EXHIBIT 10.7

Change in Control Severance Agreement with Raymond C. Kubacki, Jr.
dated November 17, 2003

                                                  November 17, 2003

CONFIDENTIAL

Mr. Raymond C. Kubacki, Jr.
c/o Psychemedics Corporation
1280 Massachusetts Avenue
Suite 200
Cambridge, MA 02138

Dear Ray:

     This letter sets forth the agreements we have made regarding your
employment with Psychemedics Corporation (the “Company”).

1.   If after the effective date hereof, your employment is terminated by the
Company without “Cause” (as defined in paragraph 13 below), or you voluntarily
terminate your employment for “Good Reason” (as defined in paragraph 13 below),
in either case at the time of, or within twelve (12) months following, a “Change
of Control of the Company” (as defined in paragraph 13 below), then you will
continue to be paid monthly an amount equal to your average monthly compensation
for the twelve full months preceding the date of such termination (“Termination
Pay”) for a period of twelve (12) months from the date of such termination,
provided that in the case of your voluntary termination of your employment for
the “Good Reason” defined in clause (iv) of paragraph 13(d) below, then such
Termination Pay shall be for a period of six (6) months from the date of
termination. For purposes of the foregoing sentence, average monthly
compensation shall be determined with reference to the aggregate base salary and
bonus compensation earned by you during such period, including any bonus
compensation accrued for such period or any portion of such period but not paid
as of the date of such termination). Your Termination Pay will be subject to
normal deductions for taxes, benefit plan contributions, other payroll
deductions and any amount due the Company as a result of cash advances. The
Company agrees to continue to make health insurance available to you, under such
health insurance plan as the Company has in effect, for twelve months so long as
you contribute such portion of the premiums for such insurance as is required of
employees under such plan. You agree, however, that if you obtain health
insurance coverage through another employer while you are eligible to receive
health insurance under this Agreement, the Company shall no longer be required
to make health insurance available to you under this Agreement. You agree to
give the Company at least fourteen (14) days prior written notice of the
termination of your employment in the

 

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    event of your voluntary termination without Good Reason. You shall not be
entitled to Termination Pay as a result of termination by reason of your death
or “Disability” (as defined in paragraph 13 below) following a Change of Control
of the Company.

2.   Notwithstanding any other provision of this Agreement, the Termination Pay
contemplated to be paid to you under certain circumstances set forth in this
Agreement shall only be paid in consideration of the execution and delivery by
you of a release reasonably satisfactory to the Company waiving all claims you,
your heirs, or legal representatives have or may have against the Company or any
of its shareholders, officers, directors, employees or agents with respect to
your employment or the termination thereof, or any other claim.   3.   You
acknowledge that, as the Company’s Chief Executive Officer, you are in
possession of specialized information concerning the total operations, conduct,
management, and strategy of the Company, as well as proprietary information
concerning the Company’s products and services and that the applicability of
your knowledge of these matters is applicable to all geographic areas in which
the Company does business. You further acknowledge that the Company has a
legitimate business interest in protecting its hair testing business from unfair
competition.   4.   You shall not, without the prior and express written
approval of the Company, either during or subsequent to the term of your
employment, disclose or use or enable another to disclose or use any secret,
private or confidential information, trade secret or other proprietary knowledge
of the Company, or its subsidiaries, divisions, employees or agents. Upon
termination of your employment with the Company, you shall deliver to the
Company all equipment, records and copies of records, notes, data, memoranda,
prototypes, designs, customer lists and other information which is embodied in
physical media and documents belonging to the Company which are then in your
possession. You agree that all such information and documents shall be the
property of the Company and that the obligations set forth in this paragraph
shall survive termination of your employment.   5.   You agree that, if you or
the Company shall terminate your employment in such a manner as to entitle you
to Termination Pay under paragraph 1, above, you shall not, for so long as you
are entitled to receive such Termination Pay:       (a) directly or indirectly
own, manage, operate or control, or participate in the ownership, management,
operation or control of, or become associated in any capacity with any business
enterprise, firm, corporation or company related to the field of testing for the
detection of drug use, which is in competition with the business of the Company,
or directly or indirectly accept employment with or render services on behalf of
a competitor of the Company, or any other third party, in any capacity which may
reasonably be considered to be useful to the competitor or such

 

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    Other third party to become a competitor, without receiving the Company’s
prior written approval; or       (b) induce or attempt to induce any employee,
officer, consultant, or agent of the Company to leave the employ thereof or in
any way interfere with the relationship between the Company and any employee,
officer, consultant, or agent thereof; hire directly or through another entity
any person who was an employee of the Company at any time during the six
(6) months prior to the date such person is to be so hired; or induce or attempt
to induce any customer, client, supplier, licensee, or other business relation
of the Company to cease doing business with the Company or in any way interfere
with the relationship between any such customer, client, supplier, licensee, or
business relation and the Company (including, without limitation, making any
negative statements or communications concerning the Company).   6.   You agree
that your obligations under paragraphs 4, and 5 are special, unique, and
extraordinary and that any breach by you of such obligations shall be deemed
material, and shall be deemed to cause irreparable injury not properly
compensable by damages in an action at law, and the rights and remedies of the
Company under paragraphs 4, and 5 may, therefore, be enforced both at law and in
equity, by injunction or otherwise. For purposes of paragraphs 4, and 5, the
term “Company” shall include any and all subsidiaries or divisions of the
Company.   7.   The Company’s obligations under paragraph 1 of this Agreement
shall expire five (5) years from the date hereof, unless the parties agree in
writing to the renewal of the provisions of such paragraph. All of the remaining
provisions of this Agreement shall remain in full force and effect during the
term of your employment and thereafter in accordance with their terms.   8.   If
at any time a controversy between you and the Company arises as to the meaning
or operation of this Agreement, such controversy shall be submitted to
arbitration by either party in Boston, Massachusetts, before an arbitrator to be
named by the President of the Boston Branch of the American Arbitration
Association, provided however, that the Company shall also have the rights set
forth in paragraph 6 above. Such arbitration proceedings shall be conducted in
accordance with the rules and procedures then in effect of the American
Arbitration Association. The decision of the arbitrator shall be binding upon
the parties and judgment on any award made by the arbitrator may be entered in
any court having jurisdiction thereof. The costs of the arbitrator shall be
borne equally by you and the Company. Each party will bear his or its own legal
costs.   9.   This Agreement shall be governed by and interpreted in accordance
with the laws of the Commonwealth of Massachusetts without reference to
principles of conflict of laws.

 

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10.   This Agreement contains the entire agreement of the parties in respect of
this transaction and supersedes any prior agreement or understanding relating to
your employment by the Company. No amendment or modification of any provision of
this Agreement will be valid unless in writing signed by both parties. Any
waiver must be in writing and signed by you or an authorized officer of the
Company, as the case may be.   11.   This Agreement shall be binding upon and
inure to the benefit of: (a) the Company, and any successors or assigns of the
Company, whether by way of a merger or consolidation, or liquidation of the
Company, or by way of the Company selling all or substantially all of the assets
and business of the Company to a successor entity; and, subject to the Company’s
right to terminate your employment at any time, the Company agrees to require
any successor entity to expressly assume or unconditionally guarantee the
Company’s obligations under this Agreement (unless such obligations are assumed
by operation of law); and (b) you and your heirs, executors and administrators.
  12.   Any notice or other communication required hereunder shall be in
writing, shall be deemed to have been given and received when delivered in
person, or, if mailed, shall be deemed to have been given when deposited in the
United States mail, first class, registered or certified, return receipt
requested, with proper postage prepaid, and shall be deemed to have been
received on the third business day thereafter, and shall be addressed as
follows:

If to the Company, addressed to:

Psychemedics Corporation
1280 Massachusetts Avenue
Suite 200
Cambridge, MA 02138
Attn: General Counsel

If to you, addressed to:

Raymond C. Kubacki, Jr.
Psychemedics Corporation
1280 Massachusetts Avenue
Suite 200
Cambridge, MA 02138

    or such other address as to which any party hereto may have notified the
other in writing.

13.   Definitions.       (a) “Cause” shall mean: (i) theft or embezzlement, or
attempted theft or embezzlement, by you of money or property of the Company,
your perpetration or attempted perpetration of fraud, or your participation in a

 

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    fraud or attempted fraud upon the Company; (ii) your unauthorized
appropriation of, or attempt to misappropriate, any tangible or intangible
assets or property of the Company, or your appropriation of, or attempt to
appropriate, a business opportunity of the Company, including but not limited to
attempting to secure or securing any profit for yourself or any of your family
members or personal associates in connection with any transaction entered into
on behalf of the Company; (iii) any act or acts of disloyalty, misconduct, or
moral turpitude by you, including but not limited to violation of the Company’s
sexual harassment or non-harassment policy, any of which the Board of Directors
of the Company determines in good faith has been or is likely to be materially
injurious to the interest, property, operations, business, or reputation of the
Company, or its directors, employees or shareholders; (iv) any act or omission
constituting gross negligence in connection with the performance of your duties
on behalf of the Company which is materially injurious to the interest,
property, operations, business, or reputation of the Company; (v) your
conviction of a crime other than minor traffic violations or other similar minor
offenses (including pleading guilty or entering a plea of no contest), or your
indictment for a felony or its equivalent, or your being charged with a violent
crime, a crime involving moral turpitude, or any other crime for which
imprisonment is a possible punishment; (vi) your willful refusal or material
failure (other than by reason of Disability) to carry out reasonable and lawful
instructions and directives from the Board of Directors and your failure to cure
or correct such refusal or failure within ten (10) days after receiving written
notice from the Board of Directors describing such refusal or failure; or
(vii) the material breach by you of your obligations under paragraphs 4, or 5
hereof or under any other confidentiality, non-compete, non-solicitation,
non-disparagement or similar agreement with the Company.       (b)“Change in
Control of the Company” shall mean

    (i) the number of shares of Common Stock directly or indirectly beneficially
owned, as defined in Rule 13d-3 under the Securities Exchange Act of 1934 (the
“Exchange Act”), by the Buyers and Permitted Assignees (as defined in the
Securities Purchase Agreement dated May 15, 1989, as amended from time to time,
by and among the Company, A. Clinton Allen, H. Wayne Huizenga, Donald F. Flynn,
Beverly L. Flynn, Patricia A. Flynn as Trustee, MW Partners and Psychemedics
Investments, Inc. as nominee), and the spouses or children of any of the
foregoing, and trusts for the benefit of any of the foregoing or for the benefit
of any partner or former partner in MW Partners (collectively the “Principal
1989 Shareholders”), in the aggregate, is less than the aggregate number of
shares of Common Stock directly or indirectly beneficially owned (as defined
above) at any time by any other person or group (as defined in Section 13(d) of
the Exchange Act); or       (ii) the consummation of a reorganization, merger or
consolidation

 

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    or sale or disposition of all or substantially all of the assets of the
Company (a “Business Combination”), unless, in each case following such Business
Combination, (A) all or substantially all of the individuals and entities who
were the beneficial owners of the Common Stock of the Company immediately before
the consummation of such Business Combination beneficially own, directly or
indirectly, more than 50% of, respectively, the then outstanding shares of
common stock and the combined voting power of the then outstanding voting
securities entitled to vote generally in the election of directors, as the case
may be, of the corporation resulting from such Business Combination (including,
without limitation, a corporation that as a result of the transaction owns the
Company or all or substantially all of the assets of the Company either directly
or indirectly through one or more subsidiaries) in substantially the same
proportions as their ownership, immediately prior to such Business Combination,
of the Common Stock of the Company; and (B) no person or group (as defined in
Section 13(d) of the Exchange Act) of the Company or the corporation resulting
from the Business Combination) beneficially owns, directly or indirectly, a
number of the then outstanding shares of the common stock of the corporation
resulting from the Business Combination or the combined voting power of the then
outstanding voting securities of the corporation greater than the number of such
shares owned by the Principal 1989 Shareholders; or       (iii) Individuals who,
as of the date of this Agreement, constitute the Board of Directors of the
Company (the “Incumbent Board”) cease for any reason to constitute at least a
majority of the Board of Directors of the Company, provided, however, that any
individual’s becoming a director after the date of this Agreement whose
election, or nomination for election by the stockholders of the Company, was
approved by a vote of at least a majority of the directors then comprising the
Incumbent Board will be considered as though the individual were a member of the
Incumbent Board, but excluding, for this purpose, any individual whose initial
assumption of office occurs as a result of an actual or threatened election
contest with respect to the election or removal of directors or other actual or
threatened solicitation of proxies or consents by or on behalf of a Person other
than the Board.

    (c) “Disability” shall mean your inability because of physical or mental
incapacity to perform your usual duties at the Company for a period of one
hundred eighty (180) days in any consecutive twelve (12) month period.       (d)
“Good Reason” shall mean: (i) reduction in your base salary below $275,000 or
such higher base salary as is in effect immediately prior to

 

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    such reduction; (ii) removal from your position as President of the Company,
or failure to re-elect or reappoint you to such position or, if the Company
shall no longer exist as a result of the Change of Control, failure to elect or
appoint you to the position of President of the division or separate entity
succeeding to the business of the Company; (iii) a material decrease in your
duties or responsibilities or the assignment to you of duties and
responsibilities, which are materially inconsistent with such position; or
(iv) the Company’s requiring you to relocate your work location outside the
Greater Boston, Massachusetts area.

     If this letter correctly sets forth our understanding and agreement, please
indicate your acceptance by signing both copies of this letter and returning one
copy.

              Very truly yours,
 
            PSYCHEMEDICS CORPORATION
 
       
 
  By:   /s/ A. Clinton Allen
 
     

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      A. Clinton Allen, Chairman of the Board

Agreed to: November 17, 2003

 

/s/ Raymond C. Kubacki, Jr.

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Raymond C. Kubacki, Jr.