Document:

Exhibit 10.7

 

EMPLOYMENT AGREEMENT

 

THIS
EMPLOYMENT AGREEMENT (the “Agreement”) is entered into and effective
as of the 3rd day of December, 2008 (the “Effective Date”) by and between Rite
Aid Corporation, a Delaware corporation (the “Company”) and Ken Martindale (the
“Executive”).

 

WHEREAS,
Executive desires to provide the Company with his services and the Company
desires to hire and employ Executive on the terms and subject to the conditions
set forth herein.

 

NOW,
THEREFORE, in consideration of the mutual representations,
warranties, covenants and agreements set forth herein, and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the Company and Executive (individually a “Party” and together
the “Parties”), intending to be legally bound, agree as follows:

 

1.             Term
of Employment.

 

The term of Executive’s employment under this
Agreement shall commence on the Effective Date and, unless earlier terminated
pursuant to Section 5 below, shall continue for a period ending on the
date that is two (2) years following the Effective Date (the “Original
Term of Employment”).  The Original Term
of Employment shall be automatically renewed for successive one year terms (the
“Renewal Terms”) unless at least 180 days prior to the expiration of the
Original Term of Employment or any Renewal Term, either Party notifies the
other Party in writing that he or it is electing to terminate this Agreement at
the expiration of the then current Term of employment “Term” shall mean the
Original Term of Employment and all Renewal Terms.  For purposes of this Agreement, except as
otherwise provided herein, the phrase “year during the Term” or similar
language shall refer to each 12 month period commencing on the Effective Date
or applicable anniversaries thereof.

 

2.             Position and
Duties.

 

2.1          Generally.  During the Term, Executive shall serve as
Senior Executive Vice President, Chief Merchandising, Marketing and Logistics
Officer of the Company and shall have the titles, duties, responsibilities and
authority as are customary for such positions and such other titles, duties,
responsibilities and authorities as shall be assigned by the Company from time
to time consistent with such positions. 
Executive shall devote his full working time, attention, knowledge and
skills faithfully and to the best of his ability, to the duties and
responsibilities assigned by the Company in furtherance of the business affairs
and activities of the Company and its subsidiaries, affiliates and strategic
partners.  Executive shall report solely
to the Company’s President and/or Chief Operating Officer and/or Chief
Executive Officer and/or Board of Directors. 
Following 

 

 

termination of Executive’s
employment for any reason, Executive shall immediately resign from all offices
and positions he holds with the Company or any subsidiary.

 

Other
than necessary travel in connection with the performance of his duties
hereunder, the Executive shall be based at the Company’s headquarters.

 

2.2          Other
Activities.  Anything
herein to the contrary notwithstanding, nothing in this Agreement shall
preclude the Executive from engaging in the following activities:  (i) serving on the board of directors of
a reasonable number of other corporations or the boards of a reasonable number
of trade associations and/or charitable organizations, subject to the Company’s
approval, which shall not be unreasonably withheld, with the current activities
listed on Appendix D being approved; (ii) engaging in charitable
activities and community affairs; and (iii) managing his personal
investments and affairs, provided that such activities do not violate Sections
6 or 7 below or materially interfere with the proper performance of his duties
and responsibilities under this Agreement. 
Executive shall at all times be subject to, observe and carry out such
lawful rules, regulations, policies, directions, and restrictions as the
Company may from time to time establish for officers of the Company.

 

3.             Compensation.

 

3.1          Base
Salary.  During the Term, as compensation
for his services hereunder, Executive shall receive a base salary at the
annualized rate of $600,000.00 per year (“Base Salary” as shall be reviewed
annually for possible increase), which shall be paid in accordance with the
Company’s normal payroll practices and procedures, less such deductions or
offsets required by applicable law or otherwise authorized by Executive.

 

3.2          Annual
Performance Bonus.  The Executive
shall participate each fiscal year during the Term in the Company’s annual
bonus plan as adopted and approved by the Board or the Compensation Committee
from time to time.  For the current
fiscal year (Fiscal Year 2009), Executive’s annual bonus opportunity pursuant
to such plan shall equal 100% (the “Annual Target Bonus”) of the annualized
Base Salary ($600,000 per year for Fiscal Year 2009) even though the entire
$600,000 Base Salary for Fiscal Year 2009 will not be paid to Executive as a
result of this Agreement.  For subsequent
fiscal years, the Annual Target Bonus may be adjusted (however, in no event
shall it be less than 100%) and shall be based upon the Board approved plan for
that year.

 

3.3          Equity
Awards.

 

(a)           On the Effective Date,
the Executive will be granted an option (the “Option”) to purchase 1,000,000
shares of the Company’s Common Stock, par value $1.00 per share (“Company Stock”).  The Option shall:  (i) be a nonqualified stock option; (ii) have
an exercise price equal to the closing price of the Company Stock as reported
on the New York Stock Exchange (“NYSE “) on the date of grant; (iii) have
a term of ten (10) years following the date of grant; (iv) vest and
become exercisable as to 

 

 

one-fourth of the shares
of the Company Stock subject to the option on each of the first four (4) anniversaries
from the date of grant; (v) be subject to the acceleration exercise and
termination provisions set forth in Section 3.3(c) and Article 5
hereof; and (vi) otherwise be evidenced by and subject to the terms of the
Company’s stock option and equity plans.

 

(b)           At
a meeting of the Compensation Committee of the Board of Directors prior to or
on the Effective Date and subject to the approval of the Compensation
Committee, Executive will be recommended for participation in the Company’s
Executive Equity Plan (the “EEP”).  On a
going forward basis, the award will be based upon Executive’s annual Base
Salary and the stock closing price on the date of grant.  For the current fiscal year (FY 2009) only,
Executive’s participation in the EEP will be on a prorated basis.

 

(c)           Upon the
occurrence of a Change in Control of the Company and prior to the termination
of Executive’s employment with the Company, the Options awarded pursuant to
subsection (a) above then held by Executive shall immediately vest and
become exercisable in full.  For purposes
of this Agreement “Change in Control” shall have the meaning set forth in the
attached Appendix A.

 

(d)           It is
understood and acknowledged by Executive that the securities underlying the
stock options and/or restricted stock that may be awarded to Executive from
time to time may not be subject to an effective registration statement under
the federal securities laws until some time after the Effective Date.  The Company agrees that if, as of the date of
termination of Executive’s employment under the circumstances described in
Sections 5.2 (except termination for Cause), 5.3 and 5.5, the securities
underlying the then vested and exercisable portion of any stock options are not
subject to an effective registration statement, the ninety (90) day periods in Section 5.2
(except termination for Cause), 5.3 and 5.5, as applicable, will be deemed to
run from the first date such securities become subject to an effective
registration statement.

 

4.             Additional
Benefits.

 

4.1      Employee
Benefits.  During the Term, Executive
and, as to welfare plans the Executive’s eligible immediate family, as the case
may be, shall be entitled to participate in the employee benefit plans
(including, but not limited to medical, dental and life insurance plans,
short-term and long-term disability coverage, the Supplemental Executive
Retirement Plan (which shall be at the monthly contribution rate equal to 2% of
Executive’s Base Salary) and 401(k) plans) in which senior management
employees of the Company are generally eligible to participate, subject to any
eligibility requirements and the other generally applicable terms of such
plans.

 

4.2      Expenses.  During the Term, the Company shall
reimburse Executive for any expenses reasonably incurred by him in furtherance
of his duties hereunder, including without limitation travel, meals and
accommodations, upon submission of vouchers or receipts and in compliance with
such rules and policies relating thereto as the 

 

 

Company may from time to
time adopt or as may be required in order to permit such payments to be taken
as proper deductions by the Company or any subsidiary under the Internal
Revenue Code of 1986, as amended, and the rules and regulations adopted
pursuant thereto now or hereafter in effect.

 

4.3      Vacation.  Executive shall be entitled to four (4) weeks
paid vacation during each year of the Term.

 

4.4      Automobile Allowance.  During the Term, the Company shall provide
Executive with an automobile allowance of $1,000.00 per month.

 

4.5      Annual
Financial Planning Allowance. 
During each year of the Term, the Company shall provide Executive with
an executive planning allowance in the amount of up to $5,000.00.

 

4.6      Relocation Benefits.  Subject to Executive providing reasonable
documentation to Company, the Company shall reimburse Executive up to a total
of $200,000 for transportation, commuting, lodging and other relocation
expenses (including but not limited to moving, house hunting trips and other
direct costs incurred in connection with Executive’s relocation) incurred  by Executive for a period of up to thirty-six (36) months
from the Effective Date (collectively, the “Relocation Benefits Payments”).  To the extent the
Relocation Benefits Payments are subject to federal, state or local income tax
payments by Executive, Company shall also pay to Executive an additional amount
(the “Gross-Up Payment”) such that the net amount retained by the Executive,
after deduction of the applicable federal, state and local income taxes upon
the Gross-Up Payment shall be equal to the total Relocation Benefits Payments.

 

4.7          Indemnification.  The Company shall (a) indemnify and
hold Executive harmless, to the full extent permitted under applicable law,
for, from and against any and all losses, claims, costs, expenses, damages,
liabilities or actions (including security holder actions, in respect thereof)
relating to or arising out of the Executive’s employment with and service as an
officer of the Company or as an officer or director of an entity other than the
Company at the request of the Company; and (b) pay all reasonable costs,
expenses and attorney’s fees incurred by Executive in connection with or
relating to the defense of any such loss, claim, cost, expense, damage,
liability or action, subject to Executive’s undertaking to repay in the event
it is ultimately determined that Executive is not entitled to be indemnified by
the Company and enforcement of its rights hereunder.  Following termination of the Executive’s
employment or service with the Company, the Company shall cause any Director
and Officer liability insurance policies applicable to the Executive prior to
such termination to remain in effect for six (6) years following the date
of termination of employment.

 

 

5.             Termination.

 

5.1          Termination
of Executive’s Employment by the Company for Cause.  The Company may terminate Executive’s
employment hereunder for Cause (as defined below).  Such termination shall be effected by written
notice thereof delivered by the Company to Executive, indicating in reasonable
detail the facts and circumstances alleged to provide a basis for such
termination, and shall be effective as of the date of such notice in accordance
with Section 12 hereof.  “Cause” as
determined in reasonable good faith by a resolution adopted by the affirmative
vote of a majority of the Company’s Board of Directors (after reasonable
written notice to Executive setting forth in reasonable detail the specific
conduct of Executive upon which the Board relies in reaching its determination,
and a reasonable opportunity for Executive, together with his counsel, to be
heard before the Board prior to making such determination) shall mean:  (i) Executive’s gross negligence or
willful misconduct in the performance of the duties or responsibilities of his
position with the Company or any subsidiary, or failure to timely carry out any
lawful and reasonable directive of the President, Chief Operating Officer,
Chief Executive Officer or Board of Directors; (ii) Executive’s
intentional misappropriation of any funds or property of the Company or any
subsidiary; (iii) the conduct by Executive which is a material violation
of this Agreement or  written
Company Policy which materially interferes with the Executive’s ability to
perform his duties; provided, however, that Executive shall have the right,
within thirty (30) days after receipt of written notice (which shall set forth
in reasonable detail the specific conduct of Executive that constitutes Cause
and the specific provision(s) of this Agreement on which Company relies)
from Company of the Executive’s violation of this subsection, to cure the event
or circumstances giving rise to such Cause and in the event of which cure, such
event or circumstances shall not constitute Cause hereunder; (iv) the
commission by Executive of an act of fraud, misappropriation or embezzlement
toward the Company or any subsidiary; (v) Executive’s gross negligence or
willful misconduct which damages or injures the Company or the Company’s
reputation; (vi) Executive is convicted of or pleads guilty to a felony
involving moral turpitude; or (vii) the use or imparting by Executive of
any confidential or proprietary information of the Company, or any subsidiary
in material violation of Section 6 below.

 

5.2          Compensation
Upon Termination by the Company for Cause or by Executive Without Good Reason.  In the event of Executive’s termination of
employment (i) by the Company for Cause or (ii) by Executive voluntarily
without Good Reason:

 

(a)           Executive
shall be entitled to receive within ten (10) business days of the date of
termination:  (i) all amounts of
accrued but unpaid Base Salary through the effective date of such termination; (ii) reimbursement
for reasonable and necessary expenses incurred by Executive through the date of
such termination, to the extent otherwise provided under Section 4.2
above; (iii) all other vested payments and benefits to which Executive may
otherwise be entitled pursuant to the terms of the applicable benefit plan or
arrangement through the effective date of such termination; and (iv) reimbursement
of Relocation Benefits Payments incurred prior to the date of termination 

 

 

((i),
(ii), (iii) and (iv), the (“Accrued Benefits”).  All other rights of Executive (and, except as
provided in Section 5.6 below, all obligations of the Company) hereunder
or otherwise in connection with Executive’s employment with the Company shall
terminate effective as of the date of such termination of employment and
Executive shall not be entitled to any payments or benefits not specifically
described in this subsection (a) or (b) below.

 

(b)           Except
as provided in Section 3.3(d), any portion of any restricted stock or any
other equity incentive awards as to which the restrictions have not lapsed or
as to which any other conditions shall not have been satisfied prior to the
date of termination shall be forfeited as of such date and any portion of
Executive’s stock options that have vested and become exercisable prior to the
date of termination shall remain exercisable for a period of ninety (90) days
following the date of termination of employment (or, such later date as may be
permitted by the relevant stock option or equity plan, or, if earlier, until
the expiration of the respective terms of the options), whereupon all such
options shall terminate; provided, however, in the event of termination of
Executive by the Company for Cause, any stock options that have not been
exercised prior to the date of termination shall immediately terminate as of
such date.

 

Any termination of
Executive’s employment by Executive voluntarily without Good Reason shall be
effective upon thirty (30) days’ notice to the Company or such earlier date as
the Company determines in its discretion and designates in writing.  A termination of Executive’s employment by
the Company for Cause or by the Executive other than for Good Reason shall not
constitute a breach of this Agreement.

 

5.3          Compensation
Upon Termination of Executive’s Employment by the Company Other Than for Cause
or by Executive for Good Reason. 
Executive’s employment hereunder may be terminated by the Company other
than for Cause or by Executive for Good Reason. 
In the event that Executive’s employment hereunder is terminated by the
Company other than for Cause or by Executive for Good Reason:

 

(a)           Executive
shall be entitled to receive:  (i) within
ten (10) business days of the date of termination the Accrued Benefits; (ii) an
amount equal to two times the sum of Executive’s then Base Salary plus Annual
Target Bonus as of the date of termination of employment, such amount payable
in equal installments pursuant to the Company’s standard payroll procedures for
management employees over a period of two (2) years following the date of
termination of employment; and (iii) continued health and medical
insurance coverage (or reimbursement to Executive of the cost of purchasing
health and medical coverage substantially comparable in all material respects
to the coverage provided by the Company to the Executive, excepting payments
for such periods that the Company provides such coverage) for Executive and his
immediate family for a period of two (2) years following the date of
termination of employment.  In addition,
if such termination occurs following the start of the Company’s fiscal year,
Executive shall also be entitled to receive (which shall be paid at the same
time paid to other eligible participants in the bonus plan and following
determination by the Board that the Company has achieved or exceeded its annual
performance targets for the fiscal 

 

 

year)
a pro rata annual bonus determined by multiplying Executive’s then Annual
Target Bonus by a fraction (x) the numerator of which is the number of
days between the beginning of the then current fiscal year of the Company and
the date of termination of employment and (y) the denominator of which is
365.

 

(b)           The
Executive’s stock option awards held by Executive shall vest and become
immediately exercisable and the restrictions with respect to any awards of
restricted stock shall lapse, in each case to the extent such options would
otherwise have become vested and exercisable (or such restrictions would have
lapsed) had Executive remained in the employ of the Company for a period of two
years following the date of termination. 
Except as provided in Section 3.3(d), such  portion
of Executive’s stock options (together with any portion of Executive’s stock
options that have vested and become exercisable prior to the date of
termination) shall remain exercisable for a period of ninety (90) days
following the date of termination of employment (or such later date as may be
permitted by the relevant stock option or equity plan, or, if earlier, until
the expiration of the respective terms of the options), whereupon all such
options shall terminate.  Any remaining
portion of Executive’s stock options that have not vested (or deemed to have
vested) as of the date of termination shall terminate as of such date; and all
shares of restricted stock as to which the restrictions shall not have lapsed
(or deemed to have lapsed) as of the date of termination shall be forfeited as
of such date.

 

(c)           All
other rights of Executive (and, except as provided in Section 5.6 below,
all obligations of the Company) hereunder or otherwise in connection with  Executive’s employment with the
Company shall terminate effective as of the date of such termination of
employment and Executive shall not be entitled to any payments or benefits not
specifically described in 5.3(a) through (c).

 

Any termination of
employment pursuant to this Section 5.3 shall be effective upon thirty
(30) days notice thereof or the Company may elect in its sole discretion to
reduce or eliminate the notice period and pay the Executive his base salary for
some or all of the notice period in lieu of notice, prorated as
applicable.  A termination of Executive’s
employment by the Company other than for Cause or by the Executive for Good
Reason shall not constitute a breach of this Agreement.  To be eligible for the payment, benefits and
stock rights described in Section 5.3(a)(ii)-(iii), (b) and (c) above,
Executive must execute, not revoke and abide by a release (which shall be
substantially in the form attached hereto as Appendix C) of all other claims,
reasonably cooperate (subject to reimbursement by Company of reasonable costs
and expenses incurred by Executive) with the Company in the event of litigation
(other than by Executive) involving the Company and fully comply in all
material respects with Executive’s obligations under Sections 6 and 7 below.

 

5.4          Definition
of Good Reason.  For purposes of
this Agreement, “Good Reason” shall mean the occurrence of any one of the
following:

 

 

(a)           any
adverse alteration in Executive’s titles, position, status, duties,
authorities, reporting relationship or responsibilities with the Company or its
subsidiaries from those specified in this Agreement; or

 

(b)           any decrease in
Executive’s then Base Salary as set forth in Section 3.1 or Annual Target
Bonus in Section 3.2 to which Executive has not agreed in writing; or

 

(c)           any other material
breach by the Company of this Agreement; or

 

(d)           failure to promptly
provide any material benefits hereunder;

 

provided, however, that
in each such case the Company shall have the right, within thirty (30) days
(fifteen (15) days for the payment of compensation under this Agreement) after
receipt of written notice (which shall set forth in reasonable detail the
specific conduct of Company that constitutes Good Reason and the specific
provision(s) of this Agreement on which Executive relies) from Executive
of the Company’s violation of any of the foregoing, to cure the event or
circumstances giving rise to such Good Reason and in the event of which cure,
such event or circumstances shall not constitute Good Reason hereunder.

 

5.5          Compensation Upon
Termination of Executive’s Employment by Reason of  Executive’s Death or Total Disability.  In the event that
Executive’s employment with the Company is terminated by reason of Executive’s
death or Total Disability (as defined below):

 

(a)           Executive
or Executive’s estate, as the case may be, shall be entitled to receive:  (i) within ten (10) business days
of the date of termination the Accrued Benefits; (ii) promptly any other
benefits payable under the then current disability and/or death benefit plans,
as applicable, in which Executive is a participant; and (iii) continued
health and medical insurance coverage (or reimbursement to Executive of the
cost of purchasing health and medical coverage substantially comparable in all
material respects to the coverage provided by the Company to the Executive,
excepting payments for such periods that the Company provides such coverage)
for Executive and/or his immediate family, as applicable, for a period of two (2) years
following the date of termination of employment.  In addition, if such termination occurs
following the start of the Company’s fiscal year, Executive shall also be
entitled to receive (which shall be paid at the same time paid to other
eligible participants in the bonus plan and following determination by the
Board that the Company has achieved or exceeded its annual performance targets
for the fiscal year) a prorata annual bonus determined by multiplying Executive’s
then Annual Target Bonus by a fraction (x) the numerator of which is the
number of days between the beginning of the then current fiscal year of the
Company and the date of termination of employment and (y) the denominator
of which is 365.

 

 

(b)           All
stock option awards held by Executive shall vest and become immediately
exercisable and the restrictions with respect to any awards of restricted stock
shall lapse, in each case to the extent such options would otherwise have
become vested and exercisable (or such restrictions would have lapsed) had
Executive remained in the employ of the Company for a period of two (2) years
following the date of termination. 
Except as provided in Section 3.3(d) such portion of Executive’s
stock options (together with any portion of Executive’s stock options that have
vested and become exercisable prior to the date of termination) shall remain
exercisable for a period of ninety (90) days following the date of termination
of employment (or, such later date as may be permitted by the relevant stock
option or equity plan, or, if earlier, until the expiration of the respective
terms of the options), whereupon all such options shall terminate.  Any remaining portion of Executive’s stock
options that have not vested (or deemed to have vested) as of the date of
termination shall terminate as of such date; and all shares of restricted stock
as to which the restrictions shall not have lapsed as of the date of
termination shall be forfeited as of such date.

 

(c)           All other
rights of Executive (and, except as provided in Section 5.6 below, all
obligations of the Company) hereunder or otherwise in connection with Executive’s
employment with the Company shall terminate effective as of the date of such
termination of employment and Executive shall not be entitled to any payments
or benefits not specifically described in Section 5.5(a) through (c).

 

“Total
Disability” shall mean any physical or mental disability that prevents
Executive from:  (a) (i) performing
one or more of the essential functions of his position for a period of not less
than 150 days in any twelve (12) month period; and (ii) which is expected
to be of permanent or indeterminate duration but expected to last at least
twelve (12) continuous months or result in death of the Executive as determined
(y) by a physician selected by the Company or its insurer or (z) pursuant
to the Company’s benefit programs; or (b) reporting to work for ninety
(90) or more consecutive business days or unable to engage in any substantial
activity.

 

5.6          Survival.  In the event of any termination of
Executive’s employment, Executive and the Company nevertheless shall continue
to be bound by the terms and conditions set forth in Section 4.7 above,
5.7 and 5.9 below and Sections 6 through 10 below, which shall survive the
expiration of the Term.

 

5.7          Excise Tax Gross-Up.

 

(a)           In the
event that any payment or benefit received or to be received by the Executive
pursuant to the terms of this Agreement or any other plan, arrangement or
agreement of the Company (or any affiliate) (collectively, the “Payments”)
would be subject to the Excise Tax (the “Excise Tax”) imposed by Section 4999
of the Internal Revenue Code of 1986, as amended (the “Code”), as determined as
provided below, the Company shall pay to the Executive, at the time specified
in Section 5.7(b) below an additional amount (the “Gross-Up Payment”)
such that the net amount retained by the Executive, after deduction of the
Excise Tax on payments and any federal, state and local

 

 

income
and employment or other tax and the Excise Tax upon the Gross-Up Payment, and
any interest, penalties or additions to tax payable by the company Executive
with respect thereto, shall be equal to the total Payments.  For purposes of determining whether any of
the Payments will be subject to the Excise Tax and the amounts of such Excise
Tax, (1) the total amount of the Payments shall be treated as “parachute
payments” within the meaning of section 280G(b)(2) of the Code, and all “excise
parachute payments” within the meaning of section 280G(b)(1) of the Code
shall be treated as subject to the Excise Tax, except to the extent that, in
the opinion of tax counsel (“Tax Counsel”) reasonably acceptable to Executive
and selected by the Company, a Payment (in whole or in part) does not
constitute a “parachute payment” within the meaning of section 280G(b)(2) of
the Code, or such “excess parachute payments” (in whole or in part) are not
subject to the Excise Tax, (2) the amount of the Payments that shall be
treated as subject to the Excise Tax shall be equal to the lesser of (A) the
total amount of the Payments or (B) the amount of “excess parachute
payments” within the meaning of section 280G(b)(1) of the Code (after
applying clause (1) hereof), and (3) the value of any noncash
benefits or any deferred payment or benefit shall be determined by the Tax
Counsel in accordance with the principles of sections 280G(d)(3) and (4) of
the Code.  For purposes of determining
the amount of the Gross-Up Payment, the Executive shall be deemed to pay
federal income taxes at the highest marginal rates of federal income taxation
applicable to individuals in the calendar year in which the Gross-Up Payment is
to be made and state and local income taxes at the highest marginal rates of
taxation applicable to individuals as are in effect in the state and locality
of the Executive’s residence in the calendar year in which the Gross-Up Payment
is to be made, net of the maximum reduction in federal income taxes that can be
obtained from deduction of such state and local taxes, taking into account any
limitations applicable to individuals subject to federal income tax at the
highest marginal rates.

 

(b)            The
Gross-Up Payment provided for in Section 5.7(a) hereof shall be made
upon the earlier of (i) thirty (30) days following the date of termination
of Executive’s employment or (ii) the imposition upon the Executive or
payment by the Executive of any Excise Tax.

 

(c)            If it is
established pursuant to a final determination of a court or an Internal Revenue
Service proceeding that the Excise Tax is less than the amount taken into
account under Section 5.7(a) hereof, the Executive shall repay to the
Company within thirty (30) days of the Executive’s receipt of notice of such
final determination the portion of the Gross-Up Payment attributable to such
reduction (plus the portion of the Gross-Up Payment attributable to the Excise
Tax and federal, state and local income tax imposed on the portion of the
Gross-Up Payment being repaid by the Executive if and to the extent that such
repayment results in a reduction in Excise Tax and a dollar for dollar
reduction in the Executive’s taxable income and wages for the purpose of
federal, state and local income taxes) plus any interest received by the
Executive on the amount of such repayment. 
If it is established pursuant to a final determination of a court or an
Internal Revenue Service proceeding that the Excise Tax exceeds the amount
taken into account hereunder (including without limitation by reason of any
payment the existence or amount of which cannot be determined at the time of
the Gross-Up Payment), the 

 

 

Company
shall make an additional Gross-Up Payment pursuant to Section 5.7(a) in
respect of such excess within thirty (30) days of the Company’s receipt of
notice of such final determination or proceeding.  The Executive and the Company shall each
reasonably cooperate with the other in connection with any administrative or
judicial proceedings concerning the existence or amount of liability for Excise
Tax with respect to the Payments.

 

(d)           In the
event of any change in, or further interpretation of, sections 280G or 4999 of
the Code and the regulations promulgated thereunder, the Executive shall be
entitled, by written notice to the Company, to request an opinion of Tax
Counsel regarding the application of such change to any of the foregoing, and
the Company shall use its best efforts to cause such opinion to be rendered as
promptly as practicable.  All fees and
expenses of the Tax Counsel incurred in connection with this Agreement shall be
borne by the Company.

 

5.8           No Other Severance or Termination Benefits.  Except as expressly set forth herein,
Executive shall not be entitled to damages or to any severance or other
benefits upon termination of employment with the Company under any
circumstances and for any or no reason, including, but not limited to any
severance pay under any Company severance plan, policy or practice.

 

5.9           Section 409A. 
Notwithstanding anything in this Agreement to the contrary, to the
extent:  (a) that any payment to
which the Executive becomes entitled under this Agreement (including, without
limitation, any payments made pursuant to this Clause), or any agreement or
plan referenced herein, in connection with the Executive’s termination of
employment with the Company constitutes deferred compensation subject to Section 409A
of the Code; and (b) the Executive is deemed at the time of such
termination of employment to be a “specified employee” under Code Section 409A,
such payment shall not be made or commence until the earliest of:  (i) the expiration of the six (6) month
period measured from the date of the Executive’s “separation from service” (as
such term is at the time defined in Treasury Regulations under Code Section 409A)
with the Company; (ii) the date the Executive becomes “disabled” (as
defined in Code Section 409A); or (iii) the date of the Executive’s
death following such separation from service; provided, however, that such
deferral shall only be effected if and to the extent required to avoid adverse
tax treatment to the Executive, including, without limitation, those imposed
under Code Section 409A(a)(1)(B) in the absence of such deferral;
provided, however, that if the Company reasonably and in good faith determines,
based upon and in accordance with advice from its outside counsel or tax
advisors, that a deferral pursuant to this sentence is necessary, the Executive
agrees that the Company will not be liable to the Executive for any damages to
the Executive arising from such deferral of such payment.  Upon the expiration of the deferral period,
any payments that would have otherwise been made during that period (whether in
a single sum or in installments) shall be paid in a single cash lump sum
payment to the Executive (or his beneficiary, as applicable).  With regard to any provision that provides
for reimbursement of costs and expenses or of in-kind benefits, except as
permitted by Code Section 409A, (i) the right to reimbursement or
in-kind benefits shall not be subject to liquidation or exchange for 

 

 

another benefit, (ii) the amount of expenses
eligible for reimbursement or in-kind benefits to be provided during any
taxable year shall not affect the expenses eligible for reimbursement or
in-kind benefits to be provided in any other taxable year, provided that the
foregoing clause (ii) shall not be violated with regard to expenses
reimbursed under any arrangement covered by Code Section 105(b) solely
because such expenses are subject to a limit related to the period the
arrangement is in effect, and (iii) such payments shall be made on or
before the last day of the Executive’s taxable year following the taxable year
in which the expense occurred.  Each
amount to be paid or benefit to be provided to the Executive shall be construed
as a “separate identified payment” for purposes of Code Section 409A to
the fullest extent permitted therein.

 

6.             Protection of Confidential Information.

 

Executive
acknowledges that during the course of his employment with the Company, its
subsidiaries, affiliates and strategic partners, he will be exposed to
documents and other information regarding the confidential affairs of the
Company, its subsidiaries, affiliates and strategic partners, including without
limitation information about their past, present and future financial
condition, pricing strategy, prices, suppliers, cost information, business and
marketing plans, the markets for their products, key personnel, past, present
or future actual or threatened litigation, trade secrets and other intellectual
property, current and prospective customer lists, operational methods,
acquisition plans, prospects, plans for future development and other business
affairs and information about the Company and its subsidiaries, affiliates and
strategic partners not readily available to the public (the “Confidential
Information”).  Executive further
acknowledges that the services to be performed under this Agreement are of a
special, unique, unusual, extraordinary and intellectual character.  In recognition of the foregoing, the
Executive covenants and agrees as follows:

 

6.1          No Disclosure or Use of Confidential Information.  At no time shall Executive ever divulge,
disclose, or otherwise use any Confidential Information (other than as
necessary to perform his duties under this Agreement and in furtherance of the
Company’s best interests or as otherwise required by law, regulation or legal
process or with respect to a lawsuit with the Company, its affiliates,
subsidiaries or parents), unless and until such information is readily
available in the public domain by reason other than Executive’s disclosure or
use thereof in violation of the first clause of this Section 6.1.  Executive acknowledges that Company is the
owner of, and that Executive has no rights to, any trade secrets, patents,
copyrights, trademarks, know-how or similar rights of any type, including any
modifications or improvements to any work or other property developed, created
or worked on by Executive during the Term of this Agreement.

 

6.2           Return of Company Property, Records and Files.  Upon the termination of Executive’s
employment at any time and for any reason, or at any other time the Board may
so direct, Executive shall promptly deliver to the Company’s offices in
Harrisburg, Pennsylvania all of the property and equipment of the Company, its
subsidiaries, affiliates and strategic partners (including any cell phones,
pagers, credit cards, personal computers, etc.) and any and all documents,
records, and files, including 

 

 

any
notes, memoranda, customer lists, reports or any and all other documents,
including any copies thereof, whether in hard copy form or on a computer disk
or hard drive, which relate to the Company, its subsidiaries, affiliates,
strategic partners, successors or assigns, and/or their respective past and
present officers, directors, employees or consultants (collectively, the “Company
Property, Records and Files”); it being expressly understood that, upon
termination of Executive’s employment at any time and for any reason, Executive
shall not be authorized to retain any of the Company Property, Records and
Files, any copies thereof or excerpts therefrom.

 

7.             Noncompetition and Other Matters.

 

7.1           Noncompetition.  During the Executive’s employment with
the Company and for the one (1) year period immediately following the date
of termination of Executive’s employment (the “Restricted Period”) Executive
shall not, directly or indirectly, in any city, town, county, parish or other
municipality in any state of the United States (the names of each such city,
town, parish, or other municipality, including, without limitation, the name of
each county in the Commonwealth of Pennsylvania being expressly incorporated by
reference herein), or any other place in the world, where the Company, or its
subsidiaries, affiliates, strategic partners, successors, or assigns, engages
in the ownership, management and operation of retail drugstores (i) engage
in a Competing Business for Executive’s own account; (ii) enter the employ
of, or render any consulting or contracting services to, any Competing
Business; or (iii) become interested in or otherwise associated or
connected with any Competing Business in any capacity, including, without
limitation, as an individual, partner, shareholder, officer, director,
principal, agent, trustee, employee, contractor,  consultant
or management position with any entity providing consulting services to a
Competing Business; provided,  however, Executive may (i) own,
directly or indirectly, solely as a passive investment, securities of any
entity traded on any national securities exchange if Executive is not a
controlling person of, or a member of a group which controls such entity and
does not, directly or indirectly, own 3% or more of any class of securities of
such entity.  For purposes of this Section 7.1,
the phrase “Competing Business” shall mean any entity a majority of whose
business involves the ownership and operation of retail or internet based
drugstores.

 

7.2           Noninterference.  During the Restricted Period , Executive
shall not, directly or indirectly, solicit, induce, or attempt to solicit or
induce any officer, director, employee, agent or consultant of the Company or
any of its subsidiaries, affiliates, strategic partners, successors or assigns
to terminate his, her or its employment or other relationship with the Company
or its subsidiaries, affiliates, strategic partners, successors or assigns for
the purpose of associating with any competitor of the Company or its
subsidiaries, affiliates, strategic partners, successors or assigns, or
otherwise encourage any such person or entity to leave or sever his, her or its
employment or other relationship with the Company or its subsidiaries,
affiliates, strategic partners, successors or assigns for any other reason.

 

7.3           Nonsolicitation.  During the Restricted Period, Executive
shall not, directly or indirectly, solicit, induce, or attempt to solicit or
induce any customers, clients, 

 

 

vendors,
suppliers or consultants then under contract to the Company or its
subsidiaries, affiliates, strategic partners, successors or assigns, to
terminate, limit or otherwise modify his, her or its relationship with the
Company or its subsidiaries, affiliates, strategic partners, successors or
assigns, for the purpose of associating with any competitor of the Company or
its subsidiaries, affiliates, strategic partners, successors or assigns, or
otherwise encourage such customers, clients, vendors, suppliers or consultants
then under contract to terminate his, her or its relationship with the Company
or its subsidiaries, affiliates, strategic partners, successors or assigns for
any reason.  During the Restricted
Period, Executive shall not hire, either directly or through any employee,
agent or representative, any field and corporate management employee of the
Company or any subsidiary or any such person who was employed by the Company or
any subsidiary within 180 days of such hiring, provided, however, nothing
herein shall prohibit any advertisement or general hiring as a result thereof
that is not specifically targeted at such persons.

 

8.             Rights and Remedies Upon Breach.

 

If
Executive breaches, or threatens to commit a breach of, any of the provisions
of Sections 6 or 7 above (the “Restrictive Covenants”), the Company and its
subsidiaries, affiliates, strategic partners, successors or assigns shall have
the following rights and remedies, each of which shall be independent of the
others and severally enforceable, and each of which shall be in addition to,
and not in lieu of, any other rights or remedies available to the Company or
its subsidiaries, affiliates, strategic partners, successors or assigns at law
or in equity.

 

8.1           Specific Performance.  The right and remedy to have the Restrictive
Covenants specifically enforced by any court of competent jurisdiction by
injunctive decree or otherwise, it being agreed that any breach or threatened
breach of the Restrictive Covenants would cause irreparable injury to the
Company or its subsidiaries, affiliates, strategic partners, successors or
assigns and that money damages would not provide an adequate remedy to the
Company or its subsidiaries, affiliates, strategic partners, successors or
assigns.

 

8.2          Accounting.  The right and remedy to require Executive
to account for and pay over to the Company or its subsidiaries, affiliates,
strategic partners, successors or assigns, as the case may be, all
compensation, profits, monies, accruals, increments or other benefits derived
or received by Executive as a result of any transaction or activity
constituting a material or intentional breach of any of the Restrictive
Covenants.

 

8.3          Severability of Covenants.  Executive acknowledges and agrees that
the Restrictive Covenants are reasonable and valid in geographic and temporal
scope and in all other respects.  If any
court determines that any of the Restrictive Covenants, or any part thereof, is
invalid or unenforceable, the remainder of the Restrictive Covenants shall not
thereby be affected and shall be given full force and effect without regard to
the invalid portions.

 

 

8.4            Modification by the Court.  If any court determines that any of the
Restrictive Covenants, or any part thereof, is unenforceable because of the
duration or scope of such provision, such court shall have the power (and is
hereby instructed by the parties) to modify or reduce the duration or scope of
such provision, as the case may be (it being the intent of the parties that any
such modification or reduction be limited to the minimum extent necessary to
render such provision enforceable), and, in its modified or reduced form, such
provision shall then be enforceable.

 

8.5            Enforceability in Jurisdictions.  Executive intends to and hereby confers
jurisdiction to enforce the Restrictive Covenants upon the courts of any jurisdiction
within the geographic scope of such covenants. 
If the courts of any one or more of such jurisdictions hold the
Restrictive Covenants unenforceable by reason of the breadth of such scope or
otherwise, it is the intention of Executive that such determination not bar or
in any way affect the right of the Company or its subsidiaries, affiliates,
strategic partners, successors or assigns to the relief provided herein in the
courts of any other jurisdiction within the geographic scope of such covenants,
as to breaches of such covenants in such other respective jurisdictions, such
covenants as they relate to each jurisdiction being, for this purpose,
severable into diverse and independent covenants.

 

8.6            Extension of Restriction in the Event of Breach.  In the event that Executive breaches any of
the provisions set forth in this Section 8, the length of time of the
Restricted Period shall be extended for a period of time equal to the period of
time during which Executive is in breach of such provision.

 

9.             No Violation of Third Party Rights.  Executive represents, warrants and
covenants that he:

 

(i)            will
not, in the course of employment, infringe upon or violate any proprietary
rights of any third party (including, without limitation, any third party
confidential relationships, patents, copyrights, mask works, trade secrets, or
other proprietary rights);

 

(ii)            is not a
party to any conflicting agreements with third parties, which will prevent him
from fulfilling the terms of employment and the obligations of this Agreement;

 

(iii)           does
not have in his possession any confidential or proprietary information or
documents belonging to others and will not disclose to the Company, use, or
induce the Company to use, any confidential or proprietary information or documents
of others; and

 

(iv)          agrees to
respect any and all valid obligations which he may now have to prior employers
or to others relating to confidential information, inventions, discoveries or
other intellectual property which are the property of those prior employers or
others, as the case may be.

 

 

Executive
has supplied to the Company a copy of each written agreement with any of
Executive’s prior employers, as well as any other agreements to which Executive
is subject, which includes any obligation of confidentiality, assignment of
intellectual property, nonsolicitation or noncompetition.  Executive has listed each of such agreements
in Appendix “B”.

 

Executive
agrees to indemnify and save harmless the Company from any loss, claim, damage,
cost or expense of any kind (including without limitation, reasonable attorney
fees) to which the Company may be subjected by virtue of a breach by Executive
of the foregoing representations, warranties, and covenants.

 

10.          Arbitration.

 

Except
as necessary for the Company and its subsidiaries, affiliates, strategic
partners, successors or assigns or Executive to specifically enforce or enjoin
a breach of this Agreement (to the extent such remedies are otherwise
available), the parties agree that any and all disputes that may arise in
connection with, arising out of or relating to this Agreement, or any dispute
that relates in any way, in whole or in part, to Executive’s employment with
the Company or any subsidiary, affiliate or strategic partner, the termination
of that employment or any other dispute by and between the parties or their
subsidiaries, affiliates, strategic partners, successors or assigns, shall be
submitted to final and binding arbitration in Harrisburg, Pennsylvania
according to the National Employment Dispute Resolution Rules and
procedures of the American Arbitration Association at the time in effect.  This arbitration obligation extends to any
and all claims that may arise by and between the parties or their subsidiaries,
affiliates, strategic partners, successors or assigns, and expressly extends
to, without limitation, claims or causes of action for wrongful termination,
impairment of ability to compete in the open labor market, breach of an express
or implied contract, breach of the covenant of good faith and fair dealing,
breach of fiduciary duty, fraud, misrepresentation, defamation, slander,
infliction of emotional distress, disability, loss of future earnings, and
claims under the Pennsylvania Constitution, the United States Constitution, and
applicable state and federal fair employment laws, federal and state equal
employment opportunity laws, and federal and state labor statutes and
regulations, including, but not limited to, the Civil Rights Act of 1964, as
amended, the Fair Labor Standards Act, as amended, the Americans With
Disabilities Act of 1990, as amended, the Rehabilitation Act of 1973, as
amended, the Employee Retirement Income Security Act of 1974, as amended, the
Age Discrimination in Employment Act of 1967, as amended, and any other state
or federal law.  Executive understands
that by entering into this Agreement, Executive is waiving Executive’s rights
to have a court determine Executive’s rights, including under federal, state or
local statutes prohibiting employment discrimination, including sexual
harassment and discrimination on the basis of age, race, color, religion,
national origin, disability, veteran status or any other factor prohibited by
governing law.

 

 

11.           Assignment.

 

Neither
this Agreement, nor any of Executive’s rights or obligations hereunder, may be
assigned or otherwise subject to hypothecation by Executive, other than by will
or the laws of the descent and distribution. 
The Company may assign its rights and obligations hereunder, and
Executive hereby consents to any such assignment, in whole or in part:  (i) to the Company’s parent corporation;
or (ii) to any other successor or assign in connection with the sale of
all or substantially all of the Company’s assets or stock or in connection with
any merger, acquisition and/or reorganization involving the Company; provided,
however, any such assignment will not diminish or waive any of Executive’s
rights hereunder, including, without limitation, rights upon any Change in
Control of the Company.

 

12.          Notices.

 

All notices
and other communications under this Agreement shall be in writing and shall be
given by fax or first class mail, certified or registered with return receipt
requested, and shall be deemed to have been duly given three (3) days
after mailing or twenty-four (24) hours after transmission of a fax to the
respective persons named below:

 

	
  If to the
  Company:

  	
  Rite Aid
  Corporation

  
	
   

  	
  30 Hunter Lane

  
	
   

  	
  Camp Hill, PA
  17011

  
	
   

  	
  Attention:
  General Counsel

  
	
   

  	
  Fax: (717)
  760-7867

  
	
   

  	
   

  
	
  If to Executive:

  	
  Ken Martindale

  
	
   

  	
  at the most
  recent address on file at the Company’s payroll office

  

 

Any party may change such
party’s address for notices by notice duly given pursuant hereto.

 

13.           General.

 

13.1        No Offset or Mitigation.  The Company’s obligation to make the
payments provided for in, and otherwise to perform its obligations under this
Agreement shall not be affected by any setoff, counterclaim, recoupment,
defense or other claim, right or action that the Company may have against the
Executive or others whether in respect of claims made under this Agreement or
otherwise.  In no event shall the
Executive be obligated to seek other employment or take any other action by way
of mitigation of the amounts, benefits and other compensation payable or
otherwise provided to the Executive under any of the provisions of this
Agreement, and such amounts shall not be reduced, regardless of whether the
Executive obtains other employment.

 

 

13.2        Governing Law.  This Agreement is executed in Pennsylvania
and shall be governed by and construed and enforced in accordance with the laws
of the Commonwealth of Pennsylvania without giving effect to conflicts of laws
principles thereof which might refer such interpretations to the laws of a
different state or jurisdiction.  Any
court action instituted by Executive relating in any way to this Agreement
shall be filed exclusively in state or federal court in Harrisburg,
Pennsylvania and Executive consents to the jurisdiction and venue of said
courts in any action instituted by or on behalf of the Company against him.

 

13.3       Entire Agreement.  This Agreement sets forth the entire
understanding of the parties relating to Executive’s employment with the
Company and cancels and supersedes all agreements, arrangements and
understandings relating thereto made prior to the date hereof, written or oral,
between the Executive and the Company and/or any subsidiary or affiliate.

 

13.4       Amendments: Waivers.  This Agreement may be amended, modified,
superseded, canceled, renewed or extended, and the terms or covenants hereof
may be waived, only by a written instrument executed by the parties, or in the
case of a waiver,  by the party waiving compliance.
The failure of any party at any time or times to require performance of any
provision hereof shall in no manner affect the right of such party at a later
time to enforce the same.  No waiver by
any party of the breach of any term or covenant contained in this Agreement,
whether by conduct or otherwise, in any one or more instances, shall be deemed
to be, or construed as, a further or continuing waiver of any such breach, or a
waiver of the breach of any other term or covenant contained in this Agreement.

 

13.5        Conflict with Other Agreements.  Executive represents and warrants that
neither his execution of this Agreement nor the full and complete performance
of his obligations hereunder will violate or conflict in any respect with any
written or oral agreement or understanding with any person or entity.

 

13.6       Successors and Assigns.  This Agreement shall inure to the benefit
of and shall be binding upon the Company (and its successors and assigns) and
Executive and his heirs, executors and personal representatives.

 

13.7       Withholding.  Notwithstanding any other provision of
this Agreement, the Company may withhold from amounts payable under this
Agreement all federal, state, local and foreign taxes that are required to be
withheld by applicable laws or regulations.

 

13.8       Severability.  The invalidity or unenforceability of any
provision of this Agreement shall not affect the validity or enforceability of
any other provision of this Agreement. 
If any provision of this Agreement shall be held invalid or
unenforceable in part, the remaining portion of such provision, together with
all other provisions of this 

 

 

Agreement, shall remain
valid and enforceable and continue in full force and effect to  the fullest extent consistent with law.

 

13.9        No Assignment.  The rights and benefits of the Executive
under this Agreement may not be anticipated, assigned, alienated or subject to
attachment, garnishment, levy, execution or other legal or equitable process
except as required by law.  Any attempt
by the Executive to anticipate, alienate, assign, sell, transfer, pledge,
encumber or charge the same shall be void. 
Payments hereunder shall not be considered assets of the Executive in
the event of insolvency or bankruptcy.

 

13.10     Survival.  This Agreement shall survive the
termination of Executive’s employment and the expiration of the Term to the
extent necessary to give effect to its provisions.

 

13.11     Captions.  The section headings contained herein are
for reference purposes only and shall not in any way affect the meaning or
interpretation of this Agreement.

 

13.12     Counterparts.  This Agreement may be executed by the
parties hereto in separate counterparts; each of which when so executed and
delivered shall be an original but all such counterparts together shall
constitute one and the same instrument.

 

13.13     Legal  Fees  and
Expenses. Promptly following the
Effective Date, the Company shall reimburse the Executive for legal fees and
expenses incurred by Executive in negotiation of this Agreement up to the
maximum of $2,000.

 

 

IN
WITNESS WHEREOF, Executive and the Company have executed this
Agreement as of the date first written above.

 

	
   

  	
   

  	
  RITE AID
  CORPORATION

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  /s/ Robert B.
  Sari

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  By:

  	
  Robert B. Sari

  
	
   

  	
   

  	
  Its:

  	
  Executive Vice
  President, General Counsel

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  EXECUTIVE

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  /s/ Ken Martindale

  
	
   

  	
   

  	
  Ken Martindale

  

 

 

APPENDIX A

 

A “Change
in Control of the Company” shall be deemed to have occurred if, as the result
of a single transaction or a series of transactions, the event set forth in any
one of the following paragraphs shall have occurred:

 

(1) any Person is or becomes the Beneficial
Owner, directly or indirectly, of securities of the Company representing 35% or
more of the combined voting power of the Company’s then outstanding voting
securities; or

 

(2) Incumbent Directors cease at any time and for
any reason to constitute  a majority of
the number of directors then serving on the Board.  “Incumbent Directors” shall mean directors
who either (A) are directors of the Company as of the Effective Date or (B) are
elected, or nominated for election, to the Board with the affirmative votes of
at least a majority of the Incumbent Directors at the time of such election or
nomination (but shall not include an individual whose election or nomination is
in connection with an actual or threatened election contest, including but not
limited to a consent solicitation, relating to the election of directors to the
Board); or

 

(3) there is consummated a merger or
consolidation of the Company or any direct or indirect subsidiary of the
Company with any other corporation, other than: 
(i) a merger or consolidation which would result in the voting
securities of the Company outstanding immediately prior to such merger or
consolidation continuing to represent (either by remaining outstanding or by
being converted into voting securities of the surviving entity or any parent
thereof) at least 60% of the combined voting power of the securities of the
Company or such surviving entity or any parent thereof outstanding immediately
after such merger or consolidation; or (ii) a merger or consolidation
effected to implement a recapitalization of the Company (or similar
transaction) in which no Person is or becomes the Beneficial Owner, directly or
indirectly, of securities of the Company representing 35% or more of the
combined voting power of the Company’s then outstanding voting securities; or

 

(4) the stockholders of the Company approve a
plan of complete liquidation or dissolution of the Company or an agreement for
the sale or disposition  by the Company
of all or substantially all of the Company’s assets, other  than
a sale or disposition by the Company of all or substantially all of the Company’s
assets to an entity, at least 60% of the combined voting power of the voting
securities of which are owned by stockholders of the Company in substantially
the same proportions as their ownership of the Company immediately prior to
such sale.

 

“Affiliate” shall  have the
meaning set forth in Rule 12b-2 under Section 12 of the Exchange Act.

 

 

“Beneficial
Owner” shall have the meaning set forth in Rule 13d-3 under the Exchange
Act, except that a Person shall not be deemed to be the Beneficial Owner of any
securities which are properly filed on a Form 13G.

 

“Exchange
Act” shall mean the Securities Exchange Act of 1934, as amended from time to
time.

 

“Person”
shall have the meaning given in Section 3(a)(9) of the Exchange Act,
as modified and used in Sections 13(d) and 14(d) thereof, except that
such term shall not include:  (i) the
Company or any of its subsidiaries; (ii) a trustee or other fiduciary
holding securities under an employee benefit plan of the Company or any of its
subsidiaries; (iii) an underwriter temporarily holding securities pursuant
to an offering of such securities; or (iv) a corporation owned, directly
or indirectly, by the stockholders of the Company in substantially the same
proportions as their ownership of stock of the Company.

 

 

APPENDIX B

 

The
following is a list of all written agreements with any of Executive’s prior
employers, as well as any other agreements to which Executive is subject, which
includes any obligation of confidentiality, assignment of intellectual
property, nonsolicitation or noncompetition. 
If none, type “None”.

 

Employment
Agreement dated December 14, 2005 with Pathmark Stores, Inc.

 

Any
duties as a member of the Board of Directors of Intesource, Inc.

 

 

	
   

  	
   

  	
  MAILING ADDRESS

  
	
   

  	
  P.O. Box
  3165

  
	
   

  	
  Harrisburg,
  PA 17105

  
	
   

  	
   

  
	
   

  	
  GENERAL OFFICE

  
	
   

  	
  30
  Hunter Lane

  
	
   

  	
  Camp
  Hill, PA 17011

  
	
   

  	
   

  
	
   

  	
  (717) 761-2633

  

 

Appendix C to Employment Agreement

 

Date

 

Name

Address

City,
St Zip

 

Re:                               Severance
Agreement and General Release

 

Dear
Name:

 

We are
interested in resolving cooperatively your separation of employment with Rite
Aid Corporation (the Company), which will take place on (date), your Separation
Date.  Toward this end, we propose the
following Severance Agreement, which includes a General Release.

 

Whereas,
the Company has previously entered into an employment agreement with you, dated
(Date) (the Employment Agreement), which contains among other things, certain
provisions regarding severance compensation payable upon termination of your
employment with the Company under certain circumstances. Other than what is
expressly set forth herein, the terms and conditions of the Employment
Agreement shall remain in full force and effect.

 

The
terms and conditions set forth in Paragraph 1 below will apply regardless
of whether you decide to sign this Severance Agreement and General
Release.  However, you will not be
eligible to receive the payments and benefits set forth in Paragraph 2
below unless you sign and do not revoke this Severance Agreement and General
Release, within the time period specified below.  (Please see Paragraph 20 below for what
it means to revoke this Severance Agreement and General Release.)

 

You
may consider for forty-five (45) days whether you wish to sign this
Severance Agreement and General Release. 
Since this Severance Agreement and General Release (“Agreement”) is a
legal document, you are encouraged to review it with your attorney.

 

1.                                       General
Terms of Termination. As noted above, whether or not you sign this
Agreement:

 

(a)                                  Your last day of employment is (date) which is your
Separation Date.  You will be paid for
all time worked up to and including your termination.

 

(b)                                 You will be paid for earned but unused vacation days
and any properly documented reasonable expenses incurred in connection with
your employment through your Separation Date.

 

1

 

(c)                                  Except as contemplated by the Employment Agreement,
your eligibility to participate in all other group benefits except Company
sponsored health insurance including medical, dental, vision and prescription
as an employee of the Company will end on your Separation Date.

 

(d)                                 You are required to comply with Paragraphs 6
and 7 below.

 

2.                                       Separation
Payment.  Except with respect to the
Accrued Benefits as defined in the Employment Agreement, if you sign this
Agreement, agreeing to be bound by the General Release in Paragraph 3
below and the other terms and conditions of this Agreement described below, and
comply with the requirements of this Paragraph 2 (other than the Accrued
Benefits), you will receive the compensation and benefits as contemplated by
the Employment Agreement. You will not be eligible for the payment and benefits
described in Paragraph 2 unless: 
(i) You sign this Agreement no later than forty five (45) days
after you receive it, promptly return the Agreement to the Company after you
sign it, and do not timely revoke it in accordance with paragraph 20 below;
(ii) you have returned all Company property and documents in accordance
with Paragraph 7 below.

 

3.                                       General
Release.

 

(a)                                  In
exchange for the consideration described
in Paragraph 2 and except as contemplated under Paragraph 4 below, you
release and forever discharge, to the maximum extent permitted by law, the
Company and each of the other
“Releasees” as defined below, from any and all claims, causes of action,
complaints, lawsuits or liabilities of any kind with respect to the Company
(collectively “Claims”) as described below which you, your heirs, agents,
administrators or executors have or may have against the Company, or any of the
other Releasees.

 

(b)                                 By
agreeing to this General Release, you are waiving, to the maximum extent
permitted by law and other than as contemplated by Paragraph 4 below, any and
all Claims which you have or may have against the Company, or any of the other
Releasees arising out of or relating to any conduct, matter, event or omission
with respect to the Company existing or occurring before the Separation Date,
including but not limited to the following:

 

(i)                                     any Claims having anything to do with your
Employment Agreement or your employment with the Company or any of the
Releasees;

 

(ii)                                  any Claims having anything to do with the
termination of your employment with the Company or any of the Releasees;

 

(iii)                               any Claims for unpaid or withheld wages,
severance or retention payments, benefits, bonuses, commissions and/or other
compensation of any kind;

 

(iv)                              any Claims for reimbursement of expenses of
any kind;

 

(v)                                 any Claims for attorneys’ fees or costs;

 

(vi)                              any Claims for any breach under the Employee
Retirement Income Security Act (“ERISA”);

 

(vii)                           any Claims of
discrimination and/or harassment based on age, sex, race, religion, color,
creed, disability, handicap, citizenship, national origin, ancestry, sexual
orientation, or any other factor protected by Federal, State or Local law as
enacted or amended (such as the Age Discrimination in Employment Act,
29 U.S.C. §621 et. seq.; Title VII of the Civil 

 

2

 

Rights Act of 1964; the Americans with Disabilities
Act, the Equal Pay Act; Civil Rights of People with Disabilities Act and
Domestic Abuse Bias in Employment Law) and any Claims for retaliation under any
of the foregoing laws;

 

(viii)                        any Claims regarding leaves of absence
including, but not limited to, any Claims under the Family and Medical Leave
Act;

 

(ix)                                any Claims under the National Labor Relations
Act;

 

(x)                                   any Claims under the Sarbanes-Oxley Act;

 

(xi)                                any Claims under the Worker Adjustment and
Retraining Notification Act (“WARN”);

 

(xii)                             any Claims for violation of public policy;

 

(xiii)                          any whistleblower or retaliation Claims;

 

(xiv)                         any Claims for emotional distress or pain and
suffering; and/or

 

(xv)                            any other statutory, regulatory, common law
or other Claims of any kind, including, but not limited to, Claims for breach
of contract (other than as contemplated hereby), libel, slander, fraud,
wrongful discharge, promissory estoppel, equitable estoppel and
misrepresentation.

 

(c)                                  The
term “Releasees” means: all and singularly, Rite Aid Corporation, Rite Aid
HDQTRS. Corp., as well as any of their direct or indirect parent, subsidiary,
related or affiliated companies, and each of their past and present employees,
officers, directors, attorneys, owners, partners, insurers, benefit plan
fiduciaries and agents, and all of their respective predecessors, successors
and assigns.

 

(d)                                 It
is important that you understand that this General Release includes all Claims
known or unknown by you, those that you may have already asserted or raised as
well as those that you have never asserted or raised.

 

4.                                       Non-Released
Claims.  Notwithstanding anything in
this Agreement to the contrary, the General Release in Paragraph 3 above
does not apply to:

 

(a)                                  Any
Claims for vested benefits under any retirement, 401(k), profit-sharing,
deferred compensation or stock option plan or other plan or arrangement;

 

(b)                                 Any
Claims to enforce the commitments set forth in this Agreement or the applicable
provisions of the Employment Agreement that survive termination of your
employment;

 

(c)                                  Any
Claims to interpret or to determine the scope, meaning or effect of this
Agreement or the applicable provisions of the Employment Agreement that survive
termination of your employment;

 

(d)                                 Any
Claims arising out of any conduct, matter, event or omission existing or
occurring after the Separation Date;

 

(e)                                  Any
Claim that can not be waived as a matter of law; or

 

3

 

(f)                                    Any
Claim arising under or otherwise having anything to do with Sections 5.3 or 5.6
of the Employment Agreement to survive termination of your employment
thereunder.

 

Further, the General
Release does not prevent you from contacting or filing a charge with any
federal, state or local government agency or commission.  However, the General Release does prevent
you, to the maximum extent permitted by law, from obtaining any monetary or
other personal relief for any of the Claims you have released in
Paragraph 3.

 

5.                                       Adequacy
of Consideration.  You acknowledge
and agree that the consideration under Paragraph 2 above:

 

(a)                                  Constitutes
adequate consideration to support your General Release in Paragraph 3
above; and

 

(b)                                 Fully
compensates you for the Claims you are releasing.

 

For
purposes of this Agreement, “consideration” means something of value to which
you are not already entitled.

 

6.                                       Prohibition
on Your Using or Disclosing Certain Information. Regardless of whether you
sign this Agreement, to the extent provided in Section 6 of the Employment
Agreement, you are prohibited from using or disclosing confidential and/or
proprietary information which you acquired in the course of your employment
with the Company or its predecessors, and which is not generally known by or
readily accessible to the public.

 

7.                                       Company
Property and Documents.  Regardless
of whether you sign this Agreement, and as a condition of receiving the payment
set forth in Paragraph 2 above, to the extent provided in Section 6
of the Employment Agreement you must return to the Company, retaining no
copies, all Company property, keys, documents (hard copy or electronic),
forms, correspondence, computer programs, memos, disks, DVDs and any other
Company property in your possession or control.

 

8.                                       Confidentiality
of this Agreement.  You and the
Company and its affiliates each agree that, at all times, the existence, terms
and conditions of this Agreement will be kept secret and confidential and will
not be disclosed voluntarily to any third party, except:  (i) to your spouse, if applicable,
(ii) to the extent required by law; (iii) in connection with any
Claim to enforce, interpret or determine the scope, meaning, or effect of the
Agreement; or (iv) to obtain confidential legal, tax or financial advice
with respect thereto.

 

9.                                       Cooperation.  To the extent provided in Section 5.3 of
the Employment Agreement, you agree that, upon reasonable request, you will
meet with representatives of the Company, Rite
Aid HDQTRS. Corp., or their respective parent or subsidiary company
representatives and provide any information you acquired during the course of
your employment relating in any way to any disputes or other matters involving
the Company or any Releasee (as defined above). You further agree that you will
cooperate fully with the Company relating to any matter in which you were
involved or which you have knowledge by virtue of your employment with the Company,
including any existing or future litigation involving the Company, whether
administrative, civil or criminal in nature in which and to the extent the
Company deems your cooperation necessary.

 

10.                                 Non-Disparagement.  You and the Company agree that neither party
will make any negative comments or disparaging remarks, in writing, orally or
electronically, about the other party or any other Releasee (as defined above)
and their respective products and services. 
However, nothing in

 

4

 

this Agreement is intended to or shall be interpreted to restrict
either party’s right and/or obligation: 
(i) to testify truthfully in any forum; or (ii) to contact,
cooperate with or provide information to any government agency or commission.

 

11.                                 Resignation
of Positions. In connection with the termination of your employment by the
Company, you hereby resign from all positions you may hold as an officer or
director of the Company and it subsidiaries and affiliates, and the Company
hereby accepts such resignations. You agree to execute all such instruments and
take all such other actions as the Company may reasonably deem necessary or
desirable to evidence or accomplish the foregoing in full.

 

12.                                 Governing
Law and Forum.  This Agreement shall
be governed by and construed in accordance with the laws of Pennsylvania, where
this Agreement is entered into, without giving effect to any conflict of law
provisions.  Any court action instituted
by you or on your behalf relating to in any way to this Agreement, or your
employment or termination of employment with the Company or any Releasee, shall
be filed exclusively in the Cumberland County Court of Common Pleas in the
Commonwealth of Pennsylvania or in the United States District Court for the
Middle District of Pennsylvania, and you consent to the jurisdiction and venue
of these courts.

 

13.                                 Statement
of Non-Admission.  Nothing in this
Agreement is intended as or shall be construed as an admission or concession of
liability or wrongdoing by you, the Company or any Releasee as defined
above.  Rather, the proposed Agreement is
being offered for the sole purpose of settling cooperatively and amicably any
and all possible disputes described in Paragraph 3.

 

14.                                 Interpretation
of Agreement.  Nothing in this
Agreement is intended to violate any law or shall be interpreted to violate any
law.  If any paragraph or part or subpart
of any paragraph in this Agreement or the application thereof is construed to be
overbroad and/or unenforceable, then the court making such determination shall
have the authority to narrow the paragraph or part or subpart of the paragraph
as necessary to make it enforceable and the paragraph or part or subpart of the
paragraph shall then be enforceable in its/their narrowed form.  Moreover, each paragraph or part or subpart
of each paragraph in this Agreement is independent of and severable (separate)
from each other.  In the event that any
paragraph or part or subpart of any paragraph in this Agreement is determined
to be legally invalid or unenforceable by a court and is not modified by a
court to be enforceable, the affected paragraph or part or subpart of such
paragraph shall be stricken from the Agreement, and the remaining paragraphs or
parts or subparts of such paragraphs of this Agreement shall remain in full,
force and effect.

 

15.                                 Entire
Agreement.  This Agreement and the
applicable provisions of the Employment Agreement constitutes the entire
agreement between the parties and supersedes any and all prior representations,
agreements, written or oral, expressed or implied, by the Company or any
Releasee arising out of or relating in any way to your employment or the
termination of your employment with any Releasee. This Agreement may not be
modified or amended other than by an agreement in writing signed by you and
either the Vice President & Assistant General Counsel or the Senior
Director of Corporate Human Resources of Rite Aid HDQTRS. Corp.

 

16.                                 Acknowledgment.  You acknowledge and agree that, subsequent to
the termination of your employment, you shall not be eligible for any payments
from the Company or any of the Releasees or any benefits arising out of your
employment with any of the Releasees, except as expressly set forth in this
Agreement or the Employment Agreement.

 

17.                                 Headings.  The headings
contained in this Agreement are for convenience of reference only and are not
intended, and shall not be construed, to modify, define, limit, or expand the
intent of the

 

5

 

parties as expressed in this Agreement, and they
shall not affect the meaning or interpretation of this Agreement.

 

18.                                 Days.  All references to a number of days throughout
this Agreement refer to calendar days.

 

19.                                 Representations.  You agree and represent that:

 

(a)                                  You
have read carefully the terms of this Agreement, including the General Release;

 

(b)                                 You
have had an opportunity to and have been encouraged to review this Agreement,
including the General Release, with an attorney;

 

(c)                                  You
understand the meaning and effect of the terms of this Agreement, including the
General Release;

 

(d)                                 You
were given forty-five (45) days to determine whether you wished to sign
this Agreement, including the General Release;

 

(e)                                  Your
decision to sign this Agreement, including the General Release, is of your own
free and voluntary act without compulsion of any kind;

 

(f)                                    No
promise or inducement not expressed in this Agreement or the Employment
Agreement has been made to you; and

 

(g)                                 You
have adequate information to make a knowing and voluntary waiver.

 

20.                                 Revocation
Period.  If you sign this Agreement,
you will retain the right to revoke it for seven (7) days.  If you revoke this Agreement, you are
indicating that you have changed your mind and do not want to be legally bound
by this Agreement.  The Agreement shall
not be effective until after the Revocation Period has expired without your
having revoked it.  To revoke this
Agreement, you must send a certified letter to the following address:  Steven Chesney, Senior Director of Corporate
Human Resources, Rite Aid HDQTRS. Corp., 30 Hunter Lane, Camp Hill, PA
17011.  The letter must be post-marked
within seven (7) days of your execution of this Agreement.  If the seventh day is a Sunday or federal
holiday, then the letter must be post-marked on the following business
day.  If you revoke this Agreement on a
timely basis, you shall not be eligible for the consideration set forth in
Paragraph 2.

 

21.                                 Offer
Expiration Date.  As noted above, you
have forty-five (45) days to decide whether you wish to sign this
Agreement.  If you do not sign this
Agreement within 45 days of the date you receive it, then this offer is
withdrawn and you will not be eligible for the consideration set forth in
Paragraph 2 above.

 

If you
agree with the all of the terms of this Agreement, please sign below,
indicating that you understand, agree with and intend to be legally bound by
this Agreement, including the General Release, and return the signed Agreement
to Steven Chesney at the above address.

 

6

 

We
wish you the best in the future.

 

	
   

  	
   

  	
  Sincerely,

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  UNDERSTOOD AND AGREED,

  	
   

  	
   

  
	
  INTENDING TO BE LEGALLY BOUND:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Name

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Date

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Witness

  	
   

  	
   

  

 

7

 

APPENDIX D

 

LISTING OF PERMITTED
ACTIVITIES

 

Serving on the Board of Directors of Intesource, Inc.exhibit10-1js.htm

    AMENDED AND RESTATED
EMPLOYMENT SEPARATION AGREEMENT

    

    

    This
Amended and Restated Employment Separation Agreement (this “Agreement”), dated
as of December 31, 2008, is entered into by and between PDI, Inc., a Delaware
corporation (the “Company”), having its principal place of business at 1 Route
17 South, Saddle River, New Jersey 07458, and Mr. Jeffrey E. Smith, residing
at                           (the
“Executive”).

    

    WHEREAS,
the Company and Executive previously entered into an Employment Separation
Agreement, effective as of May 15, 2006 (the “Prior Agreement”);
and

    

    WHEREAS,
the Company and Executive desire to amend and restate the Prior Agreement to
comply with the requirements of Section 409A of the Internal Revenue Code of
1986, as amended and the regulations promulgated thereunder (the “Code”), and to
make certain other clarifying changes, with this Agreement to supersede the
Prior Agreement in its entirety.

    

    NOW,
THEREFORE, in consideration of the premises and mutual agreements herein
contained, the parties hereby agree as follows:

    

    1.           Employment.                                In
connection with the Executive’s acceptance of that certain offer of employment
letter dated May 5, 2006 and contingent upon the Executive’s appointment by the
Company’s Board of Directors (the “Board”), the Company shall employ the
Executive as Executive Vice President, Chief Financial Officer and Treasurer
commencing on or about May 15, 2006 which employment shall terminate upon notice
by either party, for any reason.  Executive
understands and agrees that his employment with the Company is at will and can
be terminated at any time by either party, and for any or no
reason.

    

    2.           Termination
Benefits.

    

    a.           In
further consideration for Executive’s agreement to execute the PDI
Confidentiality, Non-Solicitation and Covenant Not to Compete Agreement (the
“Confidentiality Agreement”), the Company agrees that if it terminates the
Executive’s employment without Cause (as defined below) or if the Executive
terminates his employment as provided for in Section 2b. hereof, and, in each
instance, as of the 30th day
following his termination, the Executive has executed the PDI Agreement and
General Release given to him upon such termination (the “Release”), any
applicable revocation period has expired and Executive has not revoked the
Release during such revocation period, then:

    

    
      	
              i.  

            	
              If
      the Executive terminates his employment before May 15, 2007, the
      Executive shall be paid a lump sum payment equal to (y) the product of
      twelve (12) times his Base Monthly Salary, plus (z) the average annual
      cash incentive compensation paid to the Executive during the three years
      immedi­ately preceding the termination date, or such shorter period if
      applicable. For purposes of the average calculation, any amount paid for
      2006 will be annualized. The sum of (y) and (z) is referred to herein as
      the “Severance Payment”.

            

    

    

    
      	
              ii.  

            	
              If
      such termination occurs
      after May 15, 2007 the Executive shall be paid a lump sum payment
      equal to (y) the product of eighteen (18) times his Base Monthly Salary,
      plus (z) the average cash incentive compensation paid to the Executive
      during the most recent three years immedi­ately preceding the
      termination date for

            

    

    
      
         

      

      
         

        
          

        

      

      
         

      

    

    
      	
              iii.  

            	
              which
      such incentive compensation was paid, or such shorter period, For purposes
      of the average calculation, any amount paid for 2006 will be annualized.
      The sum of (y) and (z) is referred to herein as the “Severance
      Payment”.  Subject to Section 2(d) below, such payment shall be
      made within forty-five (45) days after Executive’s termination
      date.

            

    

    

    b.           In
the event that the Company is obligated to pay the Executive the Severance
Payment, in addition to such payment the Company shall reimburse Executive for
the cost of the premiums for the continuation of the Executive’s health and
welfare benefits under the Company’s group health plan under COBRA for up to
twelve (12) months (the “COBRA Benefit”), provided that no reimbursement shall
be paid unless and until Executive submits proof of payment acceptable to the
Company within 90 days after Executive incurs such expense.  Any
reimbursements of the COBRA premium that are taxable to the Executive shall be
made on or before the last day of the year following the year in which the COBRA
premium was incurred, the amount of the COBRA premium eligible for reimbursement
during one year shall not affect the amount of COBRA premium eligible for
reimbursement in any other year, and the right to reimbursement shall not be
subject to liquidation or exchange for another benefit.  If the
Executive becomes employed by a third party and is entitled to comparable health
and welfare benefits then the Company is entitled to discontinue the COBRA
Benefit.

    

    c.           All
payments due hereunder shall be subject to withholding for applicable federal,
state and local income and employment related taxes. In the event of any
termination of the Executive’s employment with the Company, the Executive shall
continue to be bound by the confidentiality, non-solicitation, non-competition
and other provisions set forth in the Confidentiality Agreement for the periods
set forth therein.  No termination benefits will be paid if the
Executive resigns or terminates his employment for any reason other than as set
forth in Section 2b. below or if the Company terminates the Executive’s
employment for Cause (as defined below) as determined by the Board (or a
committee of the Board).

    

    d.           Notwithstanding
anything herein to the contrary, if at the time of Executive’s termination of
employment with the Company, Executive is a “specified employee” within the
meaning of Code Section 409A and the regulations promulgated thereunder, then
the Company shall delay the commencement of such payments (without any
reduction) by a period of six (6) months after Executive’s termination of
employment.  Any payments that would have been paid during such six
(6) month period but for the provisions of the preceding sentence shall be paid
in a lump sum to Executive six (6) months and one (1) day after Executive’s
termination of employment.  The 6-month payment delay requirement of
this Section 2(d) shall apply only to the extent that the payments under this
Section 2 are subject to Code Section 409A.  With respect to payments
or benefits under this Agreement that are subject to Code Section 409A, whether
Executive has had a termination of employment shall be determined in accordance
with Code Section 409A and applicable guidance issued thereunder.

    

    e.           Subject
to the terms and conditions set forth in Section 2a. above, the Executive shall
be entitled to the Severance Payment and the COBRA Benefit if he terminates his
employment with the Company because (i) the Executive suffers a substantial
adverse change in his title or responsibilities (for the avoidance of doubt,
this would include the Executive no longer being the CFO of the publicly traded
Company, no matter what the reason), or (ii) the Executive suffers a reduction
in his annual base salary, or (iii) if  the Company modifies the
Executive’s overall compensation plan in a manner that materially reduces the
Executive’s earning potential, or (iv) if the Company relocates it’s principal
place of business more than 50 miles from the Executives current residence;
provided, however, that with
respect to items (i), (ii) and (iii) above, within thirty (30) days of written
notice by the Executive, the Company has not cured, or commenced to cure, such
substantial adverse change or reduction.

    

    

    
      
         

      

      
         

        
          

        

      

      
         

      

    

    3.           Definitions.

    

    a.           Cause
shall mean (1) despite adequate warnings, the failure by the Executive to
satisfactorily perform the duties and responsibilities of the position held for
any reason other than total or partial incapacity due to physical or mental
illness; (2) the failure to adhere to generally accepted standards of conduct in
the workplace and/or the Company’s policies and procedures; (3) the failure to
adhere to moral and ethical business principles; (4) Executive's conviction of a
crime (including entry of a nolo contendere plea); or (5)
any act of dishonesty in the commission of his duties.

    

    b.           Base
Monthly Salary shall mean an amount equal to one-twelfth of the
Executive's then current annual base salary.  Base Monthly Salary
shall not include incentives, bonus(es), health and welfare benefits, car
allowances, long term disability insurance or any other compensation or benefit
provided to employees of the Company at the executive level.

    

    4.   Integration;
Amendment.  This Agreement
and the Confidentiality Agreement constitute the entire agreement between the
parties hereto with respect to the matters set forth herein and supersede and
render of no force and effect all prior understandings and agreements between
the parties with respect to the matters set forth herein.   No
amendments or additions to this Agreement or the Confidentiality Agreement shall
be binding unless in writing and signed by both parties.

    

    5.   Governing
Law; Headings.  This Agreement
and its construction, performance and enforceability shall be governed by, and
construed in accordance with, the laws of the State of New Jersey, without
regard to its conflicts of law provisions.   Headings and titles
herein are included solely for convenience and shall not affect, or be used in
connection with, the interpretation of this Agreement.

    

    6.   Jurisdiction.  Except as
otherwise provided for herein, each of the parties (a) irrevocably submits to
the exclusive jurisdiction of any state court sitting in Bergen County, New
Jersey or federal court sitting in New Jersey in any action or proceeding
arising out of or relating to this Agreement; (b) agrees that all claims in
respect of the action or proceeding may be heard and determined in any such
court; (c) agrees not to bring any action or proceeding arising out of or
relating to this Agreement in any other court; and (d) waives any right such
party may have to a trial by jury with respect to any action or proceeding
arising out of or relating to this Agreement.  Each of the parties
waives any defense of inconvenient forum to the maintenance of any action or
proceedings so brought and waives any bond, surety or other security that might
be required of any other party with respect thereto.  Any party may
make service on another party by sending or delivering a copy of the process to
the party to be served at the address set forth above or such updated address as
may be provided to the other party.  Nothing in this Section 6,
however, shall affect the right of any party to serve legal process in any other
manner permitted by law.

    

    
      	
                           
      7.  

            	
                 
        Assignment.   This
      Agreement may and shall be assigned or transferred to, and be
      binding

            

    

    upon and
hall inure to the benefit of any Successor Company (any company that acquires
50% or more of the Company or is the surviving entity in the event of a
acquisition, merger, combination or similar transaction).

    

    

    
      
         

      

      
         

        
          

        

      

      
         

      

    

    IN WITNESS WHEREOF the parties
have duly executed this Agreement as of the date first above
written.

    

    

    EXECUTIVE

    

    _/s/ Jeffrey E.
Smith_________

    Jeffrey E. Smith

    

    

    PDI, INC.

    

    

    By: __/s/ Nancy
Lurker________

    Nancy Lurker

                              Chief
Executive Officer

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