Exhibit 10.1


 


STOCK PURCHASE
AGREEMENT


 


This STOCK
PURCHASE AGREEMENT (the “Agreement”) is made and entered into as of
October 14, 2003 by and among Vital Living, Inc., (the “Purchaser”)
and the selling shareholders listed on the signature page hereto (collectively,
the “Selling
Shareholders”).


 


RECITALS


 


A.            The Selling Shareholders own an aggregate
of 100% outstanding common stock (the “Shares”)
of Doctors for Nutrition, Inc., a California corporation (the “Company”),
such Shares representing all of the outstanding equity of the Company.


 


B.            The Selling Shareholders wish to sell, and
the Purchaser wishes to purchase, the Shares for the consideration set forth in
Article II hereof.


 


C.            The Indemnifying Shareholders (as defined
in Article III) and the Purchaser desire to make certain representations
and warranties and other agreements in connection with the transactions
contemplated hereby.


 


D.            At the Closing, the appropriate parties
hereto shall execute (i) an employment agreement with Bruce Howe and consulting
agreements with each of Roger Howe and Maynard Howe (collectively, the “Employment Agreements”); (ii) the
Securities Escrow Agreement (the “Escrow
Agreement”) which shall serve as collateral in respect of the
indemnification obligations set forth herein and therein; and (iii) Lockup
Agreements with each of the Selling Shareholders (the “Lockup Agreements”) (the Employment
Agreements, the Escrow Agreement and the Lockup Agreements are collectively
hereinafter referred to as the “Related Agreements”).


 


NOW, THEREFORE, in consideration of the
covenants, promises and representations set forth herein, and for other good
and valuable consideration, the parties agree as follows:


 


ARTICLE I

THE SALE OF THE INTEREST


 


1.1           The Sale of the Shares.   The “Closing”
shall mean the closing of the purchase and sale of the Shares, which shall take
place on the date of this Agreement (the “Closing
Date”).  At the Closing and
subject to and upon the terms and conditions of this Agreement, the Selling
Shareholders agree to sell to the Purchaser, and the Purchaser agrees to
purchase from the Selling Shareholders, such number of the Shares as set forth
on Exhibit A hereto, which in the
aggregate constitute all of the outstanding capital stock of the Company for
the consideration set forth in Article II hereof, subject to the
provisions contained herein.


 


1.2           Delivery.   At the Closing, the Selling Shareholders will deliver to the
Purchaser certificates registered in the Selling Shareholders’ names,
representing all of the Shares owned by


 


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each Selling Shareholder, duly endorsed for transfer, against delivery
of the Purchase Price in accordance with Article II hereof.


 


1.3           Related Agreements.  At the Closing, the applicable parties shall
execute the Related Agreements.


 


1.4           Tax Consequences.  The parties intend the sale of the Shares to
qualify as a tax free reorganization under Internal Revenue Code
Section 368(a)(1)(B) and that this Agreement constitutes a plan of
reorganization within the meaning of Treasury Regulations
Section 1.368-2(a).


 


ARTICLE II

CONSIDERATION TO BE PAID AND RELATED MATTERS


 


2.1           Closing Purchase Price.  Subject to the terms and conditions set
forth herein, including but not limited to Section 2.2, in consideration
for the sale of the Shares, the Purchaser will deliver at the Closing (subject
to Section 2.2 below) the following consideration (collectively, the “Closing
Purchase Price”): certificates representing in the aggregate
1,650,000 shares of Common Stock of the Purchaser (the “Purchaser Securities”) registered in the
names and amounts indicated on Exhibit A.


 


2.2           Escrowed Shares.   On the Closing Date, 825,,000 shares of the
Purchaser Securities shall be delivered to Mercantile National Bank (or such
other transfer agent as may be mutually acceptable (the “Escrow Agent”), of which
650,000 shares (the “Escrow Earnout Shares”)
shall be held for the purposes of providing the earnout set forth in
Section 2.3 (the “Earnout Escrow Amount”),
and 175,000 shares (the “Escrow Shares”)
of which shall be held and made available for securing the indemnity
obligations under Article VI hereof.


 


2.3           Earnout.


 


(a)           Calculation of EBITDA Amount.


 


As promptly as practicable following the
close of business on September 30, 2004, but in no event later than
December 30, 2004, the Purchaser shall, at its expense, (i) cause to be
prepared, in accordance with the Specified Accounting Principles (as defined in
Exhibit B) an unaudited income
statement of the Company for the period (the “Earnout Period”) beginning
on October 1, 2003 and ending on the close of business on
September 30, 2004 (the “Income Statement”) together with a
statement (the “Purchaser’s Earnout Statement”) setting forth in
reasonable detail the Purchaser’s calculation of the EBITDA Amount (as defined
below) and (ii) deliver to the Representative the Income Statement and the
Purchaser’s Earnout Statement.  For
purposes of this Agreement, the “EBITDA Amount” shall mean the total
amount of net income of the Company before interest, federal and state income
taxes, depreciation and amortization for the Earnout Period, as determined


 


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in accordance with the Specified Accounting Principles.


 


(b)           Review; Disputes.


 


(i)            From and after the one
year anniversary of the Closing, the Purchaser shall provide the Representative
and any accountants or advisors retained by the Selling Shareholders with full
access to the books and records of the Company for the purposes of: (A) enabling
the Selling Shareholders and their accountants and advisors to calculate, and
to review the Purchaser’s calculation of, the EBITDA Amount; and (B)
identifying any dispute related to the calculation of the EBITDA Amount in the
Purchaser’s Earnout Statement.  Costs
associated with the foregoing shall be borne by the Selling Shareholders,
unless there has been a dispute as set forth below and the EBITDA Amount
calculated by the Designated Accounting Firm is more than $10,000 greater than
the EBITDA Amount reflected in the Purchaser’s Earnout Statement, in which case
such costs shall be borne by the Purchaser.


 


(ii)           If the Selling
Shareholders dispute the calculation of the EBITDA Amount set forth in the
Purchaser’s Earnout Statement, then the Shareholders shall deliver a written
notice (a “Dispute Notice”) to the Purchaser and the Escrow Agent during
the 60-day period commencing upon receipt by the Shareholders of the Income
Statement and the Purchaser’s Earnout Statement, as prepared by the Purchaser
in accordance with the requirements of Section 2.3(a) (the “Review
Period”).  The Dispute Notice shall
set forth, with reasonable detail, the principal basis for the dispute of such
calculation.


 


(iii)          If the Selling
Shareholders do not deliver a Dispute Notice to the Purchaser prior to the
expiration of the Review Period, the Purchaser’s calculation of the EBITDA
Amount set forth in the Purchaser’s Earnout Statement shall be deemed final and
binding on the Purchaser and the Shareholders for all purposes of this Agreement.


 


(iv)          If the Selling
Shareholders deliver a Dispute Notice to the Purchaser prior to the expiration
of the Review Period, then the Selling Shareholders and the Purchaser shall use
commercially reasonable efforts to reach agreement on the EBITDA Amount.  If the Selling Shareholders and the
Purchaser are unable to reach agreement on the EBITDA Amount within 20 days
after the end of the Review Period, either party shall have the right to refer
such dispute to a mutually agreed upon, nationally recognized accounting firm
(such firm, or any successor thereto, being referred to herein as the “Designated
Accounting Firm”) after such 20th day. 
In connection with the resolution of any such dispute by the Designated
Accounting Firm: (i) each of the Purchaser and the Selling Shareholders shall
have a reasonable opportunity to meet with the Designated Accounting Firm to
provide their views as to any disputed issues with respect to the calculation
of the EBITDA Amount; (ii) the Designated Accounting Firm shall determine the
EBITDA Amount in accordance with the Specified Accounting Principles within 30
days of such referral and upon reaching such determination shall deliver a copy
of its calculations (the “Expert Calculations”) to the Representative,
the Purchaser and the Escrow Agent; and (iii) the determination of the EBITDA
Amount made by the Designated Accounting Firm shall be final and binding on the


 


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Purchaser and the
Selling Shareholders for all purposes of this Agreement, absent manifest
error.  In calculating the EBITDA
Amount, the Designated Accounting Firm shall not be limited to addressing any
particular disputes referred to in the Dispute Notice.  The Expert Calculations shall reflect in
detail the differences, if any, between the EBITDA Amount reflected therein and
the EBITDA Amount set forth in the Purchaser’s Earnout Statement.  The fees and expenses of the Designated
Accounting Firm shall be borne equally by the Purchaser and the Selling
Shareholders; provided, however, that if the EBITDA Amount
calculated by the Designated Accounting Firm exceeds the EBITDA Amount
reflected in the Purchaser’s Earnout Statement by more than $10,000, then the
entire amount of such fees and expenses shall be borne by the Purchaser and if
the EBITDA Amount calculated by the Designated Accounting Firm is the same or
less than the EBITDA Amount reflected in the Purchaser’s Earnout Statement,
then the entire amount of such fees and expenses shall be borne by the Selling
Shareholders.


 


(c)           Determination of
Amounts Payable to Selling Shareholders. 
If the EBITDA Amount, as finally determined in accordance with this
Section 2.3:


 


(v)           is less than $200,000,
then the entire balance of the Earnout Escrow Shares being held by the Escrow
Agent shall be released to the Purchaser;


 


(ii)           is at least $200,001
but less than $250,000, then (1) 125,000 shares of the Earnout Escrow Shares
shall be released to the Selling Shareholders, to be distributed among them pro
rata in proportion to the number of shares of Purchaser Securities received by
each of them at the Closing and (2) any remaining Earnout Escrow Shares shall
be released to the Purchaser; or


 


(iii)          is at least $250,000,
then a number of Earnout Escrow Shares equal to the sum of (1) 250,000 shares
of Earnout Escrow Shares plus (2) 10,000 additional shares of Earnout Escrow
Shares for each additional $10,000 of EBITDA Amount in excess of $250,000 (up
to the remaining balance of shares of Purchaser Securities then remaining in
the Earnout Escrow Amount) shall be released to the Selling Shareholders, to be
distributed among them pro rata in proportion to the number of shares of
Purchaser Securities received by each of them at the Closing.


 


(d)           Adjustment of
Purchaser Securities.  If between
the date of this Agreement and the date upon which the Selling Shareholders
receive any Purchaser Securities to which they are entitled under this
Section 2.3, the outstanding number of shares of Purchaser Securities are
changed into a different number or class of shares by reason of any stock
split, division or subdivision of shares, stock dividend, reverse stock split,
consolidation of shares, reclassification, recapitalization or similar
transaction, then the number of shares of Purchaser Securities to which the
Selling Shareholders shall be entitled to receive under this Section 2.3
shall be appropriately adjusted, and if necessary to effectuate any such
adjustment, the Purchaser shall cause to be issued and deposited into the
Earnout Escrow Amount any additional Purchaser Securities or shares of any such
other class of shares.


 


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(e)           Acceleration of
Earnout.  In the event that an
Acceleration Event (as defined below) occurs during the Earnout Period, all
Purchaser Securities then remaining in the Earnout Escrow Amount shall be
released to the Selling Shareholders, to be distributed among them pro rata in
proportion to the number of shares of Purchaser Securities received by each of
them at the Closing Shareholders.  For
purposes of this Agreement, an “Acceleration Event” shall mean any of
the following:  (1) an acquisition (by
way of merger, tender offer or otherwise) of at least 50% of the issued and
outstanding shares of Purchaser Securities or all or substantially all of the
assets of the Purchaser; (2) the disposition (by way of merger, share purchase
or otherwise) of at least 50% of the issued and outstanding shares of common
stock of he Company by the Purchaser or all or substantially all of the assets
of the Company by the Purchaser; (3) a breach by the Purchaser of its funding
obligations under Section 2.3(f); and (4) the termination without cause of
the employment of Bruce Howe by the Purchaser.


 


(f)            Operation of the
Company Following the Closing.


 


(i)            The Purchaser shall
maintain the Company as a separate, wholly owned subsidiary until the third
anniversary of the Closing Date.  During
this three-year period, the Purchaser shall maintain a separate set of books and
records for the Company for the purpose of enabling financial statements
relating to the Company to be prepared.


 


(ii)           The Purchaser shall
fund the operations of the Company in the amounts and at the times set forth in
the operating budget attached hereto as Exhibit
C (the “Operating Budget”) and shall provide such additional
financial and other support as may reasonably be required by the Company in
order to maximize the EDITDA Amount; provided, however, in no event will the
Purchaser be required to fund in excess of $250,000 in the aggregate (i.e.,
whether such funding is pursuant to the Operating Budget or otherwise).


 


Until the expiration or early termination of the
Earnout Period pursuant to Section 2.3(e), Bruce Howe shall have the title
of President of the Company, and the Purchaser hereby agrees and acknowledges
that Bruce Howe shall, as President, have authority to manage the business
operations of the Company in such a manner as to maximize the EBITDA Amount
(including exercising authority for all decisions related to sales, marketing
and advertising of the Company’s products and the fulfillment of orders for
customer accounts) subject, however, to the reporting obligations contained in
Bruce Howe’s employment agreement with the Company.  Notwithstanding the foregoing, during the Earnout Period the
Company shall not incur any indebtedness, enter into any material agreements
outside the ordinary course of business, make any capital expenditure not
identified in the Operating Budget in excess of $50,000 or vary in any material
respect from the Purchaser’s overall corporate branding strategy without the
prior written consent of the Purchaser.


 


2.4           Restrictions on Transferability.   Other than intra family transfers where the
transferee agrees to bound by the Lockup Agreement, the Purchaser Securities
shall not be sold, assigned, transferred or pledged except upon the conditions
specified in this Agreement, which conditions are intended to ensure compliance
with the provisions of the Securities Act of 1933, as amended (the


 


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“Securities
Act”).  Notwithstanding the
foregoing, the Purchaser Securities may be sold, assigned, transferred or
pledged upon an exemption from the registration provisions of the Securities
Act or pursuant to Rule 144 under the Securities Act (“Rule 144”).


 


2.5           Restrictive Legend.   Each certificate representing the Purchaser
Securities shall be stamped or otherwise imprinted with a legend in
substantially the form (in addition to any legend required under applicable state
securities laws) set forth in the Lockup Agreements being entered into by each
Selling Shareholders concurrently with the Closing.


 


ARTICLE III

REPRESENTATIONS AND WARRANTIES OF THE COMPANY

AND THE INDEMNIFYING SHAREHOLDERS


 


Maynard Howe, Roger Howe and Bruce Howe shall
be collectively hereinafter referred to as the “Indemnifying Shareholders.” 
The Indemnifying Shareholders represent and warrant to the Purchaser,
subject to the exceptions specifically disclosed in the disclosure schedule,
set forth as Exhibit D hereto (the
“Company
Disclosure Schedule”), as set forth below.


 


3.1           Organization of the Company.   The Company is a corporation duly
organized, validly existing and in good standing under the laws of State of
California.  The Company has the corporate
power to own its properties and to carry on its business as now being
conducted.  The Company is duly
qualified to do business and is in good standing in each jurisdiction in which
the conduct of its business requires it to be qualified.  The Company has delivered a true and correct
copy of its Articles of Incorporations and Bylaws, as amended to date, to the
Purchaser or its counsel.


 


3.2           Company Capital Structure.


 


(a)           The authorized and issued and outstanding
equity of the Company consists of those Shares which are referenced in the
Company Disclosure Schedule.  All of the
Company’s outstanding Shares are held by the Selling Shareholders.


 


(b)           All outstanding Shares of the Company are
duly authorized, validly issued, fully paid and non-assessable, were issued in
compliance with all applicable federal and state securities laws, and are not
subject to preemptive rights created by statute, the Articles of Incorporation
and Bylaws, as amended to date, of the Company or any agreement to which the
Company is a party or by which it is bound.


 


(c)           Other than as disclosed on
Schedule 3.2(c), there are no options, warrants, calls, rights,
commitments or agreements of any character, written or oral, to which the
Company is a party or by which it is bound obligating the Company to issue,
deliver, sell, repurchase or redeem, or cause to be issued, delivered, sold,
repurchased or redeemed, any Shares of the capital stock of the Company or
obligating the Company to grant, extend, accelerate the vesting of, change the
price of,


 


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otherwise amend or enter into any such option, warrant, call, right,
commitment or agreement regarding its capital stock.


 


3.3           Subsidiaries.   The Company’s has no subsidiaries,
partnerships, joint ventures and other entities which the Company has an equity
interest (individually, a “Subsidiary”, and collectively, the “Subsidiaries”).  The Company does not own and has not owned
any interest, beneficially or of record, any corporation, partnership, joint
venture or organization, whether incorporated or unincorporated.


 


3.4           Authority.   The execution and delivery of this Agreement by the Selling
Shareholders does not conflict with, or result in any violation of, or default
under (with or without notice or lapse of time, or both), or give rise to a
right of termination, cancellation, modification or acceleration of any
obligation or loss of any benefit under (any such event, a “Conflict”)
(i) any provision of the Articles of Incorporation of the Company, as amended,
or (ii) any material mortgage, indenture, lease, contract or other material
agreement or instrument applicable to the Company or its properties or
assets.  No consent, waiver, approval,
order or authorization of, or registration, declaration or filing with, any
court, administrative agency or commission or other federal, state, county,
local or foreign governmental authority, instrumentality, agency or Commission
(“Governmental
Entity”) or any third party, including a party to any agreement with
the Company (so as not to create or cause any Conflict), is required by or with
respect to the Company in connection with the execution and delivery of the
Transaction Agreements or the consummation of the transactions contemplated
hereby.


 


3.5       Financial Statements.


 


(a)           Schedule 3.5 of
the Company Disclosure Schedule includes the Company’s audited
consolidated financial statements (balance sheets, income statements and
statements of cash flows) as of and for the fiscal year ending
December 31, 2002 (the “Balance Sheet”) and the Company’s unaudited
consolidated financial statements (balance sheets, income statement and
statement of cash flow) as of and for the six months ended June 30, 2003
(the “Interim Unaudited
Balance Sheet”) (collectively, the “Financial Statements”).  The Financial Statements were prepared in
accordance with GAAP consistently applied throughout the periods covered
thereby and present fairly in all material respects the assets, liabilities,
revenues and expenses of the Company as of the dates thereof and the periods
covered therein.


 


(b)           The Company has no
material obligations or liabilities of any nature (matured or unmatured, fixed
or contingent) other than: (a) those set forth or adequately provided for
in the Financial Statements; (b) those not required to be reflected in the
liabilities column of a balance sheet prepared in accordance with GAAP;
(c) those incurred in the ordinary course of business; and (d) those
incurred pursuant to or in connection with the execution, delivery or
performance of this Agreement.


 


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(c)           As of
September 23, 2003, the Company had $$180,961of cash in its operating
account, its accounts receivable were no less than $$135,437, its accounts
payable were no greater than $23,207, and the Company had inventory of at least
$2,014, in each case value in accordance with GAAP; and as of the Closing Date
none of these amounts will vary by more than 5% from the amounts set forth in
this Section 3.5(c).


 


3.6           Deferred Compensation.   The Company owes no deferred compensation
of any kind or nature to any employee, director or consultant other than
ordinary payroll payable by the Company at the end of the next pay period and
reimbursement for ordinary expenses consistent with past practices.


 


3.7           No Changes.   Except as disclosed on Schedule 3.7 of the Company
Disclosure Schedule, since June 15, 2003, there has not been, occurred or
arisen any:


 


(a)           transaction by the Company except in the
ordinary course of business as conducted on that date;


 


(b)           individual capital expenditure or commitment
by the Company exceeding $25,000;


 


(c)           destruction of, damage to or loss of any
material assets, business or customer of the Company (whether or not covered by
insurance) which individually exceeds $25,000;


 


(d)           labor trouble or claim of wrongful discharge
of which the Company has received written notice or of which the Company’s
senior management is aware or other unlawful labor practice or action;


 


(e)           change in accounting methods or practices
(including any material change in depreciation or amortization policies or
rates) by the Company;


 


(f)            revaluation by the Company of any of its
assets other than depreciation as required by GAAP and reflected on the
Unaudited Balance Sheet;


 


(g)           declaration, setting aside or payment of any
dividends on or any other distribution (whether in cash, stock or property) in
respect of any of the Company’s capital stock, or any split, combination or
reclassification of any of the Company’s capital stock or the issuance or
authorization of the issuance of any of the securities in respect of, in lieu
of or in substitution for Shares of the capital stock of the Company, or the
repurchase, redemption or other acquisition, directly or indirectly, of any Shares
of the Company’s capital stock (or options, warrants, or other rights
exercisable therefor);


 


(h)           increase in the salary or other compensation
payable or to become payable by the Company to any of its officers, directors,
employees or advisors, or the declaration, payment or


 


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commitment or obligation of any kind for the payment, by the Company,
of a bonus or other additional salary or compensation to any such person except
as otherwise contemplated by this Agreement;


 


(i)            sale, lease, license or other disposition
of any of the assets or properties of the Company, except in the ordinary
course of business as conducted on that date;


 


(j)            material amendment, termination or, to the
knowledge of the Indemnifying Shareholders, violation, or any threat thereof,
of any distribution agreement, sales agency agreement or any material contract,
agreement or license to which the Company is a party or by which it is bound
other than amendment or termination by the Company pursuant to the terms
thereof in the ordinary course of business;


 


(k)           loan by the Company to any person or entity,
other than advances to employees for travel and business expenses in the
ordinary course of business and consistent with past practices, or incurring by
the Company of any indebtedness other than trade debt in the ordinary course of
business consistent with past practices, guaranty of the Company of any
indebtedness, issuance or sale of any debt securities of the Company or
guaranteeing of any debt securities of others;


 


(l)            waiver or release of any material right or
claim of the Company, including any write-off or other compromise of any
account receivable of the Company;


 


(m)          issuance, exemption or sale by the Company of
any its Shares, or securities exchangeable, convertible or exercisable
therefor, or of any other securities except for issuances or sales as a result
of rights previously granted; or


 


(n)           transactions by the Company with any of its
officers, directors or employees (other than payment of compensation paid in
the ordinary course) or with any persons or entities affiliated with any of its
officers, directors or employees.


 


3.8           Tax and Other Returns and Reports.


 


(a)           Definition of Taxes.   For the purposes of this Agreement, “Tax”
or, collectively, “Taxes,” means any and all federal, state,
local and foreign taxes, assessments and other governmental charges, duties,
impositions and liabilities, including taxes based upon or measured by gross
receipts, income, profits, sales, use and occupation, and value added, ad
valorem, transfer, franchise, withholding, payroll, recapture, employment,
excise and property taxes, together with all interest, penalties and additions
imposed with respect to such amounts and any obligations under any agreements
or arrangements with any other person with respect to such amounts and
including any liability for taxes of a predecessor entity.


 


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(b)           Tax Matters.


 


(i)            The Company, as of the Closing Date, will
have prepared and timely filed or made a timely request for extension for all
required federal, state, local and foreign returns, estimates, information
statements, elections, declarations and reports (collectively the “Returns”)
relating to any and all Taxes concerning or attributable to the Company or its
operations and such Returns are true and correct and have been completed in
accordance with applicable law.


 


(ii)           The Company as of the Closing Date will have
paid or accrued all Taxes it is required to pay or accrue and (B) the Company
will have withheld and timely remitted with respect to its employees all
federal and state income taxes, FICA, FUTA and other Taxes required to be
withheld and remitted.


 


(iii)          The Company has not been delinquent in the
payment of any Tax nor is there any Tax deficiency outstanding, assessed or to
the Indemnifying Shareholders’ knowledge proposed against the Company, nor has
the Company executed any waiver of any statute of limitations on or extending
the period for the assessment or collection of any Tax.


 


(iv)          No audit or other examination of any Return
of the Company is presently in progress, nor has the Company been notified of
any request for such an audit or other examination.


 


(v)           The Company does not have any liabilities
for unpaid federal, state, local and foreign Taxes which have not been accrued
or reserved against in accordance with GAAP on the Company’s Interim Unaudited
Balance Sheet, whether asserted or unasserted, contingent or otherwise, it
being acknowledged that the Purchaser is assuming such liability.


 


(vi)          The Company has made available to the
Purchaser or its representatives copies of all foreign, federal and state
income and all state sales and use Returns filed since inception.


 


(vii)         There are no liens, pledges, charges, claims,
security Shares or other encumbrances of any sort (“Liens”) on the assets of the
Company relating to or attributable to Taxes other than Liens for taxes not yet
due and payable.


 


(viii)        The Indemnifying Shareholders have no knowledge
of any reasonable basis for the assertion of any claim relating or attributable
to Taxes which, if adversely determined, would result in any Lien on the assets
of the Company.


 


(ix)           As of the Closing Date, there will not be
any contract, agreement, plan or arrangement, including but not limited to the
provisions of this Agreement, covering any employee or former employee of the
Company that, individually or collectively, could give rise to the payment of
any amount that would not be deductible pursuant to Section 280G or 404 of
the Code.


 


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(x)            The Company is not a party to a tax sharing
or allocation agreement nor does the Company owe any amount under any such
agreement.


 


(xi)           The Company is not, and has not been within
the time period set forth in Section 897(c)(i)(A)(ii), a “United
States real property holding corporation” within the meaning of
Section 897(c)(2) of the Code.


 


3.9           Restrictions on Business Activities.   Except as disclosed on Schedule 3.9,
there is no agreement (non-compete or otherwise), commitment, judgment,
injunction, order or decree to which the Company is a party or otherwise
binding upon the Company which has or reasonably could be expected to have the
effect of prohibiting or impairing the conduct of the business currently being
conducted by the Company.


 


3.10         Title of Properties;
Absence of Liens and Encumbrances; Condition of Equipment and Inventory.


 


(a)           Schedule 3.10(a) of the Company
Disclosure Schedule sets forth a list of all real property currently
leased by the Company (collectively, the “Real Property”), the name of the lessor,
the date of the lease and each amendment thereto and the aggregate annual
rental and/or other fees payable under any such lease.   All such leases are in full force and
effect, and are valid and effective in accordance with their respective terms,
except as such enforceability may be limited by bankruptcy, insolvency,
moratorium or other similar laws affecting or relating to creditors’ rights
generally and general principles of equity, regardless of whether asserted in a
proceeding in equity or at law.  To the
knowledge of the Indemnifying Shareholders, there is not, under any of such
leases, any existing default or event of default (or event which with notice or
lapse of time, or both, would constitute a default).  The Company does not own any real property.


 


(b)           The Company has good and valid title to, or,
in the case of leased properties and assets, valid leaseholds in, all of its
tangible properties and assets, free and clear of any Liens (as defined in
Section 3.8(b)(vii)), except (i) as reflected in the Company’ Interim
Unaudited Balance Sheet, (ii) for liens for taxes not yet due and payable and
such imperfections of title, (iii) for encumbrances, if any, which are not
material, and (iv) all Liens on any asset of the Company, as set forth on
Schedule 3.10(b) of the Company Disclosure Schedule.


 


3.11         Intellectual Property.   Schedule 3.11 of the Company
Disclosure Schedule sets forth a complete list of all patents or patents
pending or any trademark, tradenames, service mark (the “Company Intellectual Property Rights”),
and any applications therefor in respect of any of the foregoing, included in
the Company Intellectual Property Rights, and specifies, where applicable, the
jurisdictions in which each such Company Intellectual Property Right has been
issued or registered or in which an application for such issuance and
registration has been filed, including the respective registration or application
numbers and the names of all registered owners.   No claims with respect to the Company Intellectual Property
Rights have been asserted against the Company, nor to the


 


11

















 


knowledge of the Indemnifying Shareholders, are threatened against the
Company or have been asserted or threatened against a third party, nor is the
Company aware, except as disclosed on Schedule 3.11, of any reasonable
basis for any claims (i) against the use by the Company of any trademarks,
service marks, trade names, trade secrets, copyrights, patents, technology,
know-how or computer software programs and applications used in the Company’s
business as currently conducted or (ii) challenging the validity,
effectiveness, or ownership by the Company of any of the Company Intellectual
Property Rights.  All registered
patents, trademarks, service marks and copyrights held by the Company are valid
and subsisting.  To the knowledge of
Indemnifying Shareholders, there is no unauthorized use, infringement or
misappropriation of any of the Company Intellectual Property Rights owned by
the Company by any third party, including any employee or former employee of
the Company.  To the knowledge of the
Indemnifying Shareholders, No Company Intellectual Property Right or product of
the Company is subject to any outstanding decree, order, judgment, or
stipulation restricting in any manner the licensing thereof by the
Company.  The Company has not entered into
any agreement under which the Company is restricted from selling, licensing or
otherwise distributing any of its products to any class of customers, in any
geographic area, during any period of time or in any segment of the market
other than as set forth in Schedule 3.9.


 


3.12         Agreements, Contracts and Commitments.   Except as set forth in Section 3.12 of
the Company Disclosure Schedule, the Company does not have continuing
obligations under, is not a party to nor is it bound by:


 


(a)           any collective bargaining agreements;


 


(b)           any agreements or arrangements that contain
any severance pay or post-employment liabilities or obligations, other than as
contemplated herein or in the Employment Agreements;


 


(c)           any bonus, deferred compensation, pension,
profit sharing or retirement plans, or any other employee benefit plans or
arrangements;


 


(d)           any employment or consulting agreement,
contract or commitment with an employee or individual consultant or salesperson
or consulting or sales agreement, contract or commitment with a firm or other
organization;


 


(e)           any agreement or plan, including, without
limitation, any stock option plan, stock appreciation rights plan or stock
purchase plan, any of the benefits of which will be increased, or the vesting
of benefits of which will be accelerated, by the occurrence of any of the
transactions contemplated by this Agreement or the value of any of the benefits
of which will be calculated on the basis of any of the transactions
contemplated by this Agreement, except as provided herein;


 


(f)            any fidelity or surety bond;


 


12

















 


(g)           any lease of personal property having annual
lease payments individually in excess of $25,000;


 


(h)           any agreement of indemnification or guaranty
other than in the ordinary course of business;


 


(i)            any agreement, contract or commitment
containing any covenant limiting the freedom of the Company to engage in any
line of business or to compete with any person;


 


(j)            any agreement, contract or commitment
relating to capital expenditures and involving future payments in excess of
$25,000;


 


(k)           any agreement, contract or commitment
relating to the disposition or acquisition of material assets or any interest
in any business enterprise outside the ordinary course of the Company’s
business;


 


(l)            any purchase order or contract for the
purchase of raw materials involving $25,000 or more;


 


(m)          any construction contracts;


 


(n)           any agreement, contract or commitment,
including distribution or agency or sales representative agreements, with any
party which, during the last two fiscal years of the Company, accounted for, or
is expected to account during the Company’s current fiscal year, for more than
5% of the Company’s revenue or trade payables;


 


(o)           any agreement for the granting of any
distribution right by the Company to any other party; or


 


(p)           any mortgages, indentures, loans or credit
agreements, security agreements or other agreements or instruments relating to
the borrowing of money or extension of credit, including guaranties referred to
in clause (viii) hereof in an individual amount in excess of $25,000.


 


The Company has not breached, violated or
defaulted under, or received notice that it has materially breached, violated
or defaulted under, any of the material terms or conditions of (i) any
agreement, contract or commitment set forth in Schedule 3.12 of the
Company Disclosure Schedule, or (ii) any other material agreement, contract or
commitment to which it is a party or by which it is bound (any such agreement,
contract or commitment, a “Contract”).  Each Contract is in full force and effect,  and, except as otherwise disclosed in
Schedule 3.12 of the Company Disclosure Schedule, is not subject to any
default thereunder of which the Company is aware by any party obligated to the
Company pursuant thereto, other than late payments, nonpayment.  Each Contract requiring any consent, waiver
or third-party approval as a result of the transaction contemplated by this
Agreement is disclosed in Schedule 3.12 of the Company Disclosure
Schedule.  Neither the


 


13

















 


execution of this Agreement nor consummation of the transactions
contemplated hereby will cause any default or breach under any Contract,
including without limitation any key man clause in any Contract, or the
acceleration of any payment obligation of the Company.


 


3.12.1      Manufacturer and Supplier Agreements.         The Company does not have
any agreements (written or oral) or understandings with any manufacturer or
supplier of the Company’s products that would in any way require the Company to
continue to utilize any such manufacturer or supplier and, in particular, the
Company has no such agreement (written or oral) or understanding with Bactolac
Pharmaceutical, or any company in which Pailla Reddy has an interest and
Company is free to discontinue using Bactolac Pharmaceutical as a manufacturer
and/or supplier without penalty.


 


3.12.2      Distributor Agreement.       The exclusive distribution rights granted to
Sunshine of Minnesota dba Brady Sales (“Brady Sales”) pursuant to the
Distributor Agreement dated May 20, 2003 applies only to Company’s
GreensFirst product and Brady Sales has no exclusive right to distribute any of
the Company’s other products.  By
signing this Agreement and consummating the transactions contemplated herein,
Brady Sales will not obtain any exclusive rights to market or distribute any of
the Purchaser or the Purchaser’s subsidiaries products.


 


3.13         Interested Party Transactions.   Except as set forth in Schedule 3.13,
no officer, director or,  employee or
stockholder has an interest in any entity which furnishes or sells services or
products that the Company furnishes or sells, or an interest in any entity that
purchases from or sells or furnishes to the Company any goods or services.


 


3.14         Governmental Authorization.   Schedule 3.14 of the Company
Disclosure Schedule accurately lists each material consent, license, grant
or other authorization issued to the Company by a governmental entity pursuant
to which the Company currently operates its business (herein collectively
called “Company
Authorizations”), which Company Authorizations, are in full force
and effect and to the knowledge of the Indemnifying Shareholders constitute all
Company Authorizations required to permit the Company to operate its business.


 


3.15         Litigation.   Other than as set forth in the Financial Statements or on
Schedule 3.15,  there is no action,
suit, claim or proceeding of any nature pending or, to the knowledge of the
Indemnifying Shareholders after reasonable inquiry, threatened against the
Company, its properties or any of its officers or directors, in their
capacities as agents of the Company. 
There is no investigation pending or, to the knowledge of the
Indemnifying Shareholders after reasonable inquiry, threatened against the
Company, its properties or any of its officers or directors, in their
capacities as agents of the Company by or before any governmental entity.


 


3.16         Accounts Receivable; Inventory.


 


(a)           Set forth in Schedule 3.16 of the
Company Disclosure Schedule is a list of all accounts receivable of the
Company reflected on the Interim Unaudited Balance Sheet (“Accounts 


 


 


14

















 


Receivable”).


 


(b)           All Accounts Receivable of the Company arose
in the ordinary course of business, are carried at values determined in
accordance with GAAP consistently applied and, are collectible except to the
extent of reserves therefor set forth in the Unaudited Balance Sheet.  No person has any Lien on any of such
Accounts Receivable, and no request or agreement for deduction or discount has
been made with respect to any of such Accounts Receivable.


 


3.17         Minute Books.   The minute books of the Company and the Subsidiaries, made
available to counsel for the Purchaser, are the only minute books of the
Company and contain a materially accurate summary of all meetings of directors
(or committees thereof) and shareholders or actions by written consent since
the time of incorporation of the Company.


 


3.18         Brokers’ and Finders’ Fees.   The Company has not incurred, nor will it
incur, directly or indirectly, any liability for brokerage or finders’ fees or
agents’ commissions or any similar charges in connection with this Agreement or
any transaction contemplated hereby other than as set forth in Schedule 3.18.


 


3.19         Employee Benefit Plans and Compensation.


 


(a)           Definitions.  For purposes of this Agreement, the
following terms shall have the meanings set forth below:


 


(i)            “Affiliate” shall mean any other person or
entity under common control with the Company within the meaning of
Section 414(b), (c) or (m) of the Code and the regulations thereunder;


 


(ii)           “Employee Plan” shall refer to any plan,
program, policy, practice, contract, agreement or other arrangement providing
for bonuses, severance, termination pay, performance awards, stock or
stock-related awards, material fringe benefits or other material employee
benefits of any kind, whether formal or informal, funded or unfunded, including
without limitation, each “employee benefit plan,” within the meaning
of Section 3(3) of ERISA which is or has been maintained, contributed to,
or required to be contributed to, by the Company or any Affiliate for the
benefit of any “Employee” (as defined below), and pursuant to which the
Company or any Affiliate has or may have any material liability contingent or
otherwise;


 


(iii)          “Employee” shall mean any current, former,
or retired employee, officer, or director of the Company or any Affiliate;


 


(iv)          “Employee Agreement” shall refer to each
employment, severance, consulting or similar agreement or contract between the
Company or any Affiliate and any Employee;


 


15

















 


(v)           “ERISA” shall mean the Employee Retirement
Income Security Act of 1974, as amended;


 


(vi)          “IRS” shall mean the Internal Revenue
Service;


 


(vii)         “Multiemployer Plan” shall mean any “Pension Plan”
(as defined below) which is a “multiemployer plan,” as defined in
Section 3(37) of ERISA; and


 


(viii)        “Pension Plan” shall refer to each Company
Employee Plan which is an “employee pension benefit plan,” within the
meaning of Section 3(2) of ERISA.


 


(b)           Except as disclosed on Schedule 3.9(b)
of the Company Disclosure Schedule, the Company does not maintain an Employee
Plan or participate in an Multiemployer Plan.


 


(c)           Pension Plans.   The Company does not now, nor has it ever,
maintained, established, sponsored, participated in, or contributed to, any
Pension Plan which is subject to Part 3 of Subtitle B of Title I of ERISA,
Title IV of ERISA or Section 412 of the Code.


 


(d)           Employment Matters.   The Company (i) is in compliance in all
material respects with all applicable foreign, federal and state laws, rules
and regulations respecting employment, employment practices, terms and
conditions of employment and wages and hours, in each case, with respect to
Employees; (ii) has withheld all amounts required by law or by agreement to be
withheld from the wages, salaries and other payments to Employees; (iii) is not
liable for any arrears of wages or any taxes or any penalty for failure to
comply with any of the foregoing; and (iv) is not liable for any payment to any
trust or other fund or to any governmental or administrative authority, with
respect to unemployment compensation benefits, social security or other
benefits for Employees (other than routine payments to be made in the normal
course of business and consistent with past practice).  In addition, except as set forth on the
Disclosure Schedule, none of the Company employees have any accrued vacation or
personal time or any other accruals for any other employee benefits.


 


(e)           Labor.   No work stoppage or labor strike against the Company is pending
or, to the knowledge of the Indemnifying Shareholders, threatened.  The Company is not involved in or, to the
knowledge of the Indemnifying Shareholders, threatened with, any labor dispute,
grievance, or litigation relating to labor, safety or discrimination matters
involving any Employee, including, without limitation, charges of unfair labor
practices or discrimination complaints, which, if adversely determined, would,
individually or in the aggregate, result in liability to the Company.  Neither the Company nor any of its
Subsidiaries has engaged in any unfair labor practices within the meaning of
the National Labor Relations Act which would, individually or in the aggregate,
directly or indirectly result in a liability to the Company.  The Company is not presently, nor has it
been in the past, a party to, or bound by, any collective bargaining agreement
or union contract with respect to Employees and no collective bargaining
agreement is being negotiated by the Company.


 


16

















 


3.20         Insurance.   Schedule 3.20 of the Company Disclosure Schedule lists
all insurance policies and fidelity bonds, if any, covering the assets,
business, equipment, properties, operations, employees, officers and directors
of the Company.   There is no claim by
the Company pending under any of such policies or bonds as to which coverage
has been denied or disputed by the underwriters of such policies or bonds.  All premiums due and payable under all such
policies and bonds have been paid and the Company is in material compliance
with the terms of such policies and bonds. 
The Indemnifying Shareholders have no knowledge of any threatened
termination of, or material premium increase with respect to, any of such
policies.


 


3.21         Compliance with Laws.   The Company has materially complied with,
is not in material violation of, and has not received any notices of violation
with respect to, any foreign, federal, state or local statute, law or
regulation, except for violations that have been cured or are no longer being
asserted.


 


3.22         Complete Copies of Materials.   Each document (or summary of same) that has
been provided by the Company in response to a request by the Purchaser or its
counsel is true and complete in all material respects (except as specifically
noted thereon or as superceded by later documents).


 


ARTICLE IV

REPRESENTATIONS AND WARRANTIES OF PURCHASER


 


The Purchaser represents and warrants to the
Company and the Selling Shareholders, subject to the exceptions specifically
disclosed in the disclosure schedule, set forth as Exhibit E hereto (the “Purchaser Disclosure Schedule”), as
follows:


 


4.1           Organization, Standing and Power.  The Purchaser is a corporation duly
organized, validly existing and in good standing under the laws of Nevada.  The Purchaser has the corporate power to own
its properties and to carry on its business as now being conducted and is duly
qualified to do business and is in good standing in Arizona and each other
jurisdiction in which the failure to be so qualified would have a material
adverse effect on the ability of the Purchaser to consummate the transactions
contemplated hereby.


 


4.2           Authority.   The Purchaser has all requisite corporate power and authority to
enter into this Agreement and to consummate the transactions contemplated
hereby.  The execution and delivery of
this Agreement and the consummation of the transactions contemplated hereby
have been duly authorized by all necessary corporate action on the part of the
Purchaser.  This Agreement has been duly
executed and delivered by the Purchaser and constitutes the valid and binding obligations
of the Purchaser, enforceable in accordance with its terms, except as such
enforceability may be limited by principles of public policy and subject to the
laws of general application relating to bankruptcy, insolvency and the relief
of debtors and rules of law governing specific performance, injunctive relief
or other equitable remedies. 


 


17

















 


4.3           Capital Structure.


 


(a)  Section 4.3 (a) of the Purchaser Disclosure Schedule sets
forth the capital structure of the Purchaser. 
Except as set forth in
Section 4.3(a) of the Purchaser Disclosure Schedule there are no (i)
outstanding warrants, options, agreements, convertible securities or other
commitments or instruments pursuant to which the Purchaser is or may become
obligated to issue or sell any shares of capital stock or other securities of
the Purchaser, (ii) equity interests, stock appreciation rights, phantom stock,
profit participation rights or other equity or equity derivative security of
any kind of the Purchaser, (iii) preemptive or similar rights to purchase or
otherwise acquire shares of capital stock of the Purchaser pursuant to any
provision of law, the Articles of Incorporation or Bylaws of the Purchaser or
any agreement to which the Purchaser is party or otherwise, (iv) obligation
(contingent or otherwise) of the Purchaser to purchase, redeem or otherwise
acquire any shares of its capital stock or any interest therein or to pay any
dividend or make any other distribution in respect thereof or (v) voting
trusts, voting agreements, proxies or other agreements or instruments with
respect to the voting of the Purchaser’s Common Stock or other securities to
which the Purchaser is a party, or to the knowledge of the Purchaser, among or
between any individual, corporation, partnership, limited liability company,
joint venture association, joint-stock company, trust, unincorporated
organization or government or other agency or political subdivision thereof
(any “Persons”) other than the Purchaser.


 


(b)           The Purchaser Securities to be issued
pursuant to this Agreement will be duly authorized, validly issued, fully paid,
non-assessable.  All shares of the
Purchaser’s Common Stock and Preferred Stock previously issued have been duly
authorized, validly issued, fully paid, non-assessable.


 


(c)           The Purchaser has no Subsidiary.  The Purchaser does not own and has not owned
any interest, beneficially or of record, any corporation, partnership, joint
venture or organization, whether incorporated or unincorporated.


 


4.4           Authority.   The Purchaser has all requisite power and authority to enter
into this Agreement and the Related Agreements (collectively, the “Transaction
Agreements”), as applicable, and to consummate the transactions
contemplated hereby and thereby.  The
execution and delivery of the Transaction Agreements and the consummation of
the transactions contemplated thereby have been duly authorized by all
necessary corporate action on the part of the Purchaser.  The Purchaser’s Board of Directors has duly
approved the Transaction Agreements.  This Agreement has been duly executed and delivered, and the other
Transaction Agreements, when delivered, will have been duly executed and
delivered by the Purchaser and constitute the valid and binding obligation of
the Purchaser, enforceable in accordance with their terms except as such
enforceability may be limited by principles of public policy and subject to the
laws of general application relating to bankruptcy, insolvency and the relief
of debtors and rules of law governing specific performance, injunctive relief
or other equitable remedies.  The
execution and delivery of this Agreement by the Purchaser does not, and, as of
the Closing Date will not, conflict with, or result in any violation of,


 


18

















 


or default under (with or without notice or lapse of time, or both), or
Conflict with (i) any provision
of the Articles of Incorporation of the Purchaser, as amended, or (ii) any
material mortgage, indenture, lease, contract or other material agreement or instrument
applicable to the Purchaser or its properties or assets.  No consent, waiver, approval, order or
authorization of, or registration, declaration or filing with any Governmental Entity or any third
party, including a party to any agreement with the Purchaser (so as not to
create or cause any Conflict), is required by or with respect to the Purchaser
in connection with the execution and delivery of the Transaction Agreements or
the consummation of the transactions contemplated hereby.


 


4.5           No Undisclosed Liabilities.


 


To the knowledge of the Purchaser, except for
obligations incurred in the ordinary course of business which are not material
and not required under GAAP to be set forth or reflected on a balance sheet or
the notes thereto, the Purchaser does not have any liability, indebtedness,
obligation, expense, claim, deficiency, guaranty or endorsement of any type,
whether accrued, absolute, contingent, matured, unmatured or other (whether or
not required to be reflected in financial statements in accordance with
generally accepted accounting principles), which individually or in the
aggregate, has not been reflected in the Purchaser’s financial statements as
filed in the Registration Statement.


 


4.6           Acquisition of Purchased Shares.


 


The Purchaser is acquiring the Shares for its
own account and for investment, and not with a view to, or for sale in
connection with, any distribution of any such Shares.


 


4.7           SEC Documents.


 


The Purchaser has filed all required reports,
schedules, forms, statements and other documents with the Securities and
Exchange Commission (the “SEC”)
between December 31, 2002 and the date of this Agreement.  All reports, schedules, forms, statements
and other documents filed by the Purchaser with the SEC are collectively
referred to in this Agreement as the “Purchaser
SEC Documents.” As of the time each of the Purchaser SEC Documents
was filed with the SEC (or, if amended or superseded by a filing prior to the
date of this Agreement, then on the date of such filing), (i) the Purchaser SEC
Documents complied in all material respects with the requirements of the
Securities Act or Securities Exchange Act of 1934, as amended (the “Exchange Act”), as the case may be, and
the rules and regulations of the SEC promulgated thereunder applicable to such
Purchaser SEC Documents, and (ii) except to the extent that information
contained in any Purchaser SEC Document has been revised or superseded by a
later-filed Purchaser SEC Document, none of the Purchaser SEC Documents
contained any untrue statement of a material fact or omitted 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.  The financial
statements of the Purchaser included in the Purchaser SEC Documents complied as
to form in all material respects with applicable accounting requirements and
the published rules and regulations of the SEC with


 


19

















 


respect thereto, were prepared in accordance with generally accepted
accounting principles (except, in the case of unaudited statements, as
permitted by Form 10-Q of the SEC) applied on a consistent basis during the
periods involved (except as may be indicated in the notes thereto) and fairly
presented the consolidated financial position of the Purchaser as of the dates
thereof and the consolidated results of its operations and cash flows for the
periods then ended (subject, in the case of unaudited statements, to normal year-end
audit adjustments).


 


ARTICLE V

ADDITIONAL AGREEMENTS


 


5.1           Additional Documents and Further
Assurances.   Each party hereto, at
the request of another party hereto, shall execute and deliver such other
instruments and do and perform such other acts as may be reasonably necessary
to consummate this Agreement and the transactions contemplated hereby.


 


5.2           Expenses.   All fees and expenses incurred in connection with the
transaction contemplated in any of the Transaction Agreements, including,
without limitation, all legal, accounting, financial advisory, consulting and
all other transaction fees and expenses (“Transaction Expenses”) incurred by the
Selling Shareholders, Indemnifying Shareholders, the Company or the Purchaser
in connection with the negotiation and closing of the Transaction Agreements,
shall be the obligation of the party incurring such Transaction Expenses.


 


5.3           Release of Claims.   The Selling Shareholders agree that the
consideration to be received by them pursuant to this Agreement represents
settlement in full of all outstanding obligations owed to them by the Company
or the Purchaser.  The Company, the
Selling Shareholders and the Purchaser, on behalf of themselves, and their
respective heirs, executors, officers, directors, employees, investors,
shareholders, administrators, predecessor and successor corporations and
assigns, as applicable, hereby fully and forever release each other and their
respective heirs, executors, officers, directors, employees, investors,
shareholders, administrators, predecessor and successor corporations and
assigns, as applicable, from any claim duty, obligation or cause of action
relating to any matters of any kind, whether known or unknown, suspected or
unsuspected, that any of them may now possess arising from any omissions, acts
or facts that have occurred up until and prior to the date of this Agreement
including, without limitation:


 


(a)           any and all claims relating to or arising
from any of the Selling Shareholders’ employment or directorial relationship
with the Company and termination of that relationship;


 


(b)           any and all claims relating to, or arising
from, the Selling Shareholders’ right to purchase, or actual purchase, of
Shares of stock of the Company;


 


(c)           any and all claims of wrongful discharge of
employment; breach of contract, both express and implied; breach of a covenant
of good faith and fair dealing, both express and implied; negligent or
intentional infliction of emotional distress; negligent or intentional


 


20

















 


misrepresentation; negligent or intentional interference with contract
or prospective economic advantage; and defamation;


 


(d)           any and all claims for violation of any
federal, state or municipal statute, including, but not limited to, Title VII
of the Civil Rights Act of 1964, the Age Discrimination in Employment Act of
1967, and the California Fair Employment and Housing Act;


 


(e)           any and all claims arising out of any other
laws and regulations relating to employment or employment discrimination; and


 


(f)            any and all claims for attorney’s fees and
costs.


 


5.4           Rule 144 Covenant.  With a view to making available to the
Selling Shareholders the benefits of Rule 144 and any other rule or regulation
of the SEC that may at any time permit a Selling Shareholder to sell securities
of the Purchaser to the public without registration, Purchaser agrees to:


 


(a)           make and keep public information available,
as those terms are understood and defined in Rule 144, at all times;


 


(b)           file with the SEC in a timely manner all
reports and other documents required of the Company under the Securities Act
and the Exchange Act; and


 


(c)           furnish to any Selling Stockholder, so long
as the Selling Stockholder owns any of the Shares, forthwith upon request (i) a
written statement by the Purchaser that it has complied with the reporting
requirements of Rule 144, the Securities Act and the Exchange Act, (ii) a copy
of the most recent annual or quarterly report of the Purchaser and such other
reports and documents so filed by the Purchaser, and (iii) such other
information as may be reasonably requested in availing any Selling Stockholder
of any rule or regulation of the SEC which permits the selling of any such
securities without registration or pursuant to such form.


 


ARTICLE VI

INDEMNIFICATION


 


6.1                           Indemnification.


 


(a)           Except in the case of fraud, active
concealment or willful misrepresentation, and except as provided below, the
sole and exclusive remedy and recourse of the Purchaser and its affiliates (and
their respective agents and representatives) for any and all breaches, damages
and losses related to this Agreement and the Escrow Agreement and the
transactions contemplated herein and therein, including any breach of any
representations, warranties and covenants made by the Company or the
Indemnifying Shareholders in this Agreement, shall be limited to the right of
offset against the Escrow Amount in accordance with the terms of the Escrow
Agreement; provided,


 


21

















 


however, such limitation on Purchaser’s remedies and recourse shall not
apply to breaches of Section 3.1and with respect to Damages relating to
any inaccuracy in the representations and warranties contained in
Section 3.8 which the Indemnifying Shareholders will remain liable for (up
to the Escrow Amount) even after the Escrow Amount is released as provided in
Section 6.6 below.  If the Escrow
Amount is insufficient to fully satisfy any Damages (as defined in 6.1(b)
below) then the Selling Shareholders shall make available and the Purchaser may
proceed against an additional 75,000 shares of Purchaser Securities to satisfy
the Damages suffered by Purchaser.


 


(b)           Subject to the limitations set forth in this
Article VI and the other limitations set forth in this Agreement, the
Purchaser shall be entitled to be indemnified against any Damages actually
incurred by the Purchaser as a result of (i) any inaccuracy in any
representation or warranty of the Indemnifying Shareholders set forth in this
Agreement or (ii) the breach of any covenant of the Selling Shareholders (or
any of them) contained in this Agreement. 
“Damages” shall mean any
liabilities, losses, damages, penalties, fines, costs or expenses, including
reasonable legal, expert and consultant fees and expenses, but excluding any
special, indirect, consequential, exemplary and punitive damages and also
excluding any damages associated with any lost profits or lost opportunities; provided,
however, that for purposes of computing the amount of any Damages incurred
by the Purchaser: (i) there shall be deducted an amount equal to the amount of
any tax benefit actually received or receivable by the Purchaser or any of its
affiliates in connection with such Damages or any of the circumstances giving
rise thereto; and (ii) there shall be deducted an amount equal to the amount of
any insurance proceeds, indemnification payments, contribution payments or
reimbursements actually received or receivable by the Purchaser or any of its
affiliates in connection with such Damages or any of the circumstances giving
rise thereto.  “Damages” shall be
further limited as set forth in Section 6.5.  No representation or warranty of the Company or the Indemnifying
Shareholders shall be deemed to be or to have been inaccurate if the Purchaser
or its representatives had actual knowledge, on or prior to the date of this
Agreement, of the inaccuracy of such representation or warranty.


 


(c)           To secure the indemnification obligations of
the Indemnifying Shareholders hereunder, the Purchaser Securities remaining in
the Escrow Account provided for by the Escrow Agreement after the disbursement
contemplated by Section 2.3 shall be disbursed only in accordance with the
provisions hereof and in such Escrow Agreement.


 


6.2           Method of Asserting Claims.


 


(a)           The Purchaser shall give prompt written
notice (the “Claim Notice”) to the Representative (as defined in
Section 6.7) as agent for the Indemnifying Shareholders, and to the Escrow
Agent, of any claim or event known to it which gives rise or may give rise to a
claim for indemnification hereunder by the Purchaser against the Indemnifying
Shareholders (an “Indemnifiable Claim”).  The Claim Notice shall specify the nature
and estimated amount of such Damages (the “Claimed Amount”).  The failure of the Purchaser to give notice as provided in this
Section 6.2 shall not relieve the Indemnifying Shareholders of their
obligations under this Article VII, except to the extent that such failure
has materially and adversely affected the rights of the


 


22

















 


Indemnifying Shareholders.  In
the case of any claim for indemnification hereunder arising out of a claim,
action, suit or proceeding brought by any person who is not a party to this
Agreement (a “Third-Party Claim”), the Purchaser also shall give the
Representative, as agent for the Indemnifying Shareholders, copies of any
written claims, process or legal pleadings with respect to such Third-Party
Claim promptly after such documents are received by the Purchaser.


 


(b)           Within 20 calendar days after delivery of a
Claim Notice, the Representative shall provide written notice (the “Certificate
of Objection”) to the Purchaser and the Escrow Agent of his
objections, if any, to the Claim Notice.


 


(i)            If the Representative fails to deliver the
Certificate of Objection to the Purchaser and the Escrow Agent within such time
period, the Purchaser shall be entitled to receive the Claimed Amount from the
Escrow Shares by cancellation of shares in an amount determined by dividing (a)
the total amount of Damages set forth on the Claim Notice multiplied by 1.5
(unless it was a Third Party Claim the Representative did not elect to defend
then the Damages shall be multiplied by 2 as provided in Section 6.3
below) by (b) the average of the closing prices of the Purchaser Securities as
set forth on the Over the Counter Bulletin Board as reported by Nasdaq for the
30 trading days after the date of delivery of the Claim Notice.  Notwithstanding the foregoing, in no event
shall “(b)” in the foregoing formula be less than $1.00.


 


(ii)           If the Representative delivers a Certificate
of Objection to the Escrow Agent (it being understood that Escrow Agent may
rely on such Certificate of Objection for the purposes of refusing to make any
disbursement), then Purchaser Securities equal to the amount that would have
been released to Purchaser (or cancelled) if no Certificate of Objection was
delivered to Escrow Agent shall not be released by Escrow Agent from the Escrow
Shares until such time as (A) joint written instructions (the “Joint
Instructions”), executed by the Representative and the Purchaser,
are delivered to the Escrow Agent directing the Escrow Agent to the manner and
amount of any disbursement to be made or (B) a certified copy of a judgment of
a court of competent jurisdiction determining that an amount is due to
Purchaser is delivered to the Escrow Agent. 
In either such case, Purchaser shall be entitled to receive the amount
due from the Escrow Shares by cancellation of shares in an amount determined by
dividing (a) the total amount of Damages set forth in the Joint Instructions or
judgment, as applicable, multiplied by 1.5 (unless it was a Third Party Claim
the Representative did not elect to defend then the Damages shall be multiplied
by 2 as provided in Section 6.3 below) by (b) the average of the closing
prices of the Purchaser Securities as set forth on the Over the Counter
Bulletin Board as reported by Nasdaq for the 30 trading days after the date of
execution of the Joint Instructions or the date of the judgment, as applicable.
Notwithstanding the foregoing, in no event shall “(b)” in the foregoing formula
be less than $1.00.


 


6.3           Third Party Claims.  Promptly after Purchaser obtains knowledge
of a Third-Party Claim that has been or may be brought or asserted that may be
subject to indemnification hereunder, Purchaser shall promptly give notice of
such Third-Party Claim to the Representative, stating the nature and basis of
such Third-Party Claim and the dollar amount of such Third-Party Claim, to the
extent known.  The Representative shall
have the right at its election, at any time, to defend any


 


23

















 


Third-Party Claim, in which case: (i) the attorneys’ fees of
counsel reasonably acceptable to Purchaser (approval of such counsel not to be
unreasonably withheld), other professionals’ and experts’ fees and court or
arbitration costs incurred by the Representative in connection with defending
such Third-Party Claim shall be payable from the Escrow Amount, without the
requirement of any consent or approval by the Purchaser (ii) the Purchaser
shall not be entitled to be indemnified (from the Escrow Amount or otherwise)
for any costs or expenses incurred by the Purchaser in connection with the
defense of such Third-Party Claim; (iii) the Purchaser shall be entitled
to monitor such defense at its expense; (iv) the Purchaser shall make
available to the Representative all books, records and other documents and
materials that are under the direct or indirect control of the Purchaser or any
of its Subsidiaries or other affiliates and that the Representative considers
necessary or desirable for the defense of such Third-Party Claim; (v) the
Purchaser shall execute such documents and take such other actions as the
Representative may reasonably request for the purpose of facilitating the
defense of, or any settlement, compromise or adjustment relating to, such
Third-Party Claim; (vi) the Purchaser shall otherwise fully cooperate as
reasonably requested by the Representative in the defense of such Third-Party
Claim; (vii) the Purchaser shall not admit any liability with respect to
such Third-Party Claim; and (viii) the Representative shall not enter into
any settlement agreement providing for the settlement of such Third-Party Claim
without the prior written consent of the Purchaser (which consent shall not be
unreasonably withheld) if such settlement agreement imposes on the Purchaser or
any of its Subsidiaries or other affiliates any obligation, other than an
obligation to pay monetary damages in an amount less than the aggregate amount
available through the liquidation of the Shares remaining subject to the Escrow
Agreement.  If the Representative does
not elect to defend such Third Party Claim, Purchaser may defend such claim but
any Damages relating to such claim shall be paid to the Purchaser from the
Escrow Shares by cancellation of shares in an amount determined by dividing (a)
the total amount of Damages set forth on the Claim Notice multiplied by 2 by
(b) the average of the closing prices of the Purchaser Securities as set forth
on the Over the Counter Bulletin Board as reported by Nasdaq for the 30 trading
days after the date of delivery of the Claim Notice.  Notwithstanding the foregoing, in no event shall “(b)” in the
foregoing formula be less than $1.00.


 


6.4           Survival.   The representations and warranties of the Indemnifying
Shareholders and the Purchaser set forth in this Agreement shall survive the
Closing and shall continue until 15 months after the Closing Date, except for
the representations and warranties set forth in Section 3.8, which shall
survive until the expiration of the applicable statute of limitations.  Notwithstanding anything to the contrary
herein, any claim for indemnification must be made before the expiration of the
period of survival set forth above in this Section 6.4.  If a claim for indemnification is made
before the expiration of such period, then (notwithstanding the expiration of
such time period) the representation or warranty applicable to such claim shall
survive until, but only for purposes of, the resolution of such claim.


 


6.5           Limitations.


 


(a)           Except as otherwise set forth in this
Agreement or in the case of claims


 


24

















 


relating to the representations and warranties set forth in
Section 3.8, no claim for indemnification pursuant to Section 6.1
shall be made unless asserted by a written notice given to the Representative
on or before 15 months from the date of this Agreement.


 


(b)           The Purchaser shall have no recourse under
this Article VII unless and until any claim of Damages by the Purchaser
exceeds $50,000 in the aggregate, in which case the Purchaser shall be entitled
to recover all Damages in excess of $50,000. 
Only individual claims in excess of $5,000 shall be considered
“Damages”. Notwithstanding the foregoing, this provision 6.5(b) shall not apply
in the case of fraud, active concealment or willful misrepresentation or in the
event of a breach of the representations and warranties contained in
Section 3.5(c).


 


6.6           Release of Escrow.  If, after 15 months after the Closing Date
(the “Release
Date”), shares of the Purchaser’s common stock representing the
Purchaser Securities still remain in the Escrow Account and no other claims for
Damages are then pending, then any such securities remaining in the Escrow
Account shall be disbursed to the Selling Shareholders in the same ratio as set
forth on Exhibit A.  For purposes of clarity, the only amount of
Shares to remain in the Escrow Account at the end of the 15-month period shall
be an amount necessary to satisfy any outstanding Claim Notices, and
immediately after the resolution of each outstanding Claim Notice, whether by
passage of time, Joint Instructions, or judgment, such Shares shall be released
from the Escrow Account to the Selling Shareholders in accordance with the
provisions of the Escrow Agreement.


 


6.7           The Representative.


 


(a)           The Selling Shareholders and the
Indemnifying Shareholders hereby authorize, direct and appoint Bruce Howe to
act as sole and exclusive agent, attorney-in-fact and the Representative of the
Selling Shareholders, and authorizes and directs the Representative to (i) take
any and all actions (including without limitation executing and delivering any
documents, incurring any costs and expenses for the account of the Selling
Shareholders and making any and all determinations) which may be required or
permitted by this Agreement or the Escrow Agreement to be taken by the
Indemnifying Shareholders, Selling Shareholders (or any of them) or the
Representative, (ii) exercise such other rights, power and authority as are
authorized, delegated and granted to the Representative hereunder and under the
Escrow Agreement in connection with the transactions contemplated hereby and
thereby and (iii) exercise such rights, power and authority as are incidental
to the foregoing.  Any such actions
taken, exercises of rights, power or authority, and any decision or determination
made by the Representative consistent therewith, shall be absolutely and
irrevocably binding on the Selling Shareholders and Indemnifying Shareholders
as if theSelling Shareholders and/or Indemnifying Shareholders personally had
taken such action, exercised such rights, power or authority or made such
decision or determination in the Indemnifying Shareholders’ or the Selling
Shareholders’ individual capacity. 
Notwithstanding any other provision of this Agreement, with respect to
the matters covered by Article VI, (i) the Selling Shareholders
irrevocably relinquish the Selling Shareholders’ right to act independently and
other than through the Representative, except with respect to the removal of
the Representative or appointment of a successor Representative as provided in
Section 7.8(b) below, and (ii) the Selling Shareholders shall


 


25

















 


not have any right under this Agreement or otherwise to institute any
suit, action or proceeding against the Company, the Purchaser or the Escrow
Agent with respect to any such matter, any such right being irrevocably and
exclusively delegated to the Representative. 
The Representative hereby acknowledges and accepts the foregoing
authorization and appointment and agrees to serve as the Representative in accordance
with this Agreement and the Escrow Agreement.


 


(b)           The Representative shall serve as
Representative until his resignation, removal from office, incapacity or death;
provided, however, that the Representative shall not have the
right to resign without (A) prior written notice to the Selling Shareholders
and (B) picking a successor reasonably satisfactory to the Purchaser to serve
until a successor thereto is elected by the Selling Shareholders.  The Representative may be removed at any
time, and a successor representative, reasonably satisfactory to the Purchaser,
may be appointed, pursuant to written action by the Selling Shareholders.  Any successor to the Representative shall,
for purposes of this Agreement and the Escrow Agreement, be deemed to be, from
the time of the appointment thereof in accordance with the terms hereof, the
Representative, and from and after such time, the term “Representative” as used
herein and therein shall be deemed to refer to such successor.  No appointment of a successor shall be
effective unless such successor agrees in writing to be bound by the terms of
this Agreement and the Escrow Agreement.


 


(c)           The Representative shall be permitted to
retain counsel, consultants and other advisors and shall promptly notify the
Purchaser after retaining any such person.


 


(d)           The Purchaser may rely upon the actions,
decisions and determinations of the Representative and may assume that all
actions, decisions and determinations of the Representative are fully
authorized by the Indemnifying Shareholders. 
The Purchaser is hereby relieved from any liability to any person for
any acts done by the Representative in his capacity as the Representative.


 


(e)           The Representative shall not be liable to
the Indemnifying Shareholders for the performance of any act or the failure to
act so long as he acted or failed to act in good faith in what he reasonably
believed to be the scope of his authority and for a purpose which he reasonably
believed to be in the best Shares of the Selling Shareholder.


 


ARTICLE VII

GENERAL PROVISIONS


 


7.1           Notices.  All notices and other communications hereunder shall be in
writing and shall be deemed given and received if delivered personally or by
commercial delivery service, or mailed by registered or certified mail (return
receipt requested) or sent via facsimile (with acknowledgment of complete
transmission) to the parties at the following addresses (or at such other
address for a party as shall be specified by like notice):


 


26

















 


	
  if to the Purchaser, to:

  	
   

  	
  VITAL LIVING, INC.

  
	
   

  	
   

  	
  5080 North 40th Street

  
	
   

  	
   

  	
  Suite 105

  
	
   

  	
   

  	
  Phoenix, AZ  85018-2147

  
	
   

  	
   

  	
  Attn: Mr. Brad Edson

  
	
   

  	
   

  	
  Telephone 602-952-9909

  
	
   

  	
   

  	
  Facsimile: 602-952-7129

  
	
   

  	
   

  	
   

  
	
  with a copy
  to:

  	
   

  	
  Kelly Lytton & Vann LLP

  
	
   

  	
   

  	
  1900 Avenue of the Stars, Suite 1450

  
	
   

  	
   

  	
  Los Angeles, CA  90067

  
	
   

  	
   

  	
  Attention: 
  Bruce Vann Esq.

  
	
   

  	
   

  	
  Telephone No.: 310-277-5333

  
	
   

  	
   

  	
  Facsimile No.:  310-277-5953

  
	
   

  	
   

  	
   

  
	
  if to the Representative,

  	
   

  	
   

  
	
  to:

  	
   

  	
  Bruce Howe

  
	
   

  	
   

  	
  5375 Mira Sorrento Place, Suite 100

  
	
   

  	
   

  	
  San Diego, CA 92121

  
	
   

  	
   

  	
  Telephone No.: 858-622-0111

  
	
   

  	
   

  	
  Facsimile No.: 858-622-[•]

  
	
   

  	
   

  	
   

  
	
  with a copy
  to:

  	
   

  	
  Cooley Godward LLP

  
	
   

  	
   

  	
  4401 Eastgate Mall

  
	
   

  	
   

  	
  San Diego, CA 92121

  
	
   

  	
   

  	
  Attention: 
  Lance Bridges, Esq.

  
	
   

  	
   

  	
  Telephone No.: 858-550-6000

  
	
   

  	
   

  	
  Facsimile No.:  858-550-6420

  



 


7.2           Interpretation.  The words “include,” “includes”
and “including”
when used herein shall be deemed in each case to be followed by the words
“without limitation.”  The table of
contents and headings contained in this Agreement are for reference purposes
only and shall not affect in any way the meaning or interpretation of this
Agreement.


 


7.3           Counterparts.  This Agreement may be executed in one or
more counterparts, all of which shall be considered one and the same agreement
and shall become effective when one or more counterparts have been signed by
each of the parties and delivered to the other party, it being understood that
all parties need not sign the same counterpart.


 


7.4           Entire Agreement; Assignment.  This Agreement, the Company Disclosure
Schedule, the schedules and Exhibits hereto, and the documents and instruments
and other agreements among the parties hereto referenced herein: (a) constitute
the entire agreement among the parties with respect to the subject matter
hereof and supersede all prior agreements and understandings, both


 


27

















 


written and oral, among the parties with
respect to the subject matter hereof; and (b) are not intended to confer upon
any other person or entity other than the parties hereto any rights or remedies
hereunder except that the Representative and the Escrow Agent shall have the
express rights articulated in Articles VII hereof and in the Escrow Agreement
hereto.


 


7.5           Severability.  In the event that any provision of this Agreement
or the application thereof, becomes or is declared by a court of competent
jurisdiction to be illegal, void or unenforceable, the remainder of this
Agreement will continue in full force and effect.


 


7.6           Safe Harbor Language.  Notwithstanding anything herein to the
contrary, any party to this Agreement (and any employee, representative,
shareholder or other agent of any party to this Agreement) may disclose to any
and all persons and entities, without limitation of any kind, the tax treatment
and tax structure of the transactions and all materials of any kind (including
opinions or other tax analyses) that are provided to it relating to such tax
treatment and tax structure; provided
however, that such disclosure may not be made to the extent
reasonably necessary to comply with any applicable federal or state securities
laws; and provided further, that
for this purpose, (i) the “tax
treatment” of the transactions means the purported or claimed federal income
tax treatment of the transactions, and (ii) the “tax structure” of the
transactions means any fact that may be relevant to understanding the purported
or claimed federal income tax treatment of the transactions.  For the avoidance of doubt, the parties
acknowledge and agree that the tax treatment and tax structure of the
transactions does not include the name of any party to the transactions or any
sensitive business information (including, without limitation, specific
information about any party’s intellectual property or other proprietary
assets) unless such information may be related or relevant to the purported or
claimed federal income tax treatment of the transactions.


 


7.7           Governing Law.  This Agreement shall be governed by and
construed in accordance with the laws of the State of California regardless of
the laws that might otherwise govern under applicable principles of conflicts
of laws thereof.  


 


7.8           Amendment.  Except as is otherwise required by applicable law, this Agreement
may be amended by the parties hereto at any time by execution of an instrument
in writing signed on behalf of each of the parties hereto.


 


28

















 


IN WITNESS
WHEREOF, the Purchaser, the Selling Shareholder, the Shareholders’
Representative and the Escrow Agent have caused this Agreement to be signed by
their duly authorized respective officers, all as of the date first written
above.


 


	
   

  	
  PURCHASER

  
	
   

  	
  Vital Living, Inc.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Name:

  
	
   

  	
  Title:

  



 


SELLING
SHAREHOLDERS


 


	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Bruce Howe, Individually

  	
   

  	
  Derek Howe, Individually

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Maynard Howe, Individually

  	
   

  	
  Ezra Bejar, Individually

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Roger Howe, Individually

  	
   

  	
  David Stenmoe, Individually

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  John Maher, Individually

  	
   

  	
  Pailla Reddy, Individually

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Ryan Howe, Individually

  	
   

  	
  Robert Nemer, Individually

  



 


29

















 


EXHIBIT A
SCHEDULE OF SELLING SHAREHOLDERS


 


 


	
  Name and
  Address

  	
   

  	
  Shares Being

  Sold

  	
   

  	
  Shares of Common Stock

  Shares

  	
   

  	
  Escrowed Shares

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  



 

















 


EXHIBIT B
SPECIFIED ACCOUNTING PRINCIPLES


 

















 


EXHIBIT C
OPERATING BUDGET


 

















 


EXHIBIT
D
COMPANY DISCLOSURE SCHEDULE


 

















 


EXHIBIT
E
PURCHASER DISCLOSURE SCHEDULE