Document:

Savoy Purchase and Sale Agreement 100507

    
      

    

    EXHBIT
      10.6

    
 

    PURCHASE
      AND SALE AGREEMENT

     

    dated
      effective as of October 5, 2007

     

    between

     

    Hallador
      Petroleum Company, 

     

    as
      Purchaser

     

    and

     

    Savoy
      Energy Limited Partnership, 

     

    as
      Seller

     

    

    
      
        
          1-LA/947404.9 

        

        
        

      

      
        
        

        
          

        

      

      
        
        

        
          

        

      

    

    ARTICLE IDEFINITIONS1

     

    1.1Definitions1

     

    1.2Other
      Defined
      Terms2

     

    ARTICLE IIPURCHASE
      AND
      SALE2

     

    2.1Purchase
      and Sale
      of the Additional Partnership Interest2

     

    2.2Consideration3

     

    2.3Transactions
      to be
      Effected at the Closing3

     

    2.4Closing
      Date3

     

    ARTICLE IIIREPRESENTATIONS
      AND
      WARRANTIES OF SELLER3

     

    3.1Organization3

     

    3.2Authorization
      and
      Enforceability3

     

    3.3No
      Conflicts;
      Authorization4

     

    3.4No
      Brokers or
      Finders4

     

    ARTICLE IVREPRESENTATIONS
      AND
      WARRANTIES OF PURCHASER4

     

    4.1Organization4

     

    4.2Authority
      and
      Enforceability4

     

    4.3No
      Conflicts;
      Authorizations5

     

    4.4Investment
      Representations5

     

    4.5Brokers
      or
      Finders5

     

    ARTICLE VCONDITIONS
      TO
      CLOSING5

     

    5.1Conditions
      to
      Obligations of Purchaser5

     

    5.2Conditions
      to
      Obligations of Seller6

     

    ARTICLE VIPOST-CLOSING
      COVENANTS7

     

    6.1Post-Closing
      Notifications7

     

    6.2Certain
      Tax
      Matters7

     

    6.3Further
      Assurances7

     

    ARTICLE VIITERMINATION7

     

    7.1Termination7

     

    7.2Effect
      of
      Termination8

     

    7.3Remedies8

     

    ARTICLE VIIIINDEMNIFICATION9

     

    8.1Survival9

     

    8.2Indemnification9

     

    8.3Notice
      and
      Opportunity to Defend9

     

    8.4Contingent
      Claims10

     

    8.5Tax
      Treatment of
      Indemnification Payments10

     

    8.6Exclusive
      Remedy10

     

    ARTICLE IXMISCELLANEOUS10

     

    9.1Notices10

     

    9.2Amendments
      and
      Waivers11

     

    9.3Expenses12

     

    9.4Successors
      and
      Assigns12

     

    9.5Governing
      Law12

     

    9.6Consent
      to
      Jurisdiction12

     

    9.7Counterparts12

     

    9.8Third
      Party
      Beneficiaries12

     

    9.9Entire
      Agreement13

     

    9.10Captions13

     

    9.11Severability13

     

    9.12Interpretation13

     

    

    
      
        
          
            	
                    1-LA/947404.9 

                  	 	 

          

          

        

        
        

      

      
        
        

        
          

        

      

      
        
        

        
          TABLE
            OF
            CONTENTS

          (continued)

          Page

           

          

        

      

    

    PURCHASE
      AND SALE AGREEMENT

     

    This
      PURCHASE AND
      SALE AGREEMENT (this “Agreement”),
      dated as of
      October 5, 2007, is entered into by and between Hallador Petroleum Company,
      a Colorado corporation (“Purchaser”),
      and Savoy
      Energy Limited Partnership, a Michigan limited partnership (“Seller”).

     

    RECITALS:

     

    A. Purchaser
      is a
      limited partner of Seller, and its chief executive officer serves as one of
      three members of the Executive Committee of Seller.

     

    B. As
      of the date of
      this Agreement, Purchaser owns a 32.303328% limited partnership interest in
      Seller. 

     

    C. Upon
      the terms and
      subject to the conditions set forth in this Agreement, Purchaser wishes to
      purchase from Seller, and Seller wishes to sell to Purchaser, a 13.102581%
      limited partnership interest in Seller (the “Additional
      Partnership Interest”).
      Following such
      purchase and sale, Purchaser will hold a 45.405909% limited partnership interest
      in Seller.

     

    NOW,
      THEREFORE, in
      consideration of the foregoing premises and the respective representations
      and
      warranties, covenants and agreements contained herein, the parties hereto agree
      as follows:

     

    ARTICLE I  

     

    

     

    DEFINITIONS

     

    1.1  Definitions.
      When used in this
      Agreement, the following terms shall have the meanings assigned to them in
      this
Section 1.1,
      or in the
      applicable Section of this Agreement to which reference is made in this
Section 1.1.

     

    “Affiliate”
means,
      with
      respect to any specified Person, any other Person directly or indirectly
      controlling, controlled by or under common control with such specified
      Person.

     

    “Business
      Day”
means
      a day other
      than a Saturday, Sunday or other day on which banks located in Detroit, Michigan
      are authorized or required by Law to close.

     

    “Certificate”
means
      the
      Certificate of Limited Partnership of Seller filed with the Michigan Department
      of Labor and Economic Growth, as the same may be amended from time to
      time.

     

    “Governmental
      Entity”
means
      any entity
      or body exercising executive, legislative, judicial, regulatory or
      administrative functions of or pertaining to United States federal, state,
      local, or municipal government, foreign, international, multinational or other
      government, including any department, commission, board, agency, bureau,
      subdivision, instrumentality, official or other regulatory, administrative
      or
      judicial authority thereof.

     

    “Law”
means
      any
      statute, law (including common law), treaty, ordinance, code, order, decree,
      judgment, rule, regulation and any other binding requirement or determination
      of
      any Governmental Entity. 

     

    “Lien”
means,
      with
      respect to any property or asset, any mortgage, lien, pledge, charge, security
      interest, adverse claim or other encumbrance in respect of such property or
      asset.

     

    “Losses”
means
      any and all
      losses, liabilities, claims, demands, fines, judgments, orders, settlements,
      damages and any related expenses (including, without limitation, reasonable
      legal, accounting, consulting and investigation expenses and litigation costs),
      but excluding consequential damages or any damages based upon a multiple of
      damages or similar theory.

     

    “Order”
means
      any
award,
      injunction, judgment, decree, order, ruling, subpoena or verdict or other
      decision issued,
      promulgated
      or entered by or with any Governmental Entity of competent
      jurisdiction.

     

    “Person”
means
      an
      individual, a corporation, a partnership, a limited liability company, a trust,
      an unincorporated association, a Governmental Entity or any agency,
      instrumentality or political subdivision of a Governmental Entity, or any other
      entity or body.

     

    1.2  Other
      Defined
      Terms.
      The following
      terms have the meanings assigned to such terms in the Sections of the Agreement
      set forth below:

     

    
      	
              Acquisition

               

            	
               2.1

               

            
	
              Additional
                Partnership Interest

               

            	
              Recitals

               

            
	
              Agreement

               

            	
              Preamble

               

            
	
              Asserted
                Liability

               

            	
              8.3(a)

               

            
	
              Closing

               

            	
               2.4

               

            
	
              Closing
                Date

               

            	
               2.4

               

            
	
              Indemnitee

               

            	
              8.3(a)

               

            
	
              Indemnifying
                Party

               

            	
              8.3(a)

               

            
	
              Partnership
                Agreement

               

            	
              3.1

               

            
	
              Permitted
                Restrictions

               

            	
              2.1

               

            
	
              Purchase
                Price 

               

            	
              2.2

               

            
	
              Purchaser

               

            	
              Preamble

               

            
	
              Seller
                

               

            	
              Preamble

               

            

    

    ARTICLE II  

     

    

     

    PURCHASE
      AND SALE

     

    2.1  Purchase
      and
      Sale of the Additional Partnership Interest.
      Upon the terms
      and subject to the conditions of this Agreement, at the Closing, Seller shall
      sell to Purchaser, and Purchaser shall purchase from Seller, the Additional
      Partnership Interest free and clear of all Liens other than restrictions on
      transfer imposed under the Certificate and the Partnership Agreement (the
“Permitted
      Restrictions”).
      The purchase
      and sale of the Additional Partnership Interest is referred to in this Agreement
      as the “Acquisition.” 

     

    2.2  Consideration.
      At the Closing,
      Purchaser shall pay to Seller an amount equal to U.S. $6,000,000.00 (the
“Purchase
      Price”)
      by wire transfer
      of immediately available funds to the bank account set forth on Schedule 2.2.

     

    2.3  Transactions
      to
      be Effected at the Closing.

     

    (a)  At
      the Closing
      Purchaser shall deliver to Seller all documents, instruments or certificates
      required to be delivered by Purchaser to Seller at the Closing pursuant to
      this
      Agreement.

     

    (b)  At
      the Closing
      Seller shall deliver to Purchaser (i) all certificates representing or
      evidencing the Additional Partnership Interest, if any, (ii) all other
      documents and instruments necessary to vest in Purchaser all of Seller’s right,
      title and interest in and to the Additional Partnership Interest, free and
      clear
      of all Liens (other than the Permitted Restrictions), and (iii) all other
      documents, instruments or certificates required to be delivered by Seller to
      Purchaser at the Closing pursuant to this Agreement. 

     

    2.4  Closing
      Date.
      The closing of
      the Acquisition (the “Closing”)
      shall be
      coordinated by Morgan, Lewis & Bockius LLP and Barnes & Thornburg LLP
      and shall take place on October 5, 2007, unless another time, date or place
      is agreed to in writing by the parties. The date upon which the Closing occurs
      is herein referred to as the “Closing
      Date.” 

     

    ARTICLE III  

     

    

     

    REPRESENTATIONS
      AND WARRANTIES OF SELLER

     

    Seller
      represents,
      warrants and covenants to Purchaser as of the date hereof and as of the Closing
      Date that:

     

    3.1  Organization.
      Seller is a
      limited partnership existing in good standing under the Laws of Michigan and
      has
      all requisite power and authority to own, lease, and operate its assets and
      to
      carry on its business as presently conducted. Seller is duly qualified or
      licensed to do business as a foreign limited partnership and is in good standing
      in each jurisdiction in which the activity of Seller in such jurisdiction
      thereby makes such qualification necessary. Except
      for the
      Third Amended and Restated Agreement of Limited Partnership of Seller dated
      October 5, 2007 (the “Partnership
      Agreement”),
      there is no
      voting trust, proxy, or other agreement or understanding between or among any
      Persons that affects or relates to the voting or giving of written consent
      with
      respect to Seller. 

     

    3.2  Authorization
      and Enforceability.
      Seller has all
      requisite power and authority to execute and deliver this Agreement, to perform
      Seller’s obligations hereunder and to consummate the transactions contemplated
      hereby. Seller has the full power to issue the Additional Partnership Interest
      to Purchaser in accordance with the terms of this Agreement, free and clear
      of
      all Liens (other than the Permitted Restrictions). The execution and delivery
      of
      this Agreement and the consummation of the transactions contemplated hereby
      have
      been duly and validly authorized by Seller and no other proceedings by Seller
      or
      the partners of Seller are necessary to authorize this Agreement or to
      consummate the transactions contemplated hereby. This Agreement has been duly
      and validly executed and delivered by Seller, and constitutes the valid and
      binding obligation of Seller enforceable against Seller in accordance with
      its
      terms, except as such enforceability may be limited by applicable bankruptcy,
      insolvency, reorganization, moratorium or other similar Laws affecting or
      relating to creditors’ rights generally, or general principles of
      equity.

     

    3.3  No
      Conflicts;
      Authorization.
      The execution and
      delivery by Seller of this Agreement do not, and the consummation of the
      Acquisition by Seller will not:

     

    (a)  conflict
      with or
      result in a violation or breach of any of the terms, conditions or provisions
      of
      the Certificate, Partnership Agreement or similar organization documents of
      Seller;

     

    (b)  conflict
      with or
      result in a material violation or breach of any Law or Order applicable to
      Seller or any of Seller’s assets and properties or require any consent or
      approval of or any notice or filing with any Governmental Entity or other third
      party; or

     

    (c)  conflict
      with or
      result in a breach or violation of, or default under, or give rise to any right
      of acceleration or termination of, any of the terms, conditions or provisions
      of, any note, bond, lease, license, agreement or other instrument or obligation
      to which Seller is a party or by which Seller’s assets or properties are
      bound.

     

    3.4  No
      Brokers or
      Finders.
      Seller has not
      incurred and will not incur, directly or indirectly, as a result of any action
      taken or permitted to be taken by or on behalf of Seller, any liability for
      brokerage or finders’ fees or agents’ commissions or similar charges in
      connection with the execution and performance of the transactions contemplated
      by this Agreement.

     

    ARTICLE IV  

     

    

     

    REPRESENTATIONS
      AND WARRANTIES OF PURCHASER

     

    Purchaser
      represents and warrants as of the date hereof and as of the Closing
      Date:

     

    4.1  Organization.
      Purchaser is a
      corporation existing in good standing under the Laws of Colorado and has all
      requisite power and authority to own, lease, and operate its assets and to
      carry
      on its business as presently conducted. Purchaser is duly qualified or licensed
      to do business as a foreign corporation and is in good standing in each
      jurisdiction in which the activity of Seller in such jurisdiction thereby makes
      such qualification necessary. 

     

    4.2  Authority
      and
      Enforceability.
      Purchaser has all
      requisite power and authority to execute and deliver this Agreement, to perform
      Purchaser’s obligations hereunder and to consummate the transactions
      contemplated hereby. The execution and delivery of this Agreement and the
      consummation of the transactions contemplated hereby have been duly and validly
      authorized by all necessary action on the part of Purchaser and no other
      proceedings by Purchaser are necessary to authorize this Agreement or to
      consummate the transactions contemplated hereby. This Agreement has been duly
      and validly executed and delivered by Purchaser and constitutes the valid and
      binding obligation of Purchaser, enforceable against Purchaser in accordance
      with its terms, except as such enforceability may be limited by applicable
      bankruptcy, insolvency, reorganization, moratorium or other similar Laws
      affecting or relating to creditors’ rights generally, or general principles of
      equity. 

     

    4.3  No
      Conflicts;
      Authorizations.
      The execution and
      delivery of this Agreement by Purchaser does not, and the consummation of the
      Acquisition by Purchaser will not: 

     

    (a)  conflict
      with or
      result in a violation or breach of any of the terms, conditions or provisions
      of
      the charter, bylaws or similar organization documents of Purchaser;

     

    (b)  conflict
      with or
      result in a material violation or breach of any Law or Order applicable to
      Purchaser or any of Purchaser’s assets and properties or require any consent or
      approval of or any notice or filing with any Governmental Entity or other third
      party; or

     

    (c)  conflict
      with or
      result in a breach or violation of, or default under, or give rise to any right
      of acceleration or termination of, any of the terms, conditions or provisions
      of, any note, bond, lease, license, agreement or other instrument or obligation
      to which Purchaser is a party or by which Purchaser’s assets or properties are
      bound.

     

    4.4  Investment
      Representations.
      The Additional
      Partnership Interest is being acquired for Purchaser’s own account for
      investment only and not with a view to any sale or other distribution thereof.
      Purchaser understands that the Partnership Agreement and applicable Law
      prohibits Purchaser from offering to sell or otherwise dispose of, or selling
      or
      otherwise disposing of, the Additional Partnership Interest so acquired by
      it in
      violation of any Law, including, but not limited to, the Securities Act of
      1933,
      as amended (the “Act”),
      and applicable
      state securities laws. Purchaser acknowledges that its designee is a member
      of
      Seller’s Executive Committee, that it is familiar with Seller’s business
      operations and prospects, and that it has had the opportunity to review all
      information and to make all investigations that it desired regarding Seller
      prior to making the Acquisition. Purchaser is an “accredited investor” within
      the meaning of Rule 501(a) of Regulation D promulgated pursuant to the Act.
      The
      Additional Partnership Interest has not been offered or sold by means of any
      general advertising or general solicitation.

     

    4.5  Brokers
      or
      Finders.
      Purchaser has not
      incurred and will not incur, directly or indirectly, any liability for any
      brokerage, finder’s or other fee or commission in connection with the
      transactions contemplated by this Agreement.

     

    ARTICLE V  

     

    

     

    CONDITIONS
      TO CLOSING

     

    The
      obligations of
      Purchaser and Seller to effect the transactions contemplated hereby are subject
      to the satisfaction at or prior to the Closing of the following
      conditions:

     

    5.1  Conditions
      to
      Obligations of Purchaser.

     

    (a)  Representations
      and Warranties of Seller.
      The
      representations and warranties of Seller shall be true and correct as of the
      Closing Date.

     

    (b)  Agreements
      and
      Covenants.
      Seller shall have
      performed and complied in all material respects with each agreement, covenant
      and obligation required by it pursuant to this Agreement to be so performed
      or
      complied with by Seller at or before the Closing.

     

    (c)  Partnership
      Agreement.
      Seller shall
      deliver to Purchaser a copy of the Partnership Agreement, signed by each of
      the
      partners except Purchaser, the form of which is attached hereto as Exhibit
      A.
      

     

    (d)  Officer’s
      Certificate.
      An authorized
      officer of Seller shall have delivered to Purchaser at the Closing a certificate
      stating that all approvals necessary to consummate the transactions contemplated
      by this Agreement have been obtained and attaching thereto: (i) a
      copy of the
      Certificate, certified by the Michigan Department of Labor and Economic Growth
      and certified by the general partner of Seller as the true and correct copy
      of
      the Certificate as of the Closing; (ii)
      a copy of the
      Second Amended and Restated Agreement of Limited Partnership (the “Second
      Partnership Agreement”), dated as of February 1, 2003, certified by the
      general partner of Seller as the true and correct copy of the Second Partnership
      Agreement as of the Closing; (iii)
      a copy of the
      consent of the Executive Committee of Seller, evidencing the approval of this
      Agreement and the transactions contemplated hereby; and (iv) a
      copy of the
      waiver by each of the Partners of Seller, waiving their respective preemptive
      rights to acquire the Additional Partnership Interest under the Partnership
      Agreement.

     

    (e)  Legal
      opinion of
      Seller’s Counsel.
      Seller shall
      deliver, or shall cause to be delivered, a legal opinion from Barnes and
      Thornburg LLP, counsel to Seller, with respect to Section 3.1
      of the Agreement,
      in form and substance acceptable to Purchaser in its reasonable discretion.
      

     

    (f)  Third-Party
      Consents.
      Any and all
      consents or waivers required from third parties relating to the performance
      by
      Seller of its obligations hereunder shall have been obtained.

     

    (g)  No
      Actions or
      Proceedings.
      No claim, action,
      suit, investigation or proceeding shall be pending or threatened before any
      court or governmental agency which presents a substantial risk of the restraint
      or prohibition of the transactions contemplated by this Agreement.

     

    (h)  Management
      Incentive Plan.
      Seller shall have
      adopted a management equity incentive plan containing terms reasonably
      acceptable to Purchaser, substantially in the form of Exhibit
      B
      attached hereto.

     

    5.2  Conditions
      to
      Obligations of Seller.

     

    (a)  Representations,
      Warranties of Purchaser.
      The
      representations and warranties of Purchaser contained in this Agreement shall
      be
      true and correct as of the date hereof.

     

    (b)  Agreements
      and
      Covenants.
      Purchaser shall
      have performed and complied in all material respects with each agreement,
      covenant and obligation required by this Agreement to be so performed or
      complied with by Purchaser at or before the Closing, including payment of the
      Purchase Price as specified in Section 2.2.

     

    (c)  Partnership
      Agreement.
      Seller shall have
      received Purchaser’s signature to the Partnership Agreement, the form of which
      is attached hereto as Exhibit
      A.
      

     

    (d)  Third-Party
      Consents.
      Any and all
      consents or waivers required from third parties relating to the performance
      by
      Purchaser of its obligations hereunder shall have been obtained.

     

    (e)  No
      Actions or
      Proceedings.
      No claim, action,
      suit, investigation or proceeding shall be pending or threatened before any
      court or governmental agency which presents a substantial risk of the restraint
      or prohibition of the transactions contemplated by this Agreement.

     

    (f)  Management
      Incentive Plan.
      Purchaser shall
      have approved a management equity incentive plan containing terms reasonably
      acceptable to Seller, substantially in the form of Exhibit
      B
      attached hereto.

     

    ARTICLE VI  

     

    

     

    POST-CLOSING
      COVENANTS

     

    6.1  Post-Closing
      Notifications.
      Purchaser and
      Seller will, and each will cause their respective Affiliates to, comply with
      any
      post-Closing notification or other requirements, to the extent then applicable
      to such party, of any antitrust, trade competition, investment or control,
      export or other Law of any Governmental Entity having jurisdiction over
      Purchaser or Seller.

     

    6.2  Certain
      Tax
      Matters.
      All sales, use,
      transfer, stamp, conveyance, value added or other similar taxes, duties, excises
      or governmental charges imposed by any Governmental Entity with taxing
      authority, domestic or foreign, and all recording or filing fees, notarial
      fees
      and other similar costs of Closing with respect to the transfer of the
      Additional Partnership Interest or otherwise on account of this Agreement or
      the
      transactions contemplated hereby will be borne in equal shares by Seller and
      Purchaser.

     

    6.3  Further
      Assurances.
      Subject to the
      terms of this Agreement, each of Purchaser and Seller shall execute such
      documents and other instruments and take such further actions as may be
      reasonably required to carry out the provisions hereof and consummate the
      Acquisition.

     

    ARTICLE VII  

     

    

     

    TERMINATION

     

    7.1  Termination.

     

    (a)  This
      Agreement may
      be terminated and the Acquisition abandoned at any time prior to the
      Closing:

     

    (i)  by
      mutual written
      consent of Purchaser and Seller; 

     

    (ii)  by
      Purchaser or
      Seller if:

     

    (A)  the
      Closing does
      not occur on or before October 5, 2007; provided
      that
      the right to
      terminate this Agreement under this clause (ii)(A) shall not be available to
      any
      party whose breach of a representation, warranty, covenant or agreement under
      this Agreement has been the cause of or resulted in the failure of the Closing
      to occur on or before such date; or

     

    (B)  a
      Governmental
      Entity shall have issued an Order or taken any other action, in any case having
      the effect of permanently restraining, enjoining or otherwise prohibiting the
      Acquisition, which Order or other action is final and
      non-appealable;

     

    (iii)  by
      Purchaser
      if
      any
      condition to the obligations of Purchaser hereunder becomes incapable of
      fulfillment other than as a result of a breach by Purchaser of any covenant
      or
      agreement contained in this Agreement, and such condition is not waived by
      Purchaser; or

     

    (iv)  by
      Seller if any
      condition to the obligations of Seller hereunder becomes incapable of
      fulfillment other than as a result of a breach by Seller of any covenant or
      agreement contained in this Agreement, and such condition is not waived by
      Seller.

     

    (b)  The
      party desiring
      to terminate this Agreement pursuant to Section 7.1(a)(ii),
      (iii), or (iv)
      shall give written notice of such termination to the other party hereto in
      the
      manner provided in this Agreement. 

     

    7.2  Effect
      of
      Termination.
      In the event of
      termination of this Agreement as provided in Section 7.1,
      this Agreement
      shall immediately become null and void and there shall be no liability or
      obligation on the part of any party hereto or their respective officers,
      directors, stockholders, members or Affiliates, except as set forth in
      Section 7.3;
      provided that the
      provisions of Section 7.3
      and Article VIII
      of this Agreement
      shall remain in full force and effect and survive any termination of this
      Agreement.

     

    7.3  Remedies.
      Any party
      terminating this Agreement pursuant to Section 7.1
      shall have the
      right to recover damages sustained by such party as a result of any breach
      by
      the other party of any representation, warranty, covenant or agreement contained
      in this Agreement or fraud or willful misrepresentation; provided, however,
      that
      the party seeking relief is not in breach of any representation, warranty,
      covenant or agreement contained in this Agreement under circumstances which
      would have permitted the other party to terminate the Agreement under
      Section 7.1.

     

    ARTICLE VIII  

     

    

     

    INDEMNIFICATION

     

    8.1  Survival. 

     

    (a)  All
      representations
      and warranties contained in this Agreement, or in any schedule, certificate
      or
      other document delivered pursuant to this Agreement, shall terminate upon the
      Closing.

     

    (b)  The
      covenants and
      agreements which by their terms do not contemplate performance after the Closing
      Date shall survive the Closing for a period of two (2) years. The covenants
      and
      agreements which by their terms contemplate performance after the Closing Date
      shall survive the Closing in accordance with their terms until sixty (60) days
      following the expiration of any applicable statute of limitations.

     

    8.2  Indemnification.

     

    (a)  Seller
      shall
      indemnify, defend and hold harmless Purchaser from and against any and all
      Losses based upon, arising out of, in connection with, or relating to any
      inaccuracy or breach of any representation, warranty, covenant or agreement
      of
      Seller contained in this Agreement or other documents delivered by Seller
      pursuant to this Agreement.

     

    (b)  Purchaser
      shall
      indemnify, defend and hold harmless Seller from and against any and all Losses
      based upon, arising out of, in connection with, or relating to any inaccuracy
      or
      breach of any representation, warranty, covenant or agreement of Purchaser
      contained in this Agreement or other documents delivered by Purchaser pursuant
      to this Agreement.

     

    8.3  Notice
      and
      Opportunity to Defend.

     

    (a)  Promptly
      after
      receipt by any party hereto (the “Indemnitee”)
      of notice of any
      demand, claim or circumstances which gives rise or might give rise to a claim
      or
      the commencement (or threatened commencement) of any action, proceeding or
      investigation (an “Asserted
      Liability”)
      that may result
      in Losses, the Indemnitee shall give notice thereof to the party obligated
      to
      provide indemnification pursuant to Section 8.2
      (the “Indemnifying
      Party”).
      Such notice
      shall describe the Asserted Liability in reasonable detail, and shall indicate
      the amount (estimated, if necessary) of the Losses that have been or may be
      suffered by the Indemnitee. 

     

    (b)  The
      Indemnifying
      Party may elect to compromise or defend, at its own expense and by its own
      counsel, any Asserted Liability. If the Indemnifying Party elects to compromise
      or defend such Asserted Liability, it shall within thirty (30) days (or sooner,
      if the nature of the Asserted Liability so requires) notify the Indemnitee
      of
      its intent to do so, and the Indemnitee shall cooperate, at the expense of
      the
      Indemnifying Party, in the compromise of, or defense against, such Asserted
      Liability. If the Indemnifying Party elects not to compromise or defend the
      Asserted Liability, fails to notify the Indemnitee of its election as herein
      provided, or contests its obligation to indemnify under this Agreement, the
      Indemnitee may pay, compromise or defend such Asserted Liability.
      Notwithstanding the foregoing, neither the Indemnifying Party nor the Indemnitee
      may settle or compromise any claim over the objection of the other; provided,
      however,
      that consent to
      settlement or compromise shall not be unreasonably withheld, conditioned or
      delayed. In any event, the Indemnitee and the Indemnifying Party may participate
      at their own expense in the defense of such Asserted Liability. Each party
      shall
      make available to the other party choosing to defend such Asserted Liability
      any
      books, records or other documents within its control that are necessary or
      appropriate for such defense.

     

    8.4  Contingent
      Claims.
      Nothing herein
      shall be deemed to prevent an Indemnitee from making a claim hereunder for
      potential or contingent claims or demands; provided that
      any notice of
      Asserted Liability sets forth the specific basis for any such contingent claim
      to the extent then feasible and the Indemnitee has reasonable grounds to believe
      that such a claim may be made.

     

    8.5  Tax
      Treatment of
      Indemnification Payments.
      Except as
      otherwise required by applicable Law, the parties shall treat any
      indemnification payment made hereunder as an adjustment to Purchase Price.
      

     

    8.6  Exclusive
      Remedy.
      The
      indemnification rights of the parties under this Article VIII
      shall be the sole
      and exclusive remedy for any misrepresentation, breach of warranty or failure
      to
      fulfill any agreement or covenant hereunder on the part of any party
      hereto.

     

    ARTICLE IX  

     

    

     

    MISCELLANEOUS

     

    9.1  Notices.
      Any notice,
      request, demand, waiver, consent, approval or other communication which is
      required or permitted hereunder shall be in writing and shall be deemed given
      (a)
      on the date the
      same has been delivered personally, (b)
      on the date
      delivered by a private courier as established by the sender by evidence obtained
      from the courier, (c)
      on the date sent
      by facsimile, with confirmation of transmission, if sent during normal business
      hours of the recipient, if not, then on the next Business Day, or (d)
      on the fifth
      (5th)
      day after the
      date mailed, by certified or registered mail, return receipt requested, postage
      prepaid. Such communications, to be valid, must be addressed as
      follows:

     

    If
      to Purchaser,
      to:

     

    Hallador
      Petroleum
      Company 

     

    1660
      Lincoln
      Street, Suite 2700

     

    Denver,
      Colorado
      80264

     

    Attn:
      Victor
      Stabio

     

    Facsimile:
      303.832.3013

     

    With
      a copy to:

     

    Morgan,
      Lewis &
Bockius LLP

     

    300
      S. Grand
      Avenue, Suite 2200

     

    Los
      Angeles,
      California 90071

     

    Attn:
      Ingrid A.
      Myers, Esq. 

     

    Facsimile:
      213.612.2501

     

    If
      to Seller,
      to:

     

    Savoy
      Energy
      Limited Partnership

     

    c/o
      Savoy
      Exploration, Inc.

     

    148
      East Front
      Street, Suite 301

     

    Traverse
      City,
      Michigan 49684

     

    Attn:
      Thomas C.
      Pangborn

     

    Facsimile:
      231.941.9885

     

    With
      a copy to:

     

    Barnes
&
      Thornburg LLP

     

    300
      Ottawa Avenue
      N.W.

     

    Grand
      Rapids,
      Michigan 49503

     

    Attn:
      Robert R.
      Stead, Esq. 

     

    Facsimile:
      616.742.3999

     

    or
      to such other address or to the attention of such Person or Persons as the
      recipient party has specified by prior written notice to the sending party
      (or
      in the case of counsel, to such other readily ascertainable business address
      as
      such counsel may hereafter maintain). If more than one method for sending notice
      as set forth above is used, the earliest notice date established as set forth
      above shall control.

     

    9.2  Amendments
      and
      Waivers.

     

    (a)  Any
      provision of
      this Agreement may be amended or waived if, and only if, such amendment or
      waiver is in writing and is signed, in the case of an amendment, by each party
      to this Agreement, or in the case of a waiver, by the party against whom the
      waiver is to be effective.

     

    (b)  No
      failure or delay
      by any party in exercising any right or privilege hereunder shall operate as
      a
      waiver thereof, nor shall any single or partial exercise thereof preclude any
      other or further exercise thereof or the exercise of any other right, power
      or
      privilege.

     

    (c)  To
      the maximum
      extent permitted by Law, (i) no waiver that may be given by a party shall
      be applicable except in the specific instance for which it was given and
      (ii) no notice to or demand on one party shall be deemed to be a waiver of
      any obligation of such party or the right of the party giving such notice or
      demand to take further action without notice or demand.

     

    9.3  Expenses.
      Each party shall
      bear its own costs and expenses in connection with this Agreement and the
      transactions contemplated by this Agreement, including all legal, accounting,
      financial advisory, consulting and all other fees and expenses of third parties,
      whether or not the Acquisition is consummated.

     

    9.4  Successors
      and
      Assigns.
      This Agreement
      may not be assigned by either party hereto without the prior written consent
      of
      the other party. Subject to the foregoing, all of the terms and provisions
      of
      this Agreement shall inure to the benefit of and be binding upon the parties
      hereto and their respective successors and assigns.

     

    9.5  Governing
      Law.
      This Agreement
      and the Exhibits and Schedules hereto shall be governed by and interpreted
      and
      enforced in accordance with the Laws of the State of Michigan, without giving
      effect to any choice of Law or conflict of Laws rules or provisions (whether
      of
      the State of Michigan or any other jurisdiction) that would cause the
      application of the Laws of any jurisdiction other than the State of Michigan.
      

     

    9.6  Consent
      to
      Jurisdiction.
      Each party
      irrevocably submits to the exclusive jurisdiction of the United States District
      Court for the Western District of Michigan in connection with any action, suit
      or proceeding arising out of or relating to this Agreement or any breach
      thereof, or any transaction contemplated hereby, unless such court would not
      have subject matter jurisdiction thereof, in which event the parties consent
      to
      the exclusive jurisdiction of the courts of the State of Michigan, located
      in
      Grand Traverse County. Each party further agrees that service of any process,
      summons, notice or document by U.S. registered mail to such party’s respective
      address set forth above shall be effective service of process for any action,
      suit or proceeding. Each party irrevocably and unconditionally waives any
      objection to the laying of venue of any action, suit or proceeding arising
      out
      of this Agreement or the Acquisition and hereby further irrevocably and
      unconditionally waives and agrees not to plead or claim in any such court that
      any such action, suit or proceeding brought in any such court has been brought
      in an inconvenient forum. EACH PARTY HEREBY IRREVOCABLY WAIVES ALL RIGHT TO
      TRIAL BY JURY IN ANY ACTION, SUIT OR PROCEEDING (WHETHER BASED ON CONTRACT,
      TORT
      OR OTHERWISE) ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE ACTIONS OF
      SUCH PARTY IN THE NEGOTIATION, ADMINISTRATION, PERFORMANCE AND ENFORCEMENT
      HEREOF. 

     

    9.7  Counterparts.
      This Agreement
      may be executed in counterparts, and either party hereto may execute any such
      counterpart, each of which when executed and delivered shall be deemed to be
      an
      original and both of which counterparts taken together shall constitute but
      one
      and the same instrument. This Agreement shall become effective when each party
      hereto shall have received a counterpart hereof signed by the other party
      hereto. The parties agree that the delivery of this Agreement may be effected
      by
      means of an exchange of facsimile signatures with original copies to follow
      by
      mail or courier service.

     

    9.8  Third
      Party
      Beneficiaries.
      No provision of
      this Agreement is intended to confer upon any Person other than the parties
      hereto any rights or remedies hereunder; except that in the case of Article VIII
      hereof, the
      Indemnitees and their respective heirs, executors, administrators, legal
      representatives, successors and assigns, are intended third party beneficiaries
      of such sections and shall have the right to enforce such sections in their
      own
      names.

     

    9.9  Entire
      Agreement.
      This Agreement
      and the documents, instruments and other agreements specifically referred to
      herein or delivered pursuant hereto set forth the entire understanding of the
      parties hereto with respect to the Acquisition. All schedules, exhibits and
      attachments referred to herein are intended to be and hereby are specifically
      made a part of this Agreement. Any and all previous agreements and
      understandings between or among the parties regarding the subject matter hereof,
      whether written or oral, are superseded by this Agreement.

     

    9.10  Captions.
      All captions
      contained in this Agreement are for convenience of reference only, do not form
      a
      part of this Agreement and shall not affect in any way the meaning or
      interpretation of this Agreement. 

     

    9.11  Severability.
      Any provision of
      this Agreement which is invalid or unenforceable in any jurisdiction shall
      be
      ineffective to the extent of such invalidity or unenforceability without
      invalidating or rendering unenforceable the remaining provisions hereof, and
      any
      such invalidity or unenforceability in any jurisdiction shall not invalidate
      or
      render unenforceable such provision in any other jurisdiction.

     

    9.12  Interpretation.

     

    (a)  The
      meaning
      assigned to each term defined herein shall be equally applicable to both the
      singular and the plural forms of such term and vice versa, and words denoting
      either gender shall include both genders as the context requires. Where a word
      or phrase is defined herein, each of its other grammatical forms shall have
      a
      corresponding meaning.

     

    (b)  The
      terms “hereof”,
“herein” and “herewith” and words of similar import shall, unless otherwise
      stated, be construed to refer to this Agreement as a whole and not to any
      particular provision of this Agreement.

     

    (c)  When
      a reference is
      made in this Agreement to an Article, Section, paragraph, Exhibit or Schedule,
      such reference is to an Article, Section, paragraph, Exhibit or Schedule to
      this
      Agreement unless otherwise specified.

     

    (d)  The
      word “include”,
“includes”, and “including” when used in this Agreement shall be deemed to be
      followed by the words “without limitation”, unless otherwise
      specified.

     

    (e)  A
      reference to any
      party to this Agreement or any other agreement or document shall include such
      party’s predecessors, successors and permitted assigns.

     

    (f)  Reference
      to any
      Law means such Law as amended, modified, codified, replaced or reenacted, and
      all rules and regulations promulgated thereunder.

     

    (g)  The
      parties have
      participated jointly in the negotiation and drafting of this Agreement. Any
      rule
      of construction or interpretation otherwise requiring this Agreement to be
      construed or interpreted against any party by virtue of the authorship of this
      Agreement shall not apply to the construction and interpretation hereof.

     

    
      
        1-LA/947404.9 

        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

    IN
      WITNESS WHEREOF,
      the parties hereto have caused this Agreement to be duly executed by their
      respective authorized officers as of the date first above written.

     

    PURCHASER:

    

    HALLADOR
      PETROLEUM
      COMPANY 

    

    By:  /s/
      Victor P.
      Stabio   

    Name:  Victor
      P.
      Stabio   

    Title:  Chief
      Executive
      Officer and President

    SELLER:

     

    

     

    SAVOY
      ENERGY
      LIMITED PARTNERSHIP

     

    By:
 Savoy
      Exploration,
      Inc.

     

    Its: General
      Partner

     

    

     

    By:
  /s/
      Thomas C.
      Pangborn

     

    Name:
  Thomas
      C.
      Pangborn

     

    Title:
  Chief
      Executive
      Officerappa10q307ex1014.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.

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