Document:

exv10w2

 

Exhibit 10.2

EMPLOYMENT AGREEMENT

     THIS EMPLOYMENT AGREEMENT entered into as of the 13th day of February, 2006 (the
“Effective Date”), by and between PolyMedica Corporation (the “Company”), a Massachusetts
corporation, and Stephen C. Farrell, (the “Executive”) (hereinafter collectively referred to as the
“parties”).

     WHEREAS, the Executive is currently employed by the Company as its Chief Operating Officer and
during his employment has gained experience in all phases of the Company’s business;

     WHEREAS, the Company recognizes the Executive’s extraordinary experience and relationships in
the Company’s business and industry, and the Company desires to retain the services and employment
of the Executive;

     WHEREAS, the Executive and the Company are parties to an Employment Agreement dated September
1, 2000 (including subsequent amendments thereafter) and an Executive Retention Agreement dated
March 7, 2002 (including subsequent amendments thereafter)(collectively, the “Prior Agreements”);
and

     WHEREAS, the Company and the Executive desire to enter into this Agreement which will replace
and supersede the Prior Agreements and will provide for the continued employment of the Executive
by the Company upon the terms and subject to the conditions set forth herein.

     NOW, THEREFORE, in consideration of the foregoing and the mutual promises contained herein,
the parties agree as follows:

     1.    Term. The initial term of employment under this Agreement will be for
the period commencing on the Effective Date and continuing in effect until February 12, 2009. The
term of this Agreement shall be extended for successive one (1) year terms at the end of the
initial term and on each anniversary thereafter unless the Company has provided written notice to
the Executive at least six (6) months before the end of a term that the Agreement shall not be
extended (the initial term and any extensions thereof, the “Term”). Notwithstanding the foregoing,
the Executive’s employment may be terminated during a Term as provided in Section 7 below.

     2.    Employment.

           (a)    The Executive will be employed as the Chief Operating Officer of the Company or in such
other position(s) as may be mutually agreed upon by the parties. The Executive will perform the
duties, undertake the responsibilities and exercise the authority customarily performed, undertaken
and exercised by persons employed in a similar executive capacity or as directed by PolyMedica’s
Chief Executive Officer or Board of Directors of the Company (the “Board”). The Executive shall
report directly to the Chief Executive Officer of PolyMedica.

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           (b)    The Executive will devote his full working time, attention and skill to the performance of
his duties and responsibilities as an executive employee of the Company in a trustworthy and
professional manner, and will use his best efforts to promote the interests of the Company. The
Executive will not, without prior written approval of the Board, engage in any other activities
that would interfere with the performance of his duties as an employee of the Company, are in
violation of written policies of the Company, are in violation of applicable law, or would create
an actual or perceived conflict of interest with respect to the Executive’s obligations as an
employee of the Company. The Executive may (1) with advance notice to and consent of the Board,
serve on corporate, civil or charitable boards or committees; (2) deliver lectures and teach at
educational institutions; (3) serve as a personal representative or trustee; (4) manage his
personal, financial and legal affairs; and (5) invest personally in any business where no conflict
of interest exists between such investment and the business of the Company, provided those
activities do not require a material time commitment by the Executive or are otherwise contrary to
any provision of this Agreement.

     3.    Compensation. For so long as the Executive is employed by the Company
under this Agreement, the Executive shall be paid the following compensation:

           (a)    Base Salary. The Executive’s initial base salary will be $384,000 per
annum (such base salary, as may be adjusted from time to time in accordance with this Section, the
“Base Salary”), from which shall be deducted all required or authorized payroll deductions,
including state and federal withholdings. The Base Salary will be payable in accordance with the
Company’s customary payroll practices applicable to its executives. The Base Salary will be
reviewed, and may be adjusted, at least annually in a manner designated by the Board.

           (b)    Bonus. The Executive will be eligible for an annual bonus for each
fiscal year of his employment. Such bonus shall be based on a target equal to a percentage of
Executive’s Base Salary as set forth in the PolyMedica Executive Bonus Plan, or similar plan, as in
effect from time to time. The Board, or the Compensation Committee of the Board (the “Compensation
Committee”), in its sole discretion, shall establish the eligibility criteria for such annual
bonus, which may include Company financial projections and management goals specific to the
Executive. Each bonus earned by the Executive will be paid to the Executive on or before 2 1/2
months following the end of (i) the Company’s fiscal year in which the applicable bonus was earned;
or (ii) the calendar year in which the applicable bonus was earned, as applicable.

           (c)    Stock Based Compensation. The Executive will be eligible to
participate in PolyMedica’s Employee Stock Purchase Plan and to be considered by the Compensation
Committee for grants or awards of stock options or other stock-based compensation under
PolyMedica’s 2000 Stock Incentive Plan or similar plans as in effect from time to time. All such
grants or awards shall be governed by the relevant plan documents and requirements and shall be
evidenced by PolyMedica’s then-standard form of stock option, restricted stock or other applicable
agreement.

     4.    Employee Benefits. The Executive will be entitled to participate in all
employee benefit plans, practices and programs maintained by the Company and made available to
employees generally including, without limitation, all pension, retirement, profit sharing,
savings, health, hospitalization, disability, dental, life or travel accident insurance benefit
plans,

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vacation and sick leave in accordance with the terms of such plans, practices and programs as
in effect from time to time.

     5.    Executive Benefits. The Executive will be entitled to participate in
all executive benefit or incentive compensation plans now maintained or hereafter established by
the Company for the purpose of providing compensation and/or benefits to executives of the Company.
Unless otherwise provided herein or as otherwise determined by the Compensation Committee of the
Board, the Executive’s participation in such plans will be on the same basis and terms as other
similarly situated executives of the Company. No additional compensation provided under any of
such plans will be deemed to modify or otherwise affect the terms of this Agreement or any of the
Executive’s entitlements hereunder.

     6.    Reimbursements and Other Benefits.

           (a)    Expenses. The Company will pay all reasonable and properly documented
expenses incurred by the Executive in furtherance of the Company’s business in accordance with
applicable Company policies and procedures (“Expenses”), including, without limitation, traveling
and entertainment expenses, and will reimburse the Executive for all such reasonable expenses
advanced by him and not reimbursed prior to the date of this Agreement.

           (b)    Life Insurance. The Company will provide term life insurance on the
life of the Executive, for which the Executive shall designate the beneficiaries, with a death
benefit equal to 150% of the Executive’s Base Salary.

           (c)    Vacation. The Executive may take four (4) weeks of paid vacation
during each year at such times as shall be consistent with PolyMedica’s vacation policies and, in
PolyMedica’s judgment, with PolyMedica’s vacation schedule for executives and other employees.

     7.    Termination and Compensation Upon Termination. The Executive’s
employment hereunder may be terminated under the following circumstances:

           (a)    Definitions.

                    
(i)    Cause. For purposes of this Agreement, “Cause” means:

   
                         (A)    a good faith finding by the Board that the Executive failed to substantially perform his
duties and obligations to the Company (other than a failure resulting from the Executive’s
incapacity because of a Disability, as defined in Section 7(a)(ii)), including but not limited to
one or more acts of gross negligence;

                         
   (B)    a good faith finding by the Board of a material breach of the Company’s Code of Conduct or
other policies and procedures; provided that, if such material breach is determined by the Board,
in its sole discretion, to be curable, the material breach is not cured within 10 days after a
written demand for cure is received by the Executive from the Board which specifically identifies
the manner in which the Board believes the Executive has materially breached a provision of the
Company’s Code of Conduct or other written policies of the Company;

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                         (C)    indictment or conviction (including the entry of a plea of guilty or nolo contendere by
the Executive) to any felony or any misdemeanor or other criminal offense involving fraud,
dishonesty, theft, breach of trust or moral turpitude or that requires mandatory exclusion in any
Federal health care program pursuant to 42 U.S.C. § 1320a-7(a) during the Executive’s employment;

                         (D)    a good faith finding by the Board that the Executive willfully engaged in conduct which is
demonstrably and materially injurious to the Company, monetarily or otherwise;

                         (E)    a good faith finding by the Board that the Executive materially breached this Agreement or
the Confidentiality, Non-Competition/Non-Solicitation and Work Product Agreement incorporated by
Section 8;

                         (F)    the Executive’s exclusion, debarment or suspension from participation in any Federal
health care programs or in Federal procurement or nonprocurement programs; or

                         (G)    the Executive’s violation of the Securities Act of 1933 or the Securities Exchange Act of
1934.

                (ii)    Disability.

                         (A)    Except as set forth in Section 7(a)(ii)(B) below, for purposes of this Agreement,
“Disability” means a physical or mental illness, impairment or infirmity which renders the
Executive unable to perform the essential functions of his position, including his duties under
this Agreement, with reasonable accommodation, as determined by a physician selected by the Company
and acceptable to the Executive or the Executive’s legal representative, for at least one hundred
eighty (180) days during any 365-consecutive-day period.

                         (B)    Notwithstanding the foregoing, to the extent that any payment under this Agreement that is
subject to Code Section 409A may be triggered due to a Disability, “Disability” shall mean
Executive (A) is unable to engage in any substantial gainful activity by reason of any medically
determinable physical or mental impairment which can be expected to result in death or can be
expected to last for a continuous period of not less than twelve (12) months, or (B) is, by reason
of any medically determinable physical or mental impairment which can be expected to result in
death or can be expected to last for a continuous period of not less than twelve (12) months,
receiving income replacement benefits for a period of not less than three (3) months under a
Company-sponsored group disability plan.

     The Executive shall be entitled to the compensation and benefits provided for under this
Agreement for any period during the Term of this Agreement and prior to the establishment of the
Executive’s Disability during which the Executive is unable to work due to a physical or mental
illness, impairment or infirmity. Notwithstanding anything contained in this Agreement to the
contrary, the Executive will be entitled to return to his position with the Company as set forth in
this Agreement in which event no Disability of the Executive will be deemed to have occurred, until
the Termination Date specified in a Notice of Termination (as each term is hereinafter defined)
relating to the Executive’s Disability.

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               (iii)    Change in Control. For purposes of this Agreement, “Change in
Control” means the occurrence of any of the following events:

                         (A)    the acquisition by an individual, entity or group (within the meaning of Section 13(d)(3)
or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) (a “Person”)
of beneficial ownership of any capital stock of the Company if, after such acquisition, such Person
beneficially owns (within the meaning of Rule 13d-3 promulgated under the Exchange Act) in excess
of 50% of either the then-outstanding shares of common stock of the Company (the “Outstanding
Company Common Stock”) or the combined voting power of the then-outstanding securities of the
Company entitled to vote generally in the election of directors (the “Outstanding Company Voting
Securities”); provided, however, that for purposes of this subsection (A), the following
acquisitions shall not constitute a Change in Control: (1) any acquisition of more than 50% of the
Outstanding Company Common Stock directly from the Company (excluding an acquisition pursuant to
the exercise, conversion or exchange of any security exercisable for, convertible into or
exchangeable for common stock or voting securities of the Company, unless the Person exercising,
converting or exchanging such security acquired such security directly from the Company or an
underwriter or agent of the Company); (2) any acquisition of more than 50% of the Outstanding
Company Common Stock by the Company; (3) any acquisition of more than 50% of the Outstanding
Company Common Stock by any employee benefit plan (or related trust) sponsored or maintained by the
Company or any corporation controlled by the Company; or (4) any acquisition by any Person who,
prior to such acquisition, already owned more than 50% of the Outstanding Company Common Stock or
Outstanding Company Voting Securities; or

                         (B)    such time as the majority of the members of the Board (or, if applicable, the board of
directors of a successor corporation to the Company) is replaced during any 12-month period
(commencing no earlier than the date of this Agreement) by directors whose appointment or election
is not endorsed by a majority of the members of the Board prior to the date of the appointment or
election; or

                         (C)    the consummation of a merger, consolidation, reorganization, recapitalization or statutory
share exchange involving the Company or a sale or other disposition of all or substantially all of
the assets of the Company in one or a series of transactions (a “Business Combination”), unless,
immediately following such Business Combination, all or substantially all of the individuals and
entities who were the beneficial owners of the Outstanding Company Common Stock and Outstanding
Company Voting Securities immediately prior to such Business Combination beneficially own, directly
or indirectly, more than 50% of the then-outstanding shares of common stock and the combined voting
power of the then-outstanding securities entitled to vote generally in the election of directors,
respectively, of the resulting or acquiring corporation in such Business Combination (which shall
include, without limitation, a corporation which as a result of such transaction owns the Company
or substantially all of the Company’s assets either directly or through one or more subsidiaries)
in substantially the same proportions as their ownership, immediately prior to such Business
Combination, of the Outstanding Company Common Stock and Outstanding Company Voting Securities,
respectively; or

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                         (D)    approval by the stockholders of the Company of a complete liquidation or dissolution of
the Company, other than in a bankruptcy proceeding, provided that the liquidation or dissolution
otherwise meets the requirements of one of the events described in Sections 7(a)(iii)(A), (B) or
(C) above.

     In all respects, the definition of “Change in Control” shall be interpreted to comply with
Code Section 409A, and the provisions of Treasury Notice 2005-1, and any successor statute,
regulation and guidance thereto.

               
(iv)    Change in Control Date. For purposes of this Agreement, “Change in
Control Date” means (A) the first date during the Term on which a Change in Control occurs; or (B)
the date immediately prior to the date on which the Executive is terminated before a Change in
Control if a Change in Control occurs and it is reasonably demonstrated by the Executive that such
termination of employment (1) was at the request of a third party who has taken steps reasonably
calculated to effect a Change in Control; or (2) otherwise arose in connection with or in
anticipation of a Change in Control.

               (v)    Good Reason. For purposes of this Agreement, “Good Reason” means:

                         (A)    a change in the Executive’s title or duties resulting in a material diminution of the
Executive’s status, authority or responsibilities;

                         (B)    a reduction in the Executive’s Base Salary;

                         (C)    the failure by the Company to (1) continue in effect any material compensation or benefit
plan or program (including without limitation any life insurance, medical, health and accident or
disability plan and any vacation or automobile program or policy) (a “Benefit Plan”) in which the
Executive participates or which is applicable to the Executive, unless an equitable arrangement
(embodied in an ongoing substitute or alternative plan) has been made with respect to such plan or
program; (2) continue the Executive’s participation in a Benefit Plan (or in such substitute or
alternative plan) on a basis not materially less favorable, both in terms of the amount of benefits
provided and the level of the Executive’s participation relative to other participants; or (3)
award cash bonuses to the Executive in amounts and in a manner substantially consistent with past
practice in light of the Company’s financial performance;

                         (D)    a change by the Company in the location at which the Executive performs his principal
duties for the Company to a new location that is both (1) outside a radius of 35 miles from the
Executive’s principal residence; and (2) more than 20 miles from the location at which the
Executive performed his principal duties for the Company as of the date this Agreement is executed
by the Executive;

                         (E)    a requirement by the Company that the Executive travel on Company business to a
substantially greater extent than as of the date this Agreement is executed by the Executive;

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                         (F)    the failure of the Company to obtain the agreement from any successor to the Company to
assume and agree to perform this Agreement, as required by Section 11(a);

                         (G)    a purported termination of the Executive’s employment which is not effected pursuant to a
Notice of Termination satisfying the requirements of Section 7(c); or

                         (H)    any failure of the Company to pay or provide to the Executive any portion of the
Executive’s compensation or benefits due under any Benefit Plan within ten (10) days of the date
such compensation or benefits are due, or any material breach by the Company of this Agreement.

     The Executive’s right to terminate his employment for Good Reason shall not be affected by his
incapacity due to physical or mental illness.

     Notwithstanding the occurrence of any such event or circumstance, such occurrence shall not be
deemed to constitute Good Reason if (1) prior to the Date of Termination specified in the Notice of
Termination (each as defined in Sections 7(c) and 7(d)) given by the Executive in respect thereof,
such event or circumstance has been fully corrected and the Executive has been reasonably
compensated for any losses or damages resulting therefrom (provided that such right of correction
by the Company shall only apply to the first Notice of Termination for Good Reason given by the
Executive); or (2) the Company has given the Executive Notice of Termination prior to the date the
Executive provides the Company with a Notice of Termination for Good Reason.

       
(b)    Termination and Compensation Upon Termination.

                 (i)    Termination for Cause. The Company may terminate the Executive’s
employment for Cause.

                         (A)    If the Executive’s employment is terminated by the Company for Cause, then the Company
will pay the Executive all amounts earned or accrued hereunder through the Termination Date but not
paid as of the Termination Date, including (1) Base Salary; (2) Expenses incurred by the Executive
on behalf of the Company for the period ending on the Termination Date; (3) vacation pay (i.e. the
Base Salary divided by 260 and then multiplied by the number of accrued and unused vacation days as
of the Termination Date); and (4) any bonus or incentive compensation with respect to the fiscal
year ended prior to the fiscal year in which the Termination Date occurs that was earned and
unpaid, (collectively, “Accrued Compensation”).

                         (B)    In the event that the Company terminates the Executive’s employment without Cause as set
forth in Section 7(b)(ii), but the Board determines subsequently that the Company had the right to
terminate the Executive’s employment for Cause pursuant to this Section 7(b)(i), the Company may
terminate the payment of all amounts to the Executive pursuant to Section 7(b)(ii) and the
Executive shall return all previous payments made to him pursuant to Section 7(b)(ii) other than
the Accrued Compensation.

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               (ii)    Termination by the Company Without Cause or by the Executive for Good
Reason. The Company may terminate the Executive’s employment without Cause and the
Executive may terminate his employment for Good Reason. If the Executive’s employment with the
Company is terminated by the Company without Cause (excluding any termination due to the
Executive’s death or Disability) or by the Executive for Good Reason (other than within 24 months
of the Change in Control Date, in which event Section 7(b)(v) shall apply), then the Company will
pay the Executive:

                         (A)    all Accrued Compensation;

                         (B)    any deferred compensation;

                         (C)    a severance payment equal to two times the sum of (x) the Executive’s highest Base Salary
during the three-year period immediately preceding the Termination Date (or during the period the
Executive was employed by the Company, if shorter than three years) and (y) the average of the
annual bonuses awarded to the Executive pursuant to Section 3(b) above during the three-year period
immediately preceding the Termination Date (or during the period the Executive was employed by the
Company, if shorter than three years). The severance pay provided for in this section shall be paid
to the Executive in twenty-four (24) equal monthly installments on the first business day of each
month following the Termination Date except that the first payment shall not be sooner than the
eighth day following the date on which the Executive delivers to the Company the release referred
to in Section 7(b)(ii)(F) below.

                         (D)    directly, or by reimbursing the Executive for, the monthly premium for continuation
coverage under the Company’s health and dental insurance plans, to the same extent that such
insurance is provided to persons currently employed by the Company, provided that the Executive
makes a timely election for such continuation coverage under the Consolidate Omnibus Budget
Reconciliation Act of 1985 (“COBRA”). The “qualifying event” under COBRA shall be deemed to have
occurred on the Termination Date. The Company’s obligation under this paragraph shall end 18
months after the Termination Date or at such earlier date as the Executive becomes eligible for
comparable coverage under another employer’s group coverage. The Executive agrees to notify the
Company promptly and in writing of any new employment and to make full disclosure to the Company of
the health and dental insurance coverage available to him through such new employment.

                         (E)    directly, or by reimbursing the Executive for, the monthly premium to continue the life
insurance provided for in Section 6(b) for 18 months following the Termination Date.

                         (F)    The Company shall not be obligated to make the payments otherwise provided for in Sections
7(b)(ii)(B), (C), (D) and (E) unless the Executive provides to the Company, and does not revoke, a
general release of claims in a form satisfactory to the Company.

                         (G)    The Company shall not be obligated to make the payments otherwise provided for in Sections
7(b)(ii)(B), (C), (D) and (E) upon a good faith finding by the Board of a material breach of the
Confidentiality, Non-Competition/Non-Solicitation and Work

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Product Agreement incorporated by Section 8 and the Executive shall return all previous
payments made to him pursuant to Sections 7(b)(ii)(B), (C), (D) and (E) after the date on which the
Executive materially breached the Confidentiality, Non-Competition/Non-Solicitation and Work
Product Agreement incorporated by Section 8.

                         (H)    Notwithstanding any other provision with respect to the timing of payments under Sections
7(b)(ii)(B), (C), (D) and (E), to the extent that the Executive is deemed to be a “key employee”
within the meaning of Code Section 416(i), any payments to which the Executive may become entitled
under Sections 7(b)(ii) (B), (C), (D) and (E) will not commence until the first business day of the
seventh month following the Termination Date, at which time the Executive shall be paid an
aggregate amount equal to seven monthly payments otherwise due to the Executive under the terms of
Sections 7(b)(ii)(B), (C), (D) and (E). Commencing on the first business day of the eighth month
following the Termination Date and continuing each month thereafter, the Executive shall be paid
the regular monthly payment otherwise due to the Executive in accordance with the terms of Sections
7(b)(ii) (B), (C), (D) and (E).

                 (iii)    Disability. The Company may terminate the Executive’s employment upon
the Executive’s Disability. If the Executive’s employment with the Company is terminated because
of his Disability, then the Company will pay the Executive (A) all Accrued Compensation; and (B) an
amount equal to the Executive’s target bonus for the fiscal year in which the Executive’s
employment is terminated due to his Disability, multiplied by a fraction, the numerator of which
shall be the number of days from the beginning of such fiscal year through the Termination Date and
the denominator of which shall be three hundred and sixty-five (365). If the Executive’s
Disability meets the definition set forth in Section 7(a)(ii)(B), the Company will also pay the
Executive any deferred compensation. In addition, effective upon the Executive’s Disability, each
outstanding option to purchase shares of Common Stock of the Company held by the Executive shall
become immediately exercisable in full and will no longer be subject to a right of repurchase by
the Company, and each outstanding restricted stock award shall be deemed to be fully vested and
will no longer be subject to a right of repurchase by the Company.

                 (iv)    Death. The Executive’s employment shall terminate because of the
Executive’s death. If the Executive’s employment with the Company terminates because of the
Executive’s death, then the Company will pay the Executive’s beneficiaries or heirs (A) all Accrued
Compensation; (B) an amount equal to the Executive’s target bonus for the fiscal year in which the
Executive’s employment is terminated due to his death, multiplied by a fraction, the numerator of
which shall be the number of days from the beginning of such fiscal year through the Termination
Date and the denominator of which shall be three hundred and sixty-five (365); and (C) any deferred
compensation. In addition, effective upon the death of the Executive, each outstanding option to
purchase shares of Common Stock of the Company held by the Executive shall become immediately
exercisable in full and will no longer be subject to a right of repurchase by the Company, and each
outstanding restricted stock award shall be deemed to be fully vested and will no longer be subject
to a right of repurchase by the Company.

                 (v)    Termination by the Company Without Cause or by the Executive for Good Reason
Within 24 Months of Change in Control Date. If the Executive’s employment

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with the Company is terminated by the Company without Cause (excluding any termination due to
the Executive’s death or Disability) or by the Executive for Good Reason and in either case the
Termination Date occurs within twenty-four (24) months of the Change in Control Date, then the
Company will pay or reimburse the Executive:

                         (A)    all Accrued Compensation;

                         (B)    any deferred compensation;

                         (C)    a severance payment equal to two times the sum of (x) the Executive’s highest Base Salary
during the three-year period immediately preceding the Change in Control Date (or during the period
the Executive was employed by the Company, if less than three years prior to the Change in Control
Date) and (y) the average of the annual bonuses awarded to the Executive pursuant to Section 3(b)
above during the three-year period immediately preceding the Change in Control Date (or during the
period the Executive was employed by the Company, if shorter than three years). The severance pay
provided for in this section shall be paid to the Executive in twenty-four (24) equal monthly
installments on the first business day of each month following the Termination Date except that the
first payment shall not be sooner than the eighth day following the date on which the Executive
delivers to the Company the release referred to in Section 7(b)(v)(F) below.

                         (D)    directly, or by reimbursing the Executive for, the monthly premium for continuation
coverage under the Company’s health and dental insurance plans, to the same extent that such
insurance is provided to persons currently employed by the Company, provided that the Executive
makes a timely election for such continuation coverage under COBRA. The “qualifying event” under
COBRA shall be deemed to have occurred on the Termination Date. The Company’s obligation under
this paragraph shall end 18 months after the Termination Date or at such earlier date as the
Executive becomes eligible for comparable coverage under another employer’s group coverage. The
Executive agrees to notify the Company promptly and in writing of any new employment and to make
full disclosure to the Company of the health and dental insurance coverage available to him through
such new employment.

                         (E)    directly, or by reimbursing the Executive for, the monthly premium to continue the life
insurance provided for in Section 6(b) for 18 months following the Termination Date.

                         (F)    The Company shall not be obligated to make the payments otherwise provided for in Sections
7(b)(v)(B), (C), (D) and (E) unless the Executive provides to the Company, and does not revoke, a
general release of claims in a form satisfactory to the Company.

                         (G)    The Company shall not be obligated to make the payments otherwise provided for in Sections
7(b)(v)(B), (C), (D) and (E) upon a good faith finding by the Board of a material breach of the
Confidentiality, Non-Competition/Non-Solicitation and Work Product Agreement incorporated by
Section 8 and the Executive shall return all previous payments made to him pursuant to Sections
7(b)(v)(B), (C), (D) and (E) after the date on which

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the Executive materially breached the Confidentiality, Non-Competition/Non-Solicitation and
Work Product Agreement incorporated by Section 8.

                             (H)    Notwithstanding any other provision with respect to the timing of payments under Sections
7(b)(v)(B), (C), (D) and (E), to the extent that the Executive is deemed to be a “key employee”
within the meaning of Code Section 416(i), any payments to which the Executive may become entitled
under Sections 7(b)(v)(B), (C), (D) and (E) will not commence until the first business day of the
seventh month following the Termination Date, at which time the Executive shall be paid an
aggregate amount equal to seven monthly payments otherwise due to the Executive under the terms of
Sections 7(b)(v)(B), (C), (D) and (E). Commencing on the first business day of the eighth month
following the Termination Date and continuing each month thereafter, the Executive shall be paid
the regular monthly payment otherwise due to the Executive in accordance with the terms of Sections
7(b)(v)(B), (C), (D) and (E).

                   (vi)    Resignation. The Executive may terminate this Agreement without Good
Reason upon thirty (30) days’ prior written notice to the Board. If the Executive’s employment
with the Company is terminated by the Executive without Good Reason, then the Company will pay the
Executive all Accrued Compensation earned through the Termination Date specified in the Notice of
Termination.

           (c)    Notice of Termination. Any purported termination by the Company or by
the Executive will be communicated by a written Notice of Termination to the other. For purposes
of this Agreement, a “Notice of Termination” means a notice which indicates the specific
termination provision in this Agreement relied upon and sets forth the Termination Date (as defined
below). For purposes of this Agreement, no purported termination of employment will be effective
without a Notice of Termination.

           (d)    Termination Date. “Termination Date” will mean (i) in the case of the
Executive’s Death, the Executive’s date of Death; (ii) if the Executive’s employment is terminated
for Disability, the date of the Executive’s Disability; (iii) if the Executive terminates his
employment, on the effective date of termination specified in the Notice of Termination; and (iv)
if the Executive’s employment is terminated for any other reason, the date specified in the Notice
of Termination, which will not be longer than seven (7) days after the Notice of Termination.

           (e)    Timing of Payment. The Accrued Compensation payable to the Executive as
provided in Sections 7(b)(i) — (vi) will be paid pursuant to applicable state law or within ten
(10) business days after the Executive’s Termination Date, whichever period is shorter. Any
deferred compensation will be paid to the Executive or his beneficiaries, as applicable, 60 days
after the Executive’s termination date. Any other compensation provided for in Section 7(b) will
be paid as set forth above.

           (f)    Mitigation. The Executive will not be required to mitigate the amount
of any payment provided for in this Agreement by seeking other employment or otherwise and no such
payment will be offset or reduced by the amount of any compensation or benefits provided to the
Executive in any subsequent employment other than as provided under Sections 7(b)(ii)(D) and 7(b)(v)(D).

11

 

             (g)    Other. The Executive’s entitlement to any other compensation or
benefits upon termination of Executive’s employment. will be determined in accordance with the
Company’s employee benefit plans and other applicable programs and practices then in effect.

     8.    Executive Covenants. As a condition of his continued employment with
the Company and in exchange for the consideration set forth in this Agreement and the consideration
provided by the Executive’s Restricted Stock Agreement dated May 27, 2005, the Executive
acknowledges and reaffirms his obligations under his Confidentiality,
Non-Competition/Non-Solicitation and Work Product Agreement dated May 27, 2005 and as amended from
time to time (the “Non-Competition Agreement”), which shall survive the termination of his
employment.

     9.    Accelerated Vesting Upon a Change in Control. If a Change in Control
occurs during the Term, then, effective upon the Change in Control:

             (a)    each outstanding option to purchase shares of Common Stock of the Company held by the
Executive shall become immediately exercisable in full and will no longer be subject to a right of
repurchase by the Company; and

             (b)    each outstanding restricted stock award shall be deemed to be fully vested and will no
longer be subject to a right of repurchase by the Company.

     10.    Treatment of Section 280G. If it is determined that the amounts
payable to the Executive under the Agreement, when considered together with any amounts payable to
the Executive in connection with a Change in Control, cause such payments to be treated as “excess
parachute payments” as defined under Code Section 280G (“Excess Parachute Payments”), and such
payments equal an amount that is at least equal to the product of (a) 3.3, multiplied by (b) the
“base amount” as defined under Code Section 280G (“Base Amount”), then the Company will make an
additional “gross up” payment to the Executive, which shall be in an amount sufficient to pay for
any additional tax imposed on the Executive pursuant to Code Section 4999 and any additional
interest or penalties imposed on the Executive with respect to such tax, plus the federal, state
and local taxes applicable to such additional “gross up” payment. Notwithstanding the foregoing,
if it is determined that the amounts payable to the Executive under the Agreement, when considered
together with any amounts payable to the Executive in connection with a Change in Control, will
cause such payments to be treated as Excess Parachute Payments, but such payments will equal an
amount which is less than the product of (x) 3.3, multiplied by (y) the Base Amount, then the
payments to the Executive under this Agreement will be reduced to the extent necessary so that no
additional tax will be imposed on the Executive pursuant to Code Section 4999.

     11.    Successors and Assigns.

             (a)    Successor to Company. The Company shall require any successor (whether
direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of
the business or assets of the Company expressly to assume and agree to perform this Agreement to
the same extent that the Company would be required to perform it if

12

 

no such succession had taken place. Failure of the Company to obtain an assumption of this
Agreement at or prior to the effectiveness of any succession shall be a breach of this Agreement
and shall constitute Good Reason if the Executive elects to terminate employment, except that for
purposes of implementing the foregoing, the date on which any such succession becomes effective
shall be deemed the Date of Termination. 

             (b)    Successor to the Executive. Neither this Agreement nor any right or
interest hereunder will be assignable or transferable by the Executive, his beneficiaries or legal
representatives, except by will or by the laws of descent and distribution. This Agreement will
inure to the benefit of and be enforceable by the Executive’s legal personal representative.

     12.    Arbitration. The Company and the Executive agree that they prefer to
arbitrate any dispute they may have instead of litigating in court before a judge or jury.
Therefore, any and all disputes, claims and controversies between the Company or any of its
Affiliates and the Executive arising out of or relating to this Agreement, or the breach thereof,
or otherwise arising out of or relating to the Executive’s employment or the termination thereof
will be resolved by binding arbitration in accordance with the National Rules for the Resolution of
Employment Disputes of the American Arbitration Association (or any comparable rules then in
existence). The arbitration will take place in the Boston, Massachusetts metropolitan area. The
arbitrator will have no authority to award punitive damages. The award of the arbitrator will be
final and judgment thereon may be entered in any court having jurisdiction. The parties will share
the costs of the arbitration equally, unless otherwise ordered by the arbitrator. Each party will
bear its own attorneys’ fees and costs. Judgment upon the arbitration award may be entered in any
federal or state court having jurisdiction. The parties understand and agree that EACH PARTY TO
THIS AGREEMENT WAIVES ANY RIGHT TO A JURY TRIAL.

     13.    Notice. For the purposes of this Agreement, notices and all other
communications provided for in the Agreement (including the Notice of Termination) will be in
writing and will be deemed to have been duly given when personally delivered or sent by certified
mail, return receipt requested, postage prepaid, addressed to the respective addresses last given
by each party to the other, provided that all notices to the Company will be directed to the
attention of the Board with a copy to the Secretary of the Company. All notices and communications
will be deemed to have been received on the date of delivery thereof or on the third business day
after the mailing thereof, except that notice of change of address will be effective only upon
receipt.

     14.    Non-exclusivity of Rights. Nothing in this Agreement will prevent or
limit the Executive’s continuing or future participation in any benefit, bonus, incentive or other
plan or program provided by the Company or any of its subsidiaries and for which the Executive may
qualify, nor will anything herein limit or reduce such rights as the Executive may have under any
other agreements with the Company or any of its subsidiaries. Amounts which are vested benefits or
which the Executive is otherwise entitled to receive under any plan or program of the Company or
any of its subsidiaries will be payable in accordance with such plan or program, except as
explicitly modified by this Agreement.

     15.    Miscellaneous. No provision of this Agreement may be modified, waived
or discharged unless such waiver, modification or discharge is agreed to in writing and signed by
the Executive and the Company. The Company and the Executive agree that they will negotiate

13

 

in good faith and jointly execute an amendment to modify this Agreement to the extent
necessary to comply with the requirements of Code Section 409A, or any successor statute,
regulation and guidance thereto; provided that no such amendment shall increase the total financial
obligation of the Company under this Agreement. No waiver by either party hereto at any time of
any breach by the other party hereto of, or compliance with, any condition or provision of this
Agreement to be performed by such other party will be deemed a waiver of similar or dissimilar
provisions or conditions at the same or at any prior or subsequent time. No agreement or
representations, oral or otherwise, express or implied, with respect to the subject matter hereof
have been made by either party which are not expressly set forth in this Agreement.

     16.    Governing Law. This Agreement will be governed by and construed and
enforced in accordance with the laws of the Commonwealth of Massachusetts without giving effect to
the conflict of law principles thereof. The Executive hereby irrevocably submits and acknowledges
and recognizes the jurisdiction of the courts of the Commonwealth of Massachusetts, or if
appropriate, a federal court located in Massachusetts (which courts, for purposes of this
Agreement, are the only courts of competent jurisdiction), over any suit, action or other
proceeding arising out of, under or in connection with this Agreement or the subject matter hereof.

     17.    Severability. The provisions of this Agreement will be deemed
severable and the invalidity or unenforceability of any provision will not affect the validity or
enforceability of the other provisions hereof.

     18.    Entire Agreement. This Agreement, and the Non-Competition Agreement,
the 2000 Stock Incentive Plan, the Restricted Stock Grant, the PolyMedica Corporation Executive
Savings Plan and the PolyMedica Corporation Employee Stock Purchase Plan constitute the entire
agreement between the parties hereto and supersede all prior agreements, understandings and
arrangements, oral or written, between the parties hereto with respect to the subject matter
hereof, including, but not limited to, the Prior Agreements.

     19.    Tax Consequences. The Company does not guarantee the tax treatment or
tax consequences associated with any payment or benefit arising under this Agreement.

[Remainder of Page Intentionally Left Blank]

14

 

     IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by its duly
authorized officer and the Executive has executed this Agreement as of the day and year first above
written.

	 	 	 	 	 
	 	 	PolyMedica Corporation

 	 
	 	  	/s/ Patrick T. Ryan
 	 
	 	 	Name:  	Patrick T. Ryan 	 
	 	 	Title:  	President and Chief Executive Officer 	 
	 
	 	 	Executive

 	 
	 	  	/s/ Stephen C. Farrell
 	 
	 	 	 	 
	 	 	 	 
	 

 

15exv10w1

 

EXHIBIT 10.1

2006 EXECUTIVE INCENTIVE COMPENSATION PLAN

SUMMARY

The following table describes (1) the 2006 target bonus amount for each of our executive officers,
expressed as a percentage of the executive’s annual base salary, (2) the performance metrics upon
which each executive’s 2006 bonus is based and (3) the amount of bonus allocated to each
performance metric.

	 	 	 	 	 	 	 
	Executive Officer
Name and Title

	 	2006 Target Bonus

(Percentage of
Executive’s Annual
Base Salary)
	 	Performance Metrics
upon which 2006 Bonus
is Based
	 
	 	 	 	 	 	 
	James C. Bandanza —
Senior Vice
President, Worldwide
Sales and Field
Operations

	 	 	100	%	 	50% of Mr. Bandanza’s
bonus is based on RSA
Security’s
achievement of its
2006 revenue goals,
and 50% consists of
commissions on sales
	 
	 	 	 	 	 	 
	Arthur W. Coviello,
Jr. — President and
Chief Executive
Officer

	 	 	125	%	 	All of Mr. Coviello’s
bonus is based on RSA
Security’s
achievement of its
2006 operating income
goals (as further
described below)
	 
	 	 	 	 	 	 
	William L. McQuaide —
Senior Vice
President, Enterprise
Products Division

	 	 	80	%	 	All of Mr. McQuaide’s
bonus is based on RSA
Security’s
achievement of its
2006 operating income
goals (as further
described below)
	 
	 	 	 	 	 	 
	Robert P. Nault —
Senior Vice President
and General Counsel

	 	 	80	%	 	All of Mr. Nault’s
bonus is based on RSA
Security’s
achievement of its
2006 operating income
goals (as further
described below)
	 
	 	 	 	 	 	 
	Vivian M. Vitale —
Senior Vice
President, Human
Resources

	 	 	80	%	 	All of Ms. Vitale’s
bonus is based on RSA
Security’s
achievement of its
2006 operating income
goals (as further
described below)
	 
	 	 	 	 	 	 
	Richard B. Welch —
Senior Vice
President, Developer
Solutions Division

	 	 	80	%	 	70% of Mr. Welch’s
bonus is based on our
Developer Solutions
Division’s
achievement of its
2006 revenue goal,
and 30% is based on
RSA Security’s
achievement of its
2006 operating income
goals (as further
described below)
	 
	 	 	 	 	 	 
	Gerard H. Wilson —
Senior Vice President
and Chief Information
Officer

	 	 	80	%	 	All of Mr. Wilson’s
bonus is based on RSA
Security’s
achievement of its
2006 operating income
goals (as further
described below)
	 
	 	 	 	 	 	 
	John D. Worrall —
Senior Vice
President, Marketing

	 	 	80	%	 	All of Mr. Worrall’s
bonus is based on RSA
Security’s
achievement of its
2006 operating income
goals (as further
described below)

5

 

     With respect to executive bonuses that are based, either wholly or partially, on RSA
Security’s achievement of its 2006 operating income goals, our Compensation Committee will
determine the actual amount of the 2006 bonuses payable to our executive officers as follows:

	 	•	 	If RSA Security achieves less than 100% of the Base Operating Income set forth in
our 2006 operating plan for the fiscal year ending December 31, 2006, then none of our
executive officers will receive the portion of his or her target bonus that is based on
RSA Security’s operating income.
	 
	 	•	 	If RSA Security achieves 100% of the Base Operating Income set forth in our 2006
operating plan for the fiscal year ending December 31, 2006, then each executive
officer will receive 75% of the portion of his or her target bonus that is based on RSA
Security’s operating income.
	 
	 	•	 	If RSA Security achieves 100% of the Target Operating Income set forth in our 2006
operating plan for the fiscal year ending December 31, 2006, then each executive
officer will receive 100% of the portion of his or her target bonus that is based on
RSA Security’s operating income.
	 
	 	•	 	If RSA Security achieves 110% of the Target Operating Income set forth in our 2006
operating plan for the fiscal year ending December 31, 2006, then each executive
officer will receive 120% of the portion of his or her target bonus that is based on
RSA Security’s operating income.
	 
	 	•	 	If RSA Security achieves 120% or more of the Target Operating Income set forth in
our 2006 operating plan for the fiscal year ending December 31, 2006, then each
executive officer will receive 140% of the portion of his or her target bonus that is
based on RSA Security’s operating income.

     In addition, the Compensation Committee may allocate up to approximately $500,000 for
discretionary bonuses payable to the executive officers listed above. Discretionary bonuses, if
any, will be based on each executive’s individual performance during 2006. In determining the
amount of discretionary bonuses payable to executive officers other than Mr. Coviello, the
Compensation Committee will consider the recommendations of Mr. Coviello. The total discretionary
bonus payable to each individual executive officer may not exceed 30% of his or her total target
bonus. In addition, it is the current intention of the Compensation Committee that no discretionary
bonuses will be paid to executive officers if the Company achieves 100% of the Target Operating
Income metric described above.

     For purposes of determining achievement of targets under the 2006 executive incentive
compensation plan, corporate operating income is calculated on a Non-GAAP basis to exclude the
effects of restructuring charges, bonus accruals and the expensing of share-based payments to
employees as required under FAS 123R. The Compensation Committee will make the final determination
as to whether RSA Security has achieved the Base Operating Income or Target Operating Income
metrics for the fiscal year ending December 31, 2006. The Compensation Committee reserves the
right in its discretion to adjust the financial measures upon which executive bonuses are based in
the event RSA Security engages in an extraordinary corporate transaction, such as an acquisition,
during the year.

6

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