Exhibit 10.1

 

STOCK PURCHASE AGREEMENT

 

by and among

 

NATURAL ALTERNATIVES INTERNATIONAL, INC.,

 

WILLIAM H. BUNTEN II AND/OR ELIZABETH W. BUNTEN,

AS THE TRUSTEES OF THE BUNTEN FAMILY

TRUST DATED APRIL 14, 2001,

 

JOHN DULLEA AND CAROLYN A. DULLEA, AS THE

TRUSTEES OF THE JOHN F. AND CAROLYN A. DULLEA

TRUST DATED JUNE 20, 2001,

 

LINCOLN FISH, and

 

MICHAEL L. IRWIN, AS TRUSTEE OF THE MICHAEL L. IRWIN

TRUST u/t/a JUNE 25, 1991

 

December 5, 2005

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TABLE OF CONTENTS

 

     Page

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1.   Definitions

   1

2.   Sale and Transfer of Shares; Closing

   9

2.1       Shares

   9

2.2       Purchase Price

   9

2.3       Closing

   9

2.4       Closing Obligations

   9

3.   Representations and Warranties of Sellers

   11

3.1     Organization and Good Standing

   12

3.2     Authority; No Conflict

   13

3.3     Capitalization

   13

3.4     Financial Statements

   14

3.5     Books and Records

   14

3.6     Title to Properties; Encumbrances

   14

3.7     Condition and Sufficiency of Assets

   15

3.8     Accounts Receivable

   15

3.9     Inventory

   15

3.10   No Undisclosed Liabilities

   16

3.11   Taxes

   16

3.12   No Material Adverse Change

   16

3.13   Employee Benefits

   17

3.14   Compliance with Legal Requirements; Governmental Authorizations

   17

3.15   Legal Proceedings; Orders

   18

3.16   Absence of Certain Changes and Events

   19

3.17   Contracts; No Defaults

   20

3.18   Insurance

   21

3.19   Environmental Matters

   22

3.20   Employees

   23

3.21   Labor Relations; Compliance

   23

3.22   Intellectual Property

   23

3.23   Certain Payments

   25

3.24   Disclosure

   25

3.25   Relationships with Related Persons

   25

3.26   Brokers or Finders

   26

4.   Representations and Warranties of NAI

   26

4.1     Organization and Good Standing

   26

4.2     Authority; No Conflict

   26

4.3     Capitalization.

   27

4.4     Issuance of NAI Stock

   27

4.5     Investment Intent

   27

4.6     Certain Proceedings

   27

4.7     Disclosure

   28

4.8     Brokers or Finders

   28

4.9     SEC Reporting and Compliance

   28

4.10   Financial Statements

   28

 

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5.   Conditions Precedent to NAI's Obligation to Close

   29

5.1     No Errors, etc

   29

5.2     Compliance with Agreement

   29

5.3     Consents

   29

5.4     No Breach

   29

5.5     Opinion of Sellers’ Counsel

   29

5.6     Evidence of Good Standing

   29

5.7     Payment of Sellers’ Indebtedness

   30

5.8     No Restraining Action

   30

5.9     No Claim Regarding Stock Ownership or Sale Proceeds

   30

5.10   No Prohibition

   30

5.11   Additional Documents

   30

6.   Conditions Precedent to Sellers’ Obligation to Close

   30

6.1     No Errors, etc.

   30

6.2     Compliance with Agreement

   30

6.3     Consents

   30

6.4     No Breach

   31

6.5     Evidence of Good Standing

   31

6.6     No Restraining Action

   31

6.7     No Prohibition

   31

6.8     Additional Documents

   31

7.   Termination

   31

7.1     Termination Events

   31

7.2     Effect of Termination

   32

8.   Indemnification; Remedies

   32

8.1     Survival

   32

8.2     Notice as to Breach

   32

8.3     Indemnification and Payment of Damages by Sellers

   33

8.4     Indemnification and Payment of Damages by NAI

   33

8.5     Escrow; Right of Set-Of

   34

8.6     Procedure for Indemnification – Third Party Claims

   34

8.7     Procedure for Indemnification – Other Claims

   35

8.8     Limitations on Liability

   35

9.   General Provisions

   36

9.1     Expenses

   36

9.2     Public Announcements

   36

9.3     Confidentiality

   36

9.4     Amendment; Waiver

   37

9.5     Governing Law

   38

9.6     Severability

   38

9.7     Entire Agreement

   38

9.8     Construction

   38

9.9     Counterparts; Facsimile Signatures

   38

9.10   Disclosure Schedules

   39

9.11   No Parties in Interest

   39

9.12   Attorneys’ Fees

   39

9.13   Time of Essence

   39

9.14   Notices

   39

9.15   Further Assurances

   40

9.16   Venue

   40

9.17   Binding Agreement

   40

 

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LIST OF EXHIBITS AND SCHEDULES

 

Exhibits

A

  

Form of Release

B

  

Form of Employment Agreement

C

  

Form of Noncompetition Agreement

D

  

Form of Lock-Up Agreement

E

  

Form of Representation Letter

F

  

Form of Escrow Agreement

G

  

Form of Opinion of Counsel

H

  

Form of Notice of Stock Option Grant

I

  

Form of Stock Option Agreement

Sellers’ Disclosure Schedules

3.2

    

3.3

    

3.6

    

3.8

    

3.10

    

3.11

    

3.12

    

3.13

    

3.14

    

3.15

    

3.16

    

3.17

    

3.18

    

3.19

    

3.20

    

3.22

    

3.25

     NAI’s Disclosure Schedules

4.2

    

 

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STOCK PURCHASE AGREEMENT

 

This Stock Purchase Agreement (“Agreement”) is made and entered into effective
as of December 5, 2005 (“Effective Date”), by and among Natural Alternatives
International, Inc., a Delaware corporation (“NAI”), William H. Bunten II and/or
Elizabeth W. Bunten, as the trustees of The Bunten Family Trust dated April 14,
2001 (collectively, “Bunten”), John F. Dullea and Carolyn A. Dullea, as the
trustees of The John F. and Carolyn A. Dullea Trust dated June 20, 2001
(collectively, “Dullea”), Lincoln Fish (“Fish”), and Michael L. Irwin, as
trustee of The Michael L. Irwin Trust u/t/a June 25, 1991 (“Irwin”). Bunten,
Dullea, Fish and Irwin may be referred to herein individually as a “Seller” or
collectively as the “Sellers.”

 

RECITALS

 

A. As of the Effective Date, the Sellers own all of the issued and outstanding
shares of common stock, no par value (collectively, the “Shares”), of Real
Health Laboratories, Inc., a California corporation (“RHL”), as set forth below:

 

Name of Seller

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Number of Shares of

RHL Common Stock

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   Percentage of
Outstanding RHL
Common Stock

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Dullea

   425,016    42.5 %

Fish

   99,996    10.0 %

Irwin

   100,008    10.0 %

Bunten

   375,012    37.5 %     

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TOTAL

   1,000,032    100.0 %     

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B. Messrs. Dullea, Fish, Irwin and Bunten also are directors of RHL and
represent a majority of the members of RHL’s Board of Directors.

 

C. The Sellers each desire to sell all of their respective Shares to NAI, and
NAI desires to purchase all of the Shares from Sellers, for the consideration
and on the terms and subject to the conditions set forth in this Agreement.

 

NOW, THEREFORE, incorporating the above recitals and in consideration of the
obligations contained herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:

 

AGREEMENT

 

1. Definitions.

 

For purposes of this Agreement, unless the context otherwise requires, the
following terms have the meanings specified or referred to in this Section 1,
applicable to both the singular and plural forms of any of the terms herein
defined:

 

“Accounts Receivable” – as defined in Section 3.8.

 

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“Affiliate” – any Person that directly or indirectly controls, is controlled by,
or is under common control with, the indicated Person.

 

“Agreement” – this Stock Purchase Agreement.

 

“Balance Sheet” – the audited balance sheet of RHL dated as of October 31, 2004.

 

“Best Efforts” – the efforts that a prudent Person desirous of achieving a
result would use in similar circumstances to ensure that such result is achieved
as expeditiously as possible; provided, however, that an obligation to use Best
Efforts under this Agreement does not require the Person subject to that
obligation to take actions that would result in a materially adverse change in
the benefits to such Person of this Agreement and the Contemplated Transactions.

 

“Breach” – a “Breach” of a representation, warranty, covenant, obligation, or
other provision of this Agreement or any instrument delivered pursuant to this
Agreement will be deemed to have occurred if there is or has been (a) any
inaccuracy in or breach of, or any failure to perform or comply with, such
representation, warranty, covenant, obligation or other provision, or (b) any
claim (by any Person) or other occurrence or circumstance that is or was
inconsistent with such representation, warranty, covenant, obligation, or other
provision, and the term “Breach” means any such inaccuracy, breach, failure,
claim, occurrence or circumstance.

 

“Cash Purchase Price” – as defined in Section 2.2.

 

“Closing” – as defined in Section 2.3.

 

“Code” – the Internal Revenue Code of 1986, as amended, or any successor law,
and regulations issued by the IRS pursuant to the Code or any successor law.

 

“Consent” – any approval, consent, ratification, waiver or other authorization
(including any Governmental Authorization).

 

“Contemplated Transactions” – all of the transactions contemplated by this
Agreement, including, without limitation (a) the sale of the Shares by Sellers
to NAI; (b) the execution, delivery, and performance of the Sellers’ Closing
Documents; (c) the execution, delivery, and performance of NAI’s Closing
Documents; (d) the performance by NAI and Sellers of their respective covenants
and obligations under this Agreement; (e) the issuance of NAI Stock by NAI to
Sellers; (f) the payment of the Cash Purchase Price by NAI to Sellers; and
(g) NAI’s acquisition and ownership of the Shares and exercise of control over
RHL.

 

“Contract” – any agreement, contract, obligation, promise, or undertaking
(whether written or oral and whether express or implied) that is legally
binding.

 

“Damages” – as defined in Section 8.3.

 

“Effective Date” – the date first written above.

 

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“Employment Agreement” – as defined in Section 2.4(a)(iii).

 

“Encumbrance” – any charge, claim, community property interest, condition,
equitable interest, lien, option, pledge, security interest, right of first
refusal, mortgage, easement, servitude, right of way, or restriction of any
kind, including any restriction on use, voting, transfer, receipt of income or
exercise of any other attribute of ownership.

 

“Environment” – soil, land surface or subsurface strata, surface waters
(including navigable waters, ocean waters, streams, ponds, drainage basins, and
wetlands), groundwater, drinking water supply, stream sediments, ambient air
(including indoor air), plant and animal life, and any other environmental
medium or natural resource.

 

“Environmental, Health, and Safety Liabilities” – any cost, damages, expense,
liability, obligation, or other responsibility arising from or under
Environmental Law or Occupational Safety and Health Law and consisting of or
relating to: (a) any environmental, health, or safety matters or conditions
(including on-site or off-site contamination, occupational safety and health,
and regulation of chemical substances or products); (b) fines, penalties,
judgments, awards, settlements, legal or administrative proceedings, damages,
losses, claims, demands and response, investigative, remedial, or inspection
costs and expenses arising under Environmental Law or Occupational Safety and
Health Law; (c) financial responsibility under Environmental Law or Occupational
Safety and Health Law for cleanup costs or corrective action, including any
investigation, cleanup, removal, containment, or other remediation or response
actions (“Cleanup”) required by applicable Environmental Law or Occupational
Safety and Health Law (whether or not such Cleanup has been required or
requested by any Governmental Body or any other Person) and for any natural
resource damages; or (d) any other compliance, corrective, investigative, or
remedial measures required under Environmental Law or Occupational Safety and
Health Law. The terms “removal,” “remedial,” and “response action,” include the
types of activities covered by the United States Comprehensive Environmental
Response, Compensation, and Liability Act, 42 U.S.C. §9601 et seq., as amended
(“CERCLA”).

 

“Environmental Law” – any Legal Requirement that requires or relates to:
(a) advising appropriate authorities, employees, and the public of intended or
actual releases of pollutants or hazardous substances or materials, violations
of discharge limits, or other prohibitions and of the commencement of
activities, such as resource extraction or construction, that could have
significant impact on the Environment; (b) preventing or reducing to acceptable
levels the release of pollutants or hazardous substances or materials into the
Environment; (c) reducing the quantities, preventing the release, or minimizing
the hazardous characteristics of wastes that are generated; (d) assuring that
products are designed, formulated, packaged, and used so that they do not
present unreasonable risks to human health or the Environment when used or
disposed of; (e) protecting resources, species, or ecological amenities;
(f) reducing to acceptable levels the risks inherent in the transportation of
hazardous substances, pollutants, oil or other potentially harmful substances;
(g) cleaning up pollutants that have been released, preventing the threat of
release, or paying the costs of such clean up or prevention; or (h) making
responsible parties pay private parties, or groups of them, for damages done to
their health or the Environment, or permitting self- appointed representatives
of the public interest to recover for injuries done to public assets.

 

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“ERISA” – the Employee Retirement Income Security Act of 1974, as amended, or
any successor law, and regulations and rules issued pursuant to that act or any
successor law.

 

“Escrow Agreement” – as defined in Section 2.4(c).

 

“Escrow Agent” – as defined in Section 2.4(c).

 

“Exchange Act” – the Securities Exchange Act of 1934, as amended, or any
successor law, and regulations and rules issued pursuant to such act or any
successor law.

 

“Facilities” – any real property, leaseholds, or other interests currently or
formerly owned or operated by RHL and any buildings, plants, structures, or
equipment (including motor vehicles, tank cars, and rolling stock) currently or
formerly owned or operated by RHL.

 

“GAAP” – generally accepted United States accounting principles, applied on a
basis consistent with the basis on which the financial statements referred to in
Sections 3.4(b) and 4.10 were prepared.

 

“Governmental Authorization” – any approval, consent, license, permit, waiver,
or other authorization issued, granted, given, or otherwise made available by or
under the authority of any Governmental Body or pursuant to any Legal
Requirement.

 

“Governmental Body” – any (a) nation, state, county, city, town, village,
district, or other jurisdiction of any nature; (b) federal, state, local,
municipal, foreign, or other government; (c) governmental or quasi-governmental
authority of any nature (including any governmental agency, branch, department,
official, or entity and any court or other tribunal); (d) multi-national
organization or body; or (e) body exercising, or entitled to exercise, any
administrative, executive, judicial, legislative, police, regulatory, or taxing
authority or power of any nature.

 

“Hazardous Activity” – the distribution, generation, handling, importing,
management, manufacturing, processing, production, refinement, Release, storage,
transfer, transportation, treatment, or use of Hazardous Materials in, on,
under, about, or from the Facilities or any part thereof into the Environment,
and any other act, business, operation, or thing that increases the danger, or
risk of danger, or poses an unreasonable risk of harm to persons or property on
or off the Facilities, or that may affect the value of the Facilities or RHL.

 

“Hazardous Materials” – any waste or other substance that is listed, defined,
designated, or classified as, or otherwise determined to be, hazardous,
radioactive, or toxic or a pollutant or a contaminant under or pursuant to any
Environmental Law, including any admixture or solution thereof, and specifically
including petroleum and all derivatives thereof or synthetic substitutes
therefore and asbestos or asbestos-containing materials.

 

“Indebtedness” – any obligation of RHL which under generally accepted accounting
principles is required to be shown on the balance sheet of RHL as a liability.
Any obligation secured by a Lien on, or payable out of the proceeds of
production from, property of RHL shall be deemed to be Indebtedness even though
such obligation is not assumed by RHL.

 

4

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“Indebtedness for Borrowed Money” – (a) all Indebtedness in respect of money
borrowed including, without limitation, Indebtedness which represents the unpaid
amount of the purchase price of any property and is incurred in lieu of
borrowing money or using available funds to pay such amounts and not
constituting an account payable or expense accrual incurred or assumed in the
Ordinary Course of Business of RHL, (b) all Indebtedness evidenced by a
promissory note, bond or similar written obligation to pay money, or (c) all
such Indebtedness guaranteed by RHL or for which RHL is otherwise contingently
liable.

 

“Intellectual Property Assets” – as defined in Section 3.22.

 

“IRS” – the United States Internal Revenue Service or any successor agency, and,
to the extent relevant, the United States Department of Treasury.

 

“Knowledge” – an individual will be deemed to have “Knowledge” of a particular
fact or other matter if such individual is actually aware of such fact or other
matter. A Person (other than an individual) will be deemed to have “Knowledge”
of a particular fact or other matter if any individual who is serving, or who
has at any time served, as a director, officer, partner, executor, or trustee of
such Person (or in any similar capacity) has, or at any time had, Knowledge of
such fact or other matter.

 

“Legal Requirement” – any federal, state, local, municipal, foreign,
international, multinational, or other administrative order, constitution, law,
ordinance, principle of common law, regulation, statute or treaty.

 

“Lien” – any mortgage, pledge, security interest, encumbrance, lien or charge of
any kind, including, without limitation, any conditional sale or other title
retention agreement, any lease in the nature thereof and the filing of or
agreement to give any financing statement under the Uniform Commercial Code of
any jurisdiction and including any lien or charge arising by statute or other
law.

 

“Lock-Up Agreements” – as defined in Section 2.4(a)(vi).

 

“Material Adverse Change” and “Material Adverse Effect” – any change, event,
circumstance, condition or effect that has, or could reasonably be expected to
have, individually or in the aggregate, a materially adverse effect on the
condition (financial or otherwise), capitalization, properties, assets
(including intangible assets), liabilities, business, business prospects,
operations or results of operations of an entity and its subsidiaries, taken as
a whole, except and to the extent that any such change, event, circumstance,
condition or effect primarily results from: (A) changes in general economic
conditions; (B) changes affecting the industry generally in which such entity
operates; (C) the effect of the public announcement or pendency of the
Contemplated Transactions; or (D) the effect of actions by Sellers or RHL taken
at the direction of NAI or otherwise required pursuant to this Agreement.
Sellers and NAI agree that a Material Adverse Change or Material Adverse Effect
shall include, but not be limited to, any change, event, circumstance, condition
or effect that results, or could reasonably be expected to result, in any loss,
obligation, damage, cost, expense, claim or liability of One Hundred Twenty Five
Thousand Dollars ($125,000) or more.

 

“Material Contract” – as defined in Section 3.17(b).

 

5

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“NAI” – Natural Alternatives International, Inc., a Delaware corporation.

 

“NAI’s Closing Documents” – the agreements and documents listed in
Section 2.4(b)(iii) through (vii).

 

“NAI’s Disclosure Schedules” – the disclosure schedules delivered by NAI to
Sellers’ prior to the Closing and attached hereto.

 

“NAI Financial Statements” – as defined in Section 4.10.

 

“NAI SEC Documents” – as defined in Section 4.9.

 

“NAI Stock” – as defined in Section 2.2.

 

“Noncompetition Agreements” – as defined in Section 2.4(a)(iv).

 

“Occupational Safety and Health Law” – any Legal Requirement designed to provide
safe and healthful working conditions and to reduce occupational safety and
health hazards, and any program, whether governmental or private (including
those promulgated or sponsored by industry associations and insurance
companies), designed to provide safe and healthful working conditions.

 

“Order” – any award, decision, injunction, judgment, order, ruling, subpoena, or
verdict entered, issued, made, or rendered by any court, administrative agency,
or other Governmental Body or by any arbitrator.

 

“Ordinary Course of Business” – an action taken by a Person will be deemed to
have been taken in the “Ordinary Course of Business” only if: (a) such action is
consistent with the past practices of such Person and is taken in the ordinary
course of the normal day-to-day operations of such Person; (b) such action is
not required to be authorized by the board of directors of such Person (or by
any Person or group of Persons exercising similar authority); and (c) such
action is similar in nature and magnitude to actions customarily taken, without
any authorization by the board of directors (or by any Person or group of
Persons exercising similar authority), in the ordinary course of the normal
day-to-day operations of other Persons that are in the same line of business as
such Person.

 

“Organizational Documents” – the Articles of Incorporation and the By-Laws of
RHL and any amendment to such Articles of Incorporation and By-Laws.

 

“Person” – any natural person, corporation (including any non-profit
corporation), general or limited partnership, limited liability company, joint
venture, estate, trust, association, organization, labor union, or other entity
or Governmental Body.

 

“Proceeding” – any action, arbitration, audit, hearing, investigation,
litigation, or suit (whether civil, criminal, administrative, investigative, or
informal) commenced, brought, conducted, or heard by or before, or otherwise
involving, any Governmental Body or arbitrator.

 

“Purchase Price” – as defined in Section 2.2.

 

6

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“Related Person” – with respect to a particular individual (a) each other member
of such individual’s Family; (b) any Person that is directly or indirectly
controlled by such individual or one or more members of such individual’s
Family; (c) any Person in which such individual or members of such individual’s
Family hold (individually or in the aggregate) a Material Interest; and (d) any
Person with respect to which such individual or one or more members of such
individual’s Family serves as a director, officer, partner, executor, or trustee
(or in a similar capacity). With respect to a specified Person other than an
individual: (a) any Affiliate of such Person; (b) any Person that holds a
Material Interest in such specified Person; (c) each Person that serves as a
director, officer, partner, executor, or trustee of such specified Person (or in
a similar capacity); (d) any Person in which such specified Person holds a
Material Interest; (e) any Person with respect to which such specified Person
serves as a general partner or a trustee (or in a similar capacity); and (f) any
Related Person of any individual described in clause (b) or (c) immediately
above. For purposes of this definition, (a) “Family” of an individual includes
(i) the individual, (ii) the individual’s spouse, (iii) any other natural person
who is related to the individual or the individual’s spouse within the second
degree, and (iv) any other natural person who resides with such individual, and
(b) “Material Interest” means direct or indirect beneficial ownership (as
defined in Rule 13d-3 under the Exchange Act) of voting securities or other
voting interests representing at least five percent of the outstanding voting
power of a Person or equity securities or other equity interests representing at
least five percent of the outstanding equity securities or equity interests in a
Person.

 

“Release” – any spilling, leaking, emitting, discharging, depositing, escaping,
leaching, dumping, or other releasing into the Environment, whether intentional
or unintentional.

 

“Representative” – with respect to a particular Person, any director, officer,
employee, agent, consultant, advisor, or other representative of such Person,
including legal counsel, accountants and financial advisors.

 

“RHL” – Real Health Laboratories, Inc., a California corporation.

 

“SEC” – United States Securities and Exchange Commission.

 

“Securities Act” – the Securities Act of 1933, as amended, or any successor law,
and regulations and rules issued pursuant to such act or any successor law.

 

“Sellers” – as set forth in the first paragraph of this Agreement.

 

“Sellers’ Closing Documents” – the agreements and documents listed in
Section 2.4(a)(i) through (xi).

 

“Sellers’ Disclosure Schedules” – the disclosure schedules delivered by Sellers
to NAI prior to the Closing and attached hereto.

 

“Sellers’ Releases” – as defined in Section 2.4(a)(ii).

 

“Shareholders Agreement” – the Shareholders Agreement, dated as of March 31,
2001, by and among RHL, William Bunten, John Dullea and Fish, as amended by that
certain Amendment to Shareholders Agreement, dated as of December 1, 2003, by
and among RHL,

 

7

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John F. Dullea, Dullea, William Bunten, Bunten, Fish, Michael L. Irwin, and
Irwin, as further amended by that certain Amendment to Shareholders Agreement,
dated as of March 19, 2004, by and among RHL, John F. Dullea, Dullea, Fish,
Michael L. Irwin and Irwin.

 

“Shares” – all of the issued and outstanding shares of common stock of RHL, no
par value.

 

“Subsidiary” – with respect to any Person (the “Owner”), any corporation or
other Person of which securities or other interests having the power to elect a
majority of that corporation’s or other Person’s board of directors or similar
governing body, or otherwise having the power to direct the business and
policies of that corporation or other Person (other than securities or other
interests having such power only upon the happening of a contingency that has
not occurred) are held by the Owner or one or more of its Subsidiaries.

 

“Tax” – any tax (including any income tax, capital gains tax, value-added tax,
sales tax, sales and use tax, payroll tax, property tax, gift tax, or estate
tax), levy, assessment, tariff, duty (including any customs duty), deficiency,
or other fee, and any related charge or amount (including any fine, penalty,
interest or addition to tax), imposed, assessed, or collected by or under the
authority of any Governmental Body or payable pursuant to any tax-sharing
agreement or any other Contract relating to the sharing or payment of any such
tax, levy, assessment, tariff, duty, deficiency, or fee.

 

“Tax Returns” – any return (including any information return), report,
statement, schedule, notice, form, or other document or information filed with
or submitted to, or required to be filed with or submitted to, any Governmental
Body in connection with the determination, assessment, collection, or payment of
any Tax or in connection with the administration, implementation, or enforcement
of or compliance with any Legal Requirement relating to any Tax.

 

“Threatened” – a claim, Proceeding, dispute, action, or other matter will be
deemed to have been “Threatened” if any demand or statement has been made
(orally or in writing) or any notice has been given (orally or in writing), or
if any other event has occurred or any other circumstances exist, that would
lead a prudent Person to conclude that such a claim, Proceeding, dispute, action
or other matter is likely to be asserted, commenced, taken, or otherwise pursued
in the future.

 

“Threat of Release” – a substantial likelihood of a Release that may require
action in order to prevent or mitigate damage to the Environment that may result
from such Release.

 

“Unaudited Balance Sheet” – the unaudited balance sheet of RHL dated as of
October 31, 2005.

 

“Unaudited Financial Statements” – the Unaudited Balance Sheet, and the related
unaudited statement of income for the fiscal year ended October 31, 2005.

 

8

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2. Sale and Transfer of Shares; Closing.

 

2.1 Shares. Subject to the terms and conditions of this Agreement, at the
Closing, Sellers will sell and transfer all of their respective Shares to NAI,
and NAI will purchase all of such Shares from Sellers.

 

2.2 Purchase Price. The aggregate purchase price of the Shares shall be Eight
Million Six Hundred Sixty Seven Thousand and No/100 Dollars ($8,667,000)
(“Purchase Price”), payable in cash and shares of NAI common stock as follows:
Five Hundred Ten Thousand (510,000) shares of NAI’s authorized but unissued
common stock, $0.01 par vale per share (“NAI Stock”), and Five Million Eight
Hundred Eight Thousand Two Hundred Forty Six and No/100 Dollars ($5,808,246) in
cash (“Cash Purchase Price”). NAI and Sellers each acknowledge and agree that
the value, solely for the purpose of calculating the Cash Purchase Price, of the
aggregate shares of NAI Stock to be issued as part of the Purchase Price is an
amount equal to Two Million Eight Hundred Fifty Eight Thousand Seven Hundred
Fifty Four and No/100 Dollars ($2,858,754), based on the trailing ten (10) day
average of the last reported sale price of NAI Stock on the Nasdaq Stock Market.
The ten (10) day period shall be the ten (10) business days immediately
preceding, but not including, the Effective Date.

 

2.3 Closing. The closing of the purchase and sale of the Shares (“Closing”)
provided for in this Agreement will take place at the offices of Fisher Thurber
LLP, 4225 Executive Square, Suite 1600, La Jolla, California, at 10:00 a.m.
(local time) on the Effective Date, or at such other time and place as the
parties may agree.

 

2.4 Closing Obligations. At the Closing:

 

(a) Sellers will deliver to NAI:

 

(i) certificates representing the Shares, duly endorsed (or accompanied by duly
executed stock powers), for transfer to NAI;

 

(ii) releases in the form of Exhibit A attached hereto and executed by each
Seller (collectively, the “Sellers’ Releases”);

 

(iii) an employment agreement in the form of Exhibit B attached hereto executed
by John Dullea (“Employment Agreement”);

 

(iv) noncompetition agreements in the form of Exhibit C attached hereto executed
by each Seller other than Dullea (collectively, the “Noncompetition
Agreements”);

 

(v) executed resignations of William Bunten as a Director, Michael L. Irwin as a
Director, Lincoln Fish as a Director, Wilbert Schwartz as a Director, Jay Beltz
as Chief Financial Officer and Secretary, and John Dullea as Director and Chief
Executive Officer (but not as President) of RHL, with the resignations to take
effect upon the Closing;

 

(vi) one or more lock-up agreements executed by Sellers, substantially in the
form attached hereto as Exhibit D, covering the shares of NAI Stock to be issued
to Sellers (collectively, the “Lock-Up Agreements”);

 

9

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(vii) representation letters in the form attached hereto as Exhibit E, executed
by each Seller;

 

(viii) the Escrow Agreement in the form attached hereto as Exhibit F, executed
by each Seller;

 

(ix) an opinion of sellers’ counsel in the form attached hereto as Exhibit G;

 

(x) copies of resolutions of RHL’s Board of Directors, certified by the
Secretary of RHL, appointing Randell Weaver and Mark LeDoux as directors of RHL
effective upon the Closing; and

 

(xi) a notice of incentive stock option grant and a notice of nonqualified stock
option grant (collectively, “Notices of Stock Option Grants”), and a stock
option agreement (“Stock Option Agreement”), each executed by John Dullea,
representing in the aggregate options to purchase 100,000 shares of NAI common
stock under and subject to NAI’s 1999 Omnibus Equity Incentive Plan at an
exercise price equal to One Hundred Ten Percent (110%) of the last reported sale
price as reported by the Nasdaq Stock Market on December 2, 2005, each with a
term of five years, and each with vesting conditions precedent such that only
34% of the total number of shares underlying the option become vested and
capable of being purchased upon exercise of the option on or after the first
anniversary of the date of grant, an additional 33% of such shares may only
become vested and capable of being purchased upon exercise of the option on or
after the second anniversary of the date of grant, and the final 33% of such
shares may become vested and capable of being purchased upon exercise of the
option only on or after the third anniversary of the date of grant, and
otherwise as set forth in such Notices of Stock Option Grants and Stock Option
Agreement, each in the form attached hereto as Exhibits H and I, respectively.

 

(b) NAI will deliver:

 

(i) an aggregate amount equal to Four Million Eight Hundred Eight Thousand Two
Hundred Forty Six and No/100 Dollars ($4,808,246), in U.S. dollars, which amount
shall be delivered to Sellers by wire transfer in accordance with wire
instructions provided by Sellers, respectively, as follows: Two Million Forty
Three Thousand Five Hundred Fourteen and No/100 Dollars ($2,043,514) to Dullea;
Four Hundred Eighty Thousand Seven Hundred Ninety One and No/100 Dollars
($480,791) to Fish; Four Hundred Eighty Thousand Eight Hundred Forty Nine and
No/100 Dollars ($480,849) to Irwin; and One Million Eight Hundred Three Thousand
Ninety Two and No/100 Dollars ($1,803,092) to Bunten;

 

(ii) the sum of One Million Dollars ($1,000,000) to the Escrow Agent referred to
in Section 2.4(c) by wire transfer;

 

(iii) facsimile copies of certificates representing shares of NAI Stock to the
Sellers as follows: Two Hundred Sixteen Thousand Seven Hundred Fifty One
(216,751) shares registered in the name of Dullea; Fifty Thousand Nine Hundred
Ninety Six (50,996)

 

10

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shares registered in the name of Fish; Fifty One Thousand Three (51,003) shares
registered in the name of Irwin; and One Hundred Ninety One Thousand Two Hundred
Fifty (191,250) shares registered in the name of Bunten. Original copies of such
certificates shall be delivered to Sellers, as applicable, within five
(5) business days after Closing;

 

(iv) the Employment Agreement, executed by NAI;

 

(v) the Lock-Up Agreements, executed by NAI;

 

(vi) the Escrow Agreement, executed by NAI;

 

(vii) the Notices of Stock Option Grants and Stock Option Agreement, each
executed by NAI; and

 

(viii) an amount equal to the aggregate outstanding principal balances, plus
accrued and unpaid interest thereon, of RHL’s four (4) outstanding lines of
credit, which outstanding balances and accrued interest shall, at Closing, be
equal to $357,754.12 payable on the line of credit with Merrill Lynch,
$93,921.14 payable on the line of credit with Wells Fargo, $43,676.07 payable on
the line of credit with California Bank & Trust, and $94,438.72 payable on the
line of credit with Bank of America, and which amounts shall be delivered by
wire transfer to the applicable lenders in accordance with wire instructions
provided by Sellers.

 

(c) NAI and Sellers will enter into an escrow agreement in the form of Exhibit F
attached hereto (“Escrow Agreement”) with Wells Fargo Bank (“Escrow Agent”).

 

(d) NAI acknowledges and understands that the Board of Directors of RHL has
declared a one-time cash dividend to the shareholders of record on December 2,
2005, in the aggregate amount of Seven Hundred Fifty Thousand and no/100 Dollars
($750,000). Such dividend shall be payable at the Closing from RHL’s available
cash, provided at such time such distribution is permissible in accordance with
Chapter 5 of the California Corporations Code and, except as disclosed in
Sellers’ Disclosure Schedules, would otherwise not result in an event of default
under the terms of any Indebtedness.

 

3. Representations and Warranties of Sellers. Except as set forth in Sellers’
Disclosure Schedules, Sellers jointly and severally make the representations and
warranties to NAI contained in this Section 3 (except as to the representations
and warranties made in Section 3.3(b) which are made severally and not jointly
by the Sellers). Each exception set forth in Sellers’ Disclosure Schedules and
each other response to this Agreement set forth in Sellers’ Disclosure Schedules
is identified by reference to, or has been grouped under a heading referring to,
a specific individual section of this Agreement but may also relate to other
sections of this Agreement to the extent it is reasonably apparent from a
reading of such response that it also qualifies or applies to such other
sections of this Agreement.

 

3.1 Organization and Good Standing.

 

(a) RHL is a corporation duly organized, validly existing, and in good standing
under the laws of the State of California, with full corporate power and
authority to conduct its business as it is now being conducted, to own or use
the properties and assets that it

 

11

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purports to own or use, and to perform all its obligations under Material
Contracts. RHL is duly qualified to do business as a foreign corporation and is
in good standing under the laws of each state or other jurisdiction in which
either the ownership or use of the properties owned or used by it, or the nature
of the activities conducted by it, requires such qualification, except where the
failure to be so qualified would not have a Material Adverse Effect on RHL.

 

(b) Copies of the Organizational Documents of RHL that have been delivered to
NAI prior to the Effective Date are true and complete and have not since been
amended or repealed.

 

(c) RHL has no Subsidiaries or direct or indirect interest (by way of stock
ownership or otherwise) in any firm, corporation, limited liability company,
partnership, association or business.

 

3.2 Authority; No Conflict.

 

(a) This Agreement, assuming its due, valid authorization, execution and
delivery by NAI, constitutes the legal, valid, and binding obligation of
Sellers, enforceable against Sellers in accordance with its terms, except as
limited by applicable bankruptcy, insolvency, reorganization, moratorium,
fraudulent conveyance and other similar laws of general application affecting
enforcement of creditors’ rights generally. Upon the execution and delivery by
Sellers of the Sellers’ Closing Documents, and assuming the due, valid
authorization, execution and delivery by the other parties thereto, the Sellers’
Closing Documents to which Sellers are a party will constitute the legal, valid,
and binding obligations of Sellers, enforceable against Sellers in accordance
with their respective terms, except as limited by applicable bankruptcy,
insolvency, reorganization, moratorium, fraudulent conveyance and other similar
laws of general application affecting enforcement of creditors’ rights
generally. Sellers have the absolute and unrestricted right, power, authority,
and capacity to execute and deliver this Agreement and the Sellers’ Closing
Documents to which they are a party and to perform their obligations under this
Agreement and the Sellers’ Closing Documents to which they are a party.

 

(b) Except as set forth in Schedule 3.2 of Sellers’ Disclosure Schedules,
neither the execution and delivery of this Agreement nor the consummation or
performance of any of the Contemplated Transactions will, directly or indirectly
(with or without notice or lapse of time):

 

(i) contravene, conflict with, or result in a violation of (A) any provision of
the Organizational Documents of RHL, or (B) any resolution adopted by the Board
of Directors or the shareholders of RHL;

 

(ii) contravene, conflict with, or result in a material violation of, or give
any Governmental Body or other Person the right to challenge any of the
Contemplated Transactions or to exercise any remedy or obtain any relief under,
any Legal Requirement or any Order to which RHL or any Seller, or any of the
assets owned or used by RHL, are subject;

 

(iii) contravene, conflict with, or result in a material violation of any of the
terms or requirements of, or give any Governmental Body the right to revoke,
withdraw,

 

12

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suspend, cancel, terminate, or modify, any Governmental Authorization that is
held by RHL or that otherwise relates to the business of, or any of the assets
owned or used by, RHL;

 

(iv) cause any of the assets owned by RHL to be reassessed or revalued by any
taxing authority or other Governmental Body;

 

(v) contravene, conflict with, or result in a material violation or breach of
any provision of, or give any Person the right to declare a default or exercise
any remedy under, or to accelerate the maturity or performance of, or to cancel,
terminate, or modify, any Material Contract; or

 

(vi) result in the imposition or creation of an Encumbrance upon or with respect
to any of the assets owned or used by RHL.

 

(c) Except as set forth in Schedule 3.2 of Sellers’ Disclosure Schedules,
neither any Seller nor RHL is or will be required to give any notice to or
obtain any Consent from any Person in connection with the execution and delivery
of this Agreement or the consummation or performance of any of the Contemplated
Transactions.

 

(d) Sellers are acquiring the NAI Stock for their own account and not with a
view to its distribution within the meaning of Section 2(11) of the Securities
Act. Each Seller is an “accredited investor” as such term is defined in Rule
501(a) of Regulation D promulgated under the Securities Act.

 

3.3 Capitalization.

 

(a) The authorized capital stock of RHL consists of Ten Million
(10,000,000) shares of common stock, no par value, of which One Million Thirty
Two (1,000,032) shares are issued and outstanding and constitute the Shares. All
of the outstanding equity securities of RHL have been duly authorized and
validly issued and are fully paid and nonassessable. There are no Contracts
relating to the issuance, sale, or transfer of any equity securities or other
securities of RHL, including any options, warrants or other derivative
securities. All of the outstanding equity securities of RHL have been issued in
material compliance with the registration or qualification requirements (or
applicable exemptions therefrom) of the Securities Act and any other Legal
Requirement. RHL does not own, nor does it have any Contract to acquire, any
equity securities or other securities of any Person or any direct or indirect
equity or ownership interest in any other business. Other than as set forth in
this Section 3.3 or Schedule 3.3 of Sellers’ Disclosure Schedules, no other
common or preferred stock or equity securities of RHL or any options, warrants,
rights, commitments or other agreements or instruments convertible, exchangeable
or exercisable into common or preferred stock or other equity securities are
issued or outstanding.

 

(b) Sellers are and will be as of the Closing the record and beneficial owners
and holders of the Shares, free and clear of all Encumbrances except for
restrictions on transfer (a) generally applicable under federal and state
securities laws, and (b) pursuant to the Shareholders Agreement, which
Shareholders Agreement shall terminate by its terms upon the Closing. The
Sellers each own the number of Shares set forth above in Recital A. Except for
“restricted securities” legends and such legends pursuant to the Shareholders
Agreement, no

 

13

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other legend or other reference to any purported Encumbrance appears upon any
certificate representing equity securities of RHL.

 

3.4 Financial Statements. Sellers have delivered to NAI: (a) the Unaudited
Financial Statements; and (b) the Balance Sheet and the audited balance sheet of
RHL as of October 31, 2003, and the related statements of income and
comprehensive income, and retained earnings and statements of cash flows for
each of the fiscal years ended October 31, 2004 and 2003, including the notes
thereto, together with the report thereon of McGladrey & Pullen, LLP,
independent certified public accountants. Such financial statements and notes
(a) fairly present, in all material respects, the financial condition and the
results of operations, changes in shareholders’ equity, and cash flow of RHL as
of the respective dates of and for the periods referred to in such financial
statements, and (b) except as disclosed in the notes to such financial
statements, have been prepared in accordance with GAAP applied on a basis
consistent throughout the periods involved, subject, in the case of the
Unaudited Financial Statements, to normal recurring year-end adjustments (the
effect of which will not, individually or in the aggregate, be materially
adverse) and the absence of notes (that, if presented, would not differ
materially from those included in the audited financial statements). No
financial statements of any Person other than RHL are required by GAAP to be
included in the financial statements of RHL.

 

3.5 Books and Records. The books of account, minute books, stock record books,
and other records of RHL, all of which have been made available to NAI, are
complete and correct in all material respects and have been maintained in
accordance with sound business practices and all applicable Legal Requirements,
except for such failures to be so complete, correct or maintained that would not
have a Material Adverse Effect on RHL. The minute books of RHL contain, in all
material respects, accurate and complete records of all meetings held of, and
corporate action taken by, the shareholders, the Board of Directors, and any
committees of the Board of Directors of RHL, and no meeting of any such
shareholders, Board of Directors, or committees has been held for which minutes
have not been prepared and are not contained in such minute books, except for
such minutes the absence of which would not have a Material Adverse Effect on
RHL. At the Closing, all of such books and records will be in the possession of
RHL.

 

3.6 Title to Properties; Encumbrances. Schedule 3.6 of Sellers’ Disclosure
Schedules contains a complete and accurate list of all real property,
leaseholds, or other interests therein owned by RHL. RHL owns (with good and
marketable title in the case of real property, subject only to the matters
permitted by the following sentence) all the properties and assets (whether
real, personal, or mixed and whether tangible or intangible) that it purports to
own, including all of the properties and assets reflected in the Unaudited
Balance Sheet (except for assets held under capitalized leases disclosed or not
required to be disclosed in Schedule 3.6 of Sellers’ Disclosure Schedules and
personal property sold since the date of the Unaudited Balance Sheet in the
Ordinary Course of Business), and all of the properties and assets purchased or
otherwise acquired by RHL since the date of the Unaudited Balance Sheet (except
for personal property acquired and sold since the date of the Unaudited Balance
Sheet in the Ordinary Course of Business and consistent with past practice). All
material properties and assets reflected in the Unaudited Balance Sheet are free
and clear of all Encumbrances and are not, in the case of real property, subject
to any rights of way, building use restrictions, exceptions, variances,

 

14

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reservations, or limitations of any nature except, with respect to all such
properties and assets, (a) mortgages or security interests shown on the
Unaudited Balance Sheet as securing specified liabilities or obligations, with
respect to which no default (or event that, with notice or lapse of time or
both, would constitute a default) exists, (b) mortgages or security interests
incurred in connection with the purchase of property or assets after the date of
the Unaudited Balance Sheet (such mortgages and security interests being limited
to the property or assets so acquired), with respect to which no default (or
event that, with notice or lapse of time or both, would constitute a default)
exists, (c) liens for current taxes not yet due, and (d) with respect to real
property (i) minor imperfections of title, if any, none of which is substantial
in amount, materially detracts from the value or impairs the use of the property
subject thereto, or impairs the operations of RHL, and (ii) zoning laws and
other land use restrictions that do not impair the present or anticipated use of
the property subject thereto.

 

3.7 Condition and Sufficiency of Assets. The buildings, plants, structures, and
equipment of RHL are structurally sound, are in good operating condition and
repair, reasonable wear and tear excepted. The buildings, plants, structures,
and equipment of RHL are adequate for the uses to which they are being put, and
none of such buildings, plants, structures, or equipment is in need of
maintenance or repairs except for ordinary, routine maintenance and repairs that
are not material in nature or cost. The building, plants, structures and
equipment of RHL are sufficient for the continued conduct of RHL’s business
after the Closing in substantially the same manner as conducted prior to the
Closing.

 

3.8 Accounts Receivable. Except as set forth on Schedule 3.8 of Sellers’
Disclosure Schedules, all accounts receivable of RHL that are reflected on the
Unaudited Balance Sheet or on the accounting records of RHL as of the Closing
(collectively, the “Accounts Receivable”) represent or will represent valid
obligations arising from sales actually made or services actually performed in
the Ordinary Course of Business. Except as set forth on Schedule 3.8 of Sellers’
Disclosure Schedules, unless paid prior to the Closing, the Accounts Receivable
are or will be as of the Closing current and collectible net of the respective
reserves shown on the Unaudited Balance Sheet or on the accounting records of
RHL as of the Closing (which reserves are adequate and calculated consistent
with past practice and, in the case of the reserve as of the Closing, will not
represent a greater percentage of the Accounts Receivable as of the Closing than
the reserve reflected in the Unaudited Balance Sheet of the Accounts Receivable
reflected therein and will not represent a Material Adverse Change in the
composition of such Accounts Receivable in terms of aging). Except as set forth
on Schedule 3.8 of Sellers’ Disclosure Schedules, to the Knowledge of Sellers,
there is no contest, claim, or right of set-off, other than returns in the
Ordinary Course of Business, under any contract with any obligor of an Account
Receivable relating to the amount or validity of such Accounts Receivable.

 

3.9 Inventory. All inventory of RHL, whether or not reflected in the Unaudited
Balance Sheet, consists of a quality and quantity usable and salable in the
Ordinary Course of Business, except for obsolete items and items of
below-standard quality, all of which have been written off or written down to
net realizable value in the Unaudited Balance Sheet or on the accounting records
of RHL as of the Closing, as the case may be. All inventories not written off
have been priced at the lower of cost or market on a first in, first out basis.
The quantities of each item of inventory (whether raw materials, work-in-process
or finished goods) are not excessive, but are reasonable in the present
circumstances of RHL.

 

15

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3.10 No Undisclosed Liabilities. Except as set forth in Schedule 3.10 of
Sellers’ Disclosure Schedules or other schedules of Sellers’ Disclosure
Schedules, RHL has no liabilities or obligations of any nature (whether known or
unknown and whether absolute, accrued, contingent or otherwise, whether due or
to become do), arising out of any transaction entered into at or prior to the
Closing or otherwise, except for liabilities or obligations reflected or
reserved against in the Unaudited Balance Sheet and current liabilities incurred
in the Ordinary Course of Business since the respective dates thereof.

 

3.11 Taxes.

 

(a) RHL has filed or caused to be filed on a timely basis all Tax Returns that
are or were required to be filed by or with respect to it, pursuant to
applicable Legal Requirements. Sellers have delivered or made available to NAI
copies of all such Tax Returns. RHL has paid, or made provision for the payment
of, all Taxes that have or may have become due pursuant to those Tax Returns or
otherwise, or pursuant to any assessment received by Sellers or RHL, except such
Taxes, if any, as are listed in Schedule 3.11 of Sellers’ Disclosure Schedules
and are being contested in good faith and as to which adequate reserves
(determined in accordance with GAAP) have been provided in the Unaudited Balance
Sheet. All Tax Returns filed by RHL are true, correct, and complete in all
material respects. There is no tax sharing agreement that will require any
payment by RHL after the Effective Date.

 

(b) Schedule 3.11 of Sellers’ Disclosure Schedules contains a complete and
accurate list of all audits of the United States federal and state income Tax
Returns of RHL, including a reasonably detailed description of the nature and
outcome of each audit. All deficiencies proposed as a result of such audits have
been paid, reserved against, settled, or, as described in Schedule 3.11 of
Sellers’ Disclosure Schedules, are being contested in good faith by appropriate
proceedings. Except as described in Schedule 3.11 of Sellers’ Disclosure
Schedules, no Seller nor RHL has given or been requested to give waivers or
extensions (or is or would be subject to a waiver or extension given by any
other Person) of any statute of limitations relating to the payment of Taxes of
RHL or for which RHL may be liable.

 

(c) The charges, accruals, and reserves with respect to Taxes on the books of
RHL are adequate (determined in accordance with GAAP) and are at least equal to
RHL’s liability for Taxes. There exists no proposed tax assessment against RHL
except as disclosed in the Balance Sheet or Schedule 3.11 of Sellers’ Disclosure
Schedules. No consent to the application of Section 341(f)(2) of the Code has
been filed with respect to any property or assets held, acquired, or to be
acquired by RHL. All Taxes that RHL is or was required by Legal Requirements to
withhold or collect have been duly withheld or collected and, to the extent
required, have been paid to the proper Governmental Body or other Person.

 

3.12 No Material Adverse Change. Since the date of the Balance Sheet, except as
disclosed in Sellers’ Disclosure Schedules, including Schedule 3.12 of Sellers’
Disclosure Schedule, or reflected in the Unaudited Financial Statements, there
has not been any Material Adverse Change in RHL, and, to the Knowledge of
Sellers, no event has occurred or circumstances exist that could reasonably be
expected to result in such a Material Adverse Change.

 

16

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3.13 Employee Benefits.

 

(a) Except as disclosed on Schedule 3.13 of Sellers’ Disclosure Schedules, there
are no “employee benefit plans” (within the meaning of Section 3(3) of ERISA)
nor any other employee benefit or fringe benefit arrangements, practices,
contracts, policies or programs other than programs merely involving the regular
payment of wages, commissions, or bonuses established, maintained or contributed
to by RHL. Any plans listed on Schedule 3.13 of Sellers’ Disclosure Schedules
are hereinafter referred to as the “RHL Employee Benefit Plans.”

 

(b) Any current and prior material documents, including all amendments thereto,
with respect to each RHL Employee Benefit Plan have been given to NAI or its
advisors.

 

(c) All RHL Employee Benefit Plans are in material compliance with the
applicable requirements of ERISA, the Code, and any other applicable state,
federal or foreign law.

 

(d) There are no pending, or to the Knowledge of Sellers, threatened, claims or
lawsuits that have been asserted or instituted against any RHL Employee Benefit
Plan, the assets of any of the trusts or funds under any RHL Employee Benefit
Plan, the plan sponsor or the plan administrator of any of the RHL Employee
Benefit Plans or against any fiduciary of an RHL Employee Benefit Plan with
respect to the operation of such plan.

 

(e) There is no pending, or to the Knowledge of Sellers, threatened,
investigation or pending or possible enforcement action by the Pension Benefit
Guaranty Corporation, the Department of Labor, the Internal Revenue Service or
any other government agency with respect to any RHL Employee Benefit Plan.

 

(f) No actual or, to the Knowledge of Sellers, contingent, liability exists with
respect to the funding of any RHL Employee Benefit Plan or for any other expense
or obligation of any RHL Employee Benefit Plan, except as disclosed in the
financial statements of RHL provided as set forth in Section 3.4, and to the
Knowledge of Sellers, no contingent liability exists under ERISA with respect to
any “multi-employer plan,” as defined in Section 3(37) or Section 4001(a)(3) of
ERISA.

 

3.14 Compliance with Legal Requirements; Governmental Authorizations.

 

(a) Except as set forth in Schedule 3.14 of Sellers’ Disclosure Schedules,
(i) RHL is, and at all times since January 1, 2000 has been, in material
compliance with each Legal Requirement that is or was applicable to it or to the
conduct or operation of its business or the ownership or use of any of its
assets; (ii) to the Knowledge of Sellers, no event has occurred or circumstance
exists that (with or without notice or lapse of time) (A) may constitute or
result in a material violation by RHL of, or a failure on the part of RHL to
materially comply with, any Legal Requirement, or (B) may give rise to any
obligation on the part of RHL to undertake, or to bear all or any portion of the
cost of, any remedial action of any nature; and (iii) RHL has not received any
notice or other communication (whether oral or written) from any Governmental
Body or any other Person regarding (A) any actual, alleged, possible, or
potential violation of, or failure to comply with, any Legal Requirement, or
(B) any actual, alleged, possible, or potential

 

17

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obligation on the part of RHL to undertake, or to bear all or any portion of the
cost of, any remedial action of any nature.

 

(b) Schedule 3.14 of Sellers’ Disclosure Schedules contains a complete and
accurate list of each Governmental Authorization that is held by RHL or that
otherwise relates to the business of, or to any of the assets owned or used by,
RHL. Each Governmental Authorization listed or required to be listed on Schedule
3.14 of Sellers’ Disclosure Schedules is valid and in full force and effect.
Except as set forth in Schedule 3.14 of Sellers’ Disclosure Schedules, (i) RHL
is in material compliance with all of the terms and requirements of each
Governmental Authorization identified or required to be identified in Schedule
3.14 of Sellers’ Disclosure Schedules; (ii) to the Knowledge of Sellers, no
event has occurred or circumstance exists that may (with or without notice or
lapse of time) (A) constitute or result directly or indirectly in a material
violation of or a failure to materially comply with any term or requirement of
any Governmental Authorization listed or required to be listed in Schedule 3.14
of Sellers’ Disclosure Schedules, or (B) result directly or indirectly in the
revocation, withdrawal, suspension, cancellation, or termination of, or any
modification to, any Governmental Authorization listed or required to be listed
in Schedule 3.14 of Sellers’ Disclosure Schedules; (iii) RHL has not received
any notice or other communication (whether oral or written) from any
Governmental Body or any other Person regarding (A) any actual, alleged,
possible, or potential violation of or failure to comply with any term or
requirement of any Governmental Authorization, or (B) any actual, proposed,
possible or potential revocation, withdrawal, suspension, cancellation,
termination of, or modification to any Governmental Authorization; and (iv) all
applications required to have been filed for the renewal of the Governmental
Authorizations listed or required to be listed in Schedule 3.14 of Sellers’
Disclosure Schedules have been duly filed on a timely basis with the appropriate
Governmental Bodies, and all other filings required to have been made with
respect to such Governmental Authorizations have been duly made on a timely
basis with the appropriate Governmental Bodies.

 

(c) The Governmental Authorizations listed in Schedule 3.14 of Sellers’
Disclosure Schedules collectively constitute all of the Governmental
Authorizations necessary to permit RHL to lawfully conduct and operate its
business in the manner it currently conducts and operates such business and to
permit RHL to own and use its assets in the manner in which it currently owns
and uses such assets.

 

3.15 Legal Proceedings; Orders.

 

(a) Except as set forth in Schedule 3.15 of Sellers’ Disclosure Schedules, there
is no pending Proceeding, (i) that has been commenced by or against RHL or that
otherwise relates to or may affect the business of, or any of the assets owned
or used by, RHL; or (ii) that challenges, or that may have the effect of
preventing, delaying, making illegal, or otherwise interfering with, any of the
Contemplated Transactions. To the Knowledge of Sellers, (1) no such Proceeding
has been Threatened, and (2) no event has occurred or circumstance exists that
may give rise to or serve as a basis for the commencement of any such
Proceeding. Sellers have delivered to NAI copies of all pleadings,
correspondence, and other documents relating to each Proceeding listed in
Schedule 3.15 of Sellers’ Disclosure Schedules. The Proceedings listed in
Schedule 3.15 of Sellers’ Disclosure Schedules are not reasonably expected to
have a Material Adverse Effect on RHL.

 

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(b) Except as set forth in Schedule 3.15 of Sellers’ Disclosure Schedules,
(i) there is no Order to which RHL or any assets owned or used by RHL is
subject; (ii) no Seller is subject to any Order that relates to the business of,
or any of the assets owned or used by, RHL; and (iii) no officer, director,
agent or, to the Knowledge of Sellers, employee of RHL is subject to any Order
that prohibits such officer, director, agent or employee from engaging in or
continuing any conduct, activity or practice relating to the business of RHL.

 

(c) Except as set forth in Schedule 3.15 of Sellers’ Disclosure Schedules,
(i) RHL is in material compliance with all of the terms and requirements of each
Order to which it, or any of the assets owned or used by it, is or has been
subject; (ii) to the Knowledge of Sellers, no event has occurred or circumstance
exists that may constitute or result in (with or without notice or lapse of
time) a material violation of or failure to materially comply with any term or
requirement of any Order to which RHL, or any of the assets owned or used by
RHL, is subject; and (iii) RHL has not received any notice or other
communication (whether oral or written) from any Governmental Body or any other
Person regarding any actual, alleged, possible, or potential violation of, or
failure to comply with, any term or requirement of any Order to which RHL, or
any of the assets owned or used by RHL, is or has been subject.

 

3.16 Absence of Certain Changes and Events. Except as set forth in Schedule 3.16
of Sellers’ Disclosure Schedules or in the Unaudited Balance Sheet, since the
date of the Balance Sheet, RHL has conducted its business only in the Ordinary
Course of Business and there has not been any:

 

(a) change in RHL’s authorized or issued capital stock; grant of any stock
option or right to purchase shares of capital stock of RHL; issuance of any
security convertible into such capital stock; grant of any registration rights;
purchase, redemption, retirement, or other acquisition by RHL of any shares of
any such capital stock; or declaration or payment of any dividend or other
distribution or payment in respect of shares of capital stock (except as
contemplated by Section 2.4(d) of this Agreement);

 

(b) amendment to the Organizational Documents of RHL;

 

(c) payment or increase by RHL of any bonuses, salaries, or other compensation
to any shareholder, director, officer or (except in the Ordinary Course of
Business) employee or entry into any employment, severance, or similar Contract
with any director, officer, or employee;

 

(d) adoption of, or increase in the payments to or benefits under, any profit
sharing, bonus, deferred compensation, savings, insurance, pension, retirement,
or other employee benefit plan for or with any employees of RHL;

 

(e) damage to or destruction or loss of any asset or property of RHL, whether or
not covered by insurance, that has had a Material Adverse Effect on RHL;

 

(f) entry into, termination of, or receipt of notice of termination of (i) any
license, distributorship, dealer, sales representative, joint venture, credit,
or similar agreement, or (ii) any Contract or transaction involving a total
remaining commitment by or to RHL of at least Seventy Five Thousand Dollars
($75,000);

 

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(g) sale (other than sales of inventory in the Ordinary Course of Business),
lease, or other disposition of any material asset or property of RHL or
mortgage, pledge, or imposition of any lien or other Encumbrance on any material
asset or property of RHL, including the sale, lease, or other disposition of any
of the Intellectual Property Assets;

 

(h) cancellation or waiver of any claims or rights with a value to RHL in excess
of Seventy Five Thousand Dollars ($75,000);

 

(i) material change in accounting methods used by RHL; or

 

(j) agreement, whether oral or written, by RHL to do any of the foregoing.

 

3.17 Contracts; No Defaults.

 

(a) Except as set forth in Schedule 3.17 of Sellers’ Disclosure Schedules, the
Balance Sheet or the notes thereto, or the Unaudited Balance Sheet, RHL is not a
party to any written or oral agreement not made in the Ordinary Course of
Business that is material to RHL. Except as set forth in Schedule 3.17 of
Sellers’ Disclosure Schedules, RHL does not own any real property. RHL is not a
party to or otherwise bound by any written or oral (a) agreement with any labor
union, (b) agreement for the purchase of fixed assets or for the purchase of
materials, supplies or equipment in excess of normal operating requirements,
(c) agreement for the employment of any officer, individual employee or other
Person on a full-time basis or any agreement with any Person for consulting
services, (d) bonus, pension, profit sharing, retirement, stock purchase, stock
option, deferred compensation, medical, hospitalization or life insurance or
similar plan, contract or understanding with respect to any or all of the
employees of RHL or any other Person, (e) indenture, loan or credit agreement,
note agreement, deed of trust, mortgage, security agreement, promissory note or
other agreement or instrument relating to or evidencing Indebtedness for
Borrowed Money or subjecting any asset or property of RHL to any Lien or
evidencing any Indebtedness, (f) guaranty of any Indebtedness, (g) lease or
agreement under which RHL is lessee of or holds or operates any property, real
or personal, owned by any other Person, (h) lease or agreement under which RHL
is lessor or permits any Person to hold or operate any property, real or
personal, owned or controlled by RHL, (i) agreement granting any preemptive
right, right of first refusal or similar right to any Person, (j) agreement or
arrangement with any Affiliate or any “associate” (as such term is defined in
Rule 405 under the Securities Act) of RHL or any present or former officer,
director or shareholder of RHL, (k) agreement obligating RHL to pay any royalty
or similar charge for the use or exploitation of any tangible or intangible
property, (l) covenant not to compete or other restriction on its ability to
conduct a business or engage in any other activity, (m) distributor, dealer,
manufacturer’s representative, sales agency, franchise or advertising contract
or commitment, (n) agreement to register securities under the Securities Act,
(o) collective bargaining agreement, or (p) agreement or other commitment or
arrangement with any Person continuing for a period of more than two months from
the Effective Date that involves an expenditure or receipt by RHL in excess of
$5,000. Except as disclosed on Schedule 3.17 of Sellers’ Disclosure Schedules,
RHL maintains no insurance policies and insurance coverage of any kind with
respect to RHL, its business, premises, properties, assets, employees and
agents. Schedule 3.17 of Sellers’ Disclosure Schedules contains a true and
complete list and description of each bank account, savings account, other
deposit relationship and safety deposit box of RHL, including the name of the

 

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bank or other depository, the account number and the names of the individuals
having signature or other withdrawal authority with respect thereto. Except as
disclosed on Schedule 3.17 of Sellers’ Disclosure Schedules, no consent of any
bank or other depository is required to maintain any bank account, other deposit
relationship or safety deposit box of RHL in effect following the Closing and
the Contemplated Transactions. Sellers have furnished to NAI true and complete
copies of all agreements and other documents disclosed or referred to in
Schedule 3.17 of Sellers’ Disclosure Schedules or the Balance Sheet or the notes
thereto, or the Unaudited Balance Sheet, as well as any additional agreements or
documents requested by NAI.

 

(b) Except as set forth in Schedule 3.17 of Sellers’ Disclosure Schedules, each
Contract identified or required to be identified in Schedule 3.17 of Sellers’
Disclosure Schedules (collectively, “Material Contracts”) is in full force and
effect and is valid and enforceable in accordance with its terms.

 

(c) Except as set forth in Schedule 3.17 of Sellers’ Disclosure Schedules,
(i) RHL is in material compliance with all applicable terms and requirements of
each Material Contract; (ii) each Person that has or had any obligation or
liability under any Material Contract is in material compliance with all
applicable terms and requirements of such Material Contract; (iii) no event has
occurred or circumstance exists that (with or without notice or lapse of time)
may contravene, conflict with, or result in a material violation or breach of,
or give RHL or other Person the right to declare a default or exercise any
remedy under, or to accelerate the maturity or performance of, or to cancel or
terminate, or modify, any Material Contract; and (iv) RHL has not given to nor
received from any other Person any notice or other communication (whether oral
or written) regarding any actual, alleged, possible, or potential violation or
breach of, or default under, any Material Contract.

 

(d) Except as set forth on Schedule 3.17 of Sellers’ Disclosure Schedules, there
are no pending renegotiations of or attempts to renegotiate, or outstanding
rights to renegotiate any material amounts paid or payable to RHL under current
or completed Material Contracts with any Person and no such Person has made
written demand for such renegotiation.

 

3.18 Insurance. Except as set forth on Schedule 3.18 of Sellers’ Disclosure
Schedules, (i) all insurance policies to which RHL is a party or that provide
coverage to RHL or any director or officer of RHL: (A) are valid, outstanding,
and enforceable; (B) are issued by an insurer that is financially sound and
reputable; (C) taken together, provide adequate insurance coverage for the
assets and operations of RHL for all risks to which RHL is normally exposed;
(D) are sufficient for compliance with all Legal Requirements and Material
Contracts to which RHL is a party or by which it is bound; (E) will continue in
full force and effect following the consummation of the Contemplated
Transactions; and (F) do not provide for any retrospective premium adjustment or
other experienced-based liability on the part of RHL; (ii) RHL has not received
(A) any refusal of coverage or any notice that a defense will be afforded with
reservation of rights, or (B) any notice of cancellation or any other indication
that any insurance policy is no longer in full force or effect or will not be
renewed or that the issuer of any policy is not willing or able to perform its
obligations thereunder; (iii) RHL has paid all premiums due, and has otherwise
performed all of its respective obligations, under each policy to which RHL is a
party or that provides coverage to RHL or any director thereof; and (iv) RHL has
given notice to the insurer of all claims that may be insured thereby.

 

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3.19 Environmental Matters. Except as set forth in Schedule 3.19 of Sellers’
Disclosure Schedules:

 

(a) RHL is, and at all times since January 1, 2000 has been, in material
compliance with, and has not been and is not in violation of or liable under,
any Environmental Law. Sellers have no basis to expect, nor has RHL or, to the
Knowledge of Sellers, any other Person for whose conduct RHL is or may be held
to be responsible, received, any actual or Threatened order, notice, or other
communication from (i) any Governmental Body or private citizen acting in the
public interest, or (ii) the current or prior owner or operator of any
Facilities, of any actual or potential violation or failure to comply with any
Environmental Law, or of any actual or Threatened obligation to undertake or
bear the cost of any Environmental, Health, and Safety Liabilities with respect
to any of the Facilities or any other properties or assets (whether real,
personal or mixed) in which RHL has had an interest, or with respect to any
property or Facility at or to which Hazardous Materials were generated,
manufactured, refined, transferred, imported, used, or processed by RHL or any
other Person for whose conduct RHL is or may be held responsible, or from which
Hazardous Materials have been transported, treated, stored, handled,
transferred, disposed, recycled or received.

 

(b) There are no pending or, to the Knowledge of Sellers, Threatened claims,
Encumbrances, or other restrictions of any nature, resulting from any
Environmental, Health, and Safety Liabilities or arising under or pursuant to
any Environmental Law, with respect to or affecting any of the Facilities or any
other properties and assets (whether real, personal, or mixed) in which RHL has
or had an interest.

 

(c) Sellers have no Knowledge of any basis to expect, nor has RHL or, to the
Knowledge of Sellers, any other Person for whose conduct RHL is or may be held
responsible, received, any citation, directive, inquiry, notice, Order, summons,
warning, or other communication that relates to Hazardous Activity, Hazardous
Materials, or any alleged, actual or potential violation or failure to comply
with any Environmental Law, or of any alleged, actual or potential obligation to
undertake or bear the cost of any Environmental, Health, and Safety Liabilities
with respect to any of the Facilities or any other properties or assets (whether
real, personal or mixed) in which RHL had an interest, or with respect to any
property or facility to which Hazardous Materials generated, manufactured,
refined, transferred, imported, used or processed by RHL or any other Person for
whose conduct RHL is or may be held responsible, have been transported, treated,
stored, handled, transferred, disposed, recycled or received.

 

(d) There has been no Release or, to the Knowledge of Sellers, Threat of
Release, of any Hazardous Materials at or from the Facilities or at any other
locations where any Hazardous Materials were generated, manufactured, refined,
transferred, produced, imported, used, or processed from or by the Facilities,
or from or by any other properties and assets (whether real, personal or mixed)
in which RHL has or had an interest, whether by Sellers, RHL or any other
Person.

 

(e) Sellers have delivered to NAI true and complete copies and results of any
reports, studies, analyses, tests, or monitoring possessed or initiated by
Sellers or RHL pertaining to Hazardous Materials or Hazardous Activities in, on,
or under the Facilities, or concerning

 

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compliance by RHL or any other Person for whose conduct RHL is or may be held
responsible, with Environmental Laws.

 

3.20 Employees. Except as set forth on Schedule 3.20 of Sellers’ Disclosure
Schedules, other than pursuant to ordinary arrangements of employment
compensation, RHL is not under any obligation or liability to any officer,
director, employee or Affiliate of RHL. RHL has no employment agreements with,
or any severance payment obligations to, any of its officers or employees. To
the Knowledge of Sellers, no employee of RHL is a party to, or is otherwise
bound by, any agreement or arrangement, including any confidentiality,
noncompetition, or proprietary rights agreement, between such employee and any
other Person that in any way adversely affects or will affect (i) the
performance of such employee’s duties as an employee of RHL, or (ii) the ability
of RHL to conduct its business. To Sellers’ Knowledge, except for the
resignations required by Section 2.4(a)(v) no key employee of RHL intends to
terminate his or her employment with RHL.

 

3.21 Labor Relations; Compliance. RHL has not been nor is it a party to any
collective bargaining or similar Contract. There has not been, there is not
presently pending or existing, and to Sellers’ Knowledge there is not
Threatened, (a) any strike, slowdown, picketing, work stoppage, or employee
grievance process, (b) any Proceeding against or affecting RHL relating to the
alleged violation of any Legal Requirement pertaining to labor relations or
employment matters, including any charge or complaint filed by an employee or
union with the National Labor Relations Board, the Equal Employment Opportunity
Commission, or any comparable Governmental Body, organizational activity, or
other labor or employment dispute against or affecting RHL or its premises, or
(c) any application for certification of a collective bargaining agent. To
Sellers’ Knowledge, no event has occurred or circumstance exists that could
provide the basis for any work stoppage or other labor dispute. There is no
lock-out of any employees by RHL, and no such action is contemplated by RHL. RHL
has complied in all material respects with all Legal Requirements relating to
employment, equal employment opportunity, nondiscrimination, immigration, wages,
hours, benefits, collective bargaining, the payment of social security and
similar taxes, occupational safety and health, and plant closing. RHL is not
liable for the payment of any compensation, damages, taxes, fines, penalties, or
other amounts, however designated, for failure to comply with any of the
foregoing Legal Requirements.

 

3.22 Intellectual Property.

 

(a) Intellectual Property Assets – The term “Intellectual Property Assets”
includes: (i) the name “Real Health Laboratories, Inc.,” all fictional business
names, trading names, registered and unregistered trademarks, service marks, and
applications (collectively, “Marks”); (ii) all patents, patent applications, and
inventions and discoveries that may be patentable (collectively, “Patents”);
(iii) all copyrights in both published works and unpublished works
(collectively, “Copyrights”); (iv) all rights in mask works (collectively,
“Rights in Mask Works”); and (v) all know-how, trade secrets, confidential
information, customer lists, software, technical information, data, process
technology, plans, drawings, and blue prints (collectively, “Trade Secrets”);
owned, used or licensed by RHL as licensee or licensor.

 

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(b) Agreements – Schedule 3.22 of Sellers’ Disclosure Schedules contains a
complete and accurate list and summary description, including any royalties paid
or received by RHL, of all Contracts relating to Intellectual Property Assets to
which RHL is a party or by which RHL is bound, except for any license implied by
the sale of a product and perpetual, paid-up licenses for commonly available
software programs with a value of less than $1,000 under which RHL is the
licensee. There are no outstanding and, to Sellers’ Knowledge, no Threatened
disputes or disagreements with respect to any such agreement.

 

(c) Know-How Necessary for the Business – The Intellectual Property Assets are
all those necessary for the operation of RHL’s business as it is currently
conducted. RHL has the valid right and license to use, or is the owner of all
right, title and interest in and to, each of the Intellectual Property Assets,
free and clear of all liens, security interests, charges, encumbrances, equities
and other adverse claims, and, except for such Intellectual Property Assets
subject to licenses set forth on Schedule 3.22 of Sellers’ Disclosure Schedules,
has the right to use all of the Intellectual Property Assets without payment to
a third party; and (ii) except as set forth in Schedule 3.22 of Sellers’
Disclosure Schedules, all former and current employees of RHL have executed
written Contracts with RHL that assign to RHL all rights to any inventions,
improvements, discoveries or information relating to the business of RHL. To the
Knowledge of Sellers, no employee of RHL has entered into any Contract that
restricts or limits in any way the scope or type of work in which the employee
may be engaged or requires the employee to transfer, assign, or disclose
information concerning his or her work to anyone other than RHL.

 

(d) Patents – RHL does not own any Patents. To the Knowledge of Sellers, none of
the products manufactured and sold, nor any process or know-how used, by RHL
infringes or is alleged to infringe any patent or other proprietary right of any
other Person.

 

(e) Trademarks – (i) Schedule 3.22 of Sellers’ Disclosure Schedules contains a
complete and accurate list and summary description of all Marks. RHL is the
owner of all right, title and interest in and to each of the Marks, free and
clear of all liens, security interests, charges, encumbrances, equities, and
other adverse claims; (ii) all Marks that have been registered with the United
States Patent and Trademark Office are currently in material compliance with all
formal legal requirements (including the timely post-registration filing of
affidavits of use and incontestability and renewal applications), are valid and
enforceable, and are not subject to any maintenance fees or taxes or actions
falling due within ninety days after the Closing; (iii) no Mark has been or is
now involved in any opposition, invalidation, or cancellation and, to Sellers’
Knowledge, no such action is Threatened with respect to any of the Marks;
(iv) to Sellers’ Knowledge, there is no potentially interfering trademark or
trademark application of any third party; (v) to Sellers Knowledge, no Mark is
infringed or has been challenged or threatened in any way. To Sellers’
Knowledge, none of the Marks used by RHL infringes or is alleged to infringe any
trade name, trademark, or service mark of any third party; and (vi) all products
and materials containing a federally registered Mark bear the proper federal
registration notice where permitted by law.

 

(f) Copyrights – RHL does not own any Copyrights.

 

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(g) Trade Secrets – (i) With respect to each Trade Secret, the documentation
relating to such Trade Secret is current, accurate, and sufficient in detail and
content to identify and explain it and to allow its full and proper use without
reliance on the knowledge or memory of any individual; (ii) RHL has taken all
commercially reasonable precautions to protect the secrecy, confidentiality, and
value of the Trade Secrets; (iii) RHL has good title and an absolute (but not
necessarily exclusive) right to use the Trade Secrets. The Trade Secrets are not
part of the public knowledge or literature, and, to Sellers’ Knowledge, have not
been used, divulged, or appropriated either for the benefit of any Person (other
than RHL) or to the detriment of RHL. No Trade Secret is subject to any adverse
claim or has been challenged or threatened in any way.

 

3.23 Certain Payments. Neither RHL nor any director, officer, agent or employee
of RHL, or to Sellers’ Knowledge any other Person associated with or acting for
or on behalf of RHL, has directly or indirectly (a) made any contribution, gift,
bribe, rebate, payoff, influence payment, kickback, or other payment to any
Person, private or public, regardless of form, whether in money, property or
services (i) to obtain favorable treatment in securing business, (ii) to pay for
favorable treatment for business secured, (iii) to obtain special concessions or
for special concessions already obtained, for or in respect of RHL or any
Affiliate of RHL, or (iv) in violation of any Legal Requirement, or
(b) established or maintained any fund or asset that has not been recorded in
the books and records of RHL.

 

3.24 Disclosure.

 

(a) No representation or warranty of Sellers in this Agreement and no statement
in Sellers’ Disclosure Schedules omits to state a material fact necessary to
make the statements herein or therein, in light of the circumstances in which
they were made, not misleading.

 

(b) There is no fact known to any Seller that has specific applicability to a
Seller or RHL (other than general economic or industry conditions) and that
materially adversely affects or, as far as Sellers can reasonably foresee,
materially threatens, the assets, business, prospects, financial condition, or
results of operations of RHL that has not been set forth in this Agreement or
Sellers’ Disclosure Schedules.

 

3.25 Relationships with Related Persons. No Seller or any Related Person of
Sellers or of RHL has any interest in any property (whether real, personal or
mixed and whether tangible or intangible), used in or pertaining to RHL’s
business. No Seller or any Related Person of Sellers or of RHL owns (of record
or as a beneficial owner) an equity interest or any other financial or profit
interest in, a Person that has (i) had business dealings or a material financial
interest in any transaction with RHL (other than business dealings or
transactions conducted in the Ordinary Course of Business at substantially
prevailing market prices and on substantially prevailing market terms), or
(ii) engaged in competition with RHL with respect to any line of the products or
services of RHL (a “Competing Business”) in any market presently served by RHL
(except for ownership of less than one percent of the outstanding capital stock
of any Competing Business that is publicly traded on any recognized exchange or
in the over-the-counter market). Except as set forth in Schedule 3.25 of
Sellers’ Disclosure Schedules, no Seller or any Related Person of Seller or RHL
is a party to any Contract with, or has any claim or right against, RHL.

 

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3.26 Brokers or Finders. No Person is entitled by reason of any act or omission
of Sellers or RHL to any broker’s or finder’s fees, commission or other similar
compensation with respect to the execution and delivery of this Agreement or
with respect to the consummation of the Contemplated Transactions.

 

4. Representations and Warranties of NAI. Except as set forth in NAI’s
Disclosure Schedules, NAI makes the representations and warranties to Sellers
contained in this Section 4. Each exception set forth in NAI’s Disclosure
Schedules and each other response to this Agreement set forth in NAI’s
Disclosure Schedules is identified by reference to, or has been grouped under a
heading referring to, a specific individual section of this Agreement but may
also relate to other sections of this Agreement to the extent it is reasonably
apparent from a reading of such response that it also qualifies or applies to
such other sections of this Agreement.

 

4.1 Organization and Good Standing. NAI is a corporation duly organized, validly
existing, and in good standing under the laws of the State of Delaware with full
corporate power and authority to conduct its business as it is now being
conducted. NAI is duly qualified to do business as a foreign corporation and is
in good standing under the laws of each state or other jurisdiction in which
either the ownership or use of the properties owned or used by it, or the nature
of the activities conducted by it, requires such qualification, except where the
failure to be so qualified would not have a Material Adverse Effect on NAI.

 

4.2 Authority; No Conflict.

 

(a) This Agreement, assuming its due, valid authorization, execution, and
delivery by all of the Sellers, constitutes the legal, valid, and binding
obligation of NAI, enforceable against NAI in accordance with its terms, except
as limited by applicable bankruptcy, insolvency, reorganization, moratorium,
fraudulent conveyance and other similar laws of general application affecting
enforcement of creditors’ rights generally. Upon the execution and delivery by
NAI of NAI’s Closing Documents, and assuming the due, valid authorization,
execution, and delivery by the other parties thereto, NAI’s Closing Documents
will constitute the legal, valid, and binding obligations of NAI, enforceable
against NAI in accordance with their respective terms, except as limited by
applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent
conveyance and other similar laws of general application affecting enforcement
of creditors’ rights generally. NAI has the absolute and unrestricted right,
power, and authority to execute and deliver this Agreement and NAI’s Closing
Documents and to perform its obligations under this Agreement and NAI’s Closing
Documents.

 

(b) Except as set forth in Schedule 4.2 of NAI’s Disclosure Schedules, neither
the execution and delivery of this Agreement by NAI nor the consummation or
performance of any of the Contemplated Transactions by NAI will, directly or
indirectly (with or without notice or lapse of time) give any Governmental Body
or other Person the right to challenge, prevent, delay or otherwise interfere
with any of the Contemplated Transactions pursuant to:

 

(i) any provision of the Organizational Documents of NAI, or any resolution
adopted by the Board of Directors or the stockholders of NAI;

 

(ii) any Legal Requirement or any Order to which NAI is subject; or

 

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(iii) any Contract to which NAI is a party or by which NAI is bound.

 

(c) Except as set forth in Schedule 4.2 of NAI’s Disclosure Schedules, NAI is
not and will not be required to obtain any Consent from any Governmental Body or
other Person in connection with the execution and delivery of this Agreement or
the consummation or performance of any of the Contemplated Transactions.

 

4.3 Capitalization. The authorized capital stock of NAI consists of Twenty
Million (20,000,000) shares of common stock, par value $0.01 per share (“NAI
Common Stock”), of which Six Million Thirty Eight Thousand Five Hundred Sixty
Seven (6,038,567) shares of NAI Common Stock are issued and outstanding, and
Five Hundred Thousand (500,000) shares of preferred stock, par value $0.01 per
share, of which no shares are issued and outstanding. All outstanding shares of
NAI Common Stock are duly authorized, validly issued, fully paid and
nonassessable and not subject to preemptive rights. All outstanding shares of
NAI Common Stock have been offered, issued, sold and delivered by NAI in
material compliance with the registration or qualification requirements (or
applicable exemptions therefrom) of the Securities Act and any other Legal
Requirement. One Million Nine Hundred Forty Thousand Nine Hundred Fifty Two
(1,940,952) shares of NAI Common Stock are reserved for issuance upon exercise
of stock options issued under the 1999 Omnibus Equity Incentive Plan, of which
One Million Three Hundred Twenty Nine Thousand Two Hundred (1,329,200) shares of
NAI Common Stock are subject to outstanding stock options and Six Hundred Eleven
Thousand Seven Hundred Fifty Two (611,752) shares are available for issuance
thereunder. All outstanding stock options are duly authorized and validly
issued, and have been offered, issued, and delivered by NAI in material
compliance with the registration or qualification requirements (or applicable
exemptions therefrom) of the Securities Act and any other Legal Requirement.

 

4.4 Issuance of NAI Stock. The shares of NAI Stock to be issued to Sellers in
connection with the Contemplated Transactions when issued against the sale and
transfer of the Shares to NAI in accordance with the terms of this Agreement,
will be duly authorized, validly issued, fully paid and non-assessable, free and
clear of all Encumbrances (except for restrictions imposed under the Lock-Up
Agreements and applicable federal and state securities laws) and preemptive
rights, and, assuming each Seller is an “accredited investor” (as defined in
Rule 501 of Regulation D promulgated under the Securities Act) and assuming the
accuracy of the representations and warranties of each Seller set forth in the
representation letters contemplated under Section 2.4(a)(vii), issued in
compliance with all applicable United States federal and state securities laws
currently in effect.

 

4.5 Investment Intent. NAI is acquiring the Shares for its own account and not
with a view to its distribution within the meaning of Section 2(11) of the
Securities Act.

 

4.6 Certain Proceedings. There is no pending Proceeding that has been commenced
against NAI and that challenges, or may have the effect of preventing, delaying,
making illegal, or otherwise interfering with, any of the Contemplated
Transactions. To NAI’s Knowledge, no such Proceeding has been Threatened.

 

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4.7 Disclosure.

 

(a) No representation or warranty of NAI in this Agreement and no statement in
NAI’s Disclosure Schedules omits to state a material fact necessary to make the
statements herein or therein, in light of the circumstances in which they were
made, not misleading.

 

(b) There is no fact known to NAI that has specific applicability to NAI (other
than general economic or industry conditions) that materially adversely affects
or, as far as NAI can reasonably foresee, materially threatens, the assets,
business, prospects, financial condition, or results of operations of NAI that
has not been set forth in this Agreement, NAI’s Disclosure Schedules, or NAI’s
SEC Documents.

 

4.8 Brokers or Finders. No Person is entitled by reason of any act or omission
of NAI to any broker’s or finder’s fees, commission or other similar
compensation with respect to the execution and delivery of this Agreement or
with respect to the consummation of the Contemplated Transactions.

 

4.9 SEC Reporting and Compliance.

 

(a) NAI has timely filed with the SEC all reports required to be filed by NAI
during the twelve calendar months preceding the Effective Date and has otherwise
filed with the SEC all registration statements, prospectuses, reports, forms,
statements, schedules, certifications and other documents required to be filed
by companies registered pursuant to Section 12(g) of the Exchange Act (all such
required registration statements, prospectuses, reports, forms, statements,
schedules, certifications and other documents are referred to herein as the “NAI
SEC Documents”). At the time they were filed with the SEC (or at the effective
date thereof in the case of registration statements) or if amended or superseded
by a filing prior to the Effective Date, then on the date of such filing, NAI
SEC Documents (i) complied in all material respects with the requirements of the
Securities Act, the Exchange Act, the Sarbanes-Oxley Act (to the extent then
applicable), and the rules and regulations of the SEC promulgated thereunder
applicable to such NAI SEC Documents, and (ii) did not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading.

 

(b) NAI has not filed, and nothing has occurred with respect to which NAI would
be required to file, any report on Form 8-K since October 25, 2005, with the
exception of the Contemplated Transactions and the funding of certain additional
term debt NAI intends to obtain to fund the Cash Purchase Price, each of which
shall require the filing by NAI of a report on Form 8-K within four (4) business
days after the Closing.

 

(c) NAI has otherwise complied in all material respects with the Securities Act,
Exchange Act and all other applicable United States federal and state securities
laws.

 

4.10 Financial Statements. The balance sheets, and statements of operations,
statements of changes in stockholders’ equity and statements of cash flows
contained in the NAI SEC Documents (the “NAI Financial Statements”)
(i) complied, at the respective time of filing

 

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of the NAI SEC Documents with the SEC (or at the effective date thereof in the
case of registration statements) or if amended or superseded by a filing prior
to the Effective Date, then on the date of such filing, as to form in all
material respects with the published rules and regulations of the SEC with
respect thereto, (ii) have been prepared in accordance with GAAP applied on a
basis consistent with prior periods (and, in the case of unaudited financial
information, on a basis consistent with year-end audits), (iii) are in
accordance with the books and records of NAI, and (iv) present fairly in all
material respects the financial condition of NAI at the dates therein specified
and the results of its operations and changes in financial position for the
periods therein specified. The financial statements included in the Annual
Report on Form 10-K for the fiscal year ended June 30, 2005, are audited by, and
include the related report of Ernst & Young LLP, NAI’s independent registered
public accounting firm. The financial information included in the Quarterly
Report on Form 10-Q for the quarter ended September 30, 2005 is unaudited, but
reflects all adjustments (including normally recurring accounts) that NAI
considers necessary for a fair presentation of such information and have been
prepared in accordance with generally accepted accounting principles,
consistently applied.

 

5. Conditions Precedent to NAI’s Obligation to Close. NAI’s obligation to
purchase the Shares and to take the other actions required to be taken by NAI at
the Closing is subject to the satisfaction, at or prior to the Closing of each
of the following conditions (any of which may be waived by NAI, in whole or in
part):

 

5.1 No Errors, etc. The representations and warranties of the Sellers under this
Agreement shall be deemed to have been made as of the Closing and shall then be
true and correct in all material respects.

 

5.2 Compliance with Agreement. Sellers shall have performed and complied in all
material respects with all agreements and conditions required by this Agreement
to be performed or complied with by them on or before the Closing. Each of
Sellers’ Closing Documents must have been delivered to NAI at or prior to the
Closing.

 

5.3 Consents. Each of the Consents identified in Schedule 3.2 of Sellers’
Disclosure Schedules and 4.2 of NAI’s Disclosure Schedules must have been
obtained and must be in full force and effect.

 

5.4 No Breach. There shall not exist as of the Closing any Breach or any event
or condition, that with the giving of notice or lapse of time, or both, would
constitute a Breach, and except as set forth in Sellers’ Disclosure Schedules or
the Unaudited Balance Sheet, since the date of the Balance Sheet, there shall
have been no Material Adverse Change in the financial condition of RHL.

 

5.5 Opinion of Sellers’ Counsel. NAI shall have received from Sonnenschein
Nath & Rosenthal, Los Angeles, California, counsel for Sellers a favorable
opinion dated the Effective Date to the effect set forth in Exhibit G.

 

5.6 Evidence of Good Standing. NAI shall have received as of a date within
thirty (30) days of the Effective Date evidence of the good standing and
corporate existence of RHL issued by the California Secretary of State and by
the California Franchise Tax Board.

 

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5.7 Payment of Sellers’ Indebtedness. Except as expressly provided in this
Agreement, Sellers will cause all indebtedness, if any, owed to RHL by any
Seller or any Related Person of Sellers to be paid in full prior to Closing.

 

5.8 No Restraining Action. There must not have been commenced or Threatened
against NAI, or against any Person affiliated with NAI, any Proceeding
(a) involving any challenge to, or seeking damages or other relief in connection
with, any of the Contemplated Transactions, or (b) that may have the effect of
preventing, delaying, making illegal, or otherwise interfering with any of the
Contemplated Transactions.

 

5.9 No Claim Regarding Stock Ownership or Sale Proceeds. There must not have
been made or Threatened by any Person any claim asserting that such Person
(a) is the holder or the beneficial owner of, or has the right to acquire or to
obtain beneficial ownership of, any stock of, or any other voting, equity, or
ownership interest in, RHL, or (b) is entitled to all or any portion of the
Purchase Price payable for the Shares.

 

5.10 No Prohibition. Neither the consummation nor the performance of any of the
Contemplated Transaction will, directly or indirectly (with or without notice or
lapse of time), materially contravene, or conflict with, or result in a material
violation of, or cause NAI or any Person affiliated with NAI to suffer any
Material Adverse Effect under, (a) any applicable Legal Requirement or Order, or
(b) any Legal Requirement or Order that has been published, introduced, or
otherwise proposed by or before any Governmental Body.

 

5.11 Additional Documents. NAI shall have received such additional supporting
documentation and other information with respect to the Contemplated
Transactions as NAI may reasonably request. All corporate and other proceedings
and actions taken in connection with the Contemplated Transactions and all
certificates, opinions, agreements, instruments and documents mentioned herein
or incident to any such transactions shall be satisfactory in form and substance
to NAI and its legal counsel.

 

6. Conditions Precedent to Sellers’ Obligation to Close. Sellers’ obligation to
sell the Shares and to take the other actions required to be taken by Sellers at
the Closing is subject to the satisfaction, at or prior to the Closing, of each
of the following conditions (any of which may be waived by the Sellers, in whole
or in part):

 

6.1 No Errors, etc. The representations and warranties of NAI under this
Agreement shall be deemed to have been made as of the Closing and shall then be
true and correct in all material respects.

 

6.2 Compliance with Agreement. NAI shall have performed and complied in all
material respects with all agreements and conditions required by this Agreement
to be performed or complied with by it on or before the Closing. Each of NAI’s
Closing Documents must have been delivered to Sellers at or prior to the
Closing.

 

6.3 Consents. Each of the Consents identified in Schedule 3.2 of Sellers’
Disclosure Schedules and Schedule 4.2 of NAI’s Disclosure Schedules must have
been obtained and must be in full force and effect.

 

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6.4 No Breach. There shall not exist as of the Closing any Breach or any event
or condition, that with the giving of notice or lapse of time, or both, would
constitute a Breach.

 

6.5 Evidence of Good Standing. Sellers shall have received as of a date within
thirty (30) days of the Effective Date evidence of the good standing and
corporate existence of NAI issued by the Secretary of State of Delaware and of
California.

 

6.6 No Restraining Action. There must not have been commenced or Threatened
against RHL, Sellers, or against any Person affiliated with Sellers or RHL, any
Proceeding (a) involving any challenge to, or seeking damages or other relief in
connection with, any of the Contemplated Transactions, or (b) that may have the
effect of preventing, delaying, making illegal, or otherwise interfering with
any of the Contemplated Transactions.

 

6.7 No Prohibition. Neither the consummation nor the performance of any of the
Contemplated Transaction will, directly or indirectly (with or without notice or
lapse of time), materially contravene, or conflict with, or result in a material
violation of, or cause RHL, Sellers or any Person affiliated with Sellers or RHL
to suffer any Material Adverse Effect under, (a) any applicable Legal
Requirement or Order, or (b) any Legal Requirement or Order that has been
published, introduced, or otherwise proposed by or before any Governmental Body.

 

6.8 Additional Documents. Sellers shall have received such additional supporting
documentation and other information with respect to the Contemplated
Transactions as Sellers may reasonably request. All corporate and other
proceedings and actions taken in connection with the Contemplated Transactions
and all certificates, opinions, agreements, instruments and documents mentioned
herein or incident to any such transactions shall be satisfactory in form and
substance to RHL, Sellers and their respective legal counsels.

 

7. Termination.

 

7.1 Termination Events. This Agreement may, by notice given prior to or at the
Closing, be terminated:

 

(a) by either NAI or Sellers if a material Breach of any provision of this
Agreement has been committed by the other party and such Breach has not been
waived or cured within a reasonable amount of time after written notice of such
Breach by the non-breaching party to the breaching party. Notwithstanding the
foregoing, if the nature of the Breach is such that it would be impractical or
unreasonable to give the breaching party an opportunity to cure such Breach, the
non-breaching party need not give the breaching party such opportunity;

 

(b) (i) by NAI if any of the conditions in Section 5 has not been satisfied as
of the Closing or if satisfaction of such a condition is or becomes impossible
(other than through the failure of NAI to comply with its obligations under this
Agreement) and NAI has not waived such condition on or before the Closing; or
(ii) by Sellers, if any of the conditions in Section 6 has not been satisfied as
of the Closing or if satisfaction of such a condition is or becomes impossible
(other than through the failure of Sellers to comply with their obligations
under this Agreement) and Sellers have not waived such condition on or before
the Closing;

 

(c) by mutual written consent of NAI and Sellers; or

 

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(d) by either NAI or Sellers if the Closing has not occurred (other than through
the failure of any party seeking to terminate this Agreement to comply fully
with its obligations under this Agreement) on or before December 15, 2005, or
such later date as the parties may agree upon.

 

7.2 Effect of Termination. Each party’s right of termination under Section 7.1
is in addition to any other rights it may have under this Agreement or
otherwise, and the exercise of a right of termination will not be an election of
remedies. If this Agreement is terminated pursuant to Section 7.1, all further
obligations of the parties under this Agreement will terminate, except that the
obligations in Sections 8, 9.1, 9.2, 9.3, 9.5, 9.12 and 9.16 will survive;
provided, however, that if this Agreement is terminated by a party because of
the Breach of the Agreement by the other party or because one or more of the
conditions to the terminating party’s obligations under this Agreement is not
satisfied as a result of the other party’s failure to comply with its
obligations under this Agreement, the terminating party’s right to pursue all
legal remedies will survive such termination unimpaired.

 

8. Indemnification; Remedies.

 

8.1 Survival. All representations, warranties, covenants, and obligations in
this Agreement, including all exhibits and schedules attached hereto, will
survive the Closing for a period of one (1) year from the Effective Date.

 

8.2 Notice as to Breach. The right to indemnification, payment of Damages, or
other remedy based on such representations, warranties, covenants, and
obligations referred to in Section 8.1 will not be affected by any investigation
conducted with respect to, or any Knowledge acquired (or capable of being
acquired) at any time, whether before or after the execution and delivery of
this Agreement or the Closing, with respect to the accuracy or inaccuracy of or
compliance with, any such representation, warranty, covenant or obligation. The
waiver of any condition based on the accuracy of any representation or warranty,
or on the performance of or compliance with any covenant or obligation, will not
affect the right to indemnification, payment of Damages, or other remedy based
on such representations, warranties, covenants and obligations. Notwithstanding
anything in this Section 8.2 to the contrary, in the event that, at any time
prior to the Closing, NAI or Sellers shall have Knowledge that any
representation or warranty made by the other hereunder is untrue, NAI or
Sellers, as applicable, shall promptly provide the other party written notice to
that effect, indicating the basis for such belief that such representation or
warranty is untrue. For purposes of this Section 8, a party shall not be deemed
to have breached any representation, warranty, covenant or obligation if (i) the
other party, prior to the Closing, had Knowledge of the Breach, or facts and
circumstances constituting or resulting in a Breach, of such representation,
warranty, covenant or obligation, (ii) the Breach could have been cured within a
reasonable time by, or at the direction of, the breaching party if the breaching
party had known of the Breach, and (iii) the non-breaching party did not notify
the breaching party of the Breach and consummated the Contemplated Transactions
notwithstanding the non-breaching party’s Knowledge of the Breach. This
Section 8.2 shall not limit any claim for fraud or any covenant or agreement of
the parties which by its terms contemplates performance after the Effective
Date.

 

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8.3 Indemnification and Payment of Damages by Sellers. Sellers, jointly and
severally, will indemnify and hold harmless NAI, RHL and their respective
Representatives, stockholders, controlling persons, and Affiliates
(collectively, the “Indemnified Persons”) for, and will pay to the Indemnified
Persons the amount of, any loss, liability, claim, damage, expense (including
costs of investigation and defense and reasonable attorneys’ fees) or diminution
of value, whether or not involving a third party claim (collectively,
“Damages”), arising, directly or indirectly, from or in connection with:

 

(a) any Breach of any representation or warranty made by Sellers in this
Agreement, including all exhibits or schedules attached hereto and delivered by
Sellers pursuant to this Agreement;

 

(b) any Breach by any Seller of any covenant or obligation of such Seller in
this Agreement, including all exhibits or schedules attached hereto and
delivered by Sellers pursuant to this Agreement;

 

(c) any claim by any Person for brokerage or finder’s fees or commissions or
similar payments based upon any agreement or understanding alleged to have been
made by any such Person with any Seller or RHL (or any Person acting on their
behalf) in connection with any of the Contemplated Transactions;

 

(d) Real Health Laboratories, LLC, a California limited liability company, and
Real Health Company, a California general partnership; and

 

(e) the transfer and acquisition of the assets and business of Real Health
Company to and by RHL;

 

The remedies provided in this Section 8.3 will not be exclusive of or limit any
other remedies that may be available to NAI or the other Indemnified Persons.

 

8.4 Indemnification and Payment of Damages by NAI. NAI will indemnify and hold
harmless Sellers, and will pay to Sellers the amount of any Damages arising,
directly or indirectly, from or in connection with:

 

(a) any Breach of any representation or warranty made by NAI in this Agreement,
including all exhibits or schedules attached hereto and delivered by NAI
pursuant to this Agreement;

 

(b) any Breach by NAI of any covenant or obligation of NAI in this Agreement,
including all exhibits or schedules attached hereto and delivered by NAI
pursuant to this Agreement; and

 

(c) any claim by any Person for brokerage or finder’s fees or commissions or
similar payments based upon any agreement or understanding alleged to have been
made by such Person with NAI (or any Person acting on its behalf) in connection
with any of the Contemplated Transactions.

 

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The remedies provided in this Section 8.4 will not be exclusive of or limit any
other remedies that may be available to Sellers.

 

8.5 Escrow; Right of Set-Off. Upon written notice to Sellers specifying in
reasonable detail the basis for such set-off, and Sellers do not in good faith
dispute NAI’s basis for such set-off within ten (10) calendar days of receipt of
such notice from NAI, NAI may set off any amount to which it is entitled under
this Section 8 against amounts held in escrow pursuant to the Escrow Agreement
and in accordance with the procedures set forth in such Escrow Agreement. Any
exercise of such right to set-off will not constitute an election of remedies or
limit NAI in any manner in the enforcement of any other remedies that may be
available to it.

 

8.6 Procedure for Indemnification – Third Party Claims.

 

(a) Promptly after receipt by an Indemnified Person entitled to indemnity under
Section 8.3 or a Seller entitled to indemnity under Section 8.4 (an
“Indemnitee”) of notice of the assertion of a third party claim against it, such
Indemnitee shall, if a claim is to be made against the party obligated to
indemnify under such section (“Indemnitor”), give written notice to the
Indemnitor of the assertion of such third party claim, but the failure or delay
in notifying the Indemnitor will not relieve the Indemnitor of any liability
that it may have to Indemnitee, except to the extent that the Indemnitor
demonstrates that the defense of the third party claim is prejudiced by the
Indemnitee’s failure or delay in giving such notice.

 

(b) Indemnitor shall be entitled to participate in the defense of any third
party claim for which indemnification is sought and, to the extent that it
wishes (unless (i) the third party claim is also against Indemnitor and
Indemnitee determines in good faith that joint representation would be
inappropriate, or (ii) Indemnitor fails to provide reasonable assurance to
Indemnitee of its financial capacity to defend such third party claim and
provide indemnification with respect to such third party claim), to assume the
defense of such third party claim with counsel reasonably satisfactory to
Indemnitee. After notice from the Indemnitor to the Indemnitee of its election
to assume the defense of such third party claim, the Indemnitor shall not, as
long as it diligently conducts such defense, be liable to the Indemnitee under
this Section 8 for any fees of other counsel or any other expenses with respect
to the defense of such third party claim, in each case subsequently incurred by
Indemnitee in connection with the defense of such third party claim, other than
reasonable costs of investigation. If the Indemnitor assumes such defense of a
third party claim, the Indemnitee shall have the right to participate in the
defense thereof and to employ counsel, at its own expense, separate from the
counsel employed by the Indemnitor. If the Indemnitor assumes the defense of a
third party claim, (i) such assumption will not in any way establish, or
constitute evidence, for purposes of this Agreement, that the claims made in
that third party claim are within the scope of and subject to indemnification;
(ii) no compromise or settlement of such third party claim may be effected by
the Indemnitor without the Indemnitee’s prior written consent unless (A) there
is no finding or admission of any violation of any legal requirement or any
violation of the rights of any person and no effect on any other claims that may
be made against the Indemnitee, and (B) the sole relief provided is monetary
damages that are paid in full by the Indemnitor; and (iii) the Indemnitee shall
have no liability with respect to any compromise or settlement of such third
party claim effected without its consent. If notice is given to Indemnitor of
the assertion of any

 

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third party claim and the Indemnitor fails to assume the defense of such third
party claim within ten (10) days after the Indemnitee’s notice is given if
required to do so under this Section 8, the Indemnitee will (upon delivering
notice to such effect to the Indemnitor) have the right to undertake, at the
Indemnitor’s cost and expense, the defense, compromise or settlement of such
third party claim on behalf of and for the account and risk of the Indemnitor;
provided, however, in which event the Indemnitor shall be entitled, at the
Indemnitor’s cost, risk and expense, to participate in such defense, compromise
or settlement with separate counsel of its own choosing; provided, further, that
such third party claim shall not be compromised or settled without the written
consent of the Indemnitor, which consent shall not be unreasonably withheld. If
the Indemnitee settles or compromises such third party action without the prior
written consent of the Indemnitor, the Indemnitor will bear no liability
hereunder for or with respect to such third party claim unless such consent has
been requested and unreasonably denied.

 

(c) Notwithstanding the foregoing, if Indemnitee determines in good faith that
there is a reasonable probability that a third party claim may adversely affect
it other than as a result of monetary damages for which it would be entitled to
indemnification under this Agreement, Indemnitee may, by notice to Indemnitor,
assume the exclusive right to defend, compromise, or settle such third party
claim, but the Indemnitor will not be bound by any determination of any third
party claim so defended for the purposes of this Agreement or any compromise or
settlement effected without its consent (which may not be unreasonably
withheld).

 

(d) With respect to any third party claim subject to indemnification under this
Section 8, (i) both Indemnitor and Indemnitee, as the case may be, shall keep
the other fully informed of the status of such third party claim and any related
proceedings at all stages thereof where such party is not represented by its own
counsel, and (ii) the parties agree (each at its own expense) to render to each
other such assistance as they may reasonably require of each other and to
cooperate in good faith with each other in order to ensure the proper and
adequate defense of any third party claim.

 

(e) With respect to any third party claim subject to indemnification under this
Section 8, the parties agree to cooperate in such a manner as to preserve in
full (to the extent possible) the confidentiality of all Confidential
Information and the attorney-client and work-product privileges.

 

8.7 Procedure for Indemnification – Other Claims. A claim for indemnification
for any matter not involving a third-party claim may be asserted by notice to
the party from whom indemnification is sought within a reasonable time after
determination that an event has occurred that has given rise to a right of
indemnification hereunder.

 

8.8 Limitations on Liability. Notwithstanding any other provision of this
Agreement: (i) the liability of Sellers or NAI for any Damages shall be limited
to direct Damages and shall not include incidental, consequential or punitive
damages (whether arising in tort, contract or otherwise, including the
negligence or gross negligence of any of the parties and whether or not
foreseeable), unless such Damages arise as a result of fraud or willful
misconduct; (ii) no party shall have any liability for any Damages unless and
until the aggregate amount of all Damages against such party exceeds Twenty Five
Thousand Dollars ($25,000), whereupon such

 

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party shall be liable for and shall indemnify the other party from and against
all Damages; and (iii) the obligations of Sellers or NAI for Damages, whether
pursuant to the indemnity obligations of this Section 8 or otherwise, arising,
directly or indirectly, from or in connection with, this Agreement or the
Contemplated Transactions, shall in no event exceed in the aggregate the
Purchase Price.

 

9. General Provisions.

 

9.1 Expenses. Except as otherwise expressly provided in this Agreement, each
party to this Agreement will bear its respective expenses incurred in connection
with the preparation, execution, and performance of this Agreement and the
Contemplated Transactions, including all fees and expenses of agents,
representatives, counsel and accountants. Notwithstanding the foregoing, NAI
consents to RHL agreeing to pay Sonnenschein Nath & Rosenthal LLP a total of
Thirty Five Thousand Dollars ($35,000) for fees and costs incurred from and
after November 1, 2005 in connection with this Agreement and the Contemplated
Transactions, which amount is in addition to other legal fees and costs owing as
set forth in the Unaudited Balance Sheet and as may be incurred from and after
November 1, 2005 in the Ordinary Course of Business. In the event of termination
of this Agreement, the obligation of each party to pay its own expenses will be
subject to any rights of such party arising from a breach of this Agreement by
another party.

 

9.2 Public Announcements. Prior to the Closing, no party shall make any public
disclosure or issue any press release or other announcement, whether written or
oral, with respect to this Agreement or the Contemplated Transactions. After the
Closing, any public announcement or similar publicity with respect to this
Agreement or the Contemplated Transactions will be issued, if at all, at such
time and in such manner as NAI determines and otherwise in compliance with
applicable Legal Requirements. Notwithstanding the foregoing, prior to the
Closing, any party hereto may make any announcements required by applicable
Legal Requirements as long as the party making the disclosure or announcement
(i) notifies the other parties promptly upon learning of such requirement,
(ii) provides the other parties a copy of such proposed disclosure or
announcement and an opportunity to comment thereon, and (iii) in good faith
attempts to otherwise comply with this Section 9.2. Sellers and NAI agree to
consult with each other concerning the means by which RHL’s employees,
customers, and suppliers and others having dealings with RHL will be informed of
the Contemplated Transactions, and NAI will have the right to be present for any
such communication.

 

9.3 Confidentiality.

 

(a) The parties acknowledge that the existence of this Agreement and certain
information that has been or may be disclosed by the parties is considered
Confidential Information. For purposes of this Agreement, “Confidential
Information” means all information and material that is proprietary to the
disclosing party, whether or not marked as “confidential” or “proprietary” and
that is disclosed to another party hereto, which relates to the disclosing
party’s past, present or future research, development or business activities.
Confidential Information includes, without limitation, all of the following:
designs, drawings, specifications, techniques, models, data, source codes,
object codes, documentation, diagrams, flow charts, research, development,
processes, procedures, “know-how,” new product or new technology information,
product prototypes, product copies, manufacturing, development or marketing

 

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techniques and material, development or marketing timetables, strategies, and
development plans, including trade names, trademarks, customer, supplier, or
personnel names, and other information related to customers, suppliers or
personnel, pricing policies and financial information, and other information of
a similar nature, whether or not reduced to writing or other tangible form, and
other trade secrets or nonpublic business information. Confidential Information
does not include any information that (a) was in the lawful and unrestricted
possession of the receiving party before its disclosure to the receiving party
by the disclosing party; (b) is or becomes generally available to the public by
acts other than those of the receiving party after receiving it; or (c) has been
received lawfully and in good faith by the receiving party from a third party
who did not derive it from the disclosing party.

 

(b) Each party hereto agrees to not, and to cause the respective directors,
officers, employees, agents, and advisors of NAI and RHL, as applicable, to not,
without the prior written consent of the other parties, use, copy, disclose or
allow access to any Confidential Information, or disclose the existence of this
Agreement, the information contained herein or any other information delivered
by a party to any other party to any Person other than such party’s accountants,
attorneys, or Governmental Bodies and any other Persons who need such
information to assist a party in determining whether to enter into this
Agreement and to consummate the Contemplated Transactions for so long afterwards
as the pertinent information or data remain Confidential Information, regardless
of whether the Confidential Information is in written or tangible form. The
parties acknowledge that money damages for a breach under this Section 9.3 may
be inadequate and that a party shall be entitled to seek specific enforcement of
this provision.

 

(c) Upon request of the disclosing party and, in any event, upon the termination
of this Agreement, all Confidential Information and all copies thereof, whether
in printed or electronic form, shall be returned to the disclosing party.

 

(d) Sellers understand that NAI is a publicly traded company and acknowledge
that they are aware of the restrictions imposed by the United States securities
laws on the purchase or sale of securities by any Person who has received
material, non-public information from the issuer of such securities and on the
communication of such information to any other Person when it is reasonably
foreseeable that such other Person is likely to purchase or sell such securities
in reliance upon such information. Sellers agree until the termination of this
Agreement or otherwise in accordance with the terms of the Lock-Up Agreements,
not to offer, sell, contract to sell, pledge, hypothecate, assign, publicly
announce the intention to sell, or otherwise transfer or dispose of any shares
of NAI Stock, whether now owned or hereafter acquired or with respect to which a
Seller would be considered to have beneficial ownership within the meaning of
Rule 13d-3 promulgated under the Exchange Act, or any interest therein, or any
options, warrants or other rights to purchase or otherwise acquire any shares of
NAI Stock.

 

9.4 Amendment; Waiver. No amendment or modification of any of the terms of this
Agreement, nor any purported waiver of any condition or breach of any provision
hereof, shall be effective unless in writing and signed by each of the other
parties hereto. The rights and remedies of the parties to this Agreement are
cumulative and not alternative. The failure of any party at any time to require
performance by any other party of any provision hereof shall not

 

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affect in any way the right to require such performance at any later time, nor
shall the waiver by any party of a breach of any provision hereof be taken or
held to be a waiver of such provision. No waiver of any provision of this
Agreement shall be deemed, or shall constitute, a waiver of any other provision,
whether or not similar, nor shall any waiver constitute a continuing waiver.

 

9.5 Governing Law. The laws of the State of Delaware (without giving effect to
its conflicts of laws principles) shall govern the issuance of the NAI Stock to
Sellers and the laws of the State of California (without giving effect to its
conflicts of laws principles) shall govern all other matters arising out of or
relating to this Agreement and all of the Contemplated Transactions, including
without limitation, its validity, interpretation, construction, performance, and
enforcement.

 

9.6 Severability. If any provision of this Agreement is held invalid, illegal or
unenforceable for any reason by any court of competent jurisdiction (or, if
applicable, an arbitrator), the remaining provisions of this Agreement shall not
be affected and shall remain in full force and effect, and this Agreement shall
be construed as if such invalid, illegal or unenforceable provision had not been
contained in this Agreement. Any provision of this Agreement held invalid,
illegal or unenforceable only in part or degree shall remain in full force and
effect to the extent not held invalid, illegal or unenforceable.

 

9.7 Entire Agreement. This Agreement, together with all exhibits and schedules
attached hereto and other documents referred to herein, constitutes the entire
agreement between the parties hereto with respect to the subject matter hereof.
This Agreement supersedes and replaces all prior understandings, negotiations,
commitments, writings and agreements between the parties hereto, whether written
or oral, express or implied, with respect to its subject matter. Each party to
this Agreement acknowledges that no representations, warranties, inducements,
promises or agreements, oral or otherwise, have been made by any party, or
anyone acting on behalf of any party, which are not embodied herein.

 

9.8 Construction. Words used in the singular shall include the plural, and
vice-versa, and any gender shall be deemed to include the other. The captions
and headings contained in this Agreement are for convenience of reference only,
and shall not be deemed to define or limit the provisions hereof. The terms of
this Agreement shall be fairly construed and the usual rule of construction, to
the effect that any ambiguities herein should be resolved against the drafting
party, shall not be employed in the interpretation of this Agreement or any
amendments, modifications, schedules or exhibits hereto. Unless otherwise
expressly provided, the word “including” does not limit the preceding words or
terms. All references to currency herein are to United States Dollars unless
otherwise specified herein.

 

9.9 Counterparts; Facsimile Signatures. This Agreement may be executed in
counterparts, each of which shall be deemed an original and all of which, when
taken together, shall be deemed to constitute one and the same instrument. The
exchange of copies of this Agreement and of signature pages by facsimile
transmission shall constitute effective execution and delivery of this Agreement
as to the parties and may be used in lieu of the original Agreement for all
purposes. Signatures of the parties transmitted by facsimile shall be deemed to
be their original signatures for all purposes.

 

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9.10 Disclosure Schedules. In the event of any inconsistency between the
statements in the body of this Agreement and those in Sellers’ Disclosure
Schedules or NAI’s Disclosure Schedules (other than an exception or limitation
expressly set forth as such in Sellers’ Disclosure Schedules or NAI’s Disclosure
Schedules), the statements in the body of this Agreement will control.

 

9.11 No Parties in Interest. Nothing in this Agreement, whether express or
implied, is intended to confer any rights or remedies under or arising by reason
of this Agreement on any Persons other than the parties hereto and their
respective successors and permitted assigns. Nothing in this Agreement is
intended to relieve or discharge the obligation or liability of any third Person
to any party to this Agreement, nor shall any provision give any third Person
any right of subrogation or action over or against any party to this Agreement.

 

9.12 Attorneys’ Fees. If any party brings a suit or other proceeding against
another party as a result of any alleged breach or failure by the other party to
fulfill or perform any covenants or obligations under this Agreement, then the
prevailing party obtaining final judgment in such action or proceeding shall be
entitled to receive from the non-prevailing party the prevailing party’s
reasonable attorneys’ fees incurred by reason of such action or proceeding and
all costs associated with such action or proceeding incurred by the prevailing
party, including the costs of preparation and investigation. The term
“prevailing party” shall mean the party that is entitled to recover its
attorneys’ fees, costs and expenses in the proceeding under applicable law or
the party designated as such by the court or arbitrator.

 

9.13 Time of Essence. With regard to all dates and time periods set forth or
referred to in this Agreement, time is of the essence.

 

9.14 Notices. All notices, consents, waivers and other communications required
or permitted under this Agreement must be in writing and will be deemed to have
been given by a party (a) when delivered by hand; (b) one day after deposit with
a nationally recognized overnight courier service; (c) five days after deposit
in the United States mail, if sent by certified mail, return receipt requested;
or (d) when sent by facsimile with confirmation of transmission by the
transmitting equipment (a confirming copy of the notice shall also be delivered
by the method specified in (b) above); in each case costs prepaid and to the
following addresses or facsimile numbers and marked to the attention of the
person (by name or title) designated below (or to such other address, facsimile
number, or person as a party may designate by notice to the other parties).

 

If to NAI:    Natural Alternatives International, Inc.      1185 Linda Vista
Drive      San Marcos, CA 92078      Attn: John Reaves      Facsimile No.:
(760) 591-9637 With a copy to:    Fisher Thurber LLP      4225 Executive Square,
Suite 1600      La Jolla, CA 92037      Attn:    David A. Fisher      Facsimile
No.: (858) 535-1616

 

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If to Dullea:    The John F. and Carolyn A. Dullea Trust      c/o John F. Dullea
and/or Carolyn A. Dullea, trustees      12189 Caminito Corriente      San Diego,
CA 92128      Facsimile No.: (619) 213-1203 If to Bunten:    The Bunten Family
Trust      c/o William H. Bunten II and/or Elizabeth W. Bunten, trustees     
14781 Memorial Drive #1142      Houston, TX 77079      Facsimile No.: None If to
Fish:    Lincoln Fish      1660 Hotel Circle N, Suite 620      San Diego, CA
92108      Facsimile No.: (619) 819-6990 If to Irwin:    The Michael L. Irwin
Trust      c/o Michael L. Irwin, trustee      42 56th Place      Long Beach, CA
90803      Facsimile No.: None

 

9.15 Further Assurances. The parties agree (a) to furnish upon request to each
other such further information, (b) to execute and deliver to each other such
other documents, and (c) to do such other acts and things, all as the other
parties may reasonably request for the purpose of carrying out the intent of
this Agreement and the Contemplated Transactions.

 

9.16 Venue. Any action or proceeding arising out of or relating to this
Agreement shall only be brought in the state or federal courts in San Diego,
California, and each of the parties hereto submits to the personal jurisdiction
of such courts (and of the appropriate appellate courts wherever located) in any
such action or proceeding, and selects the courts in San Diego, California for
proper venue in any such action or proceeding.

 

9.17 Binding Agreement. This Agreement shall be binding upon and inure to the
benefit of the respective heirs, executors, administrators, personal
representatives, beneficiaries, successors and permitted assigns of the
respective parties hereto. Notwithstanding the foregoing, no party hereto may
assign his or its rights or obligations under this Agreement without the written
consent of the other parties hereto, except that NAI may assign any of its
rights under this Agreement to any Subsidiary of NAI.

 

[Signatures on following page.]

 

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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
Effective Date.

 

NAI

NATURAL ALTERNATIVES INTERNATIONAL, INC.,

a Delaware corporation

/s/ Randell Weaver

Randell Weaver, President

 

SELLERS

/s/ Lincoln Fish

Lincoln Fish

 

THE MICHAEL L. IRWIN TRUST

u/t/a June 25, 1991

/s/ Michael L. Irwin

Michael L. Irwin, Trustee

 

BUNTEN FAMILY TRUST

dated April 14, 2001

/s/ William H. Bunten II

William H. Bunten II, co-Trustee

/s/ Elizabeth W. Bunten

Elizabeth W. Bunten, co-Trustee

 

THE JOHN F. AND CAROLYN A. DULLEA TRUST

dated June 20, 2001

/s/ John Dullea

John Dullea, co-Trustee

/s/ Carolyn A. Dullea

Carolyn A. Dullea, co-Trustee

 

41