-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Ihv7NMWKzfvSd5FfSmUtsHmXVhCKmGTz75/JzmYqKLUE6j47hiNiGie7nJPcwTmF PtIc/nUQuo9xPGWpFXYDQA== 0000891836-03-000732.txt : 20031219 0000891836-03-000732.hdr.sgml : 20031219 20031219170058 ACCESSION NUMBER: 0000891836-03-000732 CONFORMED SUBMISSION TYPE: SC 13D/A PUBLIC DOCUMENT COUNT: 7 FILED AS OF DATE: 20031219 SUBJECT COMPANY: COMPANY DATA: COMPANY CONFORMED NAME: VITAL LIVING INC CENTRAL INDEX KEY: 0001145700 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 880485596 STATE OF INCORPORATION: AZ FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SC 13D/A SEC ACT: 1934 Act SEC FILE NUMBER: 005-79189 FILM NUMBER: 031065841 BUSINESS ADDRESS: STREET 1: 5080 NORTH 40TH STREET, SUITE 105 CITY: PHOENIX STATE: AZ ZIP: 85018 BUSINESS PHONE: 602-952-9909 MAIL ADDRESS: STREET 1: 5080 NORTH 40TH STREET, SUITE 105 CITY: PHOENIX STATE: AZ ZIP: 85018 FILED BY: COMPANY DATA: COMPANY CONFORMED NAME: SKYEPHARMA PLC CENTRAL INDEX KEY: 0001018117 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 000000000 STATE OF INCORPORATION: X0 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SC 13D/A BUSINESS ADDRESS: STREET 1: 105 PICADILLY CITY: LONDON W1J 7NJ STATE: X0 BUSINESS PHONE: 0114417149 MAIL ADDRESS: STREET 1: 105 PICADILLY CITY: LONDON W1J 7NJ STATE: X0 SC 13D/A 1 sc0375.txt SCHEDULE 13D, AMENDMENT 3 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 SCHEDULE 13D/A UNDER THE EXCHANGE ACT OF 1934 AMENDMENT NO. 3 INFORMATION TO BE INCLUDED IN STATEMENTS FILED PURSUANT TO RULE 13d-2(a) VITAL LIVING, INC. - -------------------------------------------------------------------------------- (Name of Issuer) Common Stock, par value $0.001 per share - -------------------------------------------------------------------------------- (Title of Class of Securities) 92846Y100 ------------------------------------------------------- (CUSIP Number) - -------------------------------------------------------------------------------- DONALD NICHOLSON KATHRYN A. CAMPBELL, ESQ. SKYEPHARMA PLC SULLIVAN & CROMWELL LLP 105 PICCADILLY 1 NEW FETTER LANE LONDON W1J 7NJ, ENGLAND LONDON EC4A 1AN, ENGLAND +44 20 7491 1777 +44 20 7959 8900 - -------------------------------------------------------------------------------- (Name, Address and Telephone Number of Person Authorized to Receive Notices and Communications) December 17, 2003 ------------------------------------------------------- (Date of Event which Requires Filing of this Statement) If the filing person has previously filed a statement on Schedule 13G to report the acquisition which is the subject of this Schedule 13D, and is filing this schedule because of Rule 13d-1(e), 13d-1(f) or 13d-1(g), check the following box [ ]. The information required on the remainder of this cover page shall not be deemed to be "filed" for the purpose of Section 18 of the Securities Exchange Act of 1934 (the "Act") or otherwise subject to the liabilities of that section of the Act but shall be subject to all other provisions of the Act. (continued on following pages) - -------------------------------------------------------------------------------- CUSIP NO. 92846Y100 PAGE 2 OF 8 PAGES --- ---- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 1 NAMES OF REPORTING PERSONS I.R.S. IDENTIFICATION NOS. OF ABOVE PERSONS SKYEPHARMA PLC 330387911 - -------------------------------------------------------------------------------- 2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP* (a) [_] (b) [X] - -------------------------------------------------------------------------------- 3 SEC USE ONLY - -------------------------------------------------------------------------------- 4 SOURCE OF FUNDS WC, OO - -------------------------------------------------------------------------------- 5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEMS 2(d) OR 2(e) [_] - -------------------------------------------------------------------------------- 6 CITIZENSHIP OR PLACE OF ORGANIZATION ENGLAND AND WALES - -------------------------------------------------------------------------------- 7 SOLE VOTING POWER 0 NUMBER OF ----------------------------------------------------------- SHARES 8 SHARED VOTING POWER BENEFICIALLY OWNED BY 37,860,073(1)(2) EACH REPORTING ----------------------------------------------------------- PERSON WITH 9 SOLE DISPOSITIVE POWER 17,204,548(2) ----------------------------------------------------------- 10 SHARED DISPOSITIVE POWER 0 - -------------------------------------------------------------------------------- 11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON 17,204,548(1)(2) - -------------------------------------------------------------------------------- 12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES |X| - -------------------------------------------------------------------------------- 13 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11) 28.30%(2)(3) - -------------------------------------------------------------------------------- 14 TYPE OF REPORTING PERSON CO - -------------------------------------------------------------------------------- (1) In order to facilitate the consummation of the transaction contemplated by the Agreement and Plan of Merger by and among Vital Living, Inc. (the "Issuer"), VLEN Acquisition Corp., Inc. ("VLEN") and E-Nutriceuticals, Inc. ("ENI"), dated as of August 20, 2003 - -------------------------------------------------------------------------------- CUSIP NO. 92846Y100 PAGE 3 OF 8 PAGES --- ---- - -------------------------------------------------------------------------------- (the "Merger Agreement", and the transaction contemplated thereby, the "Merger"), SkyePharma PLC ("SkyePharma") entered into a Stockholders' Agreement with the Issuer and the other parties listed therein, dated as of August 20, 2003 (the "Stockholders' Agreement"), whereby each of Bradley Edson ("Mr. Edson"), Stuart Benson ("Mr. Benson") and Donald Hannah (Mr. Hannah, and with Mr. Edson and Mr. Benson, the "Founders Group"), Fifth Avenue Capital, Inc. ("Fifth Avenue Capital") and Stephen Morris ("Mr. Morris, and with Fifth Avenue Capital, the "Morris Group"), and SkyePharma (collectively, the "Stockholders") agreed to vote its shares of common stock, par value $0.001 per share (the "Common Stock") of Vital Living, options, warrants or convertible securities to purchase Common Stock, and other voting securities of the Issuer to elect the directors nominated by the other Stockholders. SkyePharma does not have the right to dispose or direct the disposition of any of the 20,655,525 shares of Common Stock or securities convertible or exercisable into Common Stock owned by the other parties to the Stockholders' Agreement. Accordingly, SkyePharma expressly disclaims beneficial ownership of all such shares. 2 SkyePharma is currently the beneficial owner of 14,204,548 shares of Common Stock, 1,000,000 shares of Series D Convertible Preferred Stock, par value $0.001 per share, of the Issuer (the "Preferred Stock"), $1,000,000 aggregate principal amount of the 12% Senior Secured Convertible Notes due 2008 (the "Convertible Notes") and warrants exercisable for 1,000,000 shares of Common Stock (the "Warrants"). Accordingly, SkyePharma has beneficial ownership of 17,204,548 shares of Common Stock, assuming the conversion of all shares of Preferred Stock and the Convertible Notes and the exercise of all the Warrants owned by SkyePharma into Common Stock at the current conversion price or exercise price, as the case may be, of $1.00. 3 Based on 57,801,170 shares of Common Stock outstanding on December 15, 2003 as described in the Securities Purchase Agreement, by and between the Issuer and the other investors as set forth therein, dated as of December 15, 2003 (the "Securities Purchase Agreement"), which SkyePharma became a party to on December 17, the conversion of 1,000,000 shares of Preferred Stock into 1,000,000 shares of Common Stock, the conversion of the Convertible Notes into 1,000,000 shares of Common Stock and the exercise of the Warrants for 1,000,000 shares of Common Stock. ITEM 1 SECURITY AND ISSUER This Amendment No. 3 amends and supplements the Schedule 13D filed by SkyePharma with the U.S. Securities and Exchange Commission (the "Commission") on August 29, 2003, as amended by Amendment No. 1 filed with the Commission on November 21, 2003 and Amendment No. 2 filed with the Commission on December 8, 2003, relating to the Common Stock of Vital Living, Inc., a Nevada corporation, including such Common Stock issuable upon conversion of Preferred Stock and Convertible Notes, and the exercise of Warrants, held by SkyePharma. The Issuer's principal executive offices are located at 5080 North 40th Street, Suite #105, Phoenix, Arizona, 85018. ITEM 3 SOURCES AND AMOUNT OF FUNDS OR OTHER CONSIDERATION The source of funds for the purchase of the $1,000,000 aggregate principal amount of Convertible Notes, including the accompanying Warrants, was SkyePharma's cash deposits. The total amount was $1,000,000 in cash, which was paid on December 17, 2003, in accordance with the terms of the Securities Purchase Agreement. - -------------------------------------------------------------------------------- CUSIP NO. 92846Y100 PAGE 4 OF 8 PAGES --- ---- - -------------------------------------------------------------------------------- ITEM 4 PURPOSE OF THE TRANSACTION Pursuant to the terms of the Commitment Letter (the "Commitment Letter") from SkyePharma to the Issuer, dated as of August 20, 2003, executed pursuant to Section 5 of the Merger Agreement, as amended on November 19, 2003 and December 4, 2003, SkyePharma has invested $1,000,000 in the Convertible Notes and Warrants of Vital Living. As a result of SkyePharma's investment pursuant to the Commitment Letter and as governed by the Securities Purchase Agreement, SkyePharma now holds $1,000,000 aggregate principal amount of Convertible Notes convertible into 1,000,000 shares of Common Stock, based on a conversion price of $1.00, and Warrants exercisable for 1,000,000 shares of Common Stock at an exercise price of $1.00. Such conversion or exercise price, as the case may be, is subject to adjustment based on stock splits, subdivisions and combinations, dividends and distributions, reorganizations and reclassifications, and certain issuances of Common Stock, or securities convertible or exchangeable into Common Stock, at a price lower than the conversion or exercise price, as the case may be, of the Convertible Notes and the Warrants, respectively. Further, at any time after April 15, 2004 that the 2004 Registration Statement, as defined below, is not effective, the Warrants may be exercised on a cashless exercise basis by surrendering Common Stock receivable upon exercise of the Warrants in lieu of cash until such time as the 2004 Registration Statement is declared effective. Any Common Stock acquired by SkyePharma by the conversion of the Convertible Notes or the exercise of the Warrants will be subject to the terms of the Stockholders' Agreement, as described more fully in the Schedule 13D filed by SkyePharma with the Commission on August 29, 2003. SkyePharma is continuously evaluating the business and business prospects of the Issuer, and its present and future interests in, and intentions with respect to the Issuer and at any time may decide to acquire additional shares or dispose of any or all of the Common Stock, Preferred Stock, Convertible Notes or Warrants owned by it. SkyePharma currently intends to exercise its rights as shareholder in the Issuer, and in connection therewith, may, from time to time, (i) have discussion with management and/or other shareholders of the Issuer concerning various operational and financial aspects of the Issuer's business, (ii) make one or more proposals to the Issuer or other shareholders of the Issuer relating to joint ventures, mergers, business combinations or extraordinary transactions, and (iii) solicit proxies. ITEM 5 INTEREST IN SECURITIES OF THE ISSUER (a) The percentage interest held by SkyePharma presented below is based on 57,801,170 shares of Common Stock outstanding on December 15, 2003 as described in the Securities Purchase Agreement. Assuming the conversion of all shares of Preferred Stock and the Convertible Notes and the exercise of the accompanying Warrants owned by SkyePharma into Common Stock at a conversion price (or exercise price in the case of the Warrants) of $1.00, SkyePharma is the beneficial owner of 17,204,548 shares of Common Stock, representing approximately 28.30% of the Common Stock issued and outstanding. The information in this Statement with respect to the parties listed below in this Item 5(a) is based solely on information provided by the Issuer to SkyePharma, except that information with respect to Mr. Edson's shareholding is from the Form 4 filed by Mr. Edson with the Commission on October 3, 2003. Mr. Edson is the beneficial owner of 4,808,050 shares of Common Stock, representing approximately 8.32% of the Common Stock issued and outstanding. Mr. Benson is the beneficial owner of 6,345,000 shares of Common Stock, including Common Stock issuable on the conversion of convertible securities and the exercise of options and warrants, representing - -------------------------------------------------------------------------------- CUSIP NO. 92846Y100 PAGE 5 OF 8 PAGES --- ---- - -------------------------------------------------------------------------------- approximately 10.97% of the Common Stock issued and outstanding. Mr. Hannah is the beneficial owner of 611,900 shares of Common Stock, representing approximately 0.93% of the Common Stock issued and outstanding. Fifth Avenue Capital is the beneficial owner of 8,860,575 shares of Common Stock, representing approximately 15.33% of the Common Stock issued and outstanding. Stephen Morris is a principal of Fifth Avenue Capital. Mr. Morris is individually the beneficial owner of 30,000 shares of Common Stock issuable on the conversion of convertible securities and the exercise of options and warrants, representing approximately 0.05% of the Common Stock issued and outstanding. Except as set forth in this Item 5, neither SkyePharma, nor to its knowledge and belief, any of its executive officers or directors, beneficially owns any shares of Common Stock. (b) SkyePharma has the shared power to vote or to direct the vote of, and the sole power to dispose or direct the disposition of, its 14,204,548 shares of Common Stock and its 3,000,000 shares of Common Stock that would be issued on the conversion of all of its shares of Preferred Stock and its $1,000,000 principal amount of Convertible Notes, based on the current conversion prices, and the exercise of all of its Warrants. (c) There have been no transactions by SkyePharma nor, to SkyePharma's knowledge, by any of the other persons listed in Item 5(a) in the class of securities reported on in this Statement that were effected during the past 60 days, other than as set forth in this Statement. On October 1, 2003, Mr. Edson elected a cashless exercise of his 1,000,000 warrants, for which he surrendered 234,900 shares of Common Stock as payment for the 765,100 shares of Common Stock he received, resulting in a net decrease in his beneficial ownership of Common Stock, including convertible securities convertible into Common Stock, of 234,900 shares. (d) No person other than SkyePharma has the right to receive or the power to direct the receipt of dividends from, or the proceeds from the sale of, its Common Stock, Preferred Stock, Convertible Notes or Warrants. ITEM 6 CONTRACTS, ARRANGEMENTS, UNDERSTANDINGS OR RELATIONSHIPS WITH RESPECT TO SECURITIES OF THE ISSUER Pursuant to the terms of the Commitment Letter, SkyePharma invested $1,000,000 in Convertible Notes and Warrants of the Issuer, which purchase was governed by the Securities Purchase Agreement. The Securities Purchase Agreement included customary representations and warranties of the Issuer. Pursuant to the terms of the Convertible Notes, interest is payable semi-annually at a rate of 12% per annum, 8% payable in cash and the balance of 4% payable, at the Issuer's sole discretion, in either cash or Common Stock. The Convertible Notes are convertible at any time at a conversion price of $1.00 into Common Stock, subject to the customary anti-dilution adjustments described above, until the maturity date of December 17, 2008. The Convertible Notes are redeemable at the option of the Issuer, commencing on December 17, 2004, if the sales price for the Common Stock is at least $3.00 per share for ten consecutive trading days prior to the notification of redemption. The Warrants entitle SkyePharma to purchase Common Stock of the Issuer at an exercise price of $1.00 per share, subject to the customary anti-dilution adjustments described above, and are exercisable by SkyePharma at any time through December 16, 2008. The Warrants are redeemable at the option of the Issuer, commencing December 17, 2004, if the sales price for the Common Stock is at least $3.00 per share for ten consecutive trading days prior to the notification of redemption. SkyePharma and the Issuer entered into a Letter Agreement, dated December 17, 2003, pursuant to which the Issuer has agreed that in the case of a redemption by the Issuer of the Notes - -------------------------------------------------------------------------------- CUSIP NO. 92846Y100 PAGE 6 OF 8 PAGES --- ---- - -------------------------------------------------------------------------------- or the Warrants, if SkyePharma has not notified the Issuer that it will accept the redemption price for the Notes or the Warrants within the redemption notice period, SkyePharma would be deemed to have elected to convert or exercise its Notes or Warrants, as the case may be, prior to the effectiveness of such redemption, notwithstanding the procedural requirements described in the Notes and Warrants. In connection with the purchase of the Convertible Notes and Warrants, on December 17, 2003, SkyePharma became a party to a Registration Rights Agreement between the Issuer and the investors listed therein, dated as of December 15, 2003 (the "December Registration Rights Agreement"), the terms of which require the Issuer to file with the Commission on or before January 14, 2004 a registration statement (the "2004 Registration Statement") to permit the offering and sale of the Common Stock issuable on the conversion of the Convertible Notes and the exercise of the Warrants, and Common Stock issuable as payments of interest on the Convertible Notes. The Issuer must also use reasonable best efforts to have the 2004 Registration Statement declared effective by the Commission as promptly as practicable and no later than April 15, 2004. In the event that the Issuer fails to file the 2004 Registration Statement by January 14, 2004, the 2004 Registration Statement is not declared effective by April 15, 2004 or the 2004 Registration Statement does not remain effective and available for use, subject to customary blackout periods and other terms of the December Registration Rights Agreement, SkyePharma will be entitled to liquidated damages in the amount of 2.0% of the principal amount of its Convertible Notes for each thirty day period in which the Registration Statement is not declared effective or does not remain effective and available for use. The December Registration Rights Agreement also requires the Issuer to use its best efforts to list the Common Stock covered by the 2004 Registration Statement with any securities exchange on which the Common Stock of the Issuer is then listed. Pursuant to the Securities Purchase Agreement, the Issuer and the investors listed therein entered into the Security Agreement, dated as of December 15, 2003 (the "Security Agreement"), which SkyePharma became a party to on December 17, 2003. The Security Agreement granted the holders of the Notes a continuing first priority security interest in the assets of the Issuer, subject to the terms and conditions set forth therein. However, the security interest may be subordinated to the extent necessary for the Issuer to obtain a financing secured only by the Issuer's accounts receivable and inventory. - -------------------------------------------------------------------------------- CUSIP NO. 92846Y100 PAGE 7 OF 8 PAGES --- ---- - -------------------------------------------------------------------------------- ITEM 7 MATERIALS TO BE FILED AS EXHIBITS Exhibit 1. Registration Rights Agreement, between Vital Living, Inc. and SkyePharma PLC, dated as of August 20, 2003 (incorporated by reference to Exhibit 1 to the Schedule 13D filed by SkyePharma PLC with the Commission on August 29, 2003). Exhibit 2. Subscription Agreement between, Vital Living, Inc. and SkyePharma PLC, dated as of August 20, 2003 (incorporated by reference to Exhibit 2 to the Schedule 13D filed by SkyePharma PLC with the Commission on August 29, 2003). Exhibit 3. Stockholders' Agreement, between SkyePharma PLC, Vital Living Inc., Bradley Edson, Stuart Benson, Donald Hannah, Stephen Morris and Fifth Avenue Capital Inc., dated as of August 20, 2003 (incorporated by reference to Exhibit 4 to the Schedule 13D filed by SkyePharma PLC with the Commission on August 29, 2003). Exhibit 4. Securities Purchase Agreement, between Vital Living, Inc., SkyePharma PLC and the other Investors named therein, dated as of December 15, 2003. Exhibit 5. Registration Rights Agreement, between Vital Living, Inc., SkyePharma PLC and the other Investors named therein, dated as of December 15, 2003. Exhibit 6. Letter Agreement, between Vital Living, Inc. and SkyePharma PLC, dated as of December 17, 2003. Exhibit 7. Security Agreement, between Vital Living, Inc., SkyePharma PLC and the other Investors named therein, dated as of December 15, 2003. Exhibit 8. 12% Senior Secured Convertible Note of Vital Living, Inc., dated as of December 17, 2003. Exhibit 9. Warrant to purchase 1,000,000 shares of Common Stock of Vital Living, Inc., dated as of December 17, 2003. - -------------------------------------------------------------------------------- CUSIP NO. 92846Y100 PAGE 8 OF 8 PAGES --- ---- - -------------------------------------------------------------------------------- SIGNATURE After reasonable inquiry and to the best of my knowledge and belief, I certify that the information set forth in this statement is true, complete and correct. December 19, 2003 SkyePharma PLC By: /s/ Donald Nicholson ------------------------------------ Name: Donald Nicholson Title: Finance Director EX-99.4 3 ex-4.txt EXHIBIT 4 SECURITIES PURCHASE AGREEMENT Exhibit 4 - ------------------------------------------------------------------------------- SECURITIES PURCHASE AGREEMENT BY AND BETWEEN VITAL LIVING, INC. AND THE INVESTORS - ------------------------------------------------------------------------------- Dated December 15, 2003 SECURITIES PURCHASE AGREEMENT THIS SECURITIES PURCHASE AGREEMENT (the "Agreement") is made as of the 15th day of December, 2003, by and between Vital Living, Inc., a Nevada corporation (the "Company"), and the investors listed on the Schedule of Investors attached hereto as such Schedule may be amended from time to time to include Additional Investors (as defined in Section 7.12) (each an "Investor" and collectively, the "Investors"). W I T N E S S E T H: WHEREAS, the Company desires to sell to the Investors, and the Investors desire to purchase from the Company, (a) 12% senior secured convertible notes (the "Notes") in the aggregate principal amount of up to $6,000,000, in the form attached as Exhibit A hereto, and (b) warrants (the "Warrants"), in the form attached as Exhibit B hereto, to purchase a number of shares of the Company's common stock, $0.001 par value per share (the "Common Stock") equal to 100% of the principal amount of the Notes, pursuant to the provisions of this Agreement; and NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth in this Agreement, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties do hereby agree as follows: 1. Purchase and Sale of Notes and Warrants. 1.1 Issuance and Sale of Notes and Warrants. Subject to the terms and conditions of this Agreement, the Investors agree to purchase at the Initial Closing (as hereafter defined), and the Company agrees to issue and sell to the Investors at the Initial Closing, the amount of Notes and the Warrants set forth opposite each Investor's name on the Signature Page hereto. 1.2 Closing. (a) The Company may close on any amount of Notes, up to $6,000,000 in aggregate principal amount, without a minimum. However, the Company intends to effect a closing ("Initial Closing") upon the purchase and sale of Notes in an aggregate principal amount of not less than $2,030,000 and a like number of Warrants (the "Purchase Price"), since the holders of the Company's $1,530,000 aggregate principal amount Senior Convertible Promissory Notes ("Bridge Notes") sold in October and November 2003 have agreed to exchange such notes for the Notes sold hereby if at least $500,000 aggregate principal amount of Notes, in addition to the Bridge Notes, are sold. The Initial Closing shall take place at the offices of HCFP/Brenner Securities, LLC, 888 Seventh Avenue, 17th Floor, New York, New York 10106 at 10:00 a.m., on December 15, 2003, or at such time and place as the Company and the Investors mutually agree upon orally or in writing. (b) At the Initial Closing, the Company shall deliver to the Investors, the Notes and the Warrants, against payment of the Purchase Price by wire transfer to an account designated by the Company or through the exchange of the Bridge Notes described above. 2 (c) The Company may thereafter effect an interim closing (an "Interim Closing" and each of the Initial Closing and any Interim Closings hereafter referred to as a "Closing") upon the purchase and sale of additional Notes. The Interim Closing may take place at any time thereafter at the offices of HCFP/Brenner Securities, LLC, 888 Seventh Avenue, 17th Floor, New York, New York 10106 at such time and place as the Company and the Investors mutually agree upon orally or in writing, with the delivery of, and payment for, such additional Notes and warrants as described in Section 1.2(b) above. 2. Representations and Warranties of the Company. The Company hereby represents and warrants to the Investors, except as set forth on a Schedule of Exceptions to Representations and Warranties attached hereto as Exhibit C (the "Schedule of Exceptions"), the following: 2.1 Subsidiaries. The Company does not presently own or control, directly or indirectly, any interest in any other corporation, association, or other business entity except as disclosed in the SEC Reports (as hereinafter defined) (each, a "Subsidiary" and collectively, the "Subsidiaries"). Unless the context requires otherwise, all references herein to the "Company" shall refer to the Company and its Subsidiaries. The Company is not a party to any joint venture, partnership, or similar arrangement. 2.2 Organization, Good Standing, and Qualification. The Company is a corporation duly organized, validly existing, and in good standing under the laws of the State of Nevada, and has all requisite corporate power and authority to own its properties and assets and to carry on its business as presently conducted. The Subsidiaries are duly organized in their respective jurisdictions of organization, validly existing and in good standing in such respective jurisdictions and each has the power and authority to own its properties and assets and to carry on its respective business as now conducted. The Company and the Subsidiaries are duly qualified to transact business and are in good standing in each jurisdiction where such qualification is required, except where the failure so to qualify could not reasonably be expected to have a Material Adverse Effect (as hereafter defined) on the Company's business or properties. 2.3 Capitalization and Voting Rights. The number of authorized, issued and outstanding capital stock of the Company is set forth in Exhibit C. All outstanding shares have been duly authorized and are validly issued, fully paid and nonassesasble. Except as disclosed in Exhibit C, no securities of the Company or any Subsidiary are entitled to preemptive or similar rights, nor is any holder of securities of the Company or any Subsidiary entitled to preemptive or similar rights arising out of any agreement or understanding with the Company or any Subsidiary by virtue of any of the Transaction Documents (defined hereinafter). Except as disclosed in Exhibit C, there are no outstanding options, warrants, script rights to subscribe for or acquire calls or commitments of any character whatsoever relating to, or securities, except as a result of the purchase and sale of the Securities, or rights or obligations convertible into or exchangeable for, or giving any Person (as defined below) any right to subscribe for or acquire, any shares of Common Stock, or contracts, commitments, understandings, or arrangements by which the Company or any Subsidiary is or may become bound to issue additional shares of Common Stock, or securities or rights convertible or exchangeable into shares of Common Stock. To the knowledge of the Company, except as specifically disclosed in the SEC Reports (as defined below) or in Exhibit C, no Person or group of related Persons beneficially owns (as determined 3 pursuant to Rule 13d-3 promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act")), or has the right to acquire by agreement with or by obligation binding upon the Company, beneficial ownership of in excess of 5% of the Common Stock. A "Person" means an individual or corporation, partnership, trust, incorporated or unincorporated association, joint venture, limited liability company, joint stock company, government (or an agency or subdivision thereof) or other entity of any kind. 2.4 Authorization. All corporate action on the part of the Company, its officers, directors, and shareholders necessary for the due authorization, execution, and delivery of this Agreement, the Ancillary Agreements (as hereafter defined), the Notes and the Warrants (collectively, the "Transaction Documents"), the performance of all obligations of the Company hereunder and thereunder and the due authorization, valid issuance (or reservation for issuance) and delivery of the Notes and the Warrants hereunder and the Common Stock issuable upon conversion of the Notes or upon exercise of the Warrants (collectively, the "Securities"), has been taken or will be taken prior to the Initial Closing, and the Transaction Documents constitute or, in the case of the Notes, the Warrants and the Common Stock, will constitute, valid and legally binding obligations of the Company, enforceable in accordance with their respective terms, except (i) as limited by applicable bankruptcy, insolvency, reorganization, moratorium and similar laws of general application affecting enforcement of creditors' rights generally, (ii) as limited by laws relating to the availability of specific performance, injunctive relief, or other equitable remedies, and (iii) to the extent the indemnification provisions contained in the Transaction Documents may be limited by applicable federal or state laws. 2.5 Valid Issuance of Notes, Warrants and Common Stock. The Notes and the Warrants being purchased by the Investors hereunder have been duly and validly authorized and, when issued and delivered in accordance with the terms hereof for the consideration provided for herein, will be validly issued and will constitute legally binding obligations of the Company in accordance with their terms and will have been issued in compliance with all applicable federal and state securities laws. The Common Stock issuable upon conversion of the Notes and upon exercise of the Warrants has been duly and validly reserved for issuance and, upon issuance in accordance with the terms of the Notes and the Warrants (and upon payment of the exercise price as required by the Warrants), respectively, will be validly issued, fully paid and nonassessable, and will have been issued in compliance with all applicable federal and state securities laws. 2.6 Filings, Consents and Approvals. Neither the Company nor any Subsidiary is required to obtain any consent, waiver, authorization or order of, give any notice to, or make any filing or registration with, any court or other federal, state, local or other governmental authority or other Person in connection with the execution, delivery and performance by the Company of the Transaction Documents or the consummation of the transactions contemplated thereby, other than (i) the filing of a proper Form D in accordance with Regulation D promulgated under the Securities Act of 1933, as amended (the "Securities Act" or "Act"), and applicable Blue Sky filings, (ii) such filings as may be necessary to perfect the security interest granted to the Investors under the Security Agreement (as defined below) and (iii) in all other cases where the failure to obtain such consent, waiver, authorization or order, or to give such notice or make such filing or registration could not reasonably be expected to have or result in, individually or in the aggregate, a material adverse effect on the assets, business, operations, 4 financial condition, liquidity or prospects of the Company and its Subsidiaries taken as a whole ("Material Adverse Effect"). 2.7 Litigation. There is no action, suit, proceeding, claim or investigation pending or, to the knowledge of the Company, currently threatened against the Company or its affiliates which questions the validity of the Transaction Documents, or the right of the Company to enter into any of them, or to consummate the transactions contemplated hereby or thereby, or which might result or that could reasonably be expected to have a Material Adverse Effect, either individually or in the aggregate, or result in any change in the current equity ownership of the Company, nor is the Company aware that there is any basis for the foregoing. The foregoing includes, without limitation, actions, pending or threatened (or any basis therefor known to the Company), involving the prior employment of any of the Company's employees, their use in connection with the Company's business of any information or techniques allegedly proprietary to any of their former employers, or their obligations under any agreements with prior employers. The Company is not a party or subject to any order, writ, injunction, judgment, or decree of any court or government agency or instrumentality. 2.8 Patents and Trademarks. The Company and each of its Subsidiaries owns, or is licensed or otherwise possesses legally enforceable rights to use all patents, trademarks, trade names, service marks, copyrights, and any applications therefore, technology, know-how, computer software programs or applications, and tangible or intangible proprietary information or materials that are used in the business of the Company and its Subsidiaries as currently conducted, except for any such failures to own, be licensed or possess that, individually or in the aggregate, could not reasonably be expected to have a Material Adverse Effect, and to the knowledge of the officers of the Company all patents, trademarks, trade names, service marks and copyrights held by the Company and/or its Subsidiaries are valid and subsisting. Except as disclosed in Exhibit C or as could not reasonably be expected to have a Material Adverse Effect: (a) the Company is not, nor will it be as a result of the execution and delivery of the Transaction Documents or the consummation of the transactions contemplated thereby, in violation of any licenses, sublicenses and other agreements as to which the Company is a party and pursuant to which the Company is authorized to use any third-party patents, trademarks, service marks, copyrights, trade secrets or computer software (collectively, "Third-Party Intellectual Property Rights"). (b) no claims with respect to (i) the patents, registered and material unregistered trademarks and service marks, registered copyrights, trade names, and any applications therefore, trade secrets or computer software owned by the Company or any of its Subsidiaries (collectively, the "Company Intellectual Property Rights"); or (ii) Third-Party Intellectual Property Rights are currently pending or, to the knowledge of the officers of the Company, are threatened by any Person; (c) the officers of the Company do not know of any valid grounds for any bona fide claims (i) to the effect that the manufacture, sale, licensing or use of any product as now used, sold or licensed or proposed for use, sale or license by the Company or any of its Subsidiaries, infringes on any copyright, patent, trademark, service mark or trade secret of any 5 Person; (ii) against the use by the Company or any of its Subsidiaries, of any Company Intellectual Property Right or Third-Party Intellectual Property Right used in the business of the Company or any of its Subsidiaries as currently conducted or as proposed to be conducted; (iii) challenging the ownership, validity or enforceability of any of the Company Intellectual Property Rights; or (iv) challenging the license or legally enforceable right to use of the Third-Party Intellectual Rights by the Company or any of its Subsidiaries; and (d) to the knowledge of the officers of the Company, there is no unauthorized use, infringement or misappropriation of any of the Company Intellectual Property Rights by any third party, including any employee or former employee of the Company or any of its Subsidiaries. 2.9 Compliance with Other Instruments. The Company is not in violation or default of any provisions of its Amended and Restated Articles of Incorporation or Bylaws or any instrument, judgment, order, writ, decree, mortgage, indenture, lease, license or contract to which it is a party or by which it is bound or any provision of federal, state, or local statute, rule, or regulation applicable to the Company, except as could not reasonably be expected, singly or in the aggregate, to have a Material Adverse Effect or to burden or impair the ability of the Company to consummate the transactions contemplated hereby. The execution, delivery, and performance of the Transaction Documents and the consummation of the transactions contemplated thereby will not result in any such violation or be in conflict with or constitute, with or without the passage of time and giving of notice, either a default under any such provision, instrument, judgment, order, writ, decree or contract, or an event which results in the creation of any lien, charge, or encumbrance upon any assets of the Company or the suspension, revocation, impairment, forfeiture, or nonrenewal of any material permit, license, authorization, or approval applicable to the Company, its business or operations, or any of its assets or properties, except as could not reasonably be expected, singly or in the aggregate, to have a Material Adverse Effect. 2.10 Permits. The Company has all franchises, permits, licenses, and any similar authority necessary for the conduct of its business as now being conducted by it, the lack of which could, individually or in the aggregate, be reasonably expected to have a Material Adverse Effect and believes it can obtain, without undue burden or expense, any similar authority for the conduct of its business as planned to be conducted. The Company is not in default in any material respect under any of such franchises, permits, licenses, or other similar authority. 2.11 Compliance with Laws. The conduct of business by the Company and each Subsidiary as presently, conducted or proposed to be conducted is not subject to continuing oversight, supervision, regulation or examination by any governmental official or body of the United States or any other jurisdiction wherein the Company or any Subsidiary conducts or proposes to conduct such business, except such regulation as is applicable to commercial enterprises generally. Neither the Company nor any of the Subsidiaries has received any notice of any violation of or noncompliance with, any federal, state, local or foreign laws, ordinances, regulations and orders (including, without limitation, those relating to environmental protection, occupational safety and health, federal securities laws, equal employment opportunity, consumer protection, credit reporting, "truth-in-lending", and warranties and trade practices) applicable to its business or to the business of any Subsidiary, the violation of, or noncompliance with, which 6 could reasonably be expected to have a Material Adverse Effect, individually or in the aggregate, or burden or impair the ability of the Company to consummate the transactions contemplated hereby and the Company knows of no facts or set of circumstances which could give rise to such a notice. 2.12 Disclosure. This Agreement, the Notes, the Warrants and any other statements or certificates made or delivered in connection herewith or therewith, when taken together with the Disclosure Materials (as defined below), do not contain any untrue statement of a material fact or omits to state a material fact necessary to make the statements herein or therein not misleading. 2.13 Title to Property and Assets. The Company owns its property and assets free and clear of all mortgages, liens, loans, pledges, security interests, claims, equitable interests, charges, and encumbrances, except such encumbrances and liens which arise in the ordinary course of business and do not materially impair the Company's ownership or use of such property or assets. With respect to the property and assets it leases, the Company is in compliance with such leases and, to the best of its knowledge, holds a valid leasehold interest free of any liens, claims, or encumbrances. 2.14 Tax Returns, Payments, and Elections. The Company has timely filed all tax returns and reports as required by law, and all such returns and reports are true and correct in all material respects. The Company has paid all taxes and other assessments due, if any, except those contested by it in good faith which are listed in the Schedule of Exceptions. The provisions for taxes of the Company as shown in the Financial Statements is adequate for taxes due or accrued as of the date thereof. The Company has not elected pursuant to the Internal Revenue Code of 1986, as amended ("Code"), to be treated as a Subchapter S corporation or a collapsible corporation pursuant to Section 341(f) or Section 1362(a) of the Code. 2.15 Insurance. The Company has in full force and effect fire and casualty insurance policies, with extended coverage, sufficient in amount (subject to reasonable deductibles) to allow it to replace any of its properties that might be damaged or destroyed, and the Company has insurance against other hazards, risks, and liabilities to persons and property to the extent and in the manner customary for companies in similar businesses similarly situated. 2.16 SEC Reports; Financial Statements. The Company has filed all reports required to be filed by it under the Exchange Act, including pursuant to Section 13(a) or 15(d) thereof, for the three years preceding the date hereof (or such shorter period as the Company was required by law to file such material) (the foregoing materials being collectively referred to herein as the "SEC Reports" and, together with the Schedule of Exceptions to this Agreement and the documents filed as exhibits to the Company's Registration Statement on Form SB-2, as amended, the "Disclosure Materials") on a timely basis or has received a valid extension pursuant to Rule 12b-25 under the Exchange Act of such time of filing and has filed any such SEC Reports prior to the expiration of any such extension. As of their respective dates, the SEC Reports complied in all material respects with the requirements of the Securities Act and the Exchange Act and the rules and regulations of the Commission promulgated thereunder, and none of the SEC Reports, when filed, 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. 7 Except as set forth in Exhibit C, all material agreements to which the Company is a party or to which the property or assets of the Company are subject have been filed as exhibits to the SEC Reports. The financial statements of the Company included in the SEC Reports comply in all material respects with applicable accounting requirements and the rules and regulations of the Commission with respect thereto as in effect at the time of filing. Such financial statements have been prepared in accordance with generally accepted accounting principles ("GAAP") applied on a consistent basis during the periods involved, except as may be otherwise specified in such financial statements or the notes thereto, and fairly present in all material respects the financial position of the Company and its consolidated subsidiaries as of the dates thereof and the results of operations and cash flows for the periods then ended, subject, in the case of unaudited statements, to normal, immaterial, year-end audit adjustments. Except as disclosed in the Disclosure Documents, since September 30, 2003 (a) there has been no event, occurrence or development that has had or that could reasonably be expected to have or result in a Material Adverse Effect, (b) the Company has not incurred any liabilities (contingent or otherwise) other than (x) liabilities incurred in the ordinary course of business consistent with past practice and (y) liabilities not required to be reflected in the Company's financial statements pursuant to GAAP or required to be disclosed in filings made with the Commission, (c) the Company has not altered its method of accounting or the identity of its auditors and (d) the Company has not declared or made any payment or distribution of cash or other property to its stockholders or officers or directors (other than in compliance with existing Company stock option plans) with respect to its capital stock, or purchased, redeemed (or made any agreements to purchase or redeem) any shares of its capital stock. Additionally, since the adoption of the Sarbanes-Oxley Act of 2002 (the "New Act"), the Company has complied in all material respects with the laws, rules and regulation under the New Act which are applicable to it. 2.17 No Conflict of Interest. Except as otherwise disclosed in the Disclosure Materials, the Company is not indebted in excess of $5,000, directly or indirectly, to any of its employees, officers or directors or to their respective spouses or children, in any amount whatsoever other than in connection with expenses or advances of expenses incurred in the ordinary course of business or relocation expenses of employees, officers and directors, nor is the Company contemplating such indebtedness as of the date of this Agreement. Except as otherwise disclosed in the Disclosure Materials, none of said employees, officers or directors, or any member of their immediate families, is directly or indirectly indebted to the Company (other than in connection with purchases of the Company's stock) or have any direct or indirect ownership interest in any firm or corporation with which the Company is affiliated or with which the Company has a business relationship or any firm or corporation which competes with the Company, nor is the Company contemplating such indebtedness as of the date of this Agreement, except that employees, officers, directors and/or shareholders of the Company may own stock in publicly traded companies (not in excess of 1% of the outstanding capital stock thereof) which may compete with the Company. Except as otherwise disclosed in the Disclosure Materials, no employee, shareholder, officer or director, or any member of their immediate families, is, directly or indirectly, interested in any material contract with the Company, nor does any such person own, directly or indirectly, in whole or in part, any material tangible or intangible property that the Company uses or contemplates using in the conduct of its business. The Company is not a guarantor or indemnitor of any indebtedness of any other Person. 8 3. Representations and Warranties of the Investors. Each of the Investors, severally and not jointly, hereby represent and warrant that: 3.1 Authorization. The Investor represents that it has full power and authority to enter into the Transaction Documents. The Transaction Documents entered into by the Investor constitute the valid and legally binding obligations of the Investor enforceable in accordance with their terms, except (i) as limited by applicable bankruptcy, insolvency, reorganization, moratorium, and other laws of general application affecting enforcement of creditors' rights generally and (ii) as limited by laws relating to the availability of specific performance, injunctive relief, or other equitable remedies. 3.2 Purchase Entirely for Own Account. The Securities will be acquired for investment for the Investor's own account and not with a view to the resale or distribution of any part thereof. 3.3 Disclosure of Information. The Investor acknowledges that all of the SEC Reports and Disclosure Materials were made fully available to it and it has reviewed and understands them. The Investor acknowledges that it has received all the information that it has requested relating to the Company and the purchase of the Notes and the Warrants. The Investor further represents that it has had an opportunity to ask questions and receive answers from the Company regarding the terms and conditions of the offering of the Notes and the Warrants. The foregoing, however, does not limit or modify the representations and warranties of the Company in Section 2 of this Agreement or the right of the Investor to rely thereon. 3.4 Accredited Investor. The Investor is an "accredited investor" within the meaning of Rule 501 of Regulation D under the Securities Act. 3.5 Restricted Securities. Investor understands that the Notes and the Warrants (and the shares of Common Stock issuable upon conversion of the Notes and exercise of the Warrants) that it is purchasing are "restricted securities" under the federal securities laws and that under such laws and applicable regulations such securities may only be sold pursuant to an effective registration statement or an available exemption from registration. 3.6 Legends. It is understood that the certificates evidencing the Notes and the Warrants (and the Common Stock issuable upon conversion and exercise thereof, respectively) may bear the following legend: "THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), AND ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AS SET FORTH IN THIS CERTIFICATE. THE SECURITIES REPRESENTED HEREBY MAY NOT BE SOLD, TRANSFERRED, OR OTHERWISE DISPOSED OF IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT OR AN OPINION OF COUNSEL, REASONABLY ACCEPTABLE TO COUNSEL FOR THE COMPANY, TO THE EFFECT THAT THE PROPOSED SALE, TRANSFER, OR 9 DISPOSITION MAY BE EFFECTUATED WITHOUT REGISTRATION UNDER THE ACT." 4. Conditions of the Investors' Obligations at each Closing. The obligations of the Investors under subsection 1.1 of this Agreement are subject to the fulfillment on or before each Closing of each of the following conditions: 4.1 Representations and Warranties. The representations and warranties of the Company contained in Section 2 hereof shall be true and correct on and as of the date of this Agreement and as of each Closing with the same effect as though such representations and warranties had been made on and as of the date of such Closing. 4.2 Performance. The Company shall have performed and complied with all agreements, obligations, and conditions contained in this Agreement that are required to be performed or complied with by it on or before each Closing. 4.3 Compliance Certificate. The President of the Company shall deliver to the Investors, at each Closing, a certificate certifying that the conditions specified in Sections 4.1 and 4.2 have been fulfilled and stating that, except as set forth in the Disclosure Materials, there has been no material adverse change in the business, affairs, prospects, operations, properties, assets, condition, capital shares, long-term debt, results of operations, financial condition or liquidity of the Company since September 30, 2003. 4.4 Proceedings and Documents. All corporate and other proceedings in connection with the transactions contemplated at each Closing and all documents incident thereto shall be reasonably satisfactory in form and substance to the Investors and counsel to the Investors, and they shall have received all such counterpart original and certified or other copies of such documents as they may reasonably request. 4.5 Opinion of Company Counsel. The Investors shall have received from Graubard Miller an opinion, dated as of each Closing, in form attached hereto as Exhibit D. 4.6 Good Standing Certificates. The Company shall have delivered to the Investors, dated as of a date within five (5) business days of each Closing, a certificate issued by the State of Nevada to the effect that it is legally existing and in good standing. 4.7 Secretary's Certificate. The Company shall have delivered to the Investors a certificate executed by the Secretary of the Company dated as each Closing attending, true and correct copies of the following documents: (a) the resolutions adopted by the Company's Board of Directors authorizing the transactions contemplated by this Agreement; and (b) the Amended and Restated Articles of Incorporation and Bylaws of the Company. 4.8 Delivery of Notes and Warrants. The Company shall have delivered the Notes and the Warrants to the Investors for each Closing, as specified in Section 1. 10 4.9 Ancillary Agreements. 4.9.1 The Company and the Investors shall have entered into a security agreement dated of even date herewith, a form of which is attached hereto as Exhibit E (the "Security Agreement"). 4.9.2 The Company and the Investors shall have entered into a registration rights agreement dated of even date herewith, a form of which is attached hereto as Exhibit F (the "Registration Rights Agreement"). 4.9.3 The Company and Graubard Miller shall have entered into the escrow agreement dated of even date herewith, a form of which is attached hereto as Exhibit G (the "Escrow Agreement") and together with the Security Agreement and Registration Rights Agreement, the "Ancillary Agreements"). 4.10 Other Payments. Concurrent with each Closing, the Company shall pay the compensation set forth in Section 7.7 hereto. 5. Conditions of the Company's Obligations at each Closing. The obligations of the Company to Investor under this Agreement is subject to the fulfillment on or before each Closing of each of the following conditions by the Investor: 5.1 Representations and Warranties. The representations and warranties of the Investors contained in Section 3 shall be true and correct on and as of the date of this Agreement and as of each Closing with the same effect as though such representations and warranties had been made on and as of such Closing. 5.2 Payment of Purchase Price. The Investor shall have delivered the Purchase Price. 5.3 Ancillary Agreements. The Company and the Investors shall have entered into the Ancillary Agreement. 6. Indemnification. 6.1 General. The Company agrees to indemnify and hold harmless the Investors and any of their general partners, shareholders, employees, officers, directors, members, agents and other representatives (collectively, the "Indemnitees"), against any losses, damages, liabilities, or judgments or settlements of any nature or kind, including all costs and expenses relating thereto, including without limitation, interest, penalties and reasonable attorneys' fees (the "Losses") (joint or several) (i) arising out of any investigations, proceedings, claims or actions, to which the Indemnitees may become subject, whether under the Securities Act or the Exchange Act or any rules or regulations promulgated thereunder, or any state law or regulation, or common law, arising out of, related to or in any way attributable to the Indemnitee's investment in the Company, or (ii) that arise out of or are based upon any breach of any representation, warranty, agreement, obligation or covenant of the Company contained herein or in any of the Transaction Documents. The Company also agrees to reimburse the Indemnitees for any legal or other expenses reasonably incurred in connection with investigating 11 or defending any such investigations, proceedings, claims or actions, as such expenses or other costs are incurred. The indemnity provided in this Section 6.1 is not limited to Losses asserted by third parties against any Indemnitee, but includes Losses incurred or sustained by any such Indemnitee in the absence of third party claims. 6.2 Non-Exclusive Remedy. The indemnification remedies provided in this Section 6 shall not be deemed to be exclusive. Accordingly, the exercise by any person of any of its rights under this Section 6 shall not be deemed to be an election of remedies and shall not be deemed to prejudice, or to constitute or operate as a waiver of, any other right or remedy that such person may be entitled to exercise (whether under this Agreement, under any other contract, under any law or regulation or otherwise); provided, however, that no person shall seek other remedies in those situations where they have received full indemnification payments with respect to such situations. 7. Miscellaneous. 7.1 Survival of Warranties. All of the representations and warranties made herein shall survive the execution and delivery of this Agreement. The Investors are entitled to rely, and the parties hereby acknowledge that the Investors have so relied, upon the truth, accuracy and completeness of each of the representations and warranties of the Company contained herein, irrespective of any independent investigation made by Investors. The Company is entitled to rely, and the parties hereby acknowledge that the Company has so relied, upon the truth, accuracy and completeness of each of the representations and warranties of the Investors contained herein, irrespective of any independent investigation made by the Company. 7.2 Successors and Assigns. This Agreement is personal to each of the parties and may not be assigned without the written consent of the other parties; provided, however, that any of the Investors shall be permitted to assign its rights under this Agreement and the Ancillary Agreements to any affiliate of such Investor. 7.3 Governing Law. This Agreement shall be governed by and construed under the laws of the State of New York as applied to agreements among New York residents entered into and to be performed entirely within New York. The Company (1) agrees that any legal suit, action or proceeding arising out of or relating to this Agreement shall be instituted exclusively in New York State Supreme Court, County of New York, or in the United States District Court for the Southern District of New York, (2) waives any objection which the Company may have now or hereafter to the venue of any such suit, action or proceeding, and (3) irrevocably consents to the jurisdiction of the New York State Supreme Court, County of New York, and the United States District Court for the Southern District of New York in any such suit, action or proceeding. The Company further agrees to accept and acknowledge service of any and all process which may be served in any such suit, action or proceeding in the New York State Supreme Court, County of New York, or in the United States District Court for the Southern District of New York and agrees that service of process upon the Company mailed by certified mail to the Company's address shall be deemed in every respect effective service of process upon the Company, in any such suit, action or proceeding. THE PARTIES HERETO AGREE TO WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT OR ANY DOCUMENT OR AGREEMENT CONTEMPLATED HEREBY. 12 7.4 Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. This Agreement, once executed by a party, may be delivered to the other party hereto by facsimile transmission of a copy of this Agreement bearing the signature of the party so delivering this Agreement. 7.5 Titles and Subtitles. The titles and subtitles used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement. 7.6 Notices. Unless otherwise provided, any notice, authorization, request or demand required or permitted to be given under this Agreement shall be given in writing and shall be deemed effectively given upon personal delivery to the party to be notified or three (3) days following deposit with the United States Post Office, by registered or certified mail, postage prepaid, or two days after it is sent by an overnight delivery service, or when sent by facsimile with machine confirmation of delivery addressed as follows: If to the Investors to: The address set forth opposite their name on the Schedule of Investors attached hereto If to Company, to: Vital Living, Inc. 5080 North 40th Street, Suite 105, Phoenix, AZ 85018 Telecopier No.: (602) 952-7129 Attention: Stuart A. Benson, President (e-mail: cafestu@aol.com) 13 In either case, with a copy to: HCFP/Brenner Securities, LLC 888 Seventh Avenue 17th Floor New York, New York 10106 Telecopier No.: (212) 707-0378 Attention: Ira Greenspan (e-mail: igreenspan@hcfpbrenner.com) and Graubard Miller 600 Third Avenue New York, New York 10016 Telecopier No.: (212) 818-8881 Attention: David Alan Miller, Esq. (e-mail: dmiller@graubard.com) Any party may change its address for such communications by giving notice thereof to the other parties in conformity with this Section. 7.7 Finder's Fee. Each party represents that it neither is nor will be obligated for any finders' or brokers' fee or commission in connection with this transaction; provided, however, that the Company is obligated to pay certain compensation upon consummation of the transactions contemplated hereby to Sloan Securities Corp., Atlas Capital, HCFP/Brenner Securities, LLC and Aegis Capital Corp. 7.8 Transaction Expenses; Enforcement of Transaction Documents. The Company and each Investor shall pay their respective costs and expenses incurred with respect to the negotiation, execution, delivery and performance of this Agreement. If any action at law or in equity is necessary to enforce or interpret the terms of the Transaction Documents, the prevailing party shall be entitled to reasonable attorney's fees, costs, and necessary disbursements in addition to any other relief to which such party may be entitled. 7.9 Amendments and Waivers. Any term of this Agreement may be amended and the observance of any term of this Agreement may be waived (either generally or in a particular instance and either retroactively or prospectively), only with the written consent of the Company and Investor or Investors holding Notes evidencing, in the aggregate, an amount equal to not less than 50.1% of the aggregate principal amount of all Notes then outstanding. Any amendment or waiver effected in accordance with this paragraph shall be binding upon each holder of any securities purchased under this Agreement at the time outstanding (including securities into which such securities are convertible), each future holder of all such securities, and the Company. 7.10 Severability. If one or more provisions of this Agreement are held to be unenforceable under applicable law, such provision shall be excluded from this Agreement and the balance of this Agreement shall be interpreted as if such provision were so excluded and shall be enforceable in accordance with its terms. 14 7.11 Entire Agreement. This Agreement and the documents referred to herein constitute the entire agreement among the parties and no party shall be liable or bound to any other party in any manner by any warranties, representations, or covenants except as specifically set forth herein or therein. 7.12 Additional Investors. In the event that, at any time or from time to time, the Company holds an Interim Closing and issues additional Notes and Warrants to additional investors (collectively the "Additional Investors" and individually an "Additional Investor"), as a condition precedent to such Closing, the Company shall countersign a copy of this Agreement with each Additional Investor and each such Additional Investor shall agree to sign a copy of this Agreement (for and on behalf of himself or itself, his or its legal representatives and his or its transferees and assigns) thereby agreeing to be bound by all applicable provisions of this Agreement as a party hereto and in the capacity as an Investor. Except as provided herein, upon any such Interim Closing, all references to the Investors or to any Investor shall thereafter be deemed to include such Additional Investors, and upon such Closing, each such Additional Investor shall be added to the Schedule of Investors. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. Vital Living, Inc. By: /s/ Stuart A Benson ------------------------------------- Name: Title: EACH OF THE INVESTORS SET FORTH ON THE ATTACHED SCHEDULE OF INVESTORS 15 SCHEDULE OF INVESTORS Name and Address Amount Signature - ---------------- ------ --------- Donald Nicholson $1,000,000 /s/ Donald Nicholson Finance Director SkyePharma PLC 105 Piccadilly London W1J 7NJ (Signatures of other Investors omitted.) 16 EXHIBIT A NOTE 17 EXHIBIT B WARRANT 18 EXHIBIT C SCHEDULE OF EXCEPTIONS OUTSTANDING SECURITIES Common Stock Authorized: 100,000,000 shares Common Stock Outstanding: 57,801,170 shares Preferred Stock Authorized: 50,000,000 shares Preferred Stock Outstanding: 3,741,021 shares of Series A Preferred Stock 1,000,000 shares of Series B Preferred Stock 500,000 shares of Series C Preferred Stock 1,000,000 shares of Series D Preferred Stock Each share of preferred stock is currently convertible into one share of Common Stock Outstanding Warrants 70,294 Series A Warrants (exercise price of $2.00) 1,367,500 Series B Warrants (exercise price of $1.65) 1,367,500 Series C Warrants (exercise price of $2.14) 1,950,000 Series D Warrants (exercise price of $1.30) 1,500,000 Series E Warrants (exercise price of $1.60) 125,000 Series F Warrants (exercise price of $1.00) Each warrant entitles the holder to purchase 1 share of Common Stock Outstanding Options Options to purchase 3,402,500 shares of Common Stock issuable under options granted under the Company's 2001 and 2002 Stock Option Plans at exercise prices ranging from $0.35 to $3.00 Additional Outstanding Warrants Warrants to purchase 14,156,938 shares of Common Stock at exercise prices ranging from $0.35 to $1.65 Bridge Notes $1,530,000 of bridge notes that may be converted into 1,530,000 shares of Common Stock 19 EXHIBIT D FORM OF LEGAL OPINION (i) The Company has been duly organized as a corporation and is validly existing in good standing under the laws of the jurisdiction of its incorporation. (ii) The Company has the full corporate power and authority to execute and deliver the Transaction Documents and all other agreements, documents and certificates contemplated thereby and to perform its obligations thereunder. The execution, delivery and performance thereof and thereunder has been duly authorized by all necessary corporate action. Each of the Transaction Documents has been duly executed and delivered on behalf of the Company and constitutes a legal, valid and binding obligation of the Company, enforceable against it in accordance with its terms, except (i) as limited by applicable bankruptcy, insolvency, reorganization, moratorium, and other laws of general application affecting enforcement of creditors' rights generally, (ii) as limited by laws relating to the availability of specific performance, injunctive relief, or other equitable remedies, and (iii) to the extent the indemnification provisions contained in the Transaction Documents may be limited by applicable federal or state law and consideration of public policy. (iii) The Company has authorized and outstanding capital stock immediately prior to the Closing as set forth in the Purchase Agreement. All outstanding shares of capital stock of the Company have been duly authorized and are validly issued, fully paid and nonassessable and were not issued in violation of, or subject to, any statutory preemptive rights. The Securities have been duly authorized and, when delivered and paid for pursuant to the terms of the Transaction Documents, will be validly issued and fully paid and nonassessable. The issuance of the Securities is not subject to any statutory preemptive rights of any stockholder of the Company. (iv) None of the execution and delivery of, or performance by the Company under, any of the Transaction Documents or the consummation of the transactions therein contemplated, will conflict with, or result in the creation or imposition of any lien, charge or other encumbrance upon any of the properties or assets of the Company pursuant to, (a) the terms of any indenture, mortgage, deed of trust, note agreement or other instrument set forth in the exhibit list included in the Company's Form 10-KSB/A for its fiscal year ended December 31, 2002, as such list has been updated by subsequent SEC Reports, with respect to which the Company is a party or by which the Company may be bound or to which any of its assets, properties or business is or may be subject, or (b) any term of the Amended and Restated Articles of Incorporation or By-Laws of the Company, or (c) any statute, rule, regulation or ordinance, or any material license, permit, judgment, decree or order, which, expressly by its terms is known by us to be applicable to the Company or any of its assets, properties or businesses, in each 20 case except as could not reasonably be expected, singly or in the aggregate, to have a Material Adverse Effect. (v) Solely based on our discussions with officers of the Company, we are not aware of any legal or regulatory, administrative or governmental charges, actions, proceedings, claims, hearings or investigations before or by any court, governmental authority or instrumentality pending or threatened against the Company, or involving its assets or properties which, if determined adversely to the Company, could reasonably be expected to have a Material Adverse Effect on the Company or could reasonably be expected to adversely affect any of the transactions contemplated by the Transaction Documents or the validity or enforceability thereof. 21 EXHIBIT E SECURITY AGREEMENT 22 EXHIBIT F REGISTRATION RIGHTS AGREEMENT 23 EXHIBIT G ESCROW AGREEMENT 24 EX-99.5 4 ex-5.txt EXHIBIT 5 REGISTRATION RIGHTS AGREEMENT Exhibit 5 VITAL LIVING, INC. REGISTRATION RIGHTS AGREEMENT This REGISTRATION RIGHTS AGREEMENT (the "Agreement"), dated as of December 15, 2003, is made by and between Vital Living, Inc., a Nevada corporation (the "Company"), and the individuals and entities set forth on the signature page hereto as such page may be amended from time to time to include Additional Investors (as defined in Section 12) (each an "Investor" and collectively, the "Investors"). WHEREAS, in connection with that certain Securities Purchase Agreement by and among the Company and the Investors of even date herewith (the "Securities Purchase Agreement"), the Company desires to sell to the Investors, and the Investors desire to purchase from the Company, (a) certain senior secured convertible notes (each a "Note" and collectively the "Notes"), and (b) warrants (the "Warrants") to purchase shares of the Company's common stock, $0.001 par value per share (the "Common Stock"); and WHEREAS, to induce the Investors to purchase the Notes and the Warrants, the Company has agreed to register the shares of Common Stock into which the Notes may be convertible and the shares of Common Stock issuable upon exercise of the Warrants pursuant to the terms of this Agreement; NOW, THEREFORE, the Company and the Investors hereby covenant and agree as follows: 1. Certain Definitions. As used in this Agreement, the following terms shall have the following respective meanings: "Commission" shall mean the Securities and Exchange Commission, or any other federal agency at the time administering the Securities Act. "Common Stock" shall mean the common stock, par value $0.001 per share, of the Company. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended, and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time. "Register," "registered" and "registration" each shall refer to a registration effected by preparing and filing a Registration Statement or statements or similar documents in compliance with the Securities Act and the declaration or ordering of effectiveness of such Registration Statement or document by the Commission. "Registrable Securities" shall mean (i) the Common Stock issuable upon conversion of the Notes (or that may be issuable upon the conversion of any other equity security issuable upon conversion of the Notes), (ii) the Common stock issuable upon exercise of the Warrants, and (iii) any other shares of Common Stock issued as a dividend, interest payment or other distribution with respect to or in exchange for or in replacement of such Notes, Warrants or Common Stock, provided, however, that shares of Common Stock which are Registrable Securities shall cease to be Registrable Securities (x) upon any sale pursuant to a Registration Statement or Rule 144 under the Securities Act, (y) at such time, as they may be freely sold by the Investor pursuant to Rule 144(k) under the Securities Act or (z) upon any sale in any manner to a person or entity which is not entitled, pursuant to Section 9, to the rights under this Agreement. "Securities Act" shall mean the Securities Act of 1933, as amended, and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the applicable time. "Capitalized terms" used but not defined herein shall have the meanings set forth in the Securities Purchase Agreement or the Notes. 2. Registration. (a) The Company shall file with the Commission a Registration Statement on Form SB-2, S-1 or S-3 or such other appropriate form as may be prescribed by the Securities Act, covering the Registrable Securities on or before January 14, 2004 (the "Target Registration Date"). In the event that (i) such Registration Statement is not filed by the Target Registration Date or (ii) the Company fails to respond in writing to comments received from the Commission within 30 days of receipt of such comments, the Company will pay to each Investor, as liquidated damages, an amount equal to 2.0% of the principal amount of such Investor's Note for each 30-day period (or pro rata for any portion thereof) for so long as such circumstance continues. The amounts payable as liquidated damages pursuant to this paragraph shall be payable in lawful money of the United States and shall be paid monthly within ten (10) business days of the last day of each month following the Target Registration Date until (i) the Registration Statement is filed with the SEC or (ii) the Company has responded to comments from the Commission, as applicable. Amounts payable as liquidated damages hereunder shall cease when a Investor no longer holds Registrable Securities. (b) The Company shall use reasonable best efforts to have such Registration Statement declared effective as promptly as practicable and no later than April 15, 2004 (the "Target Effective Date"), and to maintain the effectiveness and use of such Registration Statement until no earlier than (i) the date on which all of the Registrable Securities may be resold by the Investors without restriction pursuant to Rule 144(k) under the Securities Act, or (ii) the date on which all of the Registrable Securities have been sold. If the Registration Statement is (i) not declared effective by the SEC on or before the Target Effective Date or (ii) subject to customary blackout periods described below, such Registration Statement does not remain effective and available for use, then the Company will pay to each Investor that is then holding Registrable Securities, as liquidated damages, an amount equal to 2.0% of the principal amount of such Investor's Note for each 30-day period (or pro rata for any portion thereof) following the Target Effective Date during which the Registration Statement is not declared effective or does not remain effective and available for such use. The amounts payable as liquidated damages pursuant to this paragraph shall be payable in lawful money of the United States and shall be paid monthly within ten (10) business days of the last day of each month 2 following the Target Effective Date until the Registration Statement is declared effective by the SEC and available for such use. Amounts payable as liquidated damages hereunder shall cease when a Investor no longer holds Registrable Securities. Notwithstanding the foregoing, in the event the Company furnishes to each Investor a certificate signed by the Chief Executive Officer of the Company (each, a "Blackout Notice") stating that in the good faith judgment of the Board of Directors of the Company it would be materially detrimental to the Company and its stockholders to amend the Registration Statement because such amendment would require disclosure of material non-public information, the disclosure of which would have a material adverse effect on the Company taken as a whole, the Company shall be excused from amending such Registration Statement and from paying damages hereunder for a reasonable period of time not to exceed forty-five (45) days. (c) The Company agrees that it will not enter into any acquisition or disposition agreements which, upon consummation, would require the filing of a Current Report on Form 8-K containing audited financial statements (a "Material Acquisition") until the Registration Statement covering the Registrable Securities is declared effective. The Company further agrees that, after the Registration Statement covering the Registrable Securities is declared effective, it will not enter into an agreement for any Material Acquisition for a period of at least 60 days unless such Registration Statement is on Form S-3. 3. Registration Procedures. If and whenever the Company is required by the provisions of Section 2 hereof to effect the registration of any Registrable Securities under the Securities Act, the Company will, as expeditiously as possible: (a) prepare and file with the Commission the Registration Statement with respect to such securities, which Registration Statement shall comply in all material respects with the requirements of the Commission, and use its reasonable best efforts to cause such Registration Statement to become effective not later than 60 days from the Target Effective Date; (b) prepare and file with the Commission such amendments and supplements to such Registration Statement and the prospectus used in connection therewith as may be necessary to keep such Registration Statement effective and up-to-date and comply with the provisions of the Securities Act and the rules and regulations promulgated thereunder with respect to the disposition of all Registrable Securities covered by such Registration Statement in accordance with the intended method of disposition set forth in such Registration Statement for such period; (c) furnish to each Investor proposing to sell Registrable Securities and to each underwriter such number of copies of the Registration Statement (including amendments and supplements thereto and, in each case, all exhibits) and the prospectus included therein (including each preliminary or summary prospectus) as such persons reasonably may request in order to facilitate the intended disposition of the Registrable Securities covered by such Registration Statement; (d) use its best efforts (i) to register or qualify the Registrable Securities covered by such Registration Statement under the securities or "blue sky" laws of such 3 jurisdictions as the Investors proposing to sell Registrable Securities or, in the case of an underwritten public offering, the managing underwriter, reasonably shall request, (ii) to prepare and file in those jurisdictions such amendments (including post-effective amendments) and supplements, and take such other actions, as may be necessary to maintain such registration and qualification in effect at all times for the period of distribution contemplated thereby, and (iii) to take such further action as may be necessary or advisable to enable the disposition of the Registrable Securities in such jurisdictions, provided, that the Company shall not for any such purpose be required to qualify generally to transact business as a foreign corporation in any jurisdiction where it is not so qualified or to consent to general service of process in any such jurisdiction; (e) use its best efforts to list the Registrable Securities covered by such Registration Statement with any securities exchange on which the Common Stock of the Company is then listed; (f) immediately notify each Investor and each underwriter under such Registration Statement, at any time when a prospectus relating thereto is required to be delivered under the Securities Act, of the happening of any event, or the discovery thereof as a result of which the prospectus contained in such Registration Statement, as then in effect, includes any untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances then existing and prepare and furnish to each Investor such number of copies of a supplement to, or an amendment of, such prospectus as may be necessary so that, as thereafter delivered to the purchasers of such securities, such, such prospectus shall not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances then existing; (g) promptly notify each Investor of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or the initiation of any proceedings for that purpose and make every reasonable effort to prevent the issuance of any stop order and, if any stop order is issued, to obtain the lifting thereof at the earliest possible time; (h) in connection with an underwritten offering, (i) enter into an underwriting, agency, placement, subscription or other agreement with respect to the offer and sale of the Registrable Securities and perform its obligations thereunder, in usual and customary form and substance, including, but not limited to, (A) usual and customary indemnities; (B) the provision by officers of the Company of customary certificates; (C) the provision by independent counsel to the Company of customary opinions and letters (which counsel and opinions and letters shall be reasonably 4 satisfactory to the lead underwriters) addressed to the Investors and the underwriters, covering such matters as are customarily covered in opinions and letters requested in underwritten offerings of equity and convertible debt securities and such other matters as may be reasonably requested by the Investors and the underwriters (it being agreed that the matters to be covered by such opinions and letters shall include, without limitation, (1) the effectiveness of the Registration Statement, (2) the compliance of the Registration Statement and the prospectus, including any prospectus supplement thereto, with the requirements of the Securities Act, and (3) the absence from the Registration Statement and the prospectus, including any documents incorporated by reference therein and any prospectus supplement thereto, of an untrue statement of a material fact or the omission of a material fact required to be stated therein or necessary to make the statements therein not misleading); and (D) the provision by the Company's independent public accountants of customary "comfort letters" addressed to the Investors and the underwriters, covering such matters as are customarily covered in "comfort letters" requested in underwritten offerings of equity and convertible debt securities and such other financial matters as may be reasonably requested by the Investors and the underwriters; and (ii) if requested by the underwriters, participate, and use its best efforts to cause its executive officers to participate, in any "roadshow" or other marketing activities intended to aid in the successful disposition of the Registrable Shares; (i) take all actions reasonably necessary to facilitate the timely preparation and delivery of certificates (not bearing any legend restricting the sale or transfer of such securities) representing the Registrable Securities to be sold pursuant to the Registration Statement and to enable such certificates to be in such denominations and registered in such names as the Investors or any underwriters may reasonably request; and (j) take all other reasonable actions necessary to expedite and facilitate the registration of the Registrable Securities pursuant to the Registration Statement. 4. Obligations of Holders. Each Investor shall furnish to the Company such information regarding such Investor, the number of Registrable Securities owned and proposed to be sold by it, the intended method of disposition of such securities and any other information as shall be required to effect the registration of the Registrable Securities, and cooperate with the Company in preparing the Registration Statement and in complying with the requirements of the Securities Act. 5. Expenses. All expenses incurred by the Company in complying with Sections 2 and 3 including, without limitation, all registration and filing fees (including fees payable to the Commission and any other regulatory body with which the Company is required to file), printing expenses, fees and disbursements of counsel and independent public accountants for the Company, fees and expenses (including counsel fees) incurred in connection with complying with state securities or "blue sky" laws, fees of transfer agents and registrars, and reasonable fees and disbursements of one counsel for the holders of Registrable Securities, but excluding any 5 Selling Expenses, are called "Registration Expenses." All underwriting discounts and selling commissions applicable to the sale of Registrable Securities are called "Selling Expenses." The Company will pay all Registration Expenses and the Selling Expenses in connection with each sale shall be borne by the participating sellers in proportion to the number of Registrable Securities sold by each or as they may otherwise agree. 6. Indemnification and Contribution. (a) In the event of a registration of any of the Registrable Securities under the Securities Act pursuant to the terms of this Agreement, the Company will indemnify and hold harmless and pay and reimburse, each Investor selling Registrable Securities thereunder, including its directors, officers, employees, agents and representatives, each underwriter of such Registrable Securities thereunder and each other person, if any, who controls any such person within the meaning of the Securities Act, against any losses, claims, damages or liabilities, joint or several, to which such person may become subject under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in any Registration Statement under which such Registrable Securities were registered under the Securities Act pursuant hereto or any preliminary prospectus or final prospectus contained therein, including any amendment thereto or supplement thereof or any documents incorporated therein, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or any violation or alleged violation of the Securities Act or any state securities or blue sky laws and will reimburse each such person for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action; provided, that the Company will not be liable vis-a-vis a particular indemnified person if and to the extent such person's loss, claim, damage or liability arises out of or is based upon the Company's reliance on an untrue statement or alleged untrue statement or omission or alleged omission so made in conformity with information furnished by such person in writing specifically for use in such Registration Statement or prospectus. (b) In the event of a registration of any of the Registrable Securities under the Securities Act pursuant hereto each Investor selling Registrable Securities thereunder, severally and not jointly, will indemnify and hold harmless the Company, each person, if any, who controls the Company within the meaning of the Securities Act, each officer of the Company who signs the Registration Statement, each director of the Company, each underwriter and each person who controls any underwriter within the meaning of the Securities Act, against all losses, claims, damages or liabilities, joint or several, to which the Company or such officer, director, underwriter or controlling person may become subject under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon reliance on any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement under which such Registrable Securities were registered under the Securities Act pursuant hereto or any preliminary prospectus or final prospectus contained therein, or any amendment or supplement thereof, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or 6 necessary to make the statements therein not misleading, and will reimburse the Company and each such officer, director, underwriter and controlling person for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action, provided, that such Investor will be liable hereunder in any such case only if and only to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in reliance upon and in conformity with information pertaining to such Investor, as such, furnished in writing to the Company by such Investor specifically for use in such Registration Statement or prospectus, and provided, that the liability of each Investor hereunder shall be limited to the proceeds received by such Investor from the sale of Registrable Securities covered by such Registration Statement. Notwithstanding the foregoing, any indemnity provided by any indemnifying Investor in this Section 6(b) shall not apply to amounts paid by the Company in settlement of any such loss, claim, damage, liability or expense if such settlement is effected without the consent of such indemnifying Investor. (c) Promptly after receipt by an indemnified party hereunder of notice of the commencement of any action, such indemnified party shall, if a claim in respect thereof is to be made against the indemnifying party hereunder, notify the indemnifying party in writing thereof, but the omission so to notify the indemnifying party shall not relieve it from any liability which it may have to such indemnified party other than under this Section 6 and shall relieve it from any liability which it may have to such indemnified party under this Section 6 only if and to the extent the indemnifying party is materially prejudiced by such omission. In case any such action shall be brought against any indemnified party and it shall notify the indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate in and, to the extent it shall wish, to assume and undertake the defense thereof with counsel reasonably satisfactory to such indemnified party, and, after notice from the indemnifying party to such indemnified party of its election so to assume and undertake the defense thereof, the indemnifying party shall not be liable to such indemnified party under this Section 6 for any legal expenses subsequently incurred by such indemnified party in connection with the defense thereof other than reasonable costs of investigation and of liaison with counsel so selected, provided, that if the defendants in any such action include both the indemnified party and the indemnifying party and the indemnified party shall have reasonably concluded based upon written advice of its counsel that there may be reasonable defenses available to it which are different from or additional to those available to the indemnifying party or if the interests of the indemnified party reasonably may be deemed to conflict with the interests of the indemnifying party, the indemnified party shall have the right to select a separate counsel and to assume such legal defenses and otherwise to participate in the defense of such action, with the expenses and fees of such separate counsel and other expenses related to such participation to be reimbursed by the indemnifying party as incurred. (d) If the indemnification provided for in this Section 6 is held by a court of competent jurisdiction to be unavailable to an indemnified party with respect to any loss, claim, damage, liability or action referred to herein, then the indemnifying party, in lieu of indemnifying such indemnified party hereunder, shall contribute to the amounts paid or payable by such indemnified party as a result of such loss, claim, damage, liability or action in such proportion as is appropriate to reflect the relative fault of the indemnifying party on the one hand 7 and of the indemnified party on the other in connection with the statements or omissions which resulted in such loss, claim, damage, liability or action as well as any other relevant equitable considerations. The relative fault of the indemnifying party and of the indemnified party shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the indemnifying party or by the indemnified party and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. 7. Changes in Capital Stock. If, and as often as, there is any change in the capital stock of the Company by way of a stock split, stock dividend, combination or reclassification, or through a merger, consolidation, reorganization or recapitalization, or by any other means, appropriate adjustment shall be made in the provisions hereof so that the rights and privileges granted hereby shall continue as so changed. 8. Representations and Warranties of the Company. The Company represents and warrants to the Investor as follows: (a) The execution, delivery and performance of this Agreement by the Company have been duly authorized by all requisite corporate action and will not violate any provision of law, any order of any court or other agency of government, the Charter or By-laws of the Company or any provision of any indenture, agreement or other instrument to which it or any or its properties or assets is bound, conflict with, result in a breach of or constitute (with due notice or lapse of time or both) a default under any such indenture, agreement or other instrument or result in the creation or imposition of any lien, charge or encumbrance of any nature whatsoever upon any of the properties or assets of the Company or its subsidiaries. (b) This Agreement has been duly executed and delivered by the Company and constitutes the legal, valid and binding obligation of the Company, enforceable in accordance with its terms, subject to any applicable bankruptcy, insolvency or other laws affecting the rights of creditors generally and to general equitable principles and the availability of specific performance. 9. Assignment of Registration Rights. The rights to have the Company register Registrable Securities pursuant to this Agreement may be assigned by the Investor to transferees or assignees of such securities; provided, that the Company is, within a reasonable time after such transfer, furnished with written notice of the name and address of such transferee or assignee and the securities with respect to which such registration rights are being assigned. The term "Investor" as used in this Agreement shall include such permitted transferees or assignees. 10. Rule 144 Requirements. The Company agrees to: (a) make and keep current public information about the Company available, as those terms are understood and defined in Rule 144; 8 (b) use its best efforts to file with the Commission in a timely manner all reports and other documents required of the Company under the Securities Act and the Exchange Act (at any time after it has become subject to such reporting requirements); and (c) furnish to any holder of Registrable Securities upon request (i) a written statement by the Company as to its compliance with the reporting requirements of Rule 144 and of the Securities Act and the Exchange Act (at any time after it has become subject to such reporting requirements), (ii) a copy of the most recent annual or quarterly report of the Company, and (iii) such other reports and documents of the Company as such holder may reasonably request to avail itself of any similar rule or regulation of the Commission allowing it to sell any such securities without registration. 11. Termination. All of the Company's obligations to register Registrable Shares under Sections 2 and 3 hereto shall terminate upon the date on which no Investor holds any Registrable Securities. 12. Miscellaneous. (a) All covenants and agreements contained in this Agreement by or on behalf of any of the parties hereto shall bind and inure to the benefit of the respective successors and assigns of the parties hereto (including without limitation transferees of any Registrable Securities), whether so expressed or not. (b) All notices, requests, consents and other communications hereunder shall be in writing and shall be delivered in person, mailed by certified or registered mail, return receipt requested, or sent by telecopier, addressed (i) if to the Company, at Vital Living, Inc., 5080 North 40th Street, Suite 105, Phoenix, AZ 85018, Telecopier No.: (602) 952-7129, Attn: Stuart A. Benson, President (E-mail: cafestu@aol.com) or if to the Investor, at the address set forth beneath such Investor's name on the signature page attached hereto; and (ii) if to any holder of Registrable Securities, to it at such address as may have been furnished to the Company in writing by such holder; or, in any case, at such other address or addresses as shall have been furnished in writing to the Company (in the case of a holder of Registrable Securities) or to the holders of Registrable Securities (in the case of the Company) in accordance with the provisions of this paragraph; and in either case, to Graubard Miller, 600 Third Avenue, 32nd Floor, New York, New York 10016, Attn: David Alan Miller (E-Mail: dmiller@graubard.com). (c) This Agreement shall be governed by and construed under the laws of the State of New York as applied to agreements among New York residents entered into and to be performed entirely within New York. The Company (1) agrees that any legal suit, action or proceeding arising out of or relating to this Agreement shall be instituted exclusively in New York State Supreme Court, County of New York, or in the United States District Court for the Southern District of New York, (2) waives any objection which the Company may have now or hereafter to the venue of any such suit, action or proceeding, and (3) irrevocably consents to the jurisdiction of the New York State Supreme Court, County of New York, and the United States District Court for the Southern District of New York in any such suit, action or proceeding. The Company further agrees to accept and acknowledge service of any and all process which may be 9 served in any such suit, action or proceeding in the New York State Supreme Court, County of New York, or in the United States District Court for the Southern District of New York and agrees that service of process upon the Company mailed by certified mail to the Company's address shall be deemed in every respect effective service of process upon the Company, in any such suit, action or proceeding. THE PARTIES HERETO AGREE TO WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT OR ANY DOCUMENT OR AGREEMENT CONTEMPLATED HEREBY. (d) This Agreement may not be amended or modified without the written consent of the Company and the holders of at least a majority of the Registrable Securities. (e) Failure of any party to exercise any right or remedy under this Agreement or otherwise, or delay by a party in exercising such right or remedy, shall not operate as a waiver thereof. No waiver shall be effective unless and until it is in writing and signed by the party granting the waiver. (f) This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. This Agreement, once executed by a party, may be delivered to the other party hereto by facsimile transmission of a copy of this Agreement bearing the signature of the party so delivering this Agreement. (g) If any provision of this Agreement shall be held to be illegal, invalid or unenforceable, such illegality, invalidity or unenforceability shall attach only to such provision and shall not in any manner affect or render illegal, invalid or unenforceable any other provision of this Agreement, and this Agreement shall be carried out as if any such illegal, invalid or unenforceable provision were not contained herein. (h) This Agreement constitutes the entire contract among the Company and the Investors relative to the subject matter hereof and supersedes in its entirety any and all prior agreements, understandings and discussions with respect thereto. (i) The headings of the Sections of this Agreement are for convenience and shall not by themselves determine the interpretation of this Agreement. (j) In the event that, at any time or from time to time, the Company holds a Closing subsequent to the Initial Closing (as such terms are defined in the Securities Purchase Agreement) and issues additional Notes and Warrants to additional investors (collectively the "Additional Investors" and individually an "Additional Investor"), as a condition precedent to such Closing, the Company shall countersign a copy of this Agreement with each Additional Investor and each such Additional Investor shall agree to sign a copy of this Agreement (for and on behalf of himself or itself, his or its legal representatives and his or its transferees and assigns) thereby agreeing to be bound by all applicable provisions of this Agreement as a party hereto and in the capacity as an Investor. Except as provided herein, upon any such Interim Closing, all references to the Investors or to any Investor shall thereafter be deemed to include such 10 Additional Investor and all references to the Notes and Warrants shall be deemed to include the Notes and Warrants purchased by such Additional Investors. 11 IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the date first written above. VITAL LIVING, INC. By: /s/ Stuart A. Benson --------------------------------------- Name: Title: INVESTOR NAME By: /s/ Donald Nicholson --------------------------------------- Name: Donald Nicholson Title: Finance Director Address: SkyePharma PLC 105 Piccadilly London W1J 7NJ (Signatures of other Investors omitted.) EX-99.6 5 ex-6.txt EXHIBIT 6 LETTER AGREEMENT VITAL LIVING, INC. 5080 N. 40th Street Suite 105 Phoenix, Arizona 85018 December 17, 2003 SkyePharma PLC 105 Piccadilly London, England W1J 7NJ RE: Senior Secured Convertible Note and Warrant Ladies and Gentlemen: Reference is made to the Senior Secured Convertible Note (the "Note") and the Warrant (the "Warrant"), each as entered into by and between SkyePharma PLC ("SkyePharma") and Vital Living, Inc. ("Vital Living"), on the date hereof. Vital Living hereby agrees as follows, which agreements shall be in addition to its obligations with respect to delivering the Redemption Notices, as defined in each of the Note and the Warrant, contained in the Preamble, Section 4 and Section 13 of the Note and the Section 1, Section 8 and Section 12 of the Warrant, to SkyePharma. Vital Living agrees that, in the case of Redemption Notices sent pursuant to the Preamble and Section 13 of the Note and Section 8 and Section 12 of the Warrant, but not in the case of Section 4 of the Note, upon conclusion of the twenty (20) business day notice period specified in such sections, if SkyePharma has not provided written notice to Vital Living indicating that it is electing to accept the price for redemption specified in the Redemption Notice, SkyePharma shall be deemed to have elected to convert the Note or exercise the Warrant prior to effectiveness of the redemption (without having to comply with the procedural requirements necessary for such conversion or exercise under the terms of the Note or the Warrant prior to the date of redemption). In other words, this shall be without prejudice to SkyePharma's ability to fulfill the procedural requirements necessary for such conversion under Section 2 of the Note or such exercise under Section 1 of the Warrant after the date set for redemption; provided, however, that SkyePharma agrees to use its commercially reasonable efforts to fulfill such procedural requirements prior to or promptly following such date for redemption. Such Redemption Notice shall state that if SkyePharma has not provided written notice to Vital Living indicating that it is electing to accept the price for redemption specified in the Redemption Notice by the deadline, SkyePharma shall be deemed to have elected to convert the Note or exercise the Warrant prior to effectiveness of the redemption. Further, Vital Living agrees to send all Redemption Notices via each of (i) registered or certified mail, return receipt requested, postage prepaid, (ii) a reputable overnight courier service guaranteeing next business day delivery in England, (iii) e-mail and (iv) telecopier, as set forth below (or to such other address as shall have been notified to Vital Living in writing): SkyePharma PLC 105 Piccadilly London, England W1J 7NJ Attention: Company Secretary (e-mail: DParkhill@Skyepharma.co.uk) Telecopier: +44-20-7491-3338 SkyePharma PLC 105 Piccadilly London, England W1J 7NJ Attention: Finance Director (e-mail: DNicholson@Skyepharma.co.uk) Telecopier: +44-20-7491-3338 With a copy to: Sullivan & Cromwell LLP 1 New Fetter Lane London EC4A 1AN England Telecopier: +44 (20) 7959-8950 Attention: Kathryn Campbell, Esq. (e-mail: campbellk@sullcrom.com) The rights contained in this letter shall be assignable only in connection with the underlying Warrant or Note to which they relate. This letter may be executed in counterparts, each of which shall be deemed to constitute an original but all of which together shall constitute one and the same instrument. Please indicate your agreement with the foregoing by signing below. VITAL LIVING, INC. By: /s/ Stuart A. Benson ------------------------------- Name: Stuart A. Benson Title: President AGREED SKYEPHARMA PLC By: /s/ Donald Nicholson ------------------------ Name: Donald Nicholson Title: Finance Director EX-99.7 6 ex-7.txt EXHIBIT 7 SECURITY AGREEMENT Exhibit 7 SECURITY AGREEMENT ------------------ AGREEMENT dated as of December 15, 2003, between VITAL LIVING, INC., a Nevada corporation, having an address at 5080 North 40th Street, Suite 105, Phoenix, Arizona 85018 (the "Company"), the persons and entities listed on SCHEDULE I hereto, as SCHEDULE I may be amended from time to time to include Additional Investors (as defined in Section 6.7) in accordance with Sections 6.7 of this Agreement (the "Investors") and HCFP/BRENNER SECURITIES, LLC, having an address at 888 Seventh Avenue, 17th Floor, New York, New York 10106, as Agent (as hereinafter defined). W I T N E S S E T H: - - - - - - - - - - ARTICLE I THE SENIOR FINANCING/GRANT OF SECURITY INTEREST SECTION 1.1 Private Offering of Senior Notes and Warrants. Concurrently with the execution of this Agreement, the Company has consummated an initial closing of a private offering ("Offering") of its 12% senior secured convertible notes in the aggregate principal amount of $3,087,738 ("Initial Notes") and warrants ("Initial Warrants") to purchase a 3,087,738 shares of the Company's Common Stock. Subsequent closings may take place at which the Company may issue additional notes of like tenor to the Initial Notes ("Additional Notes") and additional warrants ("Other Warrants") will be issued. At any subsequent closing of the Offering, the Additional Investors (as defined in Section 6.7) will become parties to this Agreement in accordance with Section 6.7. The Initial Notes and Additional Notes are hereinafter referred to collectively as the "Notes" and individually as a "Note." The Initial Warrants and the Other Warrants are collectively referred to as the "Warrants" and individually as a "Warrant." HCFP/Brenner Securities, LLC is acting as the agent for all of the Investors in the Offering ("Agent"). This Security Agreement is being signed in connection with the Offering to secure the indebtedness underlying the Notes. SECTION 1.2 Notes. Concurrently with the execution of this Agreement, the Company has executed and delivered to each Investor, a Note in the principal amount of such Investor's investment in the Offering. SECTION 1.3 Grant of Security Interest. In consideration of the receipt of the funds raised in the Offering and to secure the Company's obligation to repay to the Investors the principal amount and interest represented by the Notes, the Company hereby grants to the Investors a continuing first priority security interest in and to all of the assets of the Company, whether now or hereafter existing or now owned or hereafter acquired and wherever located, of every kind and description, tangible or intangible, including, but not limited to, all goods, equipment, inventory, documents, accounts, deposit accounts, chattel paper, instruments, investment property, money, general intangibles (including, but not limited to, intellectual property and all rights relating to such intellectual property), credits, claims, demands and any other property, rights and interests of the Company, all substitutions and replacements therefor and all products and proceeds thereof, new value thereof or proceeds of insurance thereon (collectively, "Collateral"). Notwithstanding the foregoing, the Investors acknowledge and agree that the lien granted by the Company to the Investors in the Collateral may be subordinated to the extent necessary for the Company to obtain a financing secured only by the Company's accounts receivable and inventory ("Allowed Financing"). The security interest granted herein to each Investor is an undivided interest in the Collateral as a tenant-in-common with every other Investor. Each Investor may realize upon the Collateral, subject to and in accordance with Section 4 hereof, to the extent of its Investment Percentage (as hereinafter defined), as computed from time to time. The amount of each Investor's "Investment Percentage" shall be the percentage computed by dividing the outstanding principal and interest owed to such Investor pursuant to its Note, by the aggregate outstanding principal and interest owed to all the Investors pursuant to the Notes. SECTION 1.4 Financing Statements. The Agent, for itself and on behalf of each of the Investors, is hereby authorized by the Company to sign on behalf of the Company and file any documents, including, without limitation, UCC-1 financing statements and/or any other documents with any domestic or foreign government or regulatory office or agency, including the United States Patent and Trademark Office, to perfect and/or record the security interest in the Collateral granted herein and to file Form UCC-3 Amendments, Releases and Termination Statements. 2 SECTION 1.5 Assignment. The rights under this Agreement and the security interest granted hereby only may be assigned or transferred by an Investor together with the Note in accordance with the terms thereof. ARTICLE II REPRESENTATIONS OF THE COMPANY SECTION 2.1 In order to induce the Investors to lend money to the Company and purchase the Notes and Warrants, the Company hereby represents and warrants to the Investors as follows: (a) The Company has full power to execute and deliver the Notes, and the other agreements, instruments and documents contemplated hereby and thereby, including without limitation a Uniform Commercial Code Financing Statement (collectively the "Other Security Documents"), and to incur and perform all the obligations provided for herein and therein. (b) The obligations of the Company under this Agreement constitute, and the obligations of the Company under the Other Security Documents when executed and delivered pursuant hereto will constitute, the valid and legally binding obligations of the Company ranking senior in all respects with all other obligations of the Company and enforceable in accordance with their respective terms, except (i) as such enforceability may be limited by bankruptcy, insolvency, reorganization or similar laws affecting creditors' rights generally, (ii) as enforceability of any indemnification or contribution provision may be limited under the federal and state securities laws, and (iii) that the remedy of specific performance and injunctive and other forms of equitable relief may be subject to the equitable defenses and to the discretion of the court before which any proceeding therefor may be brought. Notwithstanding the foregoing, the lien granted by the Company to the Investors may be subordinated to the extent necessary to secure the Allowed Financing. (c) The execution, delivery and performance by the Company of this Agreement and the Other Security Documents does not contravene any law, regulation, order or contractual restriction binding on or affecting the Company, its business or properties. 3 (d) No authorization or approval or other action by, and no notice to or filing with, any governmental authority or regulatory body is required for the due execution, delivery and performance by the Company of this Agreement or the matters contemplated herein and for the Investors to enjoy the benefits conferred hereby except such filings as may be necessary to perfect the security interest granted the Investors hereunder and under the Other Security Documents. (e) The Company is the sole beneficial owner of the Collateral. The lien granted by the Company to the Investors in the Collateral is a first priority security interest, subject to such lien being subordinated to the extent necessary to secure the Allowed Financing. There are no other mortgages, pledges, liens, security interests, claims, encumbrances or charges of any kind ("Encumbrances") on any of the Collateral, other than the liens permitted by Section 3.2(b) hereof. (f) The issuance of the Notes and the granting of a security interest in the Collateral to the Investors are contemporaneous exchanges for new value given by the Investors to the Company in an amount equivalent to the value given by the Company to the Investors. ARTICLE III THE COMPANY'S COVENANTS SECTION 3.1 Affirmative Covenants. The Company hereby covenants that so long as this Agreement remains in effect or any amount due hereunder or under the Notes remains outstanding and unpaid, it will, unless otherwise consented to in writing by Majority Consent of the Note holders (as defined in Section 5.7): (a) Do all things necessary to preserve and keep in full force and effect its corporate existence, including, without limitation, all licenses or similar qualifications required by it to engage in its business in all jurisdictions in which it is at the time so engaged; and continue to engage in business of the same general type as conducted as of the date hereof; and (ii) continue to conduct its business substantially as now conducted or as otherwise permitted hereunder; 4 (b) Pay and discharge promptly when due all taxes, assessments and governmental charges or levies imposed upon it or upon its income or profits or in respect of its property before the same shall become delinquent or in default, which, if unpaid, might reasonably be expected to give rise to liens or charges upon such properties or any part thereof, unless, in each case, the validity or amount thereof is being contested in good faith by appropriate proceedings and the Company has maintained adequate reserves with respect thereto in accordance with GAAP; (c) Comply in all material respects with all federal, state and local laws and regulations, orders, judgments, decrees, injunctions, rules, regulations, permits, licenses, authorizations and requirements applicable to it (collectively, "Requirements") of all governmental bodies, departments, commissions, boards, companies or associations insuring the premises, courts, authorities, officials or officers which are applicable to the Company or any of its properties, except where the failure to so comply would not have a material adverse effect ("Material Adverse Effect") on the Company or any of its properties; provided, however, that nothing provided herein shall prevent the Company from contesting the validity or the application of any Requirements; (d) Keep proper records and books of account with respect to its business activities, in which proper entries, reflecting all of their financial transactions, are made in accordance with GAAP. Such books and records shall be open at reasonable times and upon reasonable notice to the inspection of each Investor and the Agent; (e) Notify the Agent and the Investors in writing, promptly upon learning thereof, of any litigation or administrative proceeding commenced or threatened against the Company which involve a claim in excess of $50,000; (f) Promptly pay and discharge all taxes, assessments and governmental charges or levies imposed upon it or upon its income and profits, or upon any properties belonging to it before the same shall be in default; provided, however, that the Company shall not be required to pay any such tax, assessment, charge or levy which is being contested in good faith by proper proceedings and adequate reserves for the accrual of same are maintained if required by GAAP; 5 (g) Maintain at all times, preserve, protect and keep its property used or useful in the conduct of its business in good repair, working order and condition, and from time make all needful and proper repairs, renewals, replacements and improvement thereof as shall be reasonably required in the conduct of its business; (h) To the extent necessary for the operation of its business, keep adequately insured by financially sound reputable insurers, all property of a character usually insured by similar corporations and carry such other insurance as is usually carried by similar corporations; (i) Defend the title to the Collateral against all persons and against all claims and demands whatsoever; (j) Keep the Collateral free and clear of all further Encumbrances except as authorized herein; (k) On at least twenty (20) days notice in writing by the Agent, furnish further assurance of title, execute any written agreement or do any other acts necessary to effectuate the purposes and provisions of this Agreement, execute any instrument or statement required by law or otherwise in order to perfect, continue or terminate the security interest of the Investors, in the Collateral and pay all costs of filing in connection therewith; (l) Retain possession of the Collateral and not remove, sell, exchange, assign, loan, deliver, lease, license, mortgage or otherwise dispose of same outside of the normal course of business without the prior written consent of the Agent; and (m) Promptly give notice in writing to the Agent and the Investors of the occurrence of any default or Event of Default (as hereinafter defined) under this Agreement or of any default under any other material instrument or agreement to which it is a party. SECTION 3.2 Negative Covenants. The Company hereby covenants that so long as this Agreement remains in effect or any amount due hereunder or under the Notes remains outstanding and unpaid, it will not, unless otherwise consented to in writing by the Majority Consent of the Note holders: 6 (a) Create, incur, assume or suffer to exist, any indebtedness (institutional or otherwise) except (i) under the Notes, (ii) which is subordinate in right of payment to the Notes and (iii) in connection with the Allowed Financing; (b) Create, incur, assume or suffer to exist, any Encumbrance upon any of its property (tangible or intangible) or assets, income or profits secured hereunder, whether now owned or hereafter acquired, except for (i) liens contemplated by this Agreement and the Other Security Documents; (ii) statutory liens; (iii) purchase money liens and other liens granted in the ordinary course of business on equipment, fixtures and similar property; and (iv) liens which, singly or in the aggregate, would not be reasonably expected to have a Material Adverse Effect; (c) Guarantee, assume or otherwise become responsible for (directly or indirectly) the indebtedness for borrowed funds, performance, obligations, of any person, or the agreement by the Company or any of its subsidiaries to do any of the foregoing; (d) Except for the Company's existing obligations with respect to its outstanding classes of preferred stock, declare or pay, directly and indirectly, any dividends or make any distributions, whether in cash, property, securities or a combination thereof, with respect to (whether by reduction of capital or otherwise) any shares of its capital stock, except for dividends payable in shares of common stock or preferred stock; (e) Consummate any merger, combination or consolidation involving the Company (whether in one transaction or a related series of transactions) in which the Company is not the surviving entity, or the Company is the survivor but the owners of the voting stock of the Company before the transaction own less than 50% of the voting stock of the Company after the transaction, or sell, lease, transfer or assign to any persons or otherwise dispose of (whether in one transaction or a related series of transactions) all or substantially all of its consolidated properties or assets (whether now owned or hereafter acquired); (f) Purchase or acquire any stock, obligations, assets or securities of, or any interest in, or make any capital contribution or loan or advance of money, credit or property to, any other person (excluding, for the purposes hereof, customary advances made to the Company's officers, director and employees to cover business expenses), or make any other 7 investments, except that the Company may purchase or acquire (i) other businesses, whether by asset or stock acquisition or merger; (ii) existing subsidiaries or subsidiaries formed for the purposes of facilitating acquisitions or carrying out the ordinary business of the Company; (iii) certificates of deposits of any commercial banks registered to do business in any state of the United States having capital and surplus in excess of $50,000,000; (iv) readily marketable, direct obligations of the United States government or any agency thereof which are backed by the full faith and credit of the United States; and (v) investments in prime commercial paper; provided, however, that in each case mentioned in (iii), (iv) or (v) above, such obligations shall mature not more than 180 days from the date of acquisition thereof; and (g) Sell, transfer, discount or otherwise dispose of any claim or debt owing to it, including, without limitation, any notes, accounts receivable or other rights to receive payment, except for reasonable consideration and in the ordinary course of business. ARTICLE IV DEFAULT; ACCELERATION SECTION 4.1 Events of Default. The occurrence of any of the following events shall constitute an Event of Default hereunder: (a) the Company shall (i) fail to pay any amounts owed under the Notes when due (provided such failure has not been cured within 10 days after notice thereof) or (ii) have an event of default occur and be continuing under indebtedness of the Company of more than $250,000 (other than the Notes) such that the holders of such indebtedness have declared the outstanding principal and accrued interest to be immediately due and payable; or (b) if the Company shall: (i) admit in writing its inability to pay its debts generally as they become due; (ii) file a petition in bankruptcy or a petition to take advantage of any insolvency act; (iii) make an assignment for the benefit of creditors; 8 (iv) consent to the appointment of a receiver of the whole or any substantial part of its assets; (v) on a petition in bankruptcy filed against it, be adjudicated a bankrupt; or (vi) file a petition or answer seeking reorganization or arrangement under the Federal bankruptcy laws or any other applicable law or statute of the United States of America or any State, district or territory thereof; (c) if a court of competent jurisdiction shall enter an order, judgment, or decree appointing, without the consent of the Company, a receiver of the whole or any substantial part of the Company's assets, and such order, judgment or decree shall not be vacated or set aside or stayed within 90 days from the date of entry thereof; (d) if, under the provisions of any other law for the relief or aid of debtors, any court of competent jurisdiction shall assume custody or control of the whole or any substantial part of Company's assets and such custody or control shall not be terminated or stayed within 90 days from the date of assumption of such custody or control; or (e) the Company shall default (and not cure within 10 days after written notice of such default) in the performance of, or violate any material representation or warranty contained in this Agreement, the Securities Purchase Agreement pursuant to which the Notes were issued and/or the Registration Rights Agreement or in any written statement pursuant thereto or hereto, or any report, financial statement or certificate made or delivered to the Investors by the Company shall be untrue or incorrect in any material respect, as of the date when made or deemed made. SECTION 4.2 Acceleration. In addition to any other remedies provided by the Notes, upon the occurrence of an Event of Default, the Investors and/or the Agent on behalf of the Investors may, by notice to the Company, take any or all of the following actions, without prejudice to the rights of the holders of any Other Notes, to enforce the Investors' claims against the Company: (i) declare the principal of and any accrued interest and all other amounts payable under the Notes to be due and payable, whereupon the same shall become forthwith due and 9 payable without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Company, (ii) enforce or cause to be enforced any remedy provided under this Agreement or the Other Security Documents, or (iii) exercise any other remedies available at law or in equity, including specific performance of any covenant or other agreement contained in this Agreement. In addition to any other remedies provided by the Notes, upon the occurrence of an Event of Default as set forth in Section 4.1 of this Agreement, then without prejudice to the rights and remedies specified in clause (iii) above, the Notes and other obligations of the Company pursuant to this Agreement shall automatically be immediately due and payable with interest and other fees, if any, thereon without notice, demand or any other act by the Agent or any Investor. SECTION 4.3 Remedies. (a) On the occurrence of an Event of Default and/or acceleration pursuant to Section 4.2, the Investors and the Agent on behalf of the Investors, shall have the following rights and remedies, which are cumulative in nature and are in addition to the rights set forth in the Notes and shall be immediately available to the Investors: (i) All rights and remedies provided by law, including but not limited to those provided by the Uniform Commercial Code, and equitable remedies for specific performance and injunctive relief; (ii) All rights and remedies provided in this Agreement; and (iii) All rights and remedies provided in the Notes and Other Security Documents. (b) Upon any default by the Company hereunder, the Investors and the Agent on behalf of the Investors, shall have all the rights, remedies and privileges with respect to repossession, retention and sale of any or all of the Collateral of the Company and disposition of the proceeds as are accorded by the applicable sections of the Uniform Commercial Code. 10 (c) Upon any default by the Company hereunder and upon demand of the Agent, the Company shall assemble the Collateral and make it available to the Agent at the place and at the time designated in the demand. ARTICLE V THE AGENT SECTION 5.1 Authorization. (a) Each Investor has irrevocably authorized the Agent, as agent hereunder, to take such action on its behalf and as its agent under this Agreement, the Note executed in favor of such Investor and all other documents executed in connection therewith, and to exercise such powers as are specifically delegated to it hereunder and thereunder, including, without limitation, powers with respect to the enforcement and collection of the obligations underlying the Notes, and to exercise such other powers as are reasonably incidental thereto and the Agent has agreed to act in such capacity; provided, however, that the Agent shall not, without the express authorization of the Majority Consent of the Note holders, be authorized to waive any payment default under the Notes. Notwithstanding anything to the contrary herein, the Agent is authorized to enter into any intercreditor or other agreement or other instruments on behalf of the Investors with respect to the Collateral, including agreements and instruments necessary to implement the Allowed Financing. (b) Except as set forth in subparagraph (a) directly above, the Agent shall not be required to, but may, in its sole discretion, exercise any discretion or take any action, but shall be required to act or to refrain from acting (and shall be fully protected in so acting or refraining from acting) upon the instructions of the Majority Consent of the Note holders, and such instructions shall be binding upon all the Investors; provided, however, that the Agent shall not be required to take any action which exposes the Agent to personal liability or which is contrary to this Agreement or applicable law. 11 SECTION 5.2 Notices. (a) The Agent shall transmit promptly to each Investor each notice received by it from the Company hereunder which the Company is not required to furnish to the Investors and each Investor shall transmit promptly to the Agent each notice received by it from the Company which is not otherwise required to be delivered to the Agent by the terms hereof. The Agent shall be under no obligation toward any Investor to ascertain or inquire as to the performance or observance of any of the terms, covenants or conditions hereof to be performed or observed by the Company, but the Agent and each Investor shall promptly notify one another of any Event of Default of which it has actual knowledge. (b) Each Investor expressly authorizes the Agent to collect all sums due such Investor under this Agreement and the Other Security Documents, other than regular principal and interest payments made by the Company on the Notes. The Agent shall promptly disburse to the Investors (in proportion to the outstanding Investment Percentage of each Investor) any such available funds received by it for the benefit of the Investors. SECTION 5.3 Exculpation. In exercising its duties and powers hereunder, the Agent shall exercise the same care which it would exercise in dealing with loans for its own account, but neither the Agent nor any of its directors, officers, employees or attorneys shall be responsible for the truth or accuracy of any representations or warranties given or made herein or for the validity, effectiveness, sufficiency or enforceability of this Agreement, or any Other Security Documents, and the Agent or any of its directors, officers, employees or attorneys shall not be liable to any of the Investors for any action taken or omitted to be taken by it or any of them under this Agreement or the Other Security Documents. Each of the Investors represents and warrants to the Agent that it has made its own independent judgment with respect to entering into this Agreement and the Other Security Documents and undertaking its obligations hereunder and thereunder. Each Investor also acknowledges that it will, independently and without reliance upon the Agent or any other Investor and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement and the Other Security Documents. Except for the accounting for monies actually received by it hereunder, the Agent shall have no duty as to any Collateral or as 12 to the taking of any necessary steps to preserve rights against prior parties or any other rights pertaining to the Collateral. Neither the Agent nor any of its principals, directors, officers, employees or attorneys shall have any responsibility (1) to the Company on account of the failure or delay in performance or breach of any Investor of any of its obligations hereunder, or (2) to any Investor on account of the failure of or delay in performance or breach by any other Investor or the Company of any of its obligations hereunder. SECTION 5.4 Reliance. The Agent, as Agent hereunder, (a) shall be entitled to rely on any communication, instrument or document believed by it to be genuine or correct and to have been signed or sent by a person or persons believed by it to be the proper person or persons; (b) shall be entitled to consult with legal counsel, independent public accountants and other professional advisers and experts selected by it, and shall not be liable for any action taken or omitted to be taken in good faith by it in accordance with the advice of such counsel, accountants or experts; (c) makes no warranty or representation to any Investor and shall not be responsible to any Investor for any statements, warranties or representations made in or in connection with this Agreement; (d) shall not have any duty to ascertain or to inquire as to the performance or observance of any of the terms, covenants or conditions of this Agreement on the part of the Company or to inspect the property (including the books and records) of the Company; (e) shall not be responsible to any Investor for the due execution, legality, validity, enforceability, genuineness, sufficiency or venue of this Agreement or any other instrument or document furnished pursuant hereto; and (f) shall incur no liability under or in respect of this Agreement by acting upon notice, consent, certificate or other instrument or writing (which may be by telegram, telecopier, cable or telex) believed by it to be genuine and signed or sent by the proper party or parties. SECTION 5.5 Expenses and Indemnification. Each Investor agrees (a) to reimburse the Agent, as agent hereunder, on demand, pro rata in accordance with its Investment Percentage, for all expenses incurred by the Agent, including reasonable attorneys' fees, in connection with the preparation, execution, operation and enforcement of, or legal advice in respect of rights or responsibilities under, this Agreement and any document delivered in connection herewith, to the extent that such expenses are not timely reimbursed or reimbursable by the Company, and (b) to indemnify and hold harmless the Agent and any of its principals, directors, officers or employees, 13 on demand, pro rata in accordance with its Investment Percentage, from and against all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever which may be imposed on, incurred by, or asserted against the Agent in any way relating to or arising out of the Other Security Documents or any action taken or omitted by the Agent under the Other Security Documents, to the extent that expenses and costs incurred by it in connection with such liability are not reimbursed by the Company; provided that no Investor shall be liable for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting from the Agent's gross negligence or willful misconduct. SECTION 5.6 Other Investors. None of the Investors shall be deemed to be agent of any other Investors; none of such Investors or any of their respective directors, officers or employees shall have any responsibility to the Company on account of the failure or delay in performance or breach of any other Investor of any of its obligations hereunder or to any other Investor on account of the failure of or delay in performance or breach by any other Investor or the Company of its obligations hereunder. SECTION 5.7 Removal or Resignation of Agent. The Agent may resign at any time by giving written notice thereof to the Investors and the Company and may be removed at any time, with or without cause, by the "Majority Consent of the Note holders" (defined below), and upon any such resignation or removal the Majority Consent of the Note holders shall have the right to appoint a successor Agent. "Majority Consent of the Note holders" shall mean any Investor or Investors holding Notes evidencing, in the aggregate, an amount equal to not less than 50.1% of the aggregate principal amount of all Notes then outstanding. If no successor Agent shall have been so appointed by the Majority Consent of the Note holders, and shall have accepted such appointment, within thirty (30) days after the retiring Agent's giving of notice of resignation or the Majority Consent of the Note holders' removal of the retiring Agent, then the retiring Agent may, on behalf of the Investors, appoint a successor Agent. Upon the acceptance by a successor Agent of its appointment as Agent hereunder, such successor Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Agent, and the retiring Agent shall be discharged from its duties and obligations under this Agreement. After any retiring Agent's resignation or removal hereunder as Agent, the 14 provisions of this Section 5 shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Agent under this Agreement. SECTION 5.8 Fees and Expenses of Agent. Upon any Event of Default, the reasonable attorneys' fees and the legal and other expenses for pursuing, searching for, receiving, taking, keeping, storing, advertising for the sale of and selling the Collateral incurred by the Agent shall be chargeable to and paid by the Company. ARTICLE VI MISCELLANEOUS SECTION 6.1 Notices. Any and all notices, requests, demands, consents, approvals or other communications required or permitted to be given under any provision of this Agreement shall be in writing and shall be deemed given upon personal delivery or the mailing thereof by first class, registered or certified mail, return receipt requested, postage prepaid, by telecopier or facsimile, or by overnight delivery service or by courier service to the addresses listed at the head of this Agreement with respect to the Company and with respect to the Investors to the respective addresses and/or telecopier/facsimile numbers listed on Schedule I hereto. Any party may change its address for the purposes of this Agreement by notice to the other party given as aforesaid. SECTION 6.2 No Waiver; Cumulative Remedies. No failure to exercise and no delay in exercising, on the part of the Investors, any right, power or privilege hereunder or under the Notes or any Other Security Documents shall operate as a waiver thereof; nor shall any single or partial exercise of any right, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein provided are cumulative and not exclusive of any rights or remedies provided by law. No modification, or waiver of any provision of this Agreement or the Notes, no consent to any departure by the Company from the provisions hereof or thereof shall be effective unless the same shall be effective only in the specific instance and for the purpose for which it is given. The provisions set forth in Articles III and IV of this Agreement may be waived by written Majority Consent of the Note holders. No notice to the Company shall entitle the Company to any other or further notice in other or similar circumstances unless expressly provided for herein. 15 No course of dealing between the Company and the Investors shall operate as a waiver of any of the rights of the Investors under this Agreement. SECTION 6.3 Captions. The captions of the various sections and subsections of this Agreement have been inserted only for the purposes of convenience, and shall not be deemed in any manner to modify, explain, enlarge or restrict any of the provisions of this Agreement. SECTION 6.4 Payment of Fees. The Company agrees to pay all costs and expenses of the Investors and the Agent in enforcing or preserving any of the rights and remedies available to the Investors under this Agreement, the Notes or under any other documents, instruments or writings executed and delivered to the Investors or the Agent in connection herewith including, without limitation, legal fees, costs and disbursements of the Investors' or Agent's attorneys in the enforcement thereof. SECTION 6.5 Liability for Deficiency. The Company shall remain liable for any deficiency relating to the obligations underlying the Notes resulting from a sale of the Collateral and shall pay any such deficiency forthwith on demand. SECTION 6.6 Survival of Agreements. All agreements, representations and warranties made herein and in any certificates delivered pursuant hereto shall survive the execution and delivery of this Agreement, the Notes and the Other Security Documents, and shall continue in full force and effect until the indebtedness of the Company under the Notes and all other obligations hereunder and thereunder have been paid in full. The provisions of Section 1.3 shall survive the exercise of the Investors' rights under the Notes. SECTION 6.7 Additional Investors. In the event that, at any time or from time to time, the Company holds an additional closing with respect to the Offering and issues Additional Notes to additional investors (collectively the "Additional Investors" and individually an "Additional Investor"), as a condition precedent to such closing and Note issuance, the Company shall countersign a copy of this Agreement with each Additional Investor and each such Additional Investor shall agree to sign a copy of this Agreement (for and on behalf of himself or itself, his or its legal representatives and his or its transferees and assigns) thereby agreeing to be bound by all applicable provisions of this Agreement as a party hereto and in the capacity of an 16 Investor. Except as provided herein, upon any such additional closing with respect to the Offering and Note issuance, all references herein to the Investors or to any Investor shall thereafter be deemed to include such Additional Investor, and upon such closing, each such Additional Investor shall be added to SCHEDULE I. SECTION 6.8 Amendments. Except as set forth above in Section 6.7, the Company and Agent may amend this Agreement only by written agreement between the Company and the Agent upon receipt of written Majority Consent of the Note holders; provided, that no such amendment shall have the effect of modifying in any manner the definition of "Majority Consent of the Note holders" set forth in Section 5.7. SECTION 6.9 Third Party Beneficiary. To the extent that the Agent, in accordance with Section 5.1(a) herein, enters into any agreement or instrument pursuant to which a third party is granted senior rights to the Collateral or any portion thereof, the parties hereto agree that such third party shall be a third party beneficiary of this Agreement. SECTION 6.10 Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the Company and the Investors and their respective successors and assigns, except that the Company may not transfer or assign any of its rights or interests hereunder without the prior written consent of the Investors, which consent may be given or withheld in the Investors' absolute discretion. An Investor may assign this Agreement and its rights or interests hereunder in accordance with Section 1.5 hereof. SECTION 6.11 Construction of Agreement; Jurisdiction and Venue. This Agreement, the Notes and Other Security Documents and the rights and obligations of the parties hereunder and thereunder shall be governed by, and construed and interpreted in accordance with, the law of the State of New York, without regard to principles of conflicts of law. THE COMPANY AND EACH INVESTOR, IN ANY LITIGATION IN WHICH ANY INVESTOR OR THE COMPANY SHALL BE AN ADVERSE PARTY, WAIVES TRIAL BY JURY, WAIVES THE RIGHT TO CLAIM THAT A FORUM OR VENUE SPECIFIED HEREIN IS AN INCONVENIENT FORUM OR VENUE AND WAIVES THE RIGHT TO INTERPOSE ANY SETOFF, DEDUCTION OR COUNTERCLAIM OF ANY NATURE OR DESCRIPTION, AND IRREVOCABLY CONSENTS TO THE JURISDICTION OF THE 17 NEW YORK STATE SUPREME COURT, COUNTY OF NEW YORK, AND THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK IN ANY SUCH SUIT, ACTION OR PROCEEDING, AND THE COMPANY AND EACH INVESTOR FURTHER AGREE TO ACCEPT AND ACKNOWLEDGE SERVICE OF ANY AND ALL PROCESS WHICH MAY BE SERVED UPON THEM IN ANY SUCH SUIT, ACTION OR PROCEEDING CERTIFIED MAIL TO THE ADDRESS AS SET FORTH ON THE COVER OF THIS AGREEMENT WITH RESPECT TO THE COMPANY AND ON SCHEDULE I HERETO WITH RESPECT TO THE INVESTORS. If any of the provisions of this Agreement shall be or become illegal or unenforceable under any law, the other provisions shall remain in full force and effect. SECTION 6.12 Interest. Anything in the Agreement, the Notes or the Other Security Documents to the contrary notwithstanding, the Investors shall not charge, take or receive, and the Company shall not be obligated to pay, interest in excess of the maximum rate from time to time permitted by applicable law. SECTION 6.13 Currency. All amounts of currency expressed hereunder or under the Notes or the Other Security Documents shall refer to United States dollars. SECTION 6.14 Counterparts. This Agreement may be signed in any number of counterparts with the same effect as if the signatures to each counterpart were upon a single instrument, and all such counterparts together shall be deemed an original of this Agreement. 18 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. VITAL LIVING, INC. By: /s/ Stuart A. Benson ------------------------------ [Name and Title] HCFP/BRENNER SECURITIES, LLC, AGENT By: /s/ Ira Greenspan ------------------------------ [Name and Title] Ira Greenspan Vice Chairman INVESTORS LISTED ON SCHEDULE I 19 [COUNTERPART SIGNATURE PAGE] IN WITNESS WHEREOF, the following party hereto has executed this Security Agreement, dated as of December 17, 2003, indicating its intent to be bound by the terms and conditions of the Security Agreement, as of the date set forth below. SKYEPHARMA PLC -------------------------------------- [NAME OF INVESTOR] Date: 17 December 2003 By: /s/ Donald Nicholson ---------------- ---------------------------------- Name: Donald Nicholson Title: Finance Director Address for Notices: SkyePharma PLC 105 Piccadilly London W1J 7NJ (Signatures of other Investors omitted.) ACCEPTED AS OF December 15, 2003 VITAL LIVING, INC. By: /s/ Stuart A. Benson ----------------------- Name: Title: 20 SCHEDULE I LIST OF INVESTORS Telephone and Name Address Facsimile Number - ---- ------- ---------------- i EX-99.8 7 ex-8.txt EXHIBIT 8 12% SENIOR SECURED CONVERTIBLE Exhibit 8 THIS PROMISSORY NOTE AND THE SECURITIES OBTAINABLE UPON CONVERSION HEREOF (COLLECTIVELY, THE "SECURITIES") HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED ("THE ACT"), OR THE SECURITIES LAWS OF ANY STATE. THE SECURITIES MAY NOT BE PLEDGED, SOLD, ASSIGNED OR TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT AND APPLICABLE STATE SECURITIES LAWS OR PURSUANT TO AN APPLICABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF SUCH ACT AND SUCH LAWS. SENIOR SECURED CONVERTIBLE NOTE U.S. $1,000,000 December 17, 2003 FOR VALUE RECEIVED, Vital Living, Inc., a Nevada corporation (the "Company"), hereby promises to pay to the order of SkyePharma PLC (the "Lender") the principal amount of One Million ($1,000,000) Dollars (the "Principal Amount"), together with all accrued but unpaid interest on this Note on December 17, 2008 (the "Maturity Date"), subject to conversion as provided herein. The outstanding Principal Amount of this Note shall bear interest at the rate of twelve percent (12%) per annum (calculated daily on the basis of a 360-day year and actual calendar days elapsed) payable semi-annually beginning June 17, 2004 and thereafter on each June 17 and December 17. Interest at the rate of eight percent (8%) per annum will be paid in cash and the balance of four percent (4%) per annum may be paid, at the Company's sole option, either in cash or in fully paid and non-assessable shares of the Company's common stock, $0.001 par value per share ("Common Stock"). If, to the extent permitted hereunder, the Company issues shares of Common Stock to pay the interest due under this Note ("Interest Shares"), such shares shall be valued at the average of the last sales price of the Common Stock for the 10 Trading Days ended five business days prior to the relevant interest payment date. The first two interest payments to be made under this Note (payments due on June 17, 2004 and December 17, 2004) have been placed in an interest bearing escrow account pursuant to that certain escrow agreement, dated as of December 15, 2003, between the Company and Graubard Miller, as escrow agent. Both the Principal Amount and all accrued interest shall be paid in lawful money of the United States of America and/or, to the extent permitted hereunder, Interest Shares to the Lender at 105 Piccadilly, London, England W1J 7NJ, or at such other address as the Lender may designate by notice in writing to the Company, in immediately available funds. If any payment hereunder falls due on a Saturday, Sunday or legal holiday, it shall be payable on the next succeeding business day and such additional time shall be included in the computation of interest. The Company may redeem this Note, in whole but not in part, commencing December 17, 2004, upon not less than twenty (20) business days' prior written notice to the Lender as described in Section 13 hereof ("Redemption Notice") at the Principal Amount, without premium or penalty, but with all interest accrued up until the date of prepayment, provided that the last sales price of the Common Stock is at least $3.00 for the ten (10) consecutive Trading Days (as defined in Section 5(g), below) ending the day prior to the day on which the Redemption Notice is sent to the Lender. The sending of the Redemption Notice shall not affect the Lender's ability to convert the Note at any time prior to the date set for redemption. This Note is one of a series of Senior Secured Convertible Notes ("Senior Notes" or "Notes") containing substantially identical terms and conditions issued pursuant to a Securities Purchase Agreement ("Securities Purchase Agreement"), dated December 15, 2003, by and between the Company and the Investors. This Note is entitled to the benefits of that certain Security Agreement ("Security Agreement"), dated as of December 15, 2003, between the Company and Lender covering certain collateral ("Collateral"). The issuance of this Note and the granting of the security interest in the Collateral to the Lender pursuant to the Security Agreement are intended by the Company and Lender to be a contemporaneous exchange for new value given by Lender to the Company in an amount equivalent to the value given by the Company to Lender. Terms used but not defined herein shall have their respective meanings assigned in the Securities Purchase Agreement and/or Security Agreement. The Security Agreement, the Uniform Commercial Code Financing Statements to be filed in connection with the Security Agreement and any and all other documents executed and delivered by the Company to Lender under which Lender is granted liens on assets of the Company are collectively referred to as the "Security Documents." The shares of Common Stock into which this Note may be convertible, as well as the Interest Shares, are also referred to in, and entitled to the benefits of, that certain registration rights agreement between the Company and the Lender, dated as of December 15, 2003 (the "Registration Rights Agreement"). 1. Ranking. (a) The indebtedness evidenced by the Senior Notes and the payment of the Principal Amount and interest thereof shall be Senior (as hereinafter defined) to, and have priority in right of payment over, all indebtedness of the Company. "Senior" shall be deemed to mean that, in the event of any default in the payment of the obligations represented by the Senior Notes or of any liquidation, insolvency, bankruptcy, reorganization, or similar proceedings relating to the Company, all sums payable on the Senior Notes, shall first be paid in full, with interest, if any, before any payment is made upon any other indebtedness, now outstanding or hereinafter incurred, and, in any such event, any payment or distribution of any character which shall be made in respect of any other indebtedness of the Company, shall be paid over to the Lenders for application to the payment hereof, unless and until all obligations under the Senior Notes (which shall mean the Principal Amount and other obligations arising out of, premium, if any, accrued interest on, and any costs and expenses payable under, the Senior Notes) shall have been paid and satisfied in full. (b) The Company may not incur any additional indebtedness senior to or pari passu with this Note without the prior approval of the Lenders representing at least fifty percent (50%) of the principal amount of the Notes then outstanding; provided, however, that the 2 Company may arrange a financing secured only by accounts receivable and inventory, as described in the Security Agreement. 2. Conversion. (a) Conversion. The Principal Amount of this Note shall be convertible, in whole but not in part, at any time, at the election of the Lender, into validly issued, fully paid and non-assessable shares of Common Stock, free from all liens, duties and charges arising out of or by reason of the issue thereof (including, without limitation, in respect of taxes). The number of shares of Common Stock to be issued upon such conversion shall be equal to the quotient obtained by dividing (i) the principal amount of the Note by (ii) $1.00 ("Conversion Price"), subject to any adjustments pursuant to Section 5. Any fraction of a share resulting from these calculations shall be rounded upward to the whole share. (b) Mechanics and Effect of Conversion. To exercise a Conversion, the Lender shall surrender its Note, duly endorsed, together with a written conversion notice to the Company at its principal office. At its expense, the Company will, as soon as practicable thereafter, issue and deliver to such Lender, at its address, a certificate or certificates for the number of shares to which such Lender is entitled upon such conversion. This Note shall be deemed to have been converted immediately prior to the close of business on the date of giving of such notice and the Lender shall be treated for all purposes as the record holder of the Common Stock deliverable upon such conversion as of the close of business on such date. The Company shall pay the Lender all accrued but unpaid interest due hereunder through the date of conversion, such payment to accompany the stock certificate referred to above. In the event that the Company has sent a Redemption Notice and the Lender has notified the Company that it intends to convert its Note but has not properly tendered its Note, either by reason of a missing Note, improper endorsement or otherwise, the Company shall promptly notify the Lender and use its best efforts to assist the Lender to ensure that the Lender is able to convert prior to redemption, including without limitation by providing a substitute Note. (c) No Impairment. The Company will not, by amendment of its Amended and Restated Articles of Incorporation or through any reorganization, recapitalization, sale or transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Company, but will at all times in good faith assist in the carrying out of all the provisions of this Section 2 and in the taking of all such actions as may be necessary or appropriate in order to protect the conversion rights and any other rights of the Lender of this Note against dilution or other impairment. 3. Reservation of Shares. The Company shall at all times have authorized and reserved for issuance a sufficient number of shares of its capital stock to provide for the full conversion of this Note. If at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of this Note, the Company shall take any and all corporate action as is necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purpose. All shares of Common Stock which shall be so issued shall be validly issued, fully paid and nonassessable, and free from all liens, duties and charges arising out of or by reason of the issue thereof (including, 3 without limitation, in respect of taxes) and, without limiting the generality of the foregoing, the Company covenants that it will from time to time take all such action as may be requisite to assure that the par value per share of the Common Stock is at all times equal to or less than the effective Conversion Price. The Corporation will take all such action within its control as may be necessary on its part to assure that all such shares of Common Stock may be so issued without violation of any applicable law or regulation, or of any requirements of any national securities exchange upon which the Common Stock of the Company may be listed. 4. Change of Control. In the event of (i) any transaction or series of related transactions (including any reorganization, merger or consolidation) that results in the transfer of 50% or more of the outstanding voting power of the Company, (ii) a sale, lease or other disposition of all or substantially all of the assets of the Company to another person and (iii) a voluntary or involuntary dissolution, liquidation or winding up of the Company (a "Fundamental Event"), the Lender shall have the right to receive, at the option of the Lender: (A) the outstanding principal amount of this Note plus an amount equal to all accrued but unpaid interest to the date of consummation of the transaction or upon dissolution or liquidation, or (B) the consideration a Lender of the Note would receive if such Lender were a holder of the Common Stock into which such Note were convertible as of such Fundamental Event. The Company will give the Lender written notice of not less than twenty (20) business days prior to the date of the Fundamental Event. The occurrence of any such event or the giving of such notice shall be without prejudice to the Lender's right to exercise its rights pursuant to Section 2 up until the date of consummation of such Fundamental Event. The provisions of Section 2(b) and Section 13 shall apply to such notice in all respects as if such notice were a Redemption Notice. 5. Certain Adjustments. The number of shares of Common Stock into which this Note may be converted under Section 2 shall be subject to adjustment in accordance with the following provisions: (a) Adjustment for Reorganization or Recapitalization. If, while this Note remains outstanding and has not been converted, there shall be a reorganization or recapitalization (other than a combination, reclassification, exchange or subdivision of shares otherwise provided for herein), all necessary or appropriate lawful provisions shall be made so that the Lender shall thereafter be entitled to receive upon conversion of this Note, the greatest number of shares of Common Stock or other securities or property that a holder of the class of securities deliverable upon conversion of this Note would have been entitled to receive in such reorganization or recapitalization if this Note had been converted immediately prior to such reorganization or recapitalization, all subject to further adjustment as provided in this Section 5. If the per share consideration payable to the Lender for such class of securities in connection with any such transaction is in a form other than cash or readily marketable securities, then the value of such consideration shall be determined in good faith by the Company's Board of Directors. The foregoing provisions of this paragraph shall similarly apply to successive reorganizations or recapitalizations and to the stock or securities of any other corporation that are at the time receivable upon the conversion of this Note. In all events, appropriate adjustment shall be made in the application of the provisions of this Note (including adjustment of the conversion price and number of shares of Common Stock into which this Note is then convertible pursuant to the terms and conditions of this Note) with respect to the rights and interests of the Lender after the transaction, to the end that the provisions of this Note shall be 4 applicable after that event, as near as reasonably may be, in relation to any shares or other property deliverable or issuable after such reorganization or recapitalization upon conversion of this Note. (b) Adjustments for Split, Subdivision or Combination of Shares. If the Company at any time while this Note remains outstanding and unconverted, shall split or subdivide any class of securities into which this Note may be converted into a greater number of securities of the same class, the number of shares of such class issuable upon conversion of this Note immediately prior to such split or subdivision shall be proportionately increased and the conversion price for such class of securities shall be proportionately decreased. If the Company at any time while this Note, or any portion hereof, remains outstanding and unconverted shall combine any class of securities into which this Note may be converted, into a lesser number of securities of the same class, the number of shares of such class issuable upon conversion of this Note immediately prior to such combination shall be proportionately decreased and the conversion price for such class of securities shall be proportionately increased. (c) Adjustments for Dividends and Other Distributions in Stock or Other Securities or Property. (i) In case the Company shall pay or make a dividend or other distribution on shares of any class of capital stock payable in Common Stock, the Conversion Price in effect at the opening of business on the day following the date fixed for determining the entitlement of and holders of any such class of capital stock entitled to receive such dividend or other distribution shall be reduced by multiplying such Conversion Price by a fraction of which (A) the numerator shall be the number of shares of Common Stock outstanding at the close of business on the date fixed for such determination and (B) the denominator shall be the sum of such number of shares and the total number of shares constituting such dividend or other distribution, such reduction to become effective immediately after the opening of business on the day following the date fixed for such determination. (For the purposes of determining adjustments to the Conversion Price as set forth herein, shares of Common Stock held in the treasury of the Company, and distributions or issuances in respect thereof, shall be disregarded.) (ii) In case the Company shall, by dividend or otherwise, distribute to holders of its Common Stock evidences of indebtedness, shares of capital stock of any class or series, other securities, cash or assets (other than Common Stock, or options, rights or warrants to subscribe for or purchase any securities convertible into or exchangeable for shares of Common Stock, or a dividend or distribution payable exclusively in cash), the Conversion Price in effect immediately prior to the close of business on the date fixed for the payment of such distribution shall be reduced by multiplying such Conversion Price by a fraction of which (A) the numerator shall be the Market Price (as defined below) on the date fixed for such payment less the then fair market value (as determined in good faith by the Board of Directors, whose good faith determination shall be described in a resolution of the Board of Directors) of the portion of such evidences of indebtedness, shares of capital stock, other securities, cash and assets distribution per share of Common Stock and (B) the denominator shall be such Market Price, such reduction to become effective immediately prior to the opening of business on the day following the date fixed for such payment. If the Board of Directors determines the fair market value of any distribution for purposes of this paragraph by reference to the actual or when-issued 5 trading market for any securities comprising such distribution, it must in doing so consider the prices in such market over the same period used in computing the Market Price for such purposes. (d) Options, Rights, Warrants and Convertible and Exchangeable Securities. In case the Company shall at any time after the date hereof issue options, rights or warrants to subscribe for shares of Stock (as defined below), or issue any securities convertible into or exchangeable for shares of Stock, for a consideration per share less than the Conversion Price in effect immediately prior to the issuance of such options, rights, warrants or such convertible or exchangeable securities, or without consideration, the Conversion Price in effect immediately prior to the issuance of such options, rights, warrants or such convertible or exchangeable securities, as the case may be, shall be reduced to a price (calculated to the nearest full cent) equal to the quotient derived by dividing (A) an amount equal to the sum of (X) the product of (a) the Conversion Price in effect immediately prior to such issuance or sale, multiplied by (b) the total number of shares of Stock outstanding immediately prior to such issuance or sale, plus (Y) the aggregate of the amount of all consideration, if any, received by the Company upon such issuance or sale, by (B) the total number of shares of Stock outstanding immediately after such issuance or sale. For purposes of calculating (A) and (B), the shares issuable and consideration received upon issuance shall be determined in all respects in accordance with the terms of Section 5(b) of the Warrant, of like date with this Note, between the Lender and the Company. (e) Additional Shares of Stock. Except as hereinafter provided, in case the Company shall at any time after the date hereof issue or sell any shares of Common Stock, other than the issuances or sales referred to in Sections 5(a) - (d) and (h) hereof, for a consideration per share less than the Conversion Price in effect immediately prior to the issuance or sale of such shares, or without consideration, then forthwith upon such issuance or sale, the Conversion Price shall (until another such issuance or sale) be reduced to the price (calculated to the nearest full cent) equal to the quotient derived by dividing (A) an amount equal to the sum of (X) the product of (a) the Conversion Price in effect immediately prior to such issuance or sale, multiplied by (b) the total number of shares of Common Stock outstanding immediately prior to such issuance or sale, plus (Y) the aggregate of the amount of all consideration, if any, received by the Company upon such issuance or sale, by (B) the total number of shares of Common Stock outstanding immediately after such issuance or sale; provided, however, that in no event shall the Conversion Price be adjusted pursuant to this computation to an amount in excess of the Conversion Price in effect immediately prior to such computation. For purposes of any computation to be made in accordance with Section 5(d) and 5(e), the following provisions shall be applicable: (i) In case of the issuance or sale of shares of Common Stock for a consideration part or all of which shall be cash, the amount of the cash consideration, shall be deemed to be the amount of cash received by the Company for such shares (or, if shares of Common Stock are offered by the Company for subscription, the subscription price, or, if either of such securities shall be sold to underwriters or dealers for public offering without a subscription price, the public offering price, before deducting therefrom any compensation paid or discount allowed in the sale, underwriting or purchase thereof by underwriters or dealers or other persons or entities performing similar services), less any amounts payable to the security 6 holders or their affiliates, including, without limitation, any employment agreement, royalty, consulting agreement, covenant not to compete, earnout or contingent payment right or similar arrangement, agreement or understanding, whether oral or written; all such amounts shall be valued at the aggregate amount payable thereunder whether such payments are absolute or contingent and irrespective of the period or uncertainty of payment, the rate of interest, if any, or the contingent nature thereof. (ii) In case of the issuance or sale of shares of Common Stock for a consideration part or all of which shall be other than cash, the amount of the consideration therefor other than cash shall be deemed to be the value of such consideration as determined in good faith by the Board of Directors of the Company, whose good faith determination shall be described in a resolution of the Board of Directors. (iii) Shares of Stock issuable by way of dividend or other distribution on any capital stock of the Company (other than Common Stock) shall be deemed to have been issued immediately after the opening of business on the day following the record date for the determination of stockholders entitled to receive such dividend or other distribution and shall be deemed to have been issued without consideration. (iv) The reclassification of securities of the Company other than shares of Common Stock into securities including shares of Common Stock shall be deemed to involve the issuance of such shares of Stock for consideration other than cash immediately prior to the close of business on the date fixed for the determination of security holders entitled to receive such shares, and the value of the consideration allocable to such shares of Stock shall be determined as provided in Section 5(e)(ii). (v) For the purposes of determining adjustments to the Conversion Price as set forth herein, shares of Common Stock held in the treasury of the Company, and distributions or issuances in respect thereof, shall be disregarded. (f) Definition of Stock. For the purpose of this Section 5, the term "Stock" shall mean (i) the class of stock designated as Common Stock in the Amended and Restated Articles of Incorporation of the Company as may be amended as of the date hereof, or (ii) any other class of stock resulting from successive changes or reclassifications of such stock consisting solely of changes in par value, or from par value to no par value, or from no par value to par value. (g) Other Definitions. For the purpose of any computation under this Section 5 the "Market Price" shall be with respect to any day (i) the average of the closing bid and asked share prices quoted for the Common Stock on the NASD Over-the-Counter Bulletin Board for the ten (10) Trading Days immediately preceding such date or (ii) if the Common Stock is then traded on a national securities exchange or The Nasdaq Stock Market or, the average of the high and low sale prices of the Common Stock reported on The Nasdaq Stock Market or such national securities exchange for the ten (10) Trading Days immediately preceding such date. If the Market Price cannot be calculated as of such date on either of the foregoing bases, the Market Price shall be the fair market value as determined on a reasonable basis and in good faith by the Board of Directors of the Company. When used with respect to any issuance or distribution, the 7 date of measurement of the Market Price shall be the first date on which the Common Stock trades in the applicable securities market or on the applicable securities exchange without the right to receive such issuance or distribution. "Trading Day" shall mean a day during which trading in securities generally occurs in the applicable securities market or on the principal securities exchange or bulletin board on which the Common Stock is then traded, listed or quoted. (h) No Adjustment of Conversion Price in Certain Cases. No adjustment of the Conversion Price shall be made: (i) Upon issuance or sale of this Note or shares of Common Stock issuable upon conversion of or payment of interest on this Note, or the other Notes issued in connection herewith and shares of Common Stock underlying such Notes, or shares of Common Stock issuable upon exercise of other options, warrants and convertible securities outstanding as of the date hereof. (ii) Upon the issuance or sale of any shares of capital stock, or the grant of options or warrants exercisable therefor, issued or issuable after the date of this Note, to directors, officers, employees, advisers and consultants of the Company or any subsidiary pursuant to any incentive or non-qualified stock option plan or agreement, stock purchase plan or agreement, stock restriction agreement or restricted stock plan, employee stock ownership plan, consulting agreement, stock appreciation right, stock depreciation right, bonus stock arrangement, or such other similar compensatory options, issuances, arrangements, agreements or plans approved by the Board of Directors. (iii) Upon the issuance of any shares of capital stock or the grant of warrants or options (or the exercise thereof) as consideration in a bona fide business acquisition or strategic transaction by the Company, other than in connection with a financing transaction. (iv) Upon the issuance of any shares of capital stock to satisfy (a) interest or dividend obligations on the Company's preferred stock existing on the date hereof; or (b) obligations to pay penalties for failure to comply with registration requirements. (i) Minimum Adjustment. If the amount of said adjustment shall be less than one cent ($0.01) per security issuable upon conversion of this Note, provided, however, that in such case any adjustment that would otherwise be required then to be made shall be carried forward and shall be made at the time of and together with the next subsequent adjustment which, together with any adjustment so carried forward, shall amount to at least one cent ($0.01) per security issuable upon conversion of this Note. 6. Further Adjustments. In case at any time or, from time to time, the Company shall take any action that affects the class of securities into which this Note may be converted under Section 2, other than an action described herein, then, unless such action will not have a adverse effect upon any rights of the Lender, the number of shares of such class of securities (or other securities) into which this Note is convertible shall be adjusted in such a manner and at such time as shall be equitable in the circumstances. To the extent permitted by applicable law, 8 the Company from time to time may decrease the Conversion Price or increase the number of shares into which this Note shall be convertible by any amount for any period of time if the Board of Directors shall have made a determination that such decrease or increase would be in the best interests of the Company, which determination shall be conclusive. 7. Certificate as to Adjustments. Upon the occurrence of each adjustment or readjustment pursuant to Section 5 or Section 6, the Company at its sole expense shall promptly compute such adjustment or readjustment in accordance with the terms hereof and furnish to the Lender a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. The Company shall, upon the written request at any time of the Lender, furnish or cause to be furnished to Lender a like certificate setting forth (i) such adjustments and readjustments, and (ii) the number and class of securities and the amount, if any, of other property which at the time would be received upon the conversion of this Note under Section 2. 8. Payment of Taxes. The Company will pay all taxes (other than taxes based upon income or other taxes required by law to be paid by the holder) and other governmental charges that may be imposed with respect to the issue or delivery of shares of Common Stock upon conversion of this Note, excluding any tax or other charge imposed in connection with any transfer involved in the issue and delivery of shares of Common Stock in a name other than that in which this Note so converted was registered. 9. Additional Amounts. All payments of, or in respect of, principal of, and interest on, this Note by the Company will be made without deduction or withholding for or on account of any present or future taxes, assessments, duties or other governmental charges imposed or levied by or on behalf of the United States or any political subdivision thereof or any authority or agency therein or thereof having power to tax, unless the withholding or deduction of the U.S. tax is required by law. 10. Covenants of Company. The Company covenants and agrees that so long as this Note is outstanding, it will comply with the affirmative and negative covenants set forth in Sections 3.1 and 3.2 of the Security Agreement. 11. Events of Default. Upon the occurrence of an Event of Default (as defined in the Security Agreement), Lender may by notice to the Company take any or all of the following actions, without prejudice to the rights of the holder of any other Note to enforce its claims against the Company: (i) declare the Principal Amount and any accrued interest and all other amounts payable under this Note to be due and payable, whereupon the same shall become forthwith due and payable without presentment, demand protest or other notice of any kind, all of which are hereby waived by the Company, (ii) proceed to enforce or cause to be enforced any remedy provided under any of the Security Documents (as defined in the Security Agreement), (iii) exercise any other remedies available at law or in equity, including specific performance of any covenant or other agreement contained in this Note; provided, that upon the occurrence of any Event of Default referred to in Section 4.1(b) of the Security Agreement (Bankruptcy), then (without prejudice to the rights and remedies specified in clause (iii) above) automatically, without notice, demand or any other act by Lender, the principal of and any accrued interest and all other amounts payable under this Note shall become immediately due and payable without 9 presentment, demand, protest or other notice of any kind, all of which are hereby expressly waived by the Company, anything contained in this Note to the contrary notwithstanding. No remedy conferred in this Note upon Lender is intended to be exclusive of any other remedy and each and every such remedy shall be cumulative and shall be in addition to every other remedy conferred herein or now or hereinafter existing at law or in equity or by statute or otherwise. 12. Amendments and Waivers. Any term of this Note may be amended and the observance of any term of this Note may be waived (either generally or in a particular instance and either retroactively or prospectively) with the written consent of the Company and holders holding Notes evidencing, in the aggregate, an amount equal to not less than 50.1% of the aggregate principal amount of all Notes then outstanding. 13. Notices. All notices, requests, consents, and other communications in connection with this Note shall be in writing and shall be deemed delivered (i) three (3) business days after being sent by registered or certified mail, return receipt requested, postage prepaid or (ii) one (1) business day after being sent via a reputable overnight courier service guaranteeing next business day delivery in the Lender's country or region, or (iii) an actual receipt of delivery by telecopier, in each case delivery shall be made to the intended recipient as set forth below: If to the Company: Vital Living, Inc. 5080 North 40th Street, Suite 105, Phoenix, AZ 85018 Telecopier No.: (602) 952-7129 Attention: Stuart A. Benson, President (e-mail: cafestu@aol.com) With a copy to: Graubard Miller 600 Third Avenue New York, New York 10016 Telecopier No.: (212) 818-8881 Attention: David Alan Miller, Esq. (e-mail: dmiller@graubard.com) If to the Lenders: To the address set forth on the front page of this Note In either case, with a copy to: HCFP/Brenner Securities, LLC 888 Seventh Avenue 17th Floor New York, New York 10106 Telecopier No.: (212) 707-0378 Attention: Ira Greenspan (e-mail: igreenspan@hcfpbrenner.com) 10 All notices and other communications in connection with this Note shall be (x) mailed by first-class certified or registered mail, postage prepaid, and (y) sent by telecopier delivery, to the address and telecopier number furnished to the Company in writing by the last Lender of this Note who shall have furnished an address to the Company in writing. In the case of a Redemption Notice, such notice shall be provided by (x) telecopier delivery and (y) courier or hand delivery, and not by first-class certified or registered mail as prescribed above. All notices and other communications from the Lender of this Note or in connection herewith to the Company shall be mailed by first-class certified or registered mail, postage prepaid, to the Company at its principal office set forth above. If the Company should at any time change the location of its principal office to a place other than as set forth below, then it shall give prompt written notice to the Lender of this Note and thereafter all references in this Note to the location of its principal office at the particular time shall be as so specified in such notice. The Lender may also change the address to which notices, requests, consents or other communications hereunder are to be delivered to it by giving the Company notice in the manner set forth in this Section. 14. Conflicting Agreements. In the event of any inconsistencies between the terms of this Note and the terms of any other document related to the loan evidenced by this Note, the terms of this Note shall prevail. 15. Severability. The unenforceability or invalidity of any provision or provisions of this Note as to any persons or circumstances shall not render that provision or those provisions unenforceable or invalid as to any other provisions or circumstances, and all provisions hereof, in all other respects, shall remain valid and enforceable. 16. Governing Law. This Note shall be governed by and construed under the laws of the State of New York as applied to agreements among New York residents entered into and to be performed entirely within New York. The Company (1) agrees that any legal suit, action or proceeding arising out of or relating to this Note shall be instituted exclusively in New York State Supreme Court, County of New York, or in the United States District Court for the Southern District of New York, (2) waives any objection which the Company may have now or hereafter to the venue of any such suit, action or proceeding, and (3) irrevocably consents to the jurisdiction of the New York State Supreme Court, County of New York, and the United States District Court for the Southern District of New York in any such suit, action or proceeding. The Company further agrees to accept and acknowledge service of any and all process which may be served in any such suit, action or proceeding in the New York State Supreme Court, County of New York, or in the United States District Court for the Southern District of New York and agrees that service of process upon the Company mailed by certified mail to the Company's address shall be deemed in every respect effective service of process upon the Company, in any such suit, action or proceeding. THE PARTIES HERETO AGREE TO WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS NOTE OR ANY DOCUMENT OR AGREEMENT CONTEMPLATED HEREBY. 17. Waivers. The nonexercise by either party of any of its rights hereunder in any particular instance shall not constitute a waiver thereof in that or any subsequent instance. 11 18. Lost Documents. Upon receipt by the Company of evidence satisfactory to it of the loss, theft, destruction or mutilation of this Note or any Note exchanged for it, and (in the case of loss, theft or destruction) of indemnity satisfactory to it, and upon reimbursement to the Company of all reasonable expenses incidental thereto, and upon surrender and cancellation of such Note, if mutilated, the Company will make and deliver in lieu of such Note a new Note of like tenor and unpaid principal amount and dated as of the original date of this Note. [Signature Page Follows] 12 IN WITNESS WHEREOF, the Company has caused its duly authorized officer to execute this Note as of the date first written above. VITAL LIVING, INC. By /s/ Stuart A. Benson -------------------------- Name: Stuart A. Benson Title: President Acknowledged and Accepted: /s/ Donald Nicholson - -------------------- (Investor) Donald Nicholson Finance Director SkyePharma PLC 13 EX-99.9 8 ex-9.txt EXHIBIT 9 WARRANT TO PURCHASE Exhibit 9 THE SECURITIE'S REPRESENTED BY THIS WARRANT HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"). THESE SECURITIES MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER THE SECURITIES ACT OR UNDER STATE SECURITIES LAWS. THIS WARRANT AND THE WARRANT SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT MAY NOT BE PLEDGED, SOLD, ASSIGNED, TRANSFERRED OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO THE EXPRESS PROVISIONS OF THIS WARRANT, AND NO SALE, ASSIGNMENT, TRANSFER, OR OTHER DISPOSITION OF THIS WARRANT SHALL BE VALID OR EFFECTIVE UNLESS AND UNTIL SUCH PROVISIONS SHALL HAVE BEEN COMPLIED WITH. Date of Issuance: December 17, 2003 VITAL LIVING, INC. Stock Purchase Warrant (Void after December 16, 2008) Vital Living, Inc., a Nevada corporation (the "Company"), for value received, hereby certifies and agrees that SkyePharma PLC or its registered assigns (the "Registered Holder"), is entitled, subject to the terms set forth below, to purchase from the Company, at any time or from time to time on or after the date hereof (the "Date of Issuance") and on or before December 16, 2008 at not later than 5:00 p.m. New York time (such date and time, the "Expiration Time"), One Million (1,000,000) duly authorized, validly issued, fully paid and nonassessable shares of the Company's common stock, $0.001 par value per share (the "Common Stock") at an initial exercise price equal to $1.00 per share, subject to adjustment in certain cases as described herein. The shares purchasable upon exercise of this Warrant, and the purchase price per share, are hereinafter referred to as the "Warrant Shares" and the "Exercise Price," respectively. The term "Warrant" as used herein shall include this Warrant and any other warrants delivered in substitution or exchange therefor, as provided herein. This Warrant is issued pursuant to that certain Securities Purchase Agreement, dated December 15, 2003, by and among the Company and certain investors set forth therein (the "Securities Purchase Agreement"). The Warrant Shares are entitled to the benefits of that certain registration rights agreement, dated as of December 15, 2003, between the Company and certain investors named therein (the "Registration Rights Agreement"). 1 1. Exercise. 1.1 Method of Exercise (a) This Warrant may be exercised by the Registered Holder, in whole or in part, by surrendering this Warrant, with a Notice of Exercise in the form of Annex A hereto (the "Notice of Exercise") duly executed by such Registered Holder or by such Registered Holder's duly authorized attorney, at the principal office of the Company set forth in Section 12 hereof, or at such other office or agency as the Company may designate in writing pursuant to Section 12 hereof (the "Company's Office"), accompanied by payment in full, in lawful money of the United States, of the Exercise Price payable in respect of the number of shares of Warrant Shares purchased upon such exercise. (b) Each exercise of this Warrant shall be deemed to have been effected immediately prior to the close of business on the day on which the appropriate Annex form shall be dated and directed to the Company (as evidenced by the applicable postmark or other evidence of transmittal) as provided in Section 1.1(a) hereof. At such time, the person or persons in whose name or names any certificates for Warrant Shares shall be issuable upon such exercise as provided in Section 1.1(c) hereof shall be deemed to have become the holder or holders of record of the Warrant Shares represented by such certificates. Improper or late payment of the Exercise Price shall not affect the effectiveness of the election to exercise. In the event that the Company has sent a Redemption Notice and the Holder has sent a Notice of Exercise but it is deemed by the Company to be deficient, by reason of a missing Warrant, improper execution or otherwise, the Company shall promptly notify the Holder and use its best efforts to assist the Holder to ensure that the Holder is able to convert prior to redemption, including without limitation by providing a substitute Warrant. (c) As soon as practicable after the exercise of this Warrant, in full or in part, and in any event within ten (10) days thereafter, the Company, at its expense, will cause to be issued in the name of, and delivered to, the Registered Holder, or as such Registered Holder (upon payment by such Registered Holder of any applicable transfer taxes) may direct: (i) a certificate or certificates for the number of full Warrant Shares to which such Registered Holder shall be entitled upon such exercise plus, in lieu of any fractional share to which such Registered Holder would otherwise be entitled, cash in an amount determined pursuant to Section 4 hereof; and (ii) in case such exercise is in part only, a new warrant or warrants (dated the date hereof) of like tenor, representing in the aggregate on the face or faces thereof the number of Warrant Shares equal (without giving effect to any adjustment therein) to the number of such shares called for on the face of this Warrant minus the number of such shares purchased by the Registered Holder upon such exercise as provided in Section 3 hereof or received pursuant to Section 1.2 hereof. 1.2 Exercise by Surrender of Warrant. At any time after the Target Effective Date when the Registration Statement (as such terms are defined in the Registration 2 Rights Agreement) is not effective, in addition to the method of payment set forth in Section 1.1 and in lieu of any cash payment required thereunder, the Warrant may be exercised by surrendering the Warrant in the manner specified in this Section 1, together with irrevocable instructions to the Company to issue in exchange for the Warrant the number of shares of Common Stock equal to the product of (x) the number of Warrant Shares multiplied by (y) a fraction, the numerator of which is the Market Value (as defined below) of the Common Stock less the Exercise Price and the denominator of which is such Market Value. As used herein, the phrase "Market Value" at any date shall be deemed to be the last reported sale price, or, in case no such reported sale takes place on such day, the average of the last reported sale prices for the last ten (10) Trading Days, in either case as officially reported by the principal securities exchange or "over the counter" (including on the pink sheets or bulletin board) exchange on which the Common Stock is listed or admitted to trading, or, if the Common Stock is not listed or admitted to trading on any national securities exchange or sold "over the counter," the average closing bid price as furnished by the NASD through Nasdaq or similar organization if Nasdaq is no longer reporting such information, or if the Common Stock is not quoted on Nasdaq, as determined in good faith by resolution of the Board of Directors of the Company, based on the best information available to it. "Trading Day" shall mean a day during which trading in securities generally occurs in the applicable securities market or on the principal securities exchange or bulletin board on which the Common Stock is then traded, listed or quoted. 2. Shares to be Fully Paid; Reservation of Shares. The Company covenants that all shares of Common Stock which may be issued upon the exercise of the rights represented by this Warrant will, upon issuance by the Company, be duly and validly issued, fully paid and nonassessable, and free from preemptive rights and free from all taxes, liens, duties and charges with respect thereto and, in addition, the Company covenants that it will from time to time take all such action as may be requisite to assure that the par value per share of the Common Stock is at all times equal to or less than the effective Exercise Price. The Company further covenants that, from and after the Date of Issuance and during the period within which the rights represented by this Warrant may be exercised, the Company will at all times have authorized and reserved, free from preemptive rights, out of its authorized but unissued shares of Common Stock, solely for the purpose of effecting the exercise of this Warrant, a sufficient number of shares of Common Stock to provide for the exercise of the rights represented by this Warrant. If at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the exercise of this Warrant, the Company shall take any and all corporate action as is necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purpose. The Company will take all such action within its control as may be necessary on its part to assure that all such shares of Common Stock may be so issued without violation of any applicable law or regulation, or of any requirements of any national securities exchange upon which the Common Stock of the Company may be listed. 3. Fractional Shares. The Company shall not be required upon the exercise of this Warrant to issue any fractional shares, but shall make an adjustment therefor in cash on the basis of the Market Value for each fractional share of the Company's Common Stock which would be issuable upon exercise of this Warrant. 3 4. Requirements for Transfer. (a) Warrant Register. The Company will maintain a register (the "Warrant Register") containing the names and addresses of the Registered Holder or Registered Holders. Any Registered Holder of this Warrant or any portion thereof may change its address as shown on the Warrant Register by written notice to the Company requesting such change, and the Company shall promptly make such change. Until this Warrant is transferred on the Warrant Register of the Company, the Company may treat the Registered Holder as shown on the Warrant Register as the absolute owner of this Warrant for all purposes, notwithstanding any notice to the contrary, provided, however, that if and when this Warrant is properly assigned in blank, the Company may, but shall not be obligated to, treat the bearer hereof as the absolute owner hereof for all purposes, notwithstanding any notice to the contrary. (b) Warrant Agent. The Company may, by written notice to the Registered Holder, appoint an agent for the purpose of maintaining the Warrant Register referred to in Section 4(a) hereof, issuing the Common Stock issuable upon the exercise of this Warrant, exchanging this Warrant, replacing this Warrant or any or all of the foregoing. Thereafter, any such registration, issuance, exchange, or replacement, as the case may be, may be made at the office of such agent. (c) Transfer. Subject to the provisions of this Section 4, this Warrant and all rights hereunder are transferable, in whole or in part, upon the surrender of this Warrant with a properly executed Assignment Form in substantially the form attached hereto as Annex B (the "Assignment") at the principal office of the Company. (d) Exchange of Warrant Upon a Transfer. On surrender of this Warrant for exchange, properly endorsed on the Assignment and subject to the provisions of this Warrant and limitations on assignments and transfers as contained in this Section 4, the Company at its expense shall issue to or on the order of the Registered Holder a new warrant or warrants of like tenor, in the name of the Registered Holder or as the Registered Holder (on payment by the Registered Holder of any applicable transfer taxes) may direct, for the number of shares issuable upon exercise hereof. 5. Adjustment. The number of Warrant Shares purchasable hereunder and Exercise Price shall be subject to adjustment in accordance with the following provisions: (a) Computation of Adjusted Exercise Price. Except as hereinafter provided, in case the Company shall at any time after the date hereof issue or sell any shares of Common Stock, other than the issuances or sales referred to in Sections 5(b) - (e) and (j) hereof, for a consideration per share less than the Exercise Price in effect immediately prior to the issuance or sale of such shares, or without consideration, then forthwith upon such issuance or sale, the Exercise Price shall (until another such issuance or sale) be reduced to the price (calculated to the nearest full cent) equal to the quotient derived by dividing (A) an amount equal to the sum of (X) the product of (a) the Exercise Price in effect immediately prior to such issuance or sale, multiplied by (b) the total number of shares of Common Stock outstanding immediately prior to such issuance or sale, plus (Y) the aggregate of the amount of all 4 consideration, if any, received by the Company upon such issuance or sale, by (B) the total number of shares of Common Stock outstanding immediately after such issuance or sale; provided, however, that in no event shall the Exercise Price be adjusted pursuant to this computation to an amount in excess of the Exercise Price in effect immediately prior to such computation. For the purposes of this Section 5 the term Exercise Price shall mean the Exercise Price per share set forth on the first page of this Warrant, as adjusted from time to time pursuant to the provisions of this Section 5. For purposes of any computation to be made in accordance with this Section 5(a), the following provisions shall be applicable: (i) In case of the issuance or sale of shares of Common Stock for a consideration part or all of which shall be cash, the amount of the cash consideration, shall be deemed to be the amount of cash received by the Company for such shares (or, if shares of Common Stock are offered by the Company for subscription, the subscription price, or, if either of such securities shall be sold to underwriters or dealers for public offering without a subscription price, the public offering price, before deducting therefrom any compensation paid or discount allowed in the sale, underwriting or purchase thereof by underwriters or dealers or other persons or entities performing similar services) less any amounts payable to the security holders or their affiliates, including, without limitation, any employment agreement, royalty, consulting agreement, covenant not to compete, earnout or contingent payment right or similar arrangement, agreement or understanding, whether oral or written; all such amounts shall be valued at the aggregate amount payable thereunder whether such payments are absolute or contingent and irrespective of the period or uncertainty of payment, the rate of interest, if any, or the contingent nature thereof. (ii) In case of the issuance or sale of shares of Common Stock for a consideration part or all of which shall be other than cash, the amount of the consideration therefor other than cash shall be deemed to be the value of such consideration as determined in good faith by the Board of Directors of the Company, whose good faith determination shall be described in a resolution of the Board of Directors. (iii) Shares of Stock issuable by way of dividend or other distribution on any capital stock of the Company (other than Common Stock) shall be deemed to have been issued immediately after the opening of business on the day following the record date for the determination of stockholders entitled to receive such dividend or other distribution and shall be deemed to have been issued without consideration. (iv) The reclassification of securities of the Company other than shares of Common Stock into securities including shares of Common Stock shall be deemed to involve the issuance of such shares of Stock for consideration other than cash immediately prior to the close of business on the date fixed for the determination of security holders entitled to receive such shares, and the value of the consideration allocable to such shares of Stock shall be determined as provided in Section 5(a)(ii). 5 (b) Options, Rights, Warrants and Convertible and Exchangeable Securities. In case the Company shall at any time after the date hereof issue options, rights or warrants to subscribe for shares of Stock, or issue any securities convertible into or exchangeable for shares of Stock, for a consideration per share less than the Exercise Price in effect immediately prior to the issuance of such options, rights, warrants or such convertible or exchangeable securities, or without consideration, the Exercise Price in effect immediately prior to the issuance of such options, rights, warrants or such convertible or exchangeable securities, as the case may be, shall be reduced to a price determined by making a computation in accordance with the provisions of Section 5(a) hereof, provided that the aggregate maximum number of shares of Stock, as the case may be, issuable under such options, rights or warrants shall be deemed to be issued and outstanding at the time such options, rights or warrants were issued, for a consideration equal to the minimum purchase price per share provided for in such options, rights or warrants at the time of issuance, plus the consideration (determined in the same manner as consideration received on the issue or sale of shares in accordance with the terms of the Warrant), if any, received by the Company for such options, rights or warrants. The aggregate maximum number of shares of Stock issuable upon conversion or exchange of any convertible or exchangeable securities shall be deemed to be issued and outstanding at the time of issuance of such securities, and for a consideration equal to the consideration (determined in the same manner as consideration received on the issue or sale of shares of Stock in accordance with the terms of the Warrant) received by the Company for such securities, plus the minimum consideration, if any, receivable by the Company upon the conversion or exchange thereof. If any change shall occur in the price per share provided for in any of the options, rights or warrants referred to in this subsection, or in the price per share at which the securities referred to in this subsection are exchangeable, such options, rights or warrants or exchange rights, as the case may be, shall be deemed to have expired or terminated on the date when such price change became effective in respect to shares not theretofore issued pursuant to the exercise or exchange thereof, and the Company shall be deemed to have issued upon such date new options, rights or warrants or exchangeable securities at the new price in respect of the number of shares issuable upon the exercise of such options, rights or warrants or the conversion or exchange of such exchangeable securities. (c) Subdivision and Combination. If the Company at any time subdivides (by any stock split, stock dividend, recapitalization, reorganization, reclassification or otherwise) the shares of Stock subject to acquisition hereunder into a greater number of shares, then, after the date of record for effecting such subdivision, the Exercise Price in effect immediately prior to such subdivision will be proportionately reduced and the number of shares of Common Stock subject to acquisition upon exercise of this Warrant will be proportionately increased. If the Company at any time combines (by reverse stock split, recapitalization, reorganization, reclassification or otherwise) the shares of Stock subject to acquisition hereunder into a lesser number of shares, then, after the date of record for effecting such combination, the Exercise Price in effect immediately prior to such combination will be proportionately increased and the number of shares of Common Stock subject to acquisition upon exercise of this Warrant will be proportionately decreased. (d) Merger or Consolidation. In case of any consolidation of the Company with, or merger of the Company into any other corporation, or in case of any sale or 6 conveyance of all or substantially all of the assets of the Company other than in connection with a plan of complete liquidation of the Company, then as a condition of such consolidativon, merger or sale or conveyance, adequate provision will be made whereby the Registered Holder will have the right to acquire and receive upon exercise of this Warrant in lieu of the shares of Common Stock immediately theretofore subject to acquisition upon the exercise of this Warrant, the greatest number or amount of shares of stock, securities or assets as may be issued or payable with respect to or in exchange for the number of shares of Common Stock immediately theretofore subject to acquisition and receivable upon exercise of this Warrant had such consolidation, merger or sale or conveyance not taken place. In any such case, the Company will make all necessary or appropriate lawful provisions to ensure that the provisions of this Warrant including the Exercise Price will thereafter be applicable as nearly as may be in relation to any shares of stock or securities thereafter deliverable upon the exercise of this Warrant. The Company will not effect any such consolidation, merger, amalgamation, reorganization or reclassification, conveyance, sale, transfer or lease, unless prior to the consummation thereof the successor corporation (if other than the Company) resulting from such consolidation, merger or sale or conveyance, shall assume by written instrument executed and mailed or delivered to each Registered Holder of the Warrants at the last address of such holder appearing on the books of the Company, the obligation to assume the Warrant and upon exercise deliver to such Registered Holder such shares of stock, securities or assets as, in accordance with the foregoing provisions, such Registered Holder may be entitled to receive. (e) Adjustment for Reorganization or Recapitalization. If, while this Warrant remains outstanding and has not been exercised, there shall be a reorganization or recapitalization (other than a combination, reclassification, exchange or subdivision of shares otherwise provided for in this Section 5), all necessary or appropriate lawful provisions shall be made so that the Registered Holder shall thereafter be entitled to receive upon exercise of this Warrant, the greatest number of shares of stock or other securities or property that a holder of the class of securities deliverable upon exercise of this Warrant would have been entitled to receive in such reorganization or recapitalization if this Warrant had been exercised immediately prior to such reorganization or recapitalization, all subject to further adjustment as provided in this Section 5. If the per share consideration payable to the Registered Holder for such class of securities in connection with any such transaction is in a form other than cash or marketable securities, then the value of such consideration shall be determined in good faith by the Company's Board of Directors. The foregoing provisions of this paragraph shall similarly apply to successive reorganizations or recapitalizations and to the stock or securities of any other corporation that are at the time receivable upon the exercise of this Warrant. Appropriate adjustment shall be made in the application of the provisions of this Warrant (including adjustment of the Exercise Price and number of shares into which this Warrant is then exercisable pursuant to the terms and conditions of this Warrant) with respect to the rights and interests of the Registered Holder after the transaction, to the end that the provisions of this Warrant shall be applicable after that event, as near as reasonably may be, in relation to any shares or other property deliverable or issuable after such transaction upon exercise of this Warrant. (f) Notice of Adjustment. Upon the occurrence of any event which requires any adjustment of the Exercise Price or the number of shares for which this Warrant is 7 exercisable, then and in each such case the Company shall give notice thereof to the Registered Holder, which notice shall state the Exercise Price resulting from such adjustment and the increase or decrease, if any, in the number of Warrant Shares purchasable at such price upon exercise, setting forth in reasonable detail the method of calculation and the facts upon which such calculation is based. (g) Adjustment in Number of Securities and Exercise Price. Upon each adjustment of the Exercise Price pursuant to the provisions of this Section 5, the number of securities issuable upon the exercise of each Warrant shall be adjusted to the nearest full amount by multiplying a number equal to the Exercise Price in effect immediately prior to such adjustment by the number of Warrant Shares issuable upon exercise of the Warrants immediately prior to such adjustment and dividing the product so obtained by the adjusted Exercise Price. To the extent permitted by applicable law, the Company from time to time may decrease the Exercise Price or increase the number of shares for which this Warrant shall be exercisable by any amount for any period of time if the Board of Directors shall have made a determination that such decrease or increase would be in the best interests of the Company, which determination shall be conclusive. (h) Definition of Stock. For the purpose of this Agreement, the term "Stock" shall mean (i) the class of stock designated as Common Stock in the Amended and Restated Articles of Incorporation of the Company as may be amended as of the date hereof, or (ii) any other class of stock resulting from successive changes or reclassifications of such Stock consisting solely of changes in par value, or from par value to no par value, or from no par value to par value. (i) Other Definitions. For the purpose of any computation under this Section 5 the "Market Price" shall be with respect to any day (i) the average of the closing bid and asked share prices quoted for the Common Stock on the NASD Over-the-Counter Bulletin Board for the ten (10) Trading Days immediately preceding such date or (ii) if the Common Stock is then traded on a national securities exchange or The Nasdaq Stock Market or, the average of the high and low sale prices of the Common Stock reported on The Nasdaq Stock Market or such national securities exchange for the ten (10) Trading Days immediately preceding such date. If the Market Price cannot be calculated as of such date on either of the foregoing bases, the Market Price shall be the fair market value as determined on a reasonable basis and in good faith by the Board of Directors of the Company. When used with respect to any issuance or distribution, the date of measurement of the Market Price shall be the first date on which the Common Stock trades in the applicable securities market or on the applicable securities exchange without the right to receive such issuance or distribution. "Trading Day" shall mean a day during which trading in securities generally occurs in the applicable securities market or on the principal securities exchange or bulletin board on which the Common Stock is then traded, listed or quoted. (j) No Adjustment of Exercise Price in Certain Cases. No adjustment of the Exercise Price shall be made: 8 (i) Upon issuance or sale of this Warrant or Warrant Shares, or the other Warrants and Warrant Shares issued in connection herewith, or shares of Common Stock issuable upon exercise of other options, warrants and convertible securities outstanding as of the date hereof. (ii) Upon the issuance or sale of any shares of capital stock, or the grant of options or warrants exercisable therefor, issued or issuable after the date of this Warrant, to directors, officers, employees, advisers and consultants of the Company or any subsidiary pursuant to any incentive or non-qualified stock option plan or agreement, stock purchase plan or agreement, stock restriction agreement or restricted stock plan, employee stock ownership plan, consulting agreement, stock appreciation right, stock depreciation right, bonus stock arrangement, or such other similar compensatory options, issuances, arrangements, agreements or plans approved by the Board of Directors. (iii) Upon the issuance of any shares of capital stock or the grant of warrants or options (or the exercise thereof) as consideration in a bona fide business acquisition or strategic transaction by the Company, other than in connection with a financing transaction. (iv) Upon the issuance of any shares of capital stock to satisfy (a) interest or dividend obligations on the Company's preferred stock existing on the date hereof; or (b) obligations to pay penalties for failure to comply with registration requirements. (k) Minimum Adjustment. If the amount of said adjustment shall be less than one cent ($0.01) per security issuable upon exercise of this Warrant, provided, however, that in such case any adjustment that would otherwise be required then to be made shall be carried forward and shall be made at the time of and together with the next subsequent adjustment which, together with any adjustment so carried forward, shall amount to at least one cent ($0.01) per security issuable upon exercise of this Warrant. (l) Payment of Taxes. The Company will pay all taxes (other than taxes based upon income or other taxes required by law to be paid by the holder) and other governmental charges that may be imposed with respect to the issue or delivery of shares of Common Stock upon exercise of this Warrant, excluding any tax or other charge imposed in connection with any transfer involved in the issue and delivery of shares of Common Stock in a name other than that in which this Warrant so exercised was registered. 6. No Impairment. The Company will not, by amendment of its Amended and Restated Articles of Incorporation or through any reorganization, recapitalization, sale or transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant but will at all times in good faith carry out all such terms and take all such actions as may be reasonably necessary or appropriate in order to protect the rights herein of the holder of this Warrant against dilution or other impairment. 9 7. Liquidating Dividends and Other Distributions. If the Company pays a dividend or makes a distribution on the Common Stock payable otherwise than in cash out of earnings or earned surplus (determined in accordance with generally accepted accounting principles) except for a stock dividend payable in shares of Common Stock (a "Liquidating Dividend") or otherwise distributes to its stockholders any assets, properties, rights, evidence of indebtedness, securities whether issued by the Company or by another, or any other thing of value, then the Company will pay or distribute to the Registered Holder of this Warrant, upon the exercise hereof, in addition to the Warrant Shares purchased upon such exercise, either or both of, as the case may be (i) the Liquidating Dividend that would have been paid to such Registered Holder if he had been the owner of record of such Warrant Shares immediately prior to the date on which a record is taken for such Liquidating Dividend or, if no record is taken, the date as of which the record holders of Common Stock entitled to such dividends or distribution are to be determined and (ii) the same property, assets, rights, evidences of indebtedness, securities or any other thing of value that the Registered Holder would have been entitled to receive at the time of such distribution as if the Warrant had been exercised immediately prior to such distribution. 8. Redemption. This Warrant may be redeemed by the Company, in whole but not in part, at its sole option, commencing December 17, 2004, upon not less than twenty (20) business days' prior written notice as provided in Section 12 hereof ("Redemption Notice") to the Registered Holder, at the redemption price of $0.01 per share for every share of Common Stock purchasable upon exercise hereof at the time of such redemption, if the last sale price of a share of Common Stock is at least $3.00 for the 10 consecutive trading days ending on the day prior to the day on which notice of redemption is given to the Registered Holder. The sending of the Redemption Notice shall not affect the Registered Holder's ability to exercise the Warrant at any time prior to the date of redemption. On and after the date of redemption, the holder shall only have the right to receive $0.01 per share of Common Stock purchasable upon exercise hereof at the time of such redemption. 9. Notices of Record Date, Etc. In case: (a) the Company shall take a record of the holders of its Common Stock (or other stock or securities at the time deliverable upon the exercise of this Warrant) for the purpose of entitling or enabling them to receive any dividend or other distribution, or to receive any right to subscribe for or purchase any shares of stock of any class or any other securities, or to receive any other right; or of any capital reorganization of the Company, any reclassification of the capital stock of the Company, any consolidation or merger of the Company with or into another corporation (other than a consolidation or merger in which the Company is the surviving entity), or any transfer of all or substantially all of the assets of the Company; or of the voluntary or involuntary dissolution, liquidation or winding-up of the Company, then, and in each such case, the Company will mail or cause to be mailed to the Registered Holder of this Warrant a notice specifying, as the case may be, (i) the date on which a record is to be taken for the purpose of such dividend, distribution or right, and stating the amount and character of such dividend, distribution or right, or (ii) the effective date on which such reorganization, reclassification, consolidation, merger, transfer, dissolution, liquidation or winding-up is to take place, and the time, if any is to be fixed, as of which the holders of record of Common Stock (or such other stock or securities at the time deliverable upon the exercise of this Warrant) shall be entitled to 10 exchange their shares of Common Stock (or such other stock or securities) for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, transfer, dissolution, liquidation or winding-up. The Company will cause such notice to be mailed at least twenty (20) business days prior to the record date or effective date for the event specified in such notice unless such prior notice is waived by the Registered Holder. 10. No Rights of Stockholders. Subject to other Sections of this Warrant, the Registered Holder shall not be entitled to vote, to receive dividends or subscription rights, nor shall anything contained herein be construed to confer upon the Registered Holder, as such, any of the rights of a stockholder of the Company, including without limitation any right to vote for the election of directors or upon any matter submitted to stockholders, to give or withhold consent to any corporate action (whether upon any recapitalization, issuance of stock, reclassification of stock, change of par value or change of stock to no par value, consolidation, merger, conveyance, or otherwise), to receive notices, or otherwise, until the Warrant shall have been exercised as provided herein. 11. Replacement of Warrant. Upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant and (in the case of loss, theft or destruction) upon delivery of an indemnity agreement reasonably satisfactory to the Company, or (in the case of mutilation) upon surrender and cancellation of this Warrant, the Company will issue, in lieu thereof, a new Warrant of like tenor. 12. Mailing of Notices, Etc. (i) All notices, requests, consents, and other communications in connection with this Warrant shall be in writing and shall be deemed delivered (i) three (3) business days after being sent by registered or certified mail, return receipt requested, postage prepaid, (ii) one (1) business day after being sent via a reputable overnight courier service guaranteeing next business day delivery in the Holder's country or region, or (iii) on actual receipt if delivered by telecopier, in each case delivery shall be made to the intended recipient as set forth below: If to the Company: Vital Living, Inc. 5080 North 40th Street Suite 105 Phoenix, AZ 85018 Telecopier No.: (602) 952-7129 Attention: Stuart A. Benson, President (e-mail: cafestu@aol.com) 11 With a copy to: Graubard Miller 600 Third Avenue New York, New York 10016 Telecopier No.: (212) 818-8881 Attention: David Alan Miller, Esq. (e-mail: dmiller@graubard.com) If to the Registered Holder: To the address set forth in the Warrant Register as described in Section 4 hereof (ii) All notices and other communications from the Company to the Registered Holder of this Warrant shall be (x) mailed by first-class certified or registered mail, postage prepaid, and (y) sent by telecopier delivery, to the address and telecopier number furnished to the Company in writing by the last Registered Holder of this Warrant who shall have furnished an address to the Company in writing. In the case of a Redemption Notice pursuant to Section 8, such notice shall be provided by (x) telecopier delivery and (y) courier or hand delivery, and not by first class certified or registered mail as prescribed above. All notices and other communications from the Registered Holder of this Warrant or in connection herewith to the Company shall be mailed by first-class certified or registered mail, postage prepaid, to the Company's office set forth above. If the Company should at any time change the location of its principal office to a place other than as set forth below, then it shall give prompt written notice to the Registered Holder of this Warrant and thereafter all references in this Warrant to the location of its principal office at the particular time shall be as so specified in such notice. 13. Change or Waiver. Any term of this Warrant may be changed or waived only by an instrument in writing signed by the party against which enforcement of the change or waiver is sought. 14. Headings. The headings in this Warrant are for purposes of reference only and shall not limit or otherwise affect the meaning of any provision of this Warrant. 15. Severability. If any provision of this Warrant shall be held to be invalid and unenforceable, such invalidity or unenforceability shall not affect any other provision of this Warrant. 16. Governing Law and Submission to Jurisdiction. This Warrant will be governed by and construed in accordance with the laws of the State of New York without regard to principles of conflict or choice of laws of any jurisdiction. The parties hereby agree that any action, proceeding or claim against it arising out of, or relating in any way to this Warrant shall be brought and enforced in the courts of the State of New York, and irrevocably submit to such jurisdiction, which jurisdiction shall be exclusive. 12 17. Certificate. Upon request by the Registered Holder of this Warrant, the Company shall promptly deliver to such holder a certificate executed by its President or Chief Financial Officer setting forth the total number of outstanding shares of capital stock, convertible debt instruments and options, rights, warrants or other agreements relating to the purchase of such capital stock or convertible debt instruments, together with its calculation of the number of shares remaining available for issuance upon exercise of this Warrant, and a certificate of the accuracy of the statements set forth therein. 18. Supplements and Amendments. The Company and the Registered Holder may from time to time supplement or amend this Warrant in order to cure any ambiguity, to correct or supplement any provision contained herein which may be defective or inconsistent with any provision herein, or to make any other provisions in regard to matters or questions arising hereunder which the Company and the Holder may deem necessary or desirable. 19. Successors. All the covenants and provisions of this Warrant shall be binding upon and inure to the benefit of the Company and the Registered Holder and their respective successors and assigns hereunder. 20. Benefits of this Warrant. Nothing in this Warrant shall be construed to give to any person, entity or corporation other than the Company and the Registered Holder of the Warrant Certificate any legal or equitable right, remedy or claim under this Warrant; and this Warrant shall be for the sole and exclusive benefit of the Company and the Registered Holder of the Warrant Certificate. 13 IN WITNESS WHEREOF, VITAL LIVING, INC. has caused this Warrant to be signed by its duly authorized officers under its corporate seal and to be dated on the day and year first written above. VITAL LIVING, INC. By: /s/ Stuart A. Benson ----------------------------------- Name: Stuart A. Benson Title: President 14 ANNEX A NOTICE OF EXERCISE FORM To: Dated: In accordance with the Warrant enclosed with this Form of Election to Purchase, the undersigned hereby irrevocably elects to purchase _____________ shares of common stock ("Common Stock"), $.001 par value per share, of Vital Living, Inc. ("Company") and encloses herewith $________ in cash, certified or official bank check or checks or other immediately available funds, which sum represents the aggregate Exercise Price (as defined in the Warrant) for the number of shares of Common Stock to which this Form of Election to Purchase relates, together with any applicable taxes payable by the undersigned pursuant to the Warrant. or In accordance with the Warrant enclosed with this Form of Election to Purchase, the undersigned hereby irrevocably elects to purchase ____________ shares of common stock ("Common Stock"), $.001 par value per share, of Vital Living, Inc. ("Company") by surrender of the unexercised portion of the attached Warrant (with a "Market Value" of $____). The undersigned hereby represents, warrants to, and agrees with, the Company that: (i) He is acquiring the Warrant Shares for his own account and not with a view towards the distribution thereof; (ii) He has received a copy of all reports and documents required to be filed by the Company with the Commission pursuant to the Securities Exchange Act of 1934, as amended, within the last 12 months and all reports issued by the Company to its stockholders; (iii) He understands that he must bear the economic risk of the investment in the Warrant Shares, which cannot be sold unless they are registered under the Securities Act of 1933 (the "1933 Act") or an exemption therefrom is available thereunder and that the Company is under no obligation to register the Warrant Shares for sale under the 1933 Act; (iv) He is aware that the Company shall place stop transfer orders with its transfer agent against the transfer of the Warrant Shares in the absence of registration under the 1933 Act or an exemption therefrom as provided herein; Signature: Address: ANNEX B ASSIGNMENT FORM FOR VALUE RECEIVED, _________________________________ hereby sells, assigns and transfers all of the rights of the undersigned under the attached Warrant with respect to the number of shares of Common Stock covered thereby set forth below, unto: Name of Assignee Address No. of Shares - ---------------- ------- ------------- Dated: Signature: Dated: Witness: -----END PRIVACY-ENHANCED MESSAGE-----