledge that Executive
      has recently been on a medical leave of absence from his position as President
      and Chief Executive Officer of the Company.  For the avoidance of
      doubt, if at such time as Executive is ready and able to assume all of the
      duties and responsibilities of the position of President and Chief Executive
      Officer of the Company, the Company does not return him to that position, such
      action shall constitute Good Reason under this Agreement.

     

    In
      connection with the Supplemental Employment Term arising in connection with
      a
      termination of employment by the Executive for Good Reason, Executive shall
      be
      paid (i) Base Salary for the 24-month period, payable 50% at time of
      commencement of Supplemental Employment and the balance in equal installments
      in
      accordance with the Company’s normal payroll practices and (ii) an annual
      bonus for the 24-month period (prorated for any partial year) equal to the
      bonus
      paid to Executive during the immediately preceding 12-month period.

     

    (e)  Stock
      Option Vesting During Supplemental Employment Term or upon Change of
      Control.

     

    (i)  During
      any Supplemental Employment Term provided for in this Agreement, stock options
      that were granted to Executive by the Company (“Options”) shall continue to vest
      in accordance with the terms and conditions of the original option agreements
      relating to such Options.

     

    (ii)  Upon
      a
      Change of Control of the Company followed by termination of the Executive’s
      employment by the Company without Cause or by the Executive for Good Reason,
      all
      outstanding stock options previously granted to Executive shall become 100%
      vested.

     

    (f)  Lapse
      of Restrictions on Restricted Stock.  Upon a Change in Control
      provided for in this Agreement, all forfeiture and transfer restrictions on
      shares of restricted stock awarded to Executive by the Company (“Restricted
      Stock”) shall lapse in accordance with the terms and conditions of the original
      restricted stock award agreements relating to such Restricted
      Stock.

     

    (g)  For
      purposes of this Agreement, “Change of Control”: shall be deemed to have
      occurred if (i) any person or group (within the meaning of Rule 13d-3
      of the rules and regulations promulgated under the Securities Exchange Act
      of
      1934, as amended) shall acquire, in one or a series of transactions, whether
      through sale of stock or merger, ownership of stock of APP that possesses fifty
      percent or more of the total fair market value or total voting power of the
      stock of APP or any successor to APP; (ii) a merger in which APP is a party
      after which merger the stockholders of APP immediately before the sale do not
      retain, directly or indirectly, at least a majority of the beneficial interest
      in the voting stock of the surviving company; or (iii) the sale, exchange
      or transfer of all or substantially all of APP’s assets (other than a sale,
      exchange or transfer to one or more corporations where the stockholders of
      APP
      immediately before and after such sale, exchange or transfer, directly or
      indirectly, are the beneficial owners of at least a majority of the voting
      stock
      of the corporation(s) to which the assets were transferred).

     

    7.  Termination
      of Employment Relationship.  Executive’s supplemental employment
      relationship with the Company may not be terminated by the Company prior to
      the
      end of the Supplemental Employment Term, except by written agreement between
      both of the parties hereto; provided, however, that Executive’s employment with
      the Company, shall immediately and automatically terminate upon Executive’s
      breach of Section 8 hereof or for Cause.  No additional benefits
      or payments will become payable to Executive hereunder upon a
      termination

     

    8.  Covenant
      Not to Compete.

     

    (a)  Covenant
      Not to Compete.  During the CEO Employment Period and the
      Supplemental Employment Term, Executive will not render services as an employee
      or as a consultant providing more than an average of 20 hours per month, or
      participate as more than a 5% owner in, any Drug Delivery Company in the
      Restricted Territory, as such terms are defined immediately below.

     

    (b)  Drug
      Delivery Company.  “Drug Delivery Company” shall mean each company
      listed on Exhibit A hereto so long as such company is engaged in the development
      or application of drug delivery technology.  For purposes of this
      definition, “drug delivery technology” shall mean technology designed to deliver
      pharmacologically active substances into an organism in a manner that is
      controlled as to time and/or location of release as compared with bolus
      injections or standard oral nasal or rectal dosage forms.  In no event
      shall delivery of genetic materials be considered delivery for purposes of
      this
      Section 8.

     

    (c)  Restricted
      Territory.  “Restricted Territory” means any county in the State
      of California, each state in the United States and each country in the
      world.

     

    9.  Assignment.  Executive’s
      rights and obligations under this Agreement shall not be assignable by
      Executive.  The Company’s rights and obligations under this Agreement
      shall not be assignable by the Company except as incident to the transfer,
      by
      merger, liquidation, or otherwise, of all or substantially all of the business
      of the Company.

     

    10.  Notices.  Any
      notice required or permitted under this Agreement shall be given in writing
      and
      shall be deemed to have been effectively made or given if personally delivered,
      or if sent by facsimile, or mailed or sent via overnight courier to the other
      party at its address may designate by written notice to the other party
      hereto.  Any effective notice hereunder shall be deemed given on the
      date personally delivered or on the date sent by facsimile or deposited in
      the
      United States mail (sent by certified mail, return receipt requested), as the
      case may be, at the following addresses:

     

    (i)  If
      to the
      Company:

     

    
      	
               

            	
              A.P.  Pharma,
                Inc.

            


    

    
      	
               

            	
              123
                Saginaw Drive

            


    

    
      	
               

            	
              Redwood
                City, California 94063

            


    

    
      	
               

            	
              Attn:
                Chairman of the Board

            


    

     

    (ii)  If
      to the
      Executive:

     

    
      	
               

            	
              Michael
                P.J. O’Connell

            


    

    
      	
               

            	
              13621
                Pierce Road

            


    

    
      	
               

            	
              Saratoga,
                California 95070

            


    

     

    11.  Arbitration.  The
      parties hereto agree that any dispute or controversy arising out of, relating
      to, or in connection with this Agreement, or the interpretation, validity,
      construction, performance, breach, or termination thereof, shall be finally
      settled by binding arbitration to be held in San Mateo County, California under
      the Employment Dispute Resolution Rules of the American Arbitration Association
      as then in effect (the “Rules”).  The arbitrator(s) may grant
      injunctions or other relief in such dispute or controversy.  The
      decision of the arbitrator(s) shall be final, conclusive and binding on the
      parties to the arbitration, and judgment may be entered on the decision of
      the
      arbitrator(s) in any court having jurisdiction.

     

    The
      arbitrator(s) shall apply California law to the merits of any dispute or claim,
      without reference to rules of conflicts of law, and the arbitration proceedings
      shall be governed by federal arbitration law and by the Rules, without reference
      to state arbitration law.

     

    The
      parties shall each pay one-half of the costs and expenses of such arbitration,
      and each party shall pay its own counsel fees and expense.

     

    EXECUTIVE
      HAS READ AND UNDERSTANDS THIS SECTION 12, WHICH DISCUSSES
      ARBITRATION.  EXECUTIVE UNDERSTANDS THAT BY SIGNING THIS AGREEMENT,
      EXECUTIVE AGREES TO SUBMIT ANY CLAIMS ARISING OUT OF, RELATING TO, OR IN
      CONNECTION WITH THIS AGREEMENT, OR THE INTERPRETATION, VALIDITY, CONSTRUCTION,
      PERFORMANCE, BREACH OR TERMINATION THEREOF TO BINDING ARBITRATION, AND THAT
      THIS
      ARBITRATION CLAUSE CONSTITUTES A WAIVER OF EXECUTIVE’S RIGHT TO A JURY TRIAL AND
      RELATES TO THE RESOLUTION OF ALL DISPUTES RELATING TO EXECUTIVE’S EMPLOYMENT
      RELATIONSHIP WITH THE COMPANY.

     

    12.  Withholding.  The
      Company shall be entitled to withhold, or cause to be withheld, from payment
      any
      amount of withholding taxes required by law with respect to payments made to
      Executive in connection with his employment hereunder.

     

    13.      Section
      409A.

     

    (a)           Distributions.  Notwithstanding
      anything to the contrary in this Agreement, if Executive is a “specified
      employee” within the meaning of Section 409A  at the time of
      Executive’s termination of CEO Employment, and the benefits payable to
      Executive, if any, pursuant to this Agreement, when considered together with
      any
      other payments or separation benefits which may be considered deferred
      compensation under Section 409A (together, the “Deferred Compensation Separation
      Benefits”) will not and could not under any circumstances, regardless of when
      such termination occurs, be paid in full by March 15 of the year following
      Executive’s termination, then only that portion of the Deferred Compensation
      Separation Benefits which do not exceed the Section 409A Limit (as defined
      below) may be made within the first six (6) months following Employee’s
      termination of employment in accordance with the payment schedule applicable
      to
      each payment or benefit. For these purposes, each severance
      payment is hereby designated as a separate payment and will not collectively
      be
      treated as a single payment.  Any portion of the Deferred Compensation
      Separation Benefits in excess of the Section 409A Limit shall accrue and, to
      the
      extent such portion of the Deferred Compensation Separation Benefits would
      otherwise have been payable within the first six (6) months following
      Executive’s termination of CEO employment, will become payable on the first
      payroll date that occurs on or after the date six (6) months and one
      (1) day following the date of Executive’s termination of CEO
      employment.  All subsequent Deferred Compensation Separation Benefits,
      if any, will be payable in accordance with the payment schedule applicable
      to
      each payment or benefit.

     

    (b)           Amendment.  This
      provision is intended to comply with the requirements of Section 409A so that
      none of the payments and separation benefits to be provided hereunder will
      be
      subject to the additional tax imposed under Section 409A, and any ambiguities
      herein will be interpreted to so comply.  The Company and Executive
      agree to work together in good faith to consider amendments to this Agreement
      and to take such reasonable actions which are necessary, appropriate or
      desirable to avoid imposition of any additional tax or income recognition prior
      to actual payment to Executive under Section 409A.

     

    (c)           Section
      409A Limit.  For purposes of this Agreement, “Section 409A Limit”
will mean the lesser of two (2) times: (i) Executive’s annualized compensation
      based upon the annual rate of pay paid to Executive during the Company’s taxable
      year preceding the Company’s taxable year of Executive’s termination of
      Full-Time employment as determined under Treasury Regulation
      1.409A-1(b)(9)(iii)(A)(1) and any Internal Revenue Service guidance issued
      with
      respect thereto; or (ii) the maximum amount that may be taken into account
      under a qualified plan pursuant to Section 401(a)(17) of the Code for the year
      in which Executive’s Full-Time employment is terminated.

     

         
      14.          Severability.  If
      any term or provision of this Agreement shall to any extent be declared illegal
      or unenforceable by arbitrator(s) or by a duly authorized court of competent
      jurisdiction, then the remainder of this Agreement or the application of such
      term or provision in circumstances other than those as to which it is so
      declared illegal or unenforceable, shall not be affected thereby, each term
      and
      provision of this Agreement shall be valid and enforceable to the fullest extent
      permitted by law and the illegal or unenforceable term or provision shall be
      deemed replaced by a term or provision that is valid and enforceable and that
      comes to expressing the intention of the invalid or unenforceable term of
      provision.

     

    15.           Entire
      Agreement.  This Agreement and the agreements relating to the
      Options and Restricted Stock represent the entire agreement of the parties
      with
      respect to the matters set forth herein, and to the extent inconsistent with
      other prior contracts, arrangements or understandings between the parties,
      supersedes all such previous contracts, arrangements or understandings between
      the Company and the Executive.  The Agreement may be amended at any
      time only by mutual written agreement signed by the parties hereto.

     

    16.           Headings.  The
      headings of sections herein are included solely for convenience of reference
      and
      shall not control the meaning or interpretation of any of the provisions of
      this
      Agreement.

     

    17.           Counterparts.  This
      Agreement may be executed by either of the parties hereto in counterparts,
      each
      of which shall be deemed to be an original, but all such counterparts shall
      together constitute one and the same instrument.

     

    IN
      WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
      day
      and year first above written.

     

    
      	
              EXECUTIVE

            	
              A.P.
                Pharma, Inc.

            
	 	 
	 	
              By:                                                          

               

            
	
              Name:                                                                

            	
              Name:                                                          

               

            
	 	
              Title:                                                          

            


    

    
       

      
        
          

        

      

      
        
        

      

    


    EXHIBIT
      A

     

    3M
      Pharmaceuticals

     

    Alcon

     

    Alkermes,
      Inc.

     

    Alza
      Corporation

     

    Andrx
      Corporation

     

    Aradigm
      Corporation

     

    Biovail
      Corporation International

     

    Cardinal
      Health

     

    Cima
      Labs, Inc.

     

    Dura
      Pharmaceuticals, Inc.

     

    Durect
      Corporation

     

    Eurand

     

    Faulding
      Inc.

     

    Inhale
      Therapeutic Systems, Inc.

     

    K-V
      Pharmaceutical Company

     

    Lohmann
      Therapie Systeme GmbH

     

    Noven
      Pharmaceuticals, Inc.

     

    Penwest
      Pharmaceuticals Co.

     

    Research
      Triangle Pharmaceuticals

     

    SkyePharma
      plc

     

    Teva
      Pharmaceuticals

     

    Watson
      Pharmaceuticals, Inc.

     

    Yamanouchi
      Pharmaceutical Co., Ltd.

     

    1.  Including
      any and all successors and divisions or subsidiaries of such
      Persons.