XXXXXXX X. XXXXXXX
c/o Schlueter & Associates, P.C.
0000 Xxxxxxxxxxx Xxxxxx, Xxxxx 0000
Xxxxxx, XX 00000
(000) 000-0000
Facsimile: (000) 000-0000
Xxxxx 00, 0000
XXX XXXXXXXXX
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Xxxxxx Sales, President
Cinequanon Pictures International, Inc.
0000 Xxxxxxx Xxxxxxxxx
Xxx Xxxxxxx, Xxxxxxxxxx 00000
Dear Mr. Sales:
The purpose of this letter is to set forth in writing the terms and
conditions under which Aurora Acquisitions, Inc. ("Aurora") proposes to acquire
100% of the stock of Cinequanon Pictures International, Inc. (hereinafter
referred to as "CQN") in exchange for 2,445,740 shares of Aurora's common stock.
Aurora's object is the execution and consummation, as soon as feasible, of a
formal merger agreement (the "Merger Agreement"), between Aurora, a wholly-owned
subsidiary of Aurora to be formed ("Newco") and CQN.
This proposal is based upon the information which has been provided to us
by you, and in particular the Business Plan (the "Business Plan"), the audited
Consolidated Financial Statements for the years ended December 31, 1996 and 1997
and the draft unaudited financial statements for the nine months ended September
30, 1998, included with the Business Plan (the "Financial Statements") and the
1999-2003 projections (revised 2/99). To the extent such information contains
material inaccuracies, it may be necessary to negotiate an adjustment to the
number of shares of Aurora common stock exchanged for the stock of CQN. CQN
shall deliver to Aurora new 1999-2003 projections which shall have been revised
to account for future expenses, the items and amounts of which shall be agreed
upon by CQN and Aurora, to be incurred as a result of becoming a public company
(the "Revised Financial Projections"). This proposal will remain in effect until
5:00 p.m. Mountain Daylight Time on March 24, 1999, and is of course contingent
upon execution of final documentation.
A. Form of Transaction.
(1) Merger. In the proposed transaction, a wholly-owned and newly created
subsidiary of Aurora will merge with CQN with CQN being the surviving
entity (the "Merger").
(2) Share Exchange. The Merger contemplates the exchange of 2,445,740
shares of the common stock of Aurora for 100% of the issued and
outstanding stock of CQN (the "Exchange"); however, any shares of
stock issuable upon exercise of options or warrants, conversion of CQN
debt to shares of common stock, compromise of CQN debts or liabilities
in exchange for shares of common stock, or other commitments by CQN
the could result in the issuance of shares will be deducted from the
2,445,740 Aurora shares to be issued in the Exchange. The Exchange is
based upon the financial information and represented values for the
assets and liabilities described in the Business Plan and Financial
Statements which you have provided to us. It should be understood that
the actual Exchange will not be determined until the closing of the
transaction, and will be adjusted either up or down depending upon any
changes in the financial condition and asset values which occur or are
discovered between March 17, 1999 and the closing date of the Merger
which will be on or before May 31, 1999 (the "Closing Date").
We understand that the audited Financial Statements of CQN at and for
the years ended December 31, 1997 and 1998 (the "Financial
Statements") and the unuaudited financial statements at and for the
three months ended March 31, 1998 and 1999 (the "Interim Financial
Statements") will be available on or before the Closing Date. If
Financial Statements and Interim Financial Statements that are
satisfactory to Aurora (in the exercise of reasonable discretion) have
not been delivered on or before May 31, 1999, then Aurora at its
option may agree to extend the period for delivery of the financial
statements or to cancel the transaction. If the transaction is
cancelled for failure to satisfy this condition, then CQN will pay
Aurora a fee equal to $25,000 as a break-up or cancellation fee (the
"Break-up Fee") within ten days of receiving notice that the
transaction has been cancelled. If the condition is not satisfied and
Aurora elects to extend the period for delivery, then Aurora shall
retain the right to cancel the transaction and be paid the Break-up
Fee if the Financial Statements and Interim Financial Statements are
not delivered in satisfactory form on or before the date to which
Aurora extended the delivery. The financial statements of CQN shall be
prepared on a consistent basis following generally accepted accounting
principles and in compliance with applicable rules and regulations of
the United States Securities and Exchange Commission. Further, the
Financial Statements shall be audited by the existing accounting firm
of CQN (provided that such accounting firm is a member of the SEC
practice section of the AICPA and subject to peer review) and that
such firm shall issue a "clean" opinion upon the Financial Statements.
The working papers, the Financial Statements and the Interim Financial
Statements will be made available to Aurora's accounting firm for
purposes of review at least five days prior to the Closing Date.
In addition, the parties contemplate that the current shareholders of
Aurora will sell an aggregate of 650,139 shares of Aurora common stock
(subsequent to the reverse stock split referenced in paragraph B(2)(f)
of this Letter of Intent) to certain parties, immediately subsequent
to the Merger, at a price of $0.001 per share.
Based upon the foregoing parameters, the parties contemplate that the
equity of Aurora will be owned as follows after the Closing of the
Merger:
Shareholder Shares Percent
----------- ------ -------
Issued to CQN Shareholders 2,445,740 65.82%
New Aurora Shareholders(1) 650,139(2) 17.50%
Current Aurora Shareholders 369,861 9.95%
Xxxxxxxxx X. Xxxxxxx 250,000(3) 6.73%
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3,715,740 100.0%
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(1) May include prior CQN Shareholders.
(2) To be purchased from the current shareholders of Aurora.
(3) To be issued to Xxxxxxxxx X. Xxxxxxx by Aurora in consideration
for his consulting on the Merger and his efforts in assisting
Aurora with compliance under paragraph C(1) hereof. Aurora has
agreed that immediately upon consummation of the merger it will
file an appropriate registration statement with the SEC to
register these shares for resale.
It is intended that the Merger qualify as a reorganization under the
provisions of Section 368(a) of the Internal Revenue Code of 1986, as
amended (the "Code"), and that the parties desire to effectuate the
statutory merger of Newco into CQN in accordance with the provisions
of Sections 368(a)(1)(A) and 368(a)(2)(E) of the Code.
B. Formal Agreement. Upon the execution by you and return to us of this Letter
of Intent, counsel for CQN and Aurora's counsel shall prepare, and the parties
shall execute, a Merger Agreement containing provisions in accord with the
foregoing, together with such further appropriate terms and conditions as such
counsel may determine. The Merger Agreement shall be subject, in all respects,
to the approval of all parties thereto, and shall specify the Closing Date,
which is anticipated to be on or before May 31, 1999.
(1) The Merger Agreement will, among other things:
(a) set forth certain mutual representations and warranties of CQN
and its present officers and shareholders and Aurora with respect
to financial statements, litigation, tax and other liabilities,
collectibility of all receivables, titles to properties and
compliance with applicable codes, material contracts, license
agreements, contracts with management, patents, trademarks, trade
names and copyrights, absence of undisclosed or contingent
liabilities, including but not necessarily limited to liabilities
arising as a result of violations of any local, state or federal
commerce laws, rules or regulations, assignability of contracts,
such other items as may bear upon the value and acceptability to
either party of the business and assets of the other and such
further representations or warranties as the parties may
reasonably agree upon, all representations and warranties to
survive the Closing Date.
(b) restrict CQN and Aurora prior to the Closing as to (i) the
declaration and payment of dividends; and (ii) otherwise than in
the ordinary course of business incurring indebtedness or
additional liabilities, issuing additional stock, granting stock
options, entering into employment agreements with officers or
others except as contemplated herein, granting other than normal
increases in compensation and entering into material
transactions.
(c) grant to each party and its representatives, at all times, access
to (i) the other party's premises, (ii) the books and records of
the other party, (iii) the key management personnel of the other
party, (iv) such financial and operating data of the other party,
and (v) such further information with respect to the business and
properties of the other party, as each party shall, from time to
time, reasonably request. Each party and its representatives
shall be privileged to contact and communicate with the other
party's vendors, its customers, employees and other persons
having business dealings with the other party. It is understood,
of course, that all such access, investigations, contacts, etc.
shall be conducted in such a manner as not to interfere unduly
with the normal conduct of either CQN's or Aurora's business; and
further, that, if the Merger Agreement shall not be consummated
for any reason whatsoever, each party shall keep confidential any
information (unless ascertainable from public or published
information or trade sources) obtained from the other party or
such vendors, customers, employees and other persons (concerning
the other party's operations and business).
(d) provide for the termination or abandonment of the transaction at
any time prior to consummation thereof:
(i) by mutual consent of the parties;
(ii) by CQN, provided that if CQN terminates or abandons the
transaction for any reason, then, within fifteen days of
terminating or abandoning the transaction, CQN shall pay
Aurora a cash fee equal to $25,000 ; or
(iii)in accordance with such other conditions as are mutually
agreed upon.
(e) provide for indemnification by the respective parties making
representations and warranties in the definitive Merger Agreement
to the parties relying upon those representations and warranties
for any breach of those representations or warranties, or for
losses or claims arising out of the failure to make full and fair
disclosure of all material facts including disclosures of
liabilities (actual, contingent, known or unknown).
(f) grant piggy-back registration rights to Xxxxxxx Xxxx and Xxxxxx
Xxxxxx with respect to 75,000 shares of Aurora common stock to be
acquired by each of them (i.e., an aggregate of 150,000 shares),
pursuant to the Merger, said registration rights to be
exercisable for a period of three years after the Closing;
provided, however, that these shares shall be subject to such
lock-up and dribble out restrictions as are negotiated between
the parties prior to the Closing.
(g) provide that, if the Merger is consummated, then, subsequent to
Closing, Xxxxxxx Xxxx and Xxxxxx Xxxxxx shall be reimbursed by
Aurora for expenses in the approximate amount of $35,700 upon
delivery of acceptable documentation of said expenses.
(2) Conditions to Closing. The Merger Agreement shall contain as
conditions precedent to the closing of the described transaction,
among other things, the following:
(a) All officers, directors and 5% or greater shareholders of CQN
shall have executed sale lock-up letters whereby no shares of
stock acquired by them pursuant to the Merger may be sold for a
period of two years from the Closing Date ("Lock-Up"); provided
that any officer of CQN whose employment is terminated for any
reason during the term of the Lock-Up, shall be permitted to sell
the number of shares that he/she would otherwise have been
permitted to sell under the terms and conditions of Rule 144,
adopted under the Securities Act of 1933, as amended, (without
regard to whether such sales occur in public or private
transactions).
(b) An aggregate of 10% of the shares of Aurora stock issued to CQN
shareholders pursuant to the Merger shall be subject to an Escrow
Agreement or Agreements pursuant to which said shares shall be
delivered to a mutually agreed upon escrow agent (the "Escrow
Agent") and held in escrow until the audited financial statements
of CQN for the fiscal year ended December 1999 are issued. Such
shares shall be delivered to Aurora by the Escrow Agent and
cancelled if CQN fails to meet the Revised Financial Projections
for 1999. If CQN meets or exceeds the projections, then the
shares shall be released from escrow and returned to the parties
who delivered them into escrow.
(c) Xxxxxx X. Xxxxxx ("Xxxxxx"), Xxxxxxx X. Xxxx ("Xxxx"), Xxxxxx
Sales ("Sales"), and Xxxxxxxx Xxxxxxx ("Xxxxxxx"), Xxxxx
Xxxxxxxxx ("Xxxxxxxxx"), Xxxxx Xxxxxxxx ("Gregarek") and
Xxxxxxxxx X. Xxxxxxx ("Xxxxxxx") shall have entered into a voting
agreement (the "Voting Agreement"), which shall be effective for
a period of at least three (3) years. Porter, Lamb, Sales and
Xxxxxxx are collectively referred to as the "CQN Parties." and
Xxxxxxxxx, Gregarek and Xxxxxxx are collectively agreed to as the
"Aurora Parties." The Voting Agreement shall provide that the CQN
Parties shall vote for the two persons designated by the Aurora
Parties to serve as directors of the Company, and for the Aurora
Parties to vote for the three persons designated by the CQN
Parties to serve as directors of the Company. Further, the
parties agree that the Board of Directors of Aurora shall consist
of not more than five (5) members, unless the parties unanimously
agree in writing to a greater number of directors.
(d) Xxxxxx X. Xxxxxx, Xxxxxxx X. Xxxx, Xxxxxxxx Xxxxxxx and Xxxxxx
Sales each shall have entered into two-year or longer Employment
Agreements with CQN which shall provide for base salary plus
bonuses in amounts which are acceptable to Aurora, and the
parties thereto shall have agreed not to modify said Employment
Agreements for a period of at least two years.
(e) Creditors of CQN shall have agreed in writing to settle or
compromise $1,500,000 of CQN debt/liabilities in exchange for up
to $500,000 in cash which will be made available to CQN from the
proceeds of the offering described below plus up to 200,000
shares of the 2,445,740 shares Aurora common stock that is being
issued in connection with the merger transaction contemplated
herein.
(f) CQN shall have obtained the written agreement to convert a
minimum of $1,000,000 of the principal, interest, fees, and
penalties (if any) of the outstanding CQN Convertible Promissory
Notes and other Promissory Notes into shares of CQN common stock
at the Closing of the Merger; provided however that any such
shares issued as a result of the conversion will deducted from
the total amount of shares to be issued to the CQN shareholders
in accordance with Paragraph A. (2) of this letter of intent.
(g) Aurora shall have completed a one-for-three reverse split of its
issued and outstanding common stock.
(h) Each of Aurora and CQN shall have completed due diligence to the
satisfaction of each such corporation and its counsel, as to the
assets, liabilities, contracts and financial condition and
prospects of each other entity.
(i) CQN shall have obtained the approval of the requisite percentage
of its shareholders at a duly called and convened shareholders
meeting to effect the Merger in compliance with its Articles of
Incorporation, Bylaws and the law of its state of incorporation,
and the owners of not more than 10% of the issued and outstanding
shares of CQN shall have indicated that they intend to exercise
their rights to dissent from the Merger. In addition, all CQN
shareholders shall have executed such representation letters and
other documents as shall be required by counsel to Aurora to
establish exemption from the registration requirements of federal
and state securities laws.
C. Private Securities Offering.
(1) Aurora hereby agrees to use its best efforts to complete a private
offering of at least $1,100,000 of its common stock, at $1.50 per
share, prior to the Closing on the Merger, with sales of said shares
of Aurora common stock to be contingent upon Closing of the Merger;
provided, however, that in the event that either Aurora or CQN shall
give notice to the other party of its decision not to proceed with the
Merger, then Aurora's obligations under this paragraph C shall be
terminated. Aurora further agrees that, if it succeeds in raising a
minimum of $1,100,000 in gross proceeds and if the Merger is
consummated, then it will use a minimum of $500,000 of the net
proceeds from said offering to pay liabilities of CQN and a minimum of
$500,000 of the net proceeds from said offering for CQN's working
capital and other cash requirements.
(2) CQN and Aurora shall cooperate with each other in the preparation of
the private offering memorandum for the sale of the Aurora common
stock, which will be the responsibility of Aurora as the issuer of the
securities. CQN hereby agrees to pay all expenses incurred by Aurora
with respect to the private securities offering referenced in
paragraph C(1), above, regardless of whether Aurora succeeds in
selling $1,100,000 of shares and regardless of whether the Merger is
consummated. It is expressly understood and agreed that the offering
shall be made only to "Accredited" investors as defined under
Regulation D adopted under the Securities Act of 1933, as amended.
D. Exclusive Right and Preservation of Business. In consideration for the
substantial expenditures of time, effort and expense to be undertaken by the
parties in connection with the preparation and execution of the Merger
Agreement, and the various investigations and reviews referred to above in
paragraph B(2)(h), the parties undertake and agree (a) that each party shall
not, between the date of execution by it of this Letter of Intent and the
Closing Date, enter into or conduct any discussions with any other prospective
purchaser of its stock or assets; and (b) that each party shall use its best
efforts to preserve intact its business organization and the good will of its
customers, suppliers and others having business relations with it.
E. Expenses. It is understood, of course, that CQN's legal, accounting and
auditing fees and its other expenses incurred in connection with the proposed
transaction, shall be paid by CQN, and that Aurora's legal and accounting fees
and its other expenses incurred in connection with the proposed transaction
shall be paid by Aurora.
F. Letter of Intent. It is understood (a) that this letter is intended to be,
and shall be construed only as, a Letter of Intent summarizing and evidencing
the discussions between CQN and Aurora to the date hereof and not as an offer to
purchase the stock or assets of CQN or an agreement with respect thereto; and
(b) that the respective rights and obligations of Aurora and CQN remain to be
defined in the Merger Agreement, into which this Letter of Intent and all prior
discussions shall merge; provided, however, that the obligation of Aurora to use
its best efforts to complete a private securities offering and its obligation to
use $500,000 of the net proceeds therefrom to pay CQN liabilities under
paragraph C(1), the obligation of CQN to pay the expenses thereof under
paragraph C(2), the confidentiality obligations of CQN and Aurora under
paragraph B(1)(c) and the exclusive purchase right and preservation of business
provisions under paragraph D hereof shall be binding upon them respectively when
this Letter of Intent shall be executed and delivered to Aurora.
If the foregoing meets with your approval, kindly so signify by signing and
returning the enclosed duplicate copy of this letter, whereupon this letter
shall constitute a Letter of Intent between the parties in accordance with the
terms and provisions set forth above.
We look forward to receiving your prompt advice.
Very truly yours,
AURORA ACQUISITIONS, INC.
By: __________________________
Xxxxxxx X. Xxxxxxx, President
Approved:_________ , 1999
CINEQUANON PICTURES INTERNATIONAL INC.
By: ___________________________
Xxxxxx Sales, President
SHAREHOLDERS OF CINEQUANON PICTURES INTERNATIONAL INC.
____________________________
Xxxxxx Sales
____________________________
Xxxxxxxx Xxxxxxx
