January 25, 1999
Xx. Xxxx X. Xxxxxxx
Xxxxxx Scientific International, Inc.
Xxxxxxx Xxxx
Xxxxxxx, XX 00000
Re: Tax Sharing Agreements
Dear Xxxx:
In connection with the examination of the 1990 and 1991 consolidated
federal income tax returns of The Xxxxxx Group, Inc. ("Xxxxxx"), numerous
adjustments to taxable income were proposed by the examination team in their
30-day letter dated May 16, 1995. A protest was filed with the Appeals Division
on August 9, 1995, and during the last 28 months numerous discussions were held
with the Appeals Officers assigned on the case. On October 14, 1998, Xxxxxx
Xxxxxxx, the Appeals Team Chief, sent a proposed closing agreement which would
settle the issues in the case.
When we indicated a tentative willingness to settle the case, Xx. Xxxxxxx
prepared calculations showing the tax effect of the proposal. A copy of these
calculations is attached as Exhibit A. The calculations have been reviewed by
Xxxx Xxxxx, as well as by Xxxx Xxxxx of Deloitte & Touche. These calculations
show a tax due, before giving effect to carry back of 1992 net operating losses,
of $1,916,184. After giving effect to payments made with the tax return, the
payment made by Abex with respect to the tax shown as being due for "agreed"
issues and the reduction in tax resulting from the carry back of the 1992 net
operating losses, there is additional tax due in the amount of $280,223, plus
interest of approximately $464,000.
As we finalize the appeals settlement with the Internal Revenue Service, we
believe it is everyone's interest to agree as to the responsibilities of
California Coastal Communities, Inc. (formerly known as Xxxx Real Estate Group,
Inc.) ("CCC"), Xxxxxx and Xxxxxx Scientific International, Inc. ("Xxxxxx") under
all tax sharing agreements between them, including (but not limited to) the
following agreements: (i) the Tax Sharing Agreement, dated December 17, 1991,
between The Xxxxxx Group, Inc. and Xxxxxx Scientific International, Inc.; (ii)
the Tax Sharing Agreement dated as of December 18, 1989, between The Xxxxxx
Group, Inc. and New Xxxxxx, Inc.; and (iii) the Tax Sharing Agreement dated as
of December 15, 1988, between The Xxxxxx Group, Inc. and Xxxxxx Newco, Inc. (all
such tax sharing agreements being referred to collectively hereinafter as the
"Tax Sharing Agreements"). Among other things, the Tax Sharing Agreements
provide for indemnification for taxes in periods ending on or before the
disaffiliation date.
Xx. Xxxx X. Xxxxxxx
January 25, 1999
Page 2
We understand and agree that:
(1) Xxxxxx and/or CCC will be obligated to pay any tax due, including any
federal and/or state income tax and/or franchise tax liability together
with interest and any penalties thereon, resulting from the final
settlement of the 1990 and 1991 Xxxxxx Group, Inc. federal income tax
audit;
(2) There are no current or future payments required to be made by Xxxxxx
or CCC (or any of their affiliates) to Xxxxxx (or any of its
affiliates) under the Tax Sharing Agreements for tax matters other than
those referred to in Item 1 above;
(3) There are no current or future payments required to be made by Xxxxxx
(or any of its affiliates) to Xxxxxx or CCC (or any of their
affiliates) under the Tax Sharing Agreements;
(4) CCC intends to take the position for state income tax and/or franchise
tax purposes that the sale of the IL Division by Xxxxxx Scientific
Company was a "busted Section 351" transaction as per the position
taken on the consolidated federal and state returns as originally filed
for 1991. Xxxxxx agrees, on behalf of itself and its affiliates, to
provide CCC, Deloitte & Touche and outside counsel with powers of
attorney (and any necessary authorization) in order to allow CCC,
Deloitte & Touche and outside counsel to act on behalf of Xxxxxx (and
its affiliates) with regard to this position in each pertinent
jurisdiction. No such power may be revoked by Xxxxxx, unless mutually
agreed by Xxxxxx and CCC. Xxxxxx agrees that (i) Xxxxxx shall
immediately notify CCC of any proposed audit, adjustment or assessment
by any state taxing authority with respect to state income and/or
franchise taxes for the 1990 or 1991 taxable years; (ii) CCC shall have
the full authority and discretion regarding the handling of all
administrative proceedings and litigation on Xxxxxx'x (and its
affiliates') behalf with respect to state income and/or franchise taxes
for the 1990 and 1991 taxable years, which shall be at CCC's expense;
(iii) CCC shall immediately notify Xxxxxx of any proposed audit,
adjustment or assessment by any state taxing authority with respect to
Xxxxxx state income and/or franchise taxes for the 1990 or 1991 taxable
years; (iv) CCC shall notify Xxxxxx within 10 business days of receipt
of any proposed audit, adjustment or assessment notice by any state
taxing authority with respect to Xxxxxx and whether or not CCC will
appeal or agree to such notice; (v) CCC shall provide Xxxxxx notice of
and an opportunity to attend any meeting with the relevant tax
authorities regarding any claim, audit or proceeding under CCC's
indemnity to Xxxxxx; (vi) CCC will not agree to any adjustments that
affect taxable income, or taxes due for these years, without the prior
written consent of Xxxxxx, which consent shall not be unreasonably
withheld; and that (vii) neither Xxxxxx nor any affiliate of Xxxxxx
shall take any position inconsistent with its reporting position for
the 1990 and 1991 taxable years in any filing or communication with any
state taxing authority or agree to any settlement of any state income
and/or
Xx. Xxxx X. Xxxxxxx
January 25, 1999
Page 3
franchise taxes due for these years without CCC's written consent,
which consent shall not be unreasonably withheld. CCC agrees to have
prepared on Xxxxxx'x (and its affiliates') behalf and at CCC's expense,
a notification of federal audit adjustments with respect to 1990 and
1991 in each state where Xxxxxx is required to file such notification.
Xxxxxx shall assist CCC in preparing or drafting the required filings
and provide CCC with any information required on a timely basis in
order to make such filings; the required filings shall be signed by an
officer of Xxxxxx and will be filed by Xxxxxx with the appropriate
state jurisdictions after approval by CCC, but in no event later than
required to be filed with the respective jurisdiction. It is understood
and agreed that Deloitte & Touche will sign the notices or returns as
preparers;
(5) CCC shall pay the amount of any state tax liability (including interest
and any penalties) promptly upon receipt by Xxxxxx (or CCC) of a notice
that the tax is due from the pertinent state taxing authority; provided
that in the event CCC duly protests the amount due the payment shall
not be due until there is a Final Determination, as defined below, of
the amount of tax due (after all administrative procedures and
litigation are exhausted, CCC has elected not to pursue any remaining
administrative procedures or litigation, or payment is required to be
made (in any state(s) where payment is a condition precedent to
pursuing any appeals), whichever is first to occur (a "Final
Determination"). If CCC elects under 4 (iv) above to appeal or litigate
any proposed audit, adjustment or assessment notice issued by any state
taxing authority, then CCC must provide Xxxxxx with the appropriate
appeal or litigation documentation signed by Deloitte & Touche or CCC's
outside counsel, for Xxxxxx'x signature and filing five (5) days prior
to the appropriate filing date for such appeal or litigation deadline.
Xxxxxx shall be obligated to file the appeal documentation by the due
date for such filing. If CCC does not provide Xxxxxx with the appeal
documentation 5 days prior to the due date, then CCC is deemed to have
a Final Determination of the amount of tax due.
(6) CCC shall provide Xxxxxx with a letter of credit in favor of Xxxxxx in
the amount of $3.0 million substantially in the form set forth in the
attached Exhibit B as partial security for payment of CCC's obligations
under the Tax Sharing Agreements as modified by this letter. Xxxxxx
shall reimburse CCC for any letter of credit fee actually incurred in
providing such letter of credit up to a maximum amount of $30,000 per
year, payable (i) upon receipt by Xxxxxx of the executed letter of
credit and (ii) 10 business days prior to the anniversary date of the
letter of credit. Xxxxxx shall only be entitled to draw on the letter
of credit to the extent of any state tax liability (including interest
and any penalties) due as the result of a Final Determination or upon
receipt of notice of CCC's filing of a petition for relief under the
United States Bankruptcy Code. Xxxxxx shall promptly apply all
Xx. Xxxx X. Xxxxxxx
January 25, 1999
Page 4
amounts drawn under the letter of credit towards payment of such state
tax liability (including interest and any penalties). Notwithstanding
the foregoing, however, CCC's obligations under the Tax Sharing
Agreements shall not be limited or reduced in any way as a result of
its providing said letter of credit, or as the result of any provision
of such letter of credit (including any provision relating to
extensions of the letter of credit); and
(7) This Agreement shall be governed by the laws of the state of Delaware,
without regard to the principals of conflict of laws thereof.
If you are in agreement with the above statements regarding Xxxxxx'x,
Xxxxxx'x and CCC's liabilities pursuant to the Tax Sharing Agreements, please
sign and date the copy of this letter and return it via overnight delivery to
the undersigned.
Very truly yours,
/s/ Xxxxxxx X. Xxxxxx
------------------------------
Xxxxxxx X. Xxxxxx
President and
Chief Executive Officer
-------------------------------------------------------------------------------
We have reviewed the attachments to this letter, together with the Tax
Sharing Agreements, and agree that, if the audit is settled in the
manner proposed by the Internal Revenue Service, Xxxxxx and CCC (and
their affiliates) have no further liability for payments to Xxxxxx (or
any of its affiliates) with respect to taxes other than those referred
to in Items 1,5 and 6 above, and further that Xxxxxx and any of its
affiliates have no claims against Xxxxxx or CCC for tax payments other
than those referred to in Items 1,5 and 6 above. We further agree with
the other matters set forth in Items 2,3,4 and 7 above.
January 27, 1999 /s/ Xxxx X. Xxxxxxx
--------------------------- ------------------------------
Dated Xxxx X. Xxxxxxx
Chief Financial Officer
------------------------------
Title
EXHIBIT A
Income Tax Changes
Schedule 1
12/31/90 12/31/91
Consolidated taxable income per return
(Before NOL carrybacks/carryforwards) ($64,621,292) $177,275,330
Previous adjustments:
Partial Agreement - Exam RAR
Schedule 1-A $ 5,575,126 $7,774,963
Separate deductions/adjustments:
Environmental Tax Deduction ($240,747)
------------ ------------
Consolidated taxable income as
previously adjusted ($59,046,166) $184,809,546
(Before NOL carrybacks/carryforwards)
RAR unagreed adjustments
(Before NOL carrybacks/carryforwards)
Schedule 1-B $98,776,164 $14,162,863
Separate deductions/adjustments:
Environmental Tax Deduction ($91,771) ($26,406)
Environmental Tax Deduction $9,411
------------ ------------
Consolidated taxable income per
unagreed RAR $39,638,227 $198,955,214
(Before NOL carrybacks/carryforwards)
Appeals settlement
(Before NOL carrybacks/carryforwards)
Schedule 1-C ($84,081,675) ($929,881)
Separate deductions/adjustments:
Environmental Tax Deduction $91,771 $1,116
------------ ------------
Consolidated TI per Appeals ($44,351,677) $198,026,449
(Before NOL carrybacks/carryforwards)
Net operating loss deduction
Carryforward - Schedule 2 ($108,499,914)
------------ ------------
Consolidated TI per Appeals
(after NOL C/B, C/F) ($44,351,677) $89,526,535
------------ ------------
------------ ------------
Income Tax Changes
Schedule 1
12/31/90 12/31/91
Consolidated taxable income per Appeals ($44,351,677) $89,526,535
------------ ------------
------------ ------------
Tax on above $0 $30,439,022
Less credits:
Foreign tax credit - Schedule 13 $30,439,022
------------ ------------
Tax less credits $0 $0
Plus:
Alternative minimum tax - Schedule 10 $5,947,928
Environmental Tax - Schedule 11 $256,626
------------ ------------
Total corrected tax liability $0 $6,204,552
Total tax as previously adjusted
- Schedule 3 $0 $4,288,368
------------ ------------
Deficiency (overassessment) $0 $1,916,184
------------ ------------
------------ ------------
EXHIBIT B
Irrevocable Standby
Letter of Credit
No.
Issuance Date: ________________
Expiration Date: _______________
Beneficiary:
Xxxxxx Scientific International, Inc.
Xxxxxxx Xxxx
Xxxxxxx, XX 00000
Ladies and Gentlemen:
We hereby establish our Irrevocable Standby Letter of Credit No. ______
in your favor for the account of California Coastal Communities, Inc.
effective immediately for a maximum amount of USD 3,000,000.00 (US Dollars
three million) available for payment at sight by your draft(s) drawn on us
when accompanied by the following document:
Beneficiary's dated statement purportedly signed by one of its officers
worded as follows: "This certifies that Xxxxxx Scientific International
Inc., or any of its affiliates, is entitled to draw upon this Letter of
Credit in the amount of [$dollars] pursuant to paragraph 6 of the Letter
Agreement between California Coastal Communities, Inc. and Xxxxxx Scientific
International, Inc. dated January 25, 1999."
The amount of this Letter of Credit shall be reduced by
a. the amount of any drawings under this Letter of Credit
b. the amount of any reductions acceptable to the Beneficiary
by amendment.
Partial drawings are permitted.
It is a condition of this Letter of Credit that it will be automatically
renewed for a one year period upon the expiration date set forth above and
upon each anniversary of such date, (however in no event will this Letter of
Credit be extended beyond the final expiration date of December 31, 2000
except to the
Continued on Page Two
Page Two
L/C No. __________
extent of the lesser of (1) any amount of tax and interest potentially due
with respect to matters then being appealed, or (2) the then remaining
balance of the Letter of Credit) unless 60 days prior to the expiration date,
or prior to any anniversary of such date, we notify you in writing by
certified mail, return receipt requested mail, or by courier, that we elect
not to so renew this Letter of Credit.
Upon receipt of our notice of election not to renew this Letter of
Credit you may draw on us for up to the balance remaining and within the then
applicable expiration date by your sight draft drawn on us when accompanied
by the following document:
Beneficiary's dated statement purportedly signed by one of its officers
worded as follows: "The amount of this drawing USD _________ under
PaineWebber Incorporated Letter of Credit No. ___________ represents funds
due us as we have received notice from PaineWebber Incorporated of their
election not to renew this Letter of Credit, the obligations to Xxxxxx
Scientific International, Inc. remain outstanding, and we have not received
an acceptable replacement Letter of Credit."
Drafts and Documents must be presented for payment at our office located
at 0000 Xxxxxx Xxxx., 0xx Xxxxx, Xxxxxxxxx, XX 00000 to the attention of the
Letter of Credit Dept. on or before the expiration date specified herein.
This credit is subject to the Uniform Customs and Practice for
Documentary Credits (1993 revision) International Chamber of Commerce
Publication No. 500, and to the extent not inconsistent therewith, the law of
the State of New York, including Article 5 of the New York Uniform Commercial
Code.
We hereby engage with you to honor drafts and documents drawn under and
in compliance with the terms of this credit.
All communications to us with respect to this L/C must be addressed to
our office located at 0000 Xxxxxx Xxxx., 0xx Xxxxx, Xxxxxxxxx, X.X. 00000 to
the attention of the Letter of Credit Dept.
Very Truly Yours,
Authorized Signature
