September 11, 2000
John E. Hollingshead
Chief Executive Officer
Modular Processing Technologies, Inc.
14019 Southwest Freeway
Suite 301
Sugar Land, TX 77478
Re: Acquisition of Modular Processing Technologies, Inc. by Affiliated
Resources Corporation
We are pleased to express the interest of Affiliated Resources Corporation,
a Colorado corporation ("Affiliated") to complete an acquisition of all the
outstanding securities of Modular Processing Technologies, Inc., a Nevada
corporation ("Modular") on the terms and conditions set forth herein (the
"Letter of Intent") and otherwise on such terms as may be mutually agreed by and
between Modular and Affiliated. The purpose of this Letter of Intent is to (i)
summarize the preliminary discussions and negotiations we have had regarding the
proposed acquisition, and (ii) to create a binding obligation on the part of
Affiliated to advance funds to Modular pursuant to the Funding Obligations
provided herein. Except for the Funding Obligations of Affiliated to advance
the Loan to Modular(which are expressly declared to be binding upon Affiliated)
and the obligations of Modular to repay the Loan as and to the extent due
pursuant to the Promissory Note attached to this Letter of Intent as Exhibit
"A," this letter is an expression solely of the parties' mutual interest and is
not in any way to be construed as a binding agreement. Any agreement between
Affiliated and Modular shall be subject to the execution of a definitive
purchase agreement and appropriate related documentation in forms satisfactory
to Affiliated and Modular, their counsel, and their respective shareholders and
board of directors (the "Acquisition Documents"). This correspondence is not
intended to be a comprehensive recitation of the terms of the acquisition nor is
it intended to be conclusive as to any and all matters discussed or omitted
unless noted to the contrary and the parties acknowledge that the definitive
agreements may require additional terms and conditions not necessarily provided
in this Letter of Intent.
<PAGE>
1. Purchase Price and Terms.
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The acquisition will be undertaken on the following terms and conditions:
A. It is anticipated that Affiliated will acquire all of the outstanding
common stock of Modular through the use of a new wholly owned acquisition
subsidiary corporation ("Newco"), on a federal income tax free reorganization
basis which is anticipated to qualify under Section 368(a)(1)(A) of the Internal
Revenue Code of 1986, as amended. The final federal income tax free acquisition
structure shall be determined by the parties prior to Closing. All outstanding
preferred stock, options, warrants, subscriptions and convertible instruments
which give any person or entity the right to acquire Modular common stock will
be canceled at the Closing. Any federal income tax liability relating to the
transaction contemplated in this Paragraph A, whether imposed on Modular,
Affiliated, or the shareholders of either corporation, shall be the sole and
exclusive responsibility of Affiliated unless expressly assumed by Modular in
writing prior to the Closing of the merger, and if any such tax liability shall
be imposed, Affiliated shall pay to the affected taxpayer an amount sufficient
to pay such tax liability after payment to the taxpayer of all taxes imposed on
the payment from Affiliated. Any federal income tax liability of the
transaction shall be the responsibility of Affiliated unless otherwise assumed
in writing by Modular.
A. Affiliated's due diligence must confirm that the following assets are to
be acquired (or shall remain the assets of Modular) (subject to funding and
escrow requirements as hereinafter provided) at closing of the transaction:
i. All contracts signed and in force, or identified in writing, with
Rosneftegastroy ("RNGS") to sell oil and gas related equipment, in particular
modular oil processing plants and remote field units in Russia, the former
Russian Republics, the Middle East, and China;
i. All contracts signed and in force, or identified in writing, to sell oil
and gas related equipment in the United States or elsewhere;
i. Any and all ownership, equity participation, and fees related to the
current, or identified projects and backlog of projects of Modular;
i. Any and all benefits of any funding commitments, direct funding, and/or
fundings arranged or committed to third parties for the benefit of Modular,
including but not limited to Fieldstone Services Corporation, World Bank
guaranties, and Eximbank Trade Finance;
i. All rights, title, and interest in contracts, options, or other rights to
acquire Val Verde Corporation or its assets, including but not limited to its
intellectual property, subject to reinstatement of the contracts.
i. The rights to representation of, or contractual benefits arising from,
any agreements now in place or identified in writing with the RGNS London Group;
i. Employment agreements for the key officers of Modular, including John E.
Hollingshead and John Watson, mutually satisfactory to Affiliated and the
individuals;
i. The contractual services of R.F. Bearden Associates, Inc., designating
Ron F. Bearden as the principal consultant to Modular; and
i. Any and all other identified or proprietary assets which materially
affect the business operations of Modular in the design, engineering, and
fabrication of modular and remote oil and gas processing units.
i. One hundred percent (100%) of the common stock of Val Verde
International, Inc., a Texas corporation.
A. At the Closing (if a 368(a)(1)(A)) merger, and in consideration for the
surrender by the Modular shareholders of their Modular stock, Affiliated shall
issue to the Modular shareholders an aggregate of 10,000,000 shares of fully
paid and non-assessable Affiliated Preferred Stock (the "Shares"), having the
following rights and preferences:
i. The Shares shall pay a progressive dividend, unless and until the Shares
are converted into Affiliated common stock, as follows:
(a) From the date of issuance through December 31, 2001, the Shares shall
pay a monthly dividend in the amount of $0.28667 per share. This dividend shall
be payable only out of Modular net income before any allocation or charge for
general and administrative expenses of Affiliated (if the amount of Modular net
income is less than the 8% dividend, the dividend shall be payable only up to
the amount of net income), and shall be cumulative only in the event the
dividend is not paid for a reason other than the net income limitation discussed
herein;
(b) For the period between January 1, 2001 and June 30, 2001, the Shares
shall pay a quarterly dividend equal to 50% of the net income of Modular before
any allocation or charge for general and administrative expenses of Affiliated;
(c) From July 1, 2001 and thereafter, the Shares shall pay a quarterly
dividend equal to 100% of the net income of Modular before any allocation or
charge for general and administrative expenses of Affiliated;
ii. The Shares shall be subject to a mandatory conversion, at the option and
notification by the Shareholders of Modular, upon (i) obtaining approval of the
Affiliated shareholders for said conversion, into Affiliated common stock at a
rate of 2.15 shares of common stock for every one (1) share of Preferred Stock;
(ii) any governmental approval that may be necessary; and (iii) delivery of a
legal opinion of securities counsel for Affiliated that the transaction is valid
and binding and that all necessary consents or approval have been obtained.
This conversion ratio will not be affected by any forward or reverse stock split
of the Affiliated common stock. All such Affiliated Common Stock issued upon
the conversion of any Shares shall be registered shares which are freely
tradable under all federal and State law. The foregoing conversion ratio shall
be adjusted if and to the extent required to protect the holders of the Shares
against dilution pursuant to customary anti-dilution protection provisions.
iii. The Preferred Shares shall be entitled to a liquidation preference
equal to the sum of (a) all accrued and unpaid dividends, plus (b) an amount
equal to the lesser of (1) all net income of Modular (determined without regard
to intercompany amounts owed to or from Affiliated) earned from the Closing
through the date of liquidation and (2) $43,000,000.
iv. Affiliated will issue an aggregate of 4,500,000 shares of common stock,
restricted in accordance with Rule 144 but with registration rights on Form S-8,
to the principals of R.F. Bearden Associates, Inc. who acted as consultants in
this transaction.
<PAGE>
D. Within five (5) days after execution of this Letter of Intent, and upon
execution of a Secured Promissory Note in substantially the form as set forth in
Exhibit A attached hereto, Affiliated shall loan the sum of $200,000.00 to
Modular. In addition, Affiliated shall provide Modular with $100,000.00 as a
loan or working capital upon the earlier of (i) five (5) business days after the
Closing or (ii) September 30, 2000, and thereafter as additional working capital
of $100,000.00 on or before October 30, 2000 and $100,000.00 on or before
November 30, 2000 (the "Escrow Period"). Thereafter, Affiliated shall provide,
by the 30th of each month, commencing December 30, 2000, additional working
capital of $100,000.00 per month for five (5) months aggregating $1,000,000.00
in capital advances for all funds pursuant to this Section 1(D) (the "Funding
Obligation"). The parties expressly intend and agree that the obligations of
Affiliated to advance monies to Modular pursuant to the foregoing Funding
Obligations shall be the enforceable, legal and binding commitment of
Affiliated. Further, the parties acknowledge and agree that it would be
difficult and/or impracticable to measure accurately the damages that would be
suffered by Modular if Affiliated breaches any one or more of the Funding
Obligations. Accordingly, if Affiliated fails to advance the funds required
under any one or more of the Funding Obligations, Modular shall retain as
liquidated damages, the sum of $200,000.00. The parties expressly agree that
the foregoing sum represents a good faith estimate of the amount required to
compensate Modular for damages that result from breach of the Funding
Obligations. The failure of Affiliated to provide the funds during the Escrow
Period shall be a breach of the acquisition agreements and shall entitle Modular
to rescind the transaction contingent upon repayment of the Affiliated advances,
less an offset or credit in the amount of $200,000.00 for the liquidated damages
due to Modular as provided above.
D. Affiliated represents that the current authorized number of shares of
common stock is 50,000,000 of which 25,635,358 had been issued and are
outstanding. No warrants, options, or other rights to shares of the company
exist except for as otherwise disclosed on Exhibit B attached hereto.
<PAGE>
2. Formal Agreement Contemplated
-------------------------------
The acquisition will be undertaken pursuant to a formal Acquisition
Agreement to be negotiated, executed, and delivered between the parties. Such
Acquisition Agreement will contain the terms and conditions of this Letter of
Intent, as well as representations, warranties, covenants and conditions usual
and customary in the transactions of this kind. Any dispute regarding
representations, warranties, covenants and conditions, usual and customary,
shall be resolved by reference to the current American Bar Association model
form of Stock Purchase Agreement with all non-monetary representations, where
appropriate, limited to the best knowledge of Affiliated or Modular.
Affiliated also agrees that at closing any material monetary obligations
due to creditors, whether affiliated or nonaffiliated, of a potential value
greater than $50,000.00, shall be comprised with a standstill agreement between
the creditor and Affiliated for a time period of not less than six months,
except lawsuits identified in Exhibit C hereto. During the negotiations of the
Acquisition Agreement, each of Affiliated and Modular and any of their assignees
or nominees will be subject to the provisions of this Letter of Intent. After
the execution of the Acquisition Agreement, the rights and obligations of the
parties will be determined solely by the Acquisition Agreement; however, any
representations, warranties, and covenants shall survive the closing for at
least one year. Except as expressly disclosed on Exhibit "C" attached to this
Letter of Intent, Affiliated represents and warrants, to the best of its
knowledge, that there are no other outstanding obligations or liabilities of
Affiliated, contingent or non-contingent, liquidated, unliquidated or otherwise,
nor any actions or suits pending or threatened which could result in any such
liability or obligation (with such representation extending to any and all such
obligations, liabilities, suits or actions regardless of whether it must be
accrued or noted on the financial statements of Affiliated pursuant to the
requirements of GAAP, the rules or regulations of the U.S. Securities and
Exchange commission, or otherwise). The parties hereto shall use their best
efforts to prepare the Acquisition Agreement within fifteen (15) days of
execution of this Letter of Intent. The acquisition shall be consummated upon
execution of the Acquisition Agreement by both parties and delivered to the
Escrow Agent (the "Closing").
2. Effective Dates.
----------------
The acquisition will be effective as of the Closing, and after any
necessary consents required by any governmental agency, regulatory authority, or
stock exchange has been obtained.
2. Additional Conditions to Closing.
-----------------------------------
Notwithstanding any other provision of this Letter of Intent, the Closing
of this transaction shall be subject to the satisfaction of the following
conditions:
By Affiliated.
--------------
A. The satisfactory review of all the books and materials of Modular by
Affiliated, its agents and advisors.
B. The negotiation and execution of the definitive acquisition agreement and
ancillary documents;
C. There is no material adverse change in the financial condition or
business affairs of Modular since the date of this Letter of Intent.
D. Three board of directors of the authorized five total directors for
Affiliated (currently only three directors) to be nominated and approved by
Modular.
By Modular.
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A. The satisfactory review of all the books and materials of Affiliated by
Modular, its agents and advisors.
B. The negotiation and execution of the definitive acquisition agreement and
ancillary documents;
C. There is no material adverse change in the financial condition or
business affairs of Affiliated since the date of this Letter of Intent.
D. There has been no issuance of any additional preferred or common stock of
Affiliated or contractual rights thereto, without the written consent of
Modular.
E. Any and all required governmental or other approvals (including any
required approvals of shareholders) shall have been obtained and remain in full
force and effect.
F. Modular shall have received an opinion of counsel or other evidence
satisfactory to Modular and its counsel that the transactions contemplated in
this Letter of Intent will qualify as a tax-free reorganization under the
provisions of Section 368(a)(1)(A) of the Internal Revenue Code of 1986, as
amended, and all regulatory, administrative and decisional authority thereunder.
G. As of the Closing, John E. Hollingshead shall be the duly elected and
incumbent President and Chief Executive Officer of both Modular and Affiliated.
2. Access to Information.
-----------------------
Each of Affiliated and Modular, together with each of their appropriate
attorneys, agents and representatives, shall be permitted to make the full and
complete investigation of the other and have full access to all of the books and
records of the other during reasonable business hours. Notwithstanding the
foregoing, such parties shall treat all such information as confidential and
shall not disclose such information without the prior consent of the other
party.
2. Costs.
-----
Each of Affiliated and Modular shall bear their own expenses including,
without limitation, fees of legal counsel, accountants and other consultants or
representatives incurred in connection with the transactions contemplated
hereby, whether or not they are consummated.
2. Conduct of Business.
---------------------
Until the Closing, or upon notice of termination by either party, neither
Modular nor Affiliated, shall take no action which results in any material
change or aggregate of changes in the condition, financial or otherwise, in the
business, operations, liquidity, property, assets, liabilities, obligations or
prospects of Modular or Affiliated.
2. Trade Secrets and Confidentiality.
------------------------------------
At no time shall either party disclose or make available to any person,
business concern or other entity any proprietary or confidential information to
anyone other than either party's authorized recipient of such disclosure under
the terms of this Letter of Intent.
2. Limitation of Liability.
-------------------------
In no event will either party be liable to the other for any claims or
damages including, without limitation, any lost revenues, lost profits, lost
savings, lost sales or other incidental, special, indirect or consequential
damages arising out of this Letter of Intent, except as otherwise provided
herein.
2. Escrow Agreement.
-----------------
Affiliated and Modular agree that all documents assigning or transferring
the rights and assets of Modular to Affiliated will be conditional and held in
trust by Brian A. Lebrecht, Esq. ("Escrow Agent") pending the timely fulfillment
of Affiliated's advance of $500,000.00 during the Escrow Period. Upon timely
funding to Affiliated, Modular will deliver an authorization letter to Escrow
Agent to release the documentation to Affiliated. The parties hereto agree to
enter into such indemnifications and irrevocable powers of attorneys as may be
necessary to indemnify Escrow Agent.
2. Termination by Modular
------------------------
Modular may rescind the merger with Newco after the Closing, upon delivery
of written notice from the CEO of Modular to the CEO of Affiliated at any time
prior to the completion of the Funding Period, as follows:
<PAGE>
A. Before end of Escrow Period.
If, before the expiration of the Escrow Period, a material default
occurs or is discovered by Modular, Modular has the irrevocable right to rescind
and terminate the transaction with offset of liquidated damages in the amount of
$200,000.00 as hereinbefore provided.
B. After Escrow Period and Before Funding Period.
In the event of a material breach or discovery of a material
misrepresentation by Affiliated subsequent to the close of the Escrow Period,
but prior to the completion of the Funding Period, Affiliated has the
irrevocable right to rescind and terminate the transaction without offset of
liquidated damages in the amount of $200,000.00 as hereinbefore provided and
repayment of all advances by Affiliated, plus interest at 10% from each funding.
C. Termination by Modular Before Completion of Funding
In the sole discretion of Modular, in the event of a discovery of an
undisclosed obligation in excess of $250,000.00, with or without default by
Affiliated, prior to the completion of the Funding Period, Modular may elect to
terminate and/or rescind this transaction upon notice to Affiliated and
repayment to affiliated of any advances with interest at 12% and tender of 5% of
the common stock of Modular in complete satisfaction of all damages or claims
costs or expenses of Affiliated within 20 days of the notice.
12. Arbitration.
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The parties hereby agree that all disputes, claims and controversies
between them, whether individual, joint, or class in nature, arising from this
Letter of Intent, the acquisition documents, or otherwise, including, without
limitation, contract and tort disputes, shall be arbitrated pursuant to the
Rules of the American Arbitration Association upon the request of either party
to be conducted in Houston, Harris County, Texas. Judgment upon any award
rendered by any arbitrator may be entered in any court having jurisdiction.
Nothing in this Letter of Intent, or any of the other acquisition documents or
otherwise shall preclude any party from seeking equitable relief from a court of
competent jurisdiction. Statute of limitations, estoppel, waiver, laches, and
other similar doctrines which would otherwise be applicable in an action brought
by a party shall be applicable in any arbitration proceeding, and the
commencement of an arbitration proceeding shall be deemed the commencement of an
action for these purposes. The Federal Arbitration Act shall apply to the
construction, interpretation, and enforcement of this arbitration provision.
13. Miscellaneous Provisions.
-------------------------
13.1 RELATIONSHIP OF PARTIES. The parties hereto agree and acknowledge
that the relationship between Affiliated and Modular shall in no way be
construed as either party being an agent or representative of the other in any
dealings in which either party may have with any other person or entity, and
Affiliated and Modular has no power to act for or to legally bind the other in
any such transaction.
13.2 ASSIGNABILITY. Assignment of this Letter of Intent by either party
must be approved in writing by the other party.
13.3 COUNTERPARTS. This Letter of Intent may be executed in several
counterparts, all of which taken together shall constitute one single Letter of
Intent between the parties hereto.
13.4 AUTHORITY AND ACCEPTANCE. Each of the undersigned parties warrants and
that he has full authority to sign and execute this Letter of Intent.
<PAGE>
If this Letter of Intent represents your understanding of the contemplated
transaction, please execute a copy of this statement and return it to this
office.
Modular Processing Technologies, Inc. Affiliated Resources Corporation
___________________________________ ________________________________
John E. Hollingshead Peter C. Vanucci
President Chairman and CEO
