Document:

Exhibit
10.77

 

CHANGE-IN-CONTROL
AGREEMENT

FOR CERTAIN EXECUTIVES

OF DISCOVERY PARTNERS INTERNATIONAL, INC.

JULY
2003

 

PERSONAL
AND CONFIDENTIAL

 

Douglas Livingston

Senior Vice President and General Manager

of Discovery Chemistry

Discovery Partners International, Inc.

9640 Towne Centre Drive

San Diego, CA 92121

 

Dear Doug:

 

Discovery Partners
International, Inc.  (the “Company”)
considers it essential to the best interests of its stockholders to foster the
continued employment of key management personnel.  In this connection, the Board of Directors of the Company (the
“Board”) recognizes that the possibility of a change in ownership or control of
the Company may result in the departure or distraction of such personnel to the
detriment of the Company and its stockholders. 
As you are a skilled and dedicated executive with important management
responsibilities and talents, the Company believes that its best interests will
be served if you are encouraged to remain with the Company.

 

The Company has
determined that your ability to perform your responsibilities and utilize your
talents for the benefit of the Company, and the Company’s ability to retain you
as an employee, will be significantly enhanced if you are provided with fair
and reasonable protection from the risks of a change in ownership or control of
the Company.  Accordingly, in order to
induce you to remain in the employ of the Company, you and the Company agree as
follows:

 

1.     TERM OF
AGREEMENT.

 

(a)    GENERALLY. 
Except as provided in Section 1(b) hereof, (i) this Agreement shall
be effective immediately and shall continue in effect through December 31, 2004
and (ii) commencing on January 1, 2005 and each January 1 thereafter, this
Agreement shall be automatically extended for one additional year unless, not
later than September 30th of the preceding year, either party to
this Agreement gives notice to the other that the Agreement shall not be
extended under this Section 1(a); provided, however, that no such notice by the
Company shall be effective if a Change in Control (as defined herein) shall
have occurred within 18 months before the date of such notice.

 

1

 

(b)   UPON
A CHANGE IN CONTROL.  If a Change in
Control shall have occurred at any time during the period in which this
Agreement is effective, this Agreement shall continue in effect for 365 days
beyond the date on which such Change in Control occurred (such 365-day period
hereinafter referred to as the “Protected Period”).

 

2.     “CHANGE IN
CONTROL” DEFINED.  A “Change in Control”
shall be deemed to have occurred if, during the term of this Agreement:

 

(a)   any
Person becomes the beneficial owner, directly or indirectly, of securities of
the Company representing 15% or more of the combined voting power of the
Company’s then-outstanding securities. 
“Person” has the same meaning as in section 13(d) or 14(d) of the
Securities Exchange Act.  However, for
purposes of this Section 2(a), “Person” does not

include—

 

(A)                              Applera
Corp.,

 

(B)                                any
Applera Corp. transferee which is subject to the Standstill Agreement between
the Company and Axys Pharmaceuticals, Inc. (a “New Holder of Axys’ Shares”),

 

(C)                                any
trustee or other fiduciary holding securities under an employee benefit plan of
the Company, or

 

(D)                               any
company owned, directly or indirectly, by the stockholders of the Company in
substantially the same proportions as their ownership of stock of the Company);

 

(b)   during
any period of 24 months or less (not including any period before the effective
date of this Agreement), individuals who at the beginning of such period
constitute the Board, and any Approved New Directors, cease for any reason to
constitute at least a majority of the Board. 
“Approved New Directors” means new director(s) whose election by the
Board or nomination for election by the Company’s stockholders was approved in
advance by a vote of at least two-thirds (2/3) of the directors then still in
office who either were directors at the beginning of the period or who were
themselves Approved New Directors. 
However, the following persons cannot be Approved New Directors—

 

(A)                              a
director nominated by a Person who has entered into an agreement with the
Company to effect a transaction described in Sections 2(a), (c) or
(d) of this Agreement,

 

(B)                                a
director nominated by any Person who publicly announced an intention to take or
to consider taking actions (including, but not limited to, an actual or
threatened proxy contest) which if consummated would constitute a Change in
Control,

 

(C)                                a
director nominated by any Person (other than Applera Corp. or a New Holder of
Axys’ Shares) who is the beneficial owner, directly or indirectly, of
securities of

 

2

 

the Company representing
10% or more of the combined voting power of the Company’s securities, or

 

(D)                               a
director nominated by Applera Corp. (or a New Holder of Axys’ Shares) above and
beyond the number of directors which Applera Corp. (or the New Holder of Axys’
Shares) would be entitled to nominate under the current terms of the Standstill
Agreement between the Company and Axys Pharmaceuticals, Inc.;

 

(c)   the
stockholders of the Company approve any transaction or series of transactions
under which the Company is merged or consolidated with any other company in a Merger.  A “Merger” means any merger or consolidation
except one—

 

(A)                              which
would result in the voting securities of the Company outstanding immediately
prior thereto continuing to represent (either by remaining outstanding or by
being converted into voting securities of the surviving entity) more than
66-2/3% of the combined voting power of the voting securities of the Company or
such surviving entity outstanding immediately after such merger or
consolidation, and

 

(B)                                after
which no Person holds 15% or more of the combined voting power of the
then-outstanding securities of the Company (if it is the surviving parent) or
such surviving entity – provided, that Applera Corp. or a New Holder of Axys’
Shares shall not be deemed such a 15% holder unless after such merger or
consolidation it holds at least 37% of such combined voting power.

 

If consummation of
a Merger is subject, at the time of such approval by stockholders, to the
consent of any government or governmental agency or approval of the
stockholders of another entity or other material contingency, no Change in
Control shall occur until such time as such consent and approval has been
obtained and any other material contingency has been satisfied or waived;

 

(d)   the
stockholders of the Company approve a plan of complete liquidation of the
Company or an agreement for the sale or disposition by the Company of all or
substantially all of the Company’s assets; provided, however, that, if
consummation of the transaction referred to in this Section 2(d) is subject, at
the time of such approval by stockholders, to the consent of any government or
governmental agency or approval of the stockholders of another entity or other
material contingency, no Change in Control shall occur until such time as such
consent and approval has been obtained and any other material contingency has
been satisfied or waived; or

 

(e)   the
Board adopts a resolution to the effect that, for purposes of this Agreement, a
Change in Control has occurred, provided that the Board may impose limitations
on the effects of a Change in Control or the payment of amounts or benefits
under this Agreement if the

 

3

 

Change in Control has occurred under this Section 2(e) and
not under other subsections of this Section 2.

 

3.     TERMINATION.

 

(a)   TERMINATION
BY THE COMPANY FOR CAUSE, BY YOU WITHOUT GOOD REASON, OR BY REASON OF DEATH OR
DISABILITY.  If during the Protected
Period your employment by the Company is terminated by the Company for Cause,
by you without Good Reason, or because of your death or Disability, the Company
shall be relieved of its obligation to make any payments to you other than
(i) its payment of amounts otherwise accrued and owing but not yet paid
and (ii) any amounts payable under then-existing employee benefit programs
at the time such amounts are due.

 

(b)   TERMINATION
BY THE COMPANY WITHOUT CAUSE OR BY YOU FOR GOOD REASON.  If during the Protected Period your
employment by the Company is terminated by the Company without cause or by you for
Good Reason, you shall be entitled to the compensation and benefits described
in this Section 3(b).  If your
employment by the Company is terminated prior to a Change in Control at the
request of a Person engaging in a transaction or series of transactions that
would result in a Change in Control, the Protected Period shall commence upon
the subsequent occurrence of a Change in Control, your actual termination shall
be deemed a termination occurring during the Protected Period and covered by
this Section 3(b), your Date of Termination shall be deemed to have occurred
immediately following the Change in Control, and Notice of Termination shall be
deemed to have been given by the Company immediately prior to your actual
termination.  Your continued employment
shall not constitute consent to, or a waiver of rights with respect to, any
circumstances constituting Good Reason hereunder.  The compensation and benefits provided under this Section 3(b)
are as follows:

 

(i)            The Company shall pay you your full
base salary through the Date of Termination at the rate in effect at the time
Notice of Termination is given, no later than the fifth day following the Date
of Termination, and you shall receive all other amounts to which you are
entitled under any compensation or benefit plan of the Company, at the time
such payments are due.

 

(ii)           At the time specified in Section 3(d)
hereof, the Company shall pay you, in lieu of any further salary, bonus or
severance payments for periods subsequent to the Date of Termination, a lump
sum amount in cash equal to the sum of:

 

(A)                              (i) your
average bonus for the three prior full calendar years of employment with the
Company (or such lesser number of full calendar years during which you were
employed by the Company), times (ii) the number of days in the calendar
year through the Date of Termination, divided by (iii) 365; and

 

4

 

(B)                                the
greater of 100 percent of (i) your annual base salary in effect
immediately prior to the Change in Control of the Company or (ii) your
annual base salary in effect at the time Notice of Termination is given.

 

(iii)          For purposes of determining the
vesting of any awards made to you under the Company’s 2000 Stock Incentive
Plan, as well as any unvested shares of Company Stock you acquired pursuant to
any awards made under that plan, you shall be treated as if you had completed
an additional 12 months of service immediately before the date on which your
employment is terminated.

 

(c)   LIMITATION
ON BENEFIT.  The payment of your benefit
under this Agreement shall be subject to the following rules:

 

(i)            In the event that the benefits that
you would receive that are unassociated with this Agreement (“Unrelated
Benefits”) would be sufficient in size and nature to trigger adverse tax
consequences under the golden parachute rules of Code Sections 280G and 4999
(“Section 280G Threshold”), then you will not receive any benefits under this
Agreement (“Related Benefits”);

 

(ii)           In the event that the sum of your
Unrelated Benefits and your Related Benefits would be less than the Section
280G Threshold, then you will receive the total amount of your Related
Benefits; and

 

(iii)          In the event that the sum of your
Unrelated Benefits and your Related Benefits would exceed the Section 280G
Threshold, then the amount of your Related Benefit will be reduced to the
minimum extent necessary to avoid reaching that limit.  For this purpose, your benefit under Section
3(b)(ii) (“Cash Payment”) shall be reduced first, so that your benefit under
Section 3(b)(iii) (“Stock Acceleration Benefit”) will be reduced only after
your Cash Payment benefit has been completely eliminated.

 

(d)   TIME OF PAYMENT.  The cash payments provided for in Section 3(b)(ii) shall be made
not later than the 30th day following the Date of Termination;
provided, however, that if the amount of such payments cannot be finally
determined on or before such day, the Company shall pay to you on such day an
estimate, as determined in good faith by the Company, of the minimum amount of
such payments and shall pay the remainder of such payments (together with
interest at the rate provided in Section 1274(b)(2)(B) of the Code) as soon as
the amount thereof can be determined. 
In the event that the amount of the estimated payments exceeds the
amount subsequently determined to have been due, such excess shall constitute a
loan by the Company to you, payable on the 15th day after the demand
by the Company (together with interest at the rate provided in Section
1274(b)(2)(B) of the Code).

 

(e)   NOTICE.  During the Protected Period, any purported
termination of your employment by the Company or by you shall be communicated
by written Notice of Termination to the other party hereto.

 

5

 

(f)    CERTAIN
DEFINITIONS.  Except as otherwise
indicated in this Agreement, all definitions in this Section 3(f) shall be
applicable during the Protected Period only.

 

(i)            Disability.  “Disability” shall mean your absence from
the full-time performance of your duties with the Company for six consecutive
months as a result of your incapacity due to physical or mental illness or
disability, and within 30 days after written Notice of Termination is
thereafter given you shall not have returned to the full-time performance of
your duties.

 

(ii)           Cause.  “Cause” for termination shall be determined by the Company based
on the Board’s reasonable belief that one or more of the following has
occurred: (A) your indictment or conviction of any felony or of any crime
involving dishonesty; (B) your participation in any fraud against the Company;
(C) breach of your duties to the Company, whether arising under this Agreement
or by operation of law, provided that the Company has given advance written
notice to you for at least 30 days and you have not cured such breach to the
satisfaction of the Board within said 30-day period; (D) your intentional
damage to any property of the Company; or (E) conduct by you or lack of
performance which in the good faith and reasonable determination of the Board
demonstrates unfitness to serve.

 

(iii)          Good Reason.  “Good Reason” shall mean, without your express written consent,
the occurrence upon or after a Change in Control of any of the following
circumstances unless, in the case of Sections 3(f)(iii)(A), (B), (F) or (G)
hereof, such circumstances are fully corrected prior to the Date of Termination
specified in the Notice of Termination given in respect thereof:

 

(A)                              the
assignment to you of any duties inconsistent with the position in the Company
that you held immediately prior to the Change in Control or an adverse
alteration in the nature or status of your responsibilities or the conditions
of your employment from those in effect immediately prior to such Change in
Control;

 

(B)                                your
title is changed to a title that, under customary practice within the
biotechnology industry within the state in which the Company’s principal
offices are located at the date of such reduction, would be considered to be a
lower-level title than your title immediately prior to the Change in Control;

 

(C)                                a
reduction by the Company in your annual base salary, any target bonus or
perquisites as in effect immediately prior to the Change in Control or as the
same may be increased from time to time except for overall reductions in
benefits in which you are treated proportionately given your position, length
of service, income and other relevant factors customary within the
biotechnology industry within the state in which the Company’s principal
offices are located at the date of such reduction;

 

6

 

(D)                               the
relocation of the principal place of your employment to a location more than 35
miles from the location of such place of employment on the date of this
Agreement; except for required travel on the Company’s business to an extent
substantially consistent with your business travel obligations prior to the
Change in Control;

 

(E)                                 the
failure by the Company to pay to you any portion of your compensation or to pay
to you any portion of an installment of deferred compensation under any
deferred compensation program of the Company within seven days of the date such
compensation is due;

 

(F)                                 the
failure by the Company to continue in effect any material compensation or
benefit plan in which you participated immediately prior to the Change in
Control, unless an equitable arrangement (embodied in an ongoing substitute or
alternative plan) has been made with respect to such plan, or the failure by
the Company to continue your participation therein (or in such substitute or
alternative plan) on a basis not materially less favorable, both in terms of
the amounts of benefits provided and the level of your participation relative
to other participants, as existed at the time of the Change in Control; or

 

(G)                                the
failure of the Company to obtain a satisfactory agreement from any successor to
assume and agree to perform this Agreement, as contemplated in Section 6
hereof.

 

(iv)          Notice of Termination.  “Notice of Termination” shall mean notice
indicating the specific termination provision in this Agreement relied upon and
setting forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination of your employment under the provision so
indicated.

 

(v)           Date of Termination.  “Date of Termination” shall mean (A) if your
employment is terminated for Disability, 30 days after Notice of Termination is
given (provided that you shall not have returned to the full-time performance
of your duties during such 30-day period) or (B) if your employment is
terminated for any other reason, the date specified in the Notice of
Termination (which, in the case of a termination for Cause, shall not be less
than 30 days from the date such Notice of Termination is given — provided, that
in its discretion the Company may relieve you of all your employment
responsibilities for all or any part of the interim period — and, in the case
of a termination for Good Reason, shall not be less than 15 nor more than 60
days from the date such Notice of Termination is given).

 

4.     MITIGATION.  You shall not be required to mitigate the amount of payment
provided for under this Agreement by seeking other employment or otherwise, nor
shall the amount of payment or benefit provided for under this Agreement be
reduced by any compensation earned by you as the result of employment by
another employer, by retirement benefits, by offset against any amount claimed
to be owed by you to the Company, or otherwise.

 

7

 

5.     COSTS OF PROCEEDINGS.  If any suit or other proceeding is brought
for the enforcement or interpretation of this Agreement, or because of any
alleged dispute, breach, default or misrepresentation in connection with any of
the provisions of this Agreement, the successful or prevailing party shall be
entitled to recover, from the other party, reasonable attorneys’ fees and other
costs incurred in that suit or proceeding, in addition to any other relief to
which such party may be entitled.  The
Court shall determine which party is, under all the circumstances, the
“successful or prevailing party,” all in accordance with the principles and
provisions of California Civil Code Section 1717.  The Company shall pay prejudgment interest on any money judgment
obtained by you as a result of such proceeding, calculated at the prime rate of
Wells Fargo Bank as in effect from time to time from the date that payment
should have been made to you under this Agreement.

 

6.     SUCCESSORS;
BINDING AGREEMENT.

 

(a)   SUCCESSOR
TO COMPANY TO ASSUME OBLIGATIONS.  The
Company shall require any successor (whether direct or indirect, by purchase,
merger, consolidation or otherwise) to all or substantially all of the business
and/or assets of the Company to expressly assume and agree to perform this
Agreement in the same manner and to the same extent that the Company would be
required to perform it if no such succession had taken place.  As used in this Agreement, “Company” shall
mean the Company as hereinbefore defined and any successor to its business
and/or assets as aforesaid which assumes and agrees to perform this Agreement
by operation of law, or otherwise.

 

(b)   EMPLOYEE’S
SUCCESSORS.  This Agreement shall inure
to the benefit of and be enforceable by you and your personal or legal
representatives, executors, administrators, successors, heirs, distributees,
devisees and legatees.  In the event of
your death, all amounts otherwise payable to you hereunder shall, unless
otherwise provided herein, be paid in accordance with the terms of this Agreement
to your devisee, legatee or other designee or, if there is no such designee, to
your estate.

 

7.     NOTICE. 
Notices and all other communications provided for in this Agreement
shall be in writing and shall be deemed to have been duly given when (a) personally
delivered or (b) mailed by United States certified or registered mail,
return receipt requested, postage prepaid, addressed to the respective
addresses set forth on the first page of this Agreement; provided that all
notice to the Company shall be directed to the attention of the Board with a
copy to the General Counsel of the Company (or, if there is no General Counsel,
then to the Company’s primary outside attorney as identified in the Company’s
most recent Annual Report), or to such other address as either party may have
furnished to the other in writing in accordance herewith, except that notice of
change of address shall be effective only upon receipt.

 

8.     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 you and such officer as may be designated by the
Board.  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

 

8

 

of this
Agreement to be performed by such other party shall be deemed a waiver of
similar or dissimilar provisions or conditions at the time or at any prior or
subsequent time.  The validity,
interpretation, construction and performance of this Agreement shall be
governed by the laws of the State of California without regard to its conflicts
of law principles.  All references to
sections of the Securities Exchange Act or the Code shall be deemed also to
refer to any successor provisions to such sections.  Any payments provided for hereunder shall be paid net of any
applicable withholding required under federal, state or local law.  The obligations of the Company and/or you
under this Agreement shall survive the expiration of this Agreement to the
extent necessary to give effect to this Agreement.

 

9.     VALIDITY. 
The invalidity or unenforceability of any provision of this Agreement
shall not affect the validity or enforceability of any other provision of this
Agreement, which shall remain in full force and effect.

 

10.   COUNTERPARTS.  This Agreement may be executed in counterparts, each of which
shall be deemed to be an original but all of which together will constitute one
and the same instrument.

 

11.   ENTIRE AGREEMENT.  This Agreement sets forth the entire agreement of the parties
hereto in respect of the subject matter contained herein and during the term of
this Agreement supersedes the provisions of all prior agreements, promises,
covenants, arrangements, communications, representations or warranties, whether
oral or written, by any officer, employee or representative of any party hereof
with respect to the subject matter contained herein, including, without
limitation, the Change in Control Agreement entered into between the parties
hereto on July17, 2003, which is replaced in its entirety by this
Agreement.  The parties hereto agree
that (a) the subject matter of this Agreement is limited to the parties’ rights
and obligations in the event that you are terminated by the Company during the
Protected Period following a Change of Control or otherwise in connection with
a Change of Control as provided for by Section 3(b), (b) this
Agreement does not apply to any termination by the Company of you that does not
occur during the Protected Period following a Change of Control or that is not
otherwise in connection with a Change of Control and provided for by
Section 3(b), and (c) with respect to any termination by the Company of
you that does not occur during the Protected Period following a Change of
Control or that is not otherwise in connection with a Change of Control and
provided for by Section 3(b), the provisions of any prior agreements,
promises, covenants, arrangements, communications, representations or
warranties, whether oral or written, between the parties will apply to the
extent applicable and legally enforceable. 
No agreements 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. 
Notwithstanding anything to the contrary in this Agreement, the
procedural provisions of this Agreement shall apply to all benefits payable as
a result of a Change in Control (or other change in control) under any employee
benefit plan, agreement, program, policy or arrangement of the Company, unless
ERISA or the tax qualifications thereof require otherwise.

 

9

 

If this letter
sets forth our agreement on the subject matter hereof, kindly sign and return
to the Company the enclosed copy of this letter, which will then constitute our
agreement on this subject.

 

 

	
   

  	
   

  	
  DISCOVERY
  PARTNERS INTERNATIONAL, INC.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
  Riccardo
  Pigliucci

  	
   

  
	
   

  	
   

  	
  Chairman
  and Chief Executive Officer

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Agreed to
  this          day
  of                                 ,
  2003.

  

 

 

	
  EMPLOYEE

  
	
   

  
	
   

  	
   

  
	
   

  
	
  Douglas Livingston

  
	
  Senior Vice President and General Manager

  
	
  of Discovery Chemistry

  

 

10Exhibit
4.1

 

PROMISSORY NOTE

	
   

  	
   

  	
  Columbus,
  Ohio, U.S.A

  
	
  U.S.$770,000

  	
   

  	
  Date:
  April 16, 2003

  

 

FOR VALUE
RECEIVED, the
undersigned, Quality Products, Inc., a Delaware corporation, with offices at 2222
S. Third St., Columbus, Ohio 43207-2402,
(“Borrower”) promises to pay to the order of Richard A. and Clare F.
Drexler as joint tenants with rights of survivorship, Dan L. Drexler, Jason
Drexler, Theodore P. Schwartz, Eleanor Metnick and Nicole E. Drexler as joint
tenants with rights of survivorship, RD&J Corporation, Dale S. Drexler
Living Trust, Karen K. Hart, and Alyce A. Lazar Declaration of Trust Dated
September 24, 1992 (the “Lenders”) their portion (as listed in Exhibit A to
this note) of the principal sum of seven
hundred seventy thousand and no/100 United States dollars (U.S.$770,000) and
interest on the outstanding principal balance from the date hereof at the rate
of 8% per annum simple
interest.

 

Security Agreement and Guarantee –
As of April 16, 2003, Borrower and its subsidiaries, QPI Multipress, Inc., an
Ohio corporation, and Columbus Jack Corporation, an Ohio corporation
(collectively the “Guarantors”) have entered into a separate Security Agreement
with Lenders securing payment of this Note and QPI Multipress, Inc., and
Columbus Jack Corporation have entered into a separate Guarantee of this Note.

 

Definition of Holder -
Jason Drexler shall be the Holder of this note on behalf of the Lenders.  Lenders agree to act through Jason Drexler
as their agent.  Borrower shall consider
Jason Drexler as the duly appointed agent for the Lenders with the sole right
to act as the Holder of the Note unless and until he is replaced by a writing
signed by all Lenders and delivered to Borrower.  Upon final payment of monies owed to Mr. Schwartz under this
Note, he shall no longer be a Lender.

 

Payment Schedule - The principal amount of this note shall be
payable in fifty nine (59) equal installments as follows: U.S. $12,833.33 on the last day of each month commencing April
30, 2003 with the final installment of the remaining amount due and payable on
March 31, 2008 upon Holder’s presentation of this Note for final payment.  Accrued interest under this note shall be
payable with each installment of principal. 
Borrower shall divide the monthly installment into a separate check
for each Lender.  Each check shall
contain the interest due on each Lender’s share of this Note plus such Lender’s
proportionate share of the principal payment then due.  All payments made shall be applied first to
accrued interest and only thereafter to reduction of the principal
balance.  Initially, Borrower shall pay
all principal paid under this Note to Theodore P. Schwartz until Borrower has
paid Mr. Schwartz’ share of the principal in full.  Thereafter, principal payments shall be apportioned in accordance
with each Lender’s share of the remaining amount due on this Note.

 

Default - If any
of the following events shall occur, the outstanding principal balance of this
note together with accrued interest thereon shall, on demand by the Holder of
this note, be due and payable: (a) any amount owing under this note is not paid
within ten (10) calendar days of the date due; (b) a default under any other
provision of this note or under any guarantee or the agreement providing
security for the payment of this note; (c) a breach of any representation or
warranty under this note or under any such guarantee or security agreement; (d)
the liquidation or dissolution of the undersigned corporation or one of the two
Guarantors who are also providing security for the payment of this note; (e)
the sale of a material portion of the business and assets of the undersigned or
any Guarantor; (f) the filing of a petition under any bankruptcy, insolvency or
similar law by the undersigned or by any Guarantor; (g) the making of any
assignment for the benefit of creditors by the undersigned or by any Guarantor;
(h) the filing of a petition

 

1

 

under any bankruptcy, insolvency, or similar law
against Borrower or against any Guarantor and such petition not being dismissed
within a period of thirty (30) days of the filing.

 

Default Interest - The outstanding balance of any amount owing
under this note, which is not paid when due shall bear interest at the rate of
ten percent (10%) per annum, compounded daily.

 

Usury Clause -
Notwithstanding any other provision of this note, interest under this note
shall not exceed the maximum rate permitted by law; and if any amount is paid
under this note as interest in excess of such maximum rate, then the amount so
paid will not constitute interest but will constitute a prepayment on account
of the principal amount of this note. 
If at any time the interest rate under this note would, but for the
provision of the preceding sentence, exceed the maximum rate permitted by law,
then the outstanding principal balance of this note shall, on demand by the
Holder of this note, become and be due and payable.

 

Where to Make Payments - All payments of principal and interest shall be
made in lawful currency of the United States of America in immediately
available funds at the addresses listed in Exhibit A for each Lender, or in
such other manner or at such other place as the Holder of this note designates
in writing.

 

Defenses, Set-offs, and Counterclaims - All payments under this note shall be made
without defense, set-off, or counterclaim, free and clear of and without
deduction for any taxes of any nature now or hereafter imposed.

 

Expenses - The
undersigned agrees to pay on demand (i) all reasonable expenses (including,
without limitation, legal fees and disbursements) incurred in connection with
negotiating and preparing this note and any documents in connection with this
note, and (ii) all reasonable expenses of collecting and enforcing this note
and any guarantee or obtaining control over and selling any collateral securing
this note, including, without limitation, expenses and fees of legal counsel,
court costs, and the cost of appellate proceedings.

 

Governing Law - This
note and the obligations of the undersigned shall be governed by and construed
in accordance with the law of the State of Ohio, U.S.A.

 

Waiver of
Presentment, Etc. - The
undersigned waives presentment for payment (except for payment of the final
installment), demand, protest, and notice of protest and of non-payment.

 

Delay; Waiver - The
failure or delay by the Holder of this note in exercising any of Lenders’
rights hereunder in any instance shall not constitute a waiver thereof in that
or any other instance.  The Holder of
this note may not waive any of Lenders’ rights except by an instrument in
writing signed by the Holder.

 

2

 

Prepayment - The
undersigned may prepay all or any portion of the principal of this note at any
time and from time to time without premium or penalty.  Any such prepayment shall be applied against
the installments of principal due under this note in the inverse order of their
maturity and shall be accompanied by payment of accrued interest on the amount
prepaid to the date of prepayment.

 

Amendment - This
note may not be amended without the written approval of the Holder.

 

	
  Date: April 16, 2003

  	
  QUALITY PRODUCTS, INC.

  
	
   

  	
   

  
	
   

  	
   

  	
  By:

  	
  /s/ Tac D. Kensler

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Chief Financial Officer

  	
   

  
	
   

  	
   

  	
  Name and Title

  	
   

  

 

3

 

Exhibit A - Identification of Lenders
 

	Name
	 
	Note Amount
	 

	Richard A. and Clare F. Drexler as joint tenants with rights of survivorship
	 
	$
	300,000
	 

	Dan L. Drexler
	 
	$
	100,000
	 

	Jason I. Drexler
	 
	$
	200,000
	 

	Theodore P. Schwartz
	 
	$
	25,000
	 

	Eleanor Metnick and Nicole E. Drexler as joint tenants with rights of survivorship
	 
	$
	25,000
	 

	RD&J Corporation
	 
	$
	25,000
	 

	Dale S. Drexler Living Trust U/A March 15, 1999 Dale S. Drexler, Trustee
	 
	$
	25,000
	 

	Karen K. Hart
	 
	$
	20,000
	 

	Alyce A. Lazar Declaration of Trust dated September 24, 1992
	 
	$
	50,000
	 

	TOTAL
	 
	$
	770,000.00
	 

 
4

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