TAX SHARING AGREEMENT
---------------------
Tax Sharing Agreement ("Agreement") dated this
twenty-first day of April, 1998, by and among Diamond Brands
Operating Corp. (the "Borrower") and each of the subsidiaries
listed on Schedule I hereto (each a "Subsidiary").
RECITALS
--------
1. For purposes of applying the provisions of this
Agreement, Borrower and the Subsidiaries shall be treated as the
only members ("Members") of an affiliated group (the "Affiliated
Group"), as defined in Section 1504(a) of the Internal Revenue
Code of 1986 (the "Code"), for the taxable year beginning April
22, 1998, of which Borrower is the parent. All references in this
Agreement to provisions of the Code or the Treasury Regulations
promulgated thereunder shall include any corresponding successor
provisions.
2. It is the intent and desire of the parties hereto
that a method be established for allocating the federal and state
consolidated tax liability of the Affiliated Group among its
Members, for reimbursing Borrower for payment of such tax
liability, and to provide for the allocation and payment of any
refund arising from a carry-back of losses or tax credits from
subsequent taxable years.
AGREEMENT
---------
Now, therefore, in consideration of the mutual
covenants and promises contained herein, the parties hereto agree
as follows:
1. Allocation of Tax Liability. Borrower and
Subsidiaries agree that the consolidated tax liability for each
year beginning with 1998, determined in accordance with Treasury
Regulations Section 1.1502-2, shall be apportioned among them in
accordance with the
provisions of Treasury Regulations Sections 1.1552-1(a)(2) and
1.1502-33(d)(2). Accordingly, the tax liability shall be
allocated to the several Members on the basis of the percentage
of the total tax that the tax of such Member if computed on a
separate return would bear to the total amount of taxes for all
Members so computed pursuant to Section 1552(a)(2) of the Code
and Treasury Regulations Section 1.1552-1(a)(2). If a Member (the
"Tax Attribute Member") is unable to absorb a tax attribute on a
separate return basis in one year but is able to absorb that
attribute on a separate return basis in a subsequent year a
portion of the consolidated tax liability which otherwise would
have been allocated to the Tax Attribute Member in the subsequent
year under Treasury Regulation Section 1.1552-1(a)(2) will
instead be reallocated among the other Members of the Affiliated
Group, using the principles of Treasury Regulations Section
1.1502- 33(d)(2). For purposes of this Agreement, the
consolidated tax liability shall include any liability for
alternative minimum tax.
3. Payment of Tax. Each Subsidiary shall pay to
Borrower no later than ten business days before the date on which
the Affiliated Group's consolidated income tax return is required
to be filed (taking account of any extensions thereof) an amount
equal to the Subsidiary's allocated consolidated federal income
tax liability as determined under paragraph 2 hereof, plus its
ratable share of any interest or penalties shown due on the
return (determined by multiplying such interest or penalties by a
fraction, the numerator of which equals the portion of the
Affiliated Group's tax liability allocated to such Member (before
interest or penalties) and the denominator of which equals the
Affiliated Group's tax liability (before interest or penalties))
less (in the case of a Tax Attribute Member) the amount of the
consolidated tax liability which otherwise would have been
allocated to the Tax Attribute Member pursuant to Treasury
Regulation Section 1.1552-1(a)(2) but which was reallocated from
the Tax Attribute Member pursuant to Treasury Regulation Section
1.1502-33(d)(2) in a prior taxable year.
4. Carryforward/Carryback of Losses and Credits. If
part or all of an unused loss or tax credit is allocated to a
Member pursuant to Treasury Regulations Sections 1.1502-21T or
1.1502-79, and it is carried back or forward to a year in which
such Member filed a separate return or a consolidated return with
another affiliated group, any refund or reduction in tax
liability arising from the carryback or carryover shall be
retained by such Member. Notwithstanding the foregoing, Borrower
shall determine whether an election shall be made (i) not to
carry back any portion of any such loss arising in a consolidated
return year (including any portion allocated to a Member under
Treasury Regulations Section 1.1502-21T) in accordance with Code
Section 172(b)(3), and (ii) to reattribute to itself any portion
of any loss attributable to the disposition of the stock of a
Subsidiary, to the extent permitted by Treasury Regulations
Section 1.1502-20(g). Each Subsidiary agrees to join with
Borrower in filing any necessary elections under Treasury
Regulations Section 1.1502-20(g).
5. Estimated Tax Payments. If the Affiliated Group is
required to make estimated federal income tax payments (including
(i) payment due at the time any extension of time is sought for
the filing of the Affiliated Group's federal income tax return
and (ii) any estimated tax payments pursuant to any other tax
sharing agreement), each Subsidiary shall, if requested by
Borrower, pay to Borrower, no later than ten business days before
the date each estimated tax payment is to be made by Borrower,
that percentage of the estimated tax payment that equals the
percentage which the estimated separate return tax liability of
such Subsidiary bears to the aggregate of the Members' estimated
separate return tax liabilities for the taxable year (computed as
provided in Treasury Regulations Section 1.1552-1(a)(2)(ii)).
Such estimates
shall be determined by Borrower. Any estimated tax payments made
by a Subsidiary under this paragraph 5 with respect to any
taxable year shall be applied to reduce the amount, if any, owed
by the Subsidiary under paragraph 3 hereof with respect to such
year. Any excess of such estimated payments by a Subsidiary over
the amount described in paragraph 3 for such year shall be repaid
by Borrower to the Subsidiary no later than twenty business days
after the date of filing of the consolidated return for such
taxable year or, to the extent such excess represents all or a
part of a tax refund to be received by the Affiliated Group, no
later than twenty business days after the receipt of the refund.
6. Adjustments to Tax Liability. If the consolidated
tax liability is adjusted for any taxable period, whether
pursuant to an amended return, a claim for refund, a tax audit by
the Internal Revenue Service or some other reason, the liability
of each Member shall be recomputed to give effect to such
adjustments, and in the case of a refund, Borrower shall make
payment to each Member for its share of the refund, determined in
the same manner as in paragraph 2 above, within twenty business
days after the refund is received by Borrower, and in the case of
an increase in tax liability, each Member shall pay to Borrower
its allocable share of such increased tax liability (including
interest and penalties) within ten business days after receiving
notice of such liability from Borrower. The parties recognize
that a recomputation of the consolidated tax liability for any
taxable year under this paragraph 6 is not necessarily the final
liability for such year, and such liability may be recomputed
more than once.
7. New Members of Affiliated Group. If during a
consolidated return period Borrower or any Subsidiary acquires or
organizes another corporation that is required to be included in
the Affiliated Group's consolidated return, then such corporation
shall join in and be bound by this Agreement.
8. Termination of Agreement. This Agreement shall
apply to all taxable periods as to which a consolidated return is
filed by Borrower and any Subsidiary unless Borrower and the
Subsidiaries agree in writing to terminate the Agreement, except
that this Agreement shall be terminated with respect to any
Subsidiary that ceases to be included in the Affiliated Group but
continues to be a corporation subject to federal income tax
("Former Member"). Notwithstanding any such termination, this
Agreement shall continue in effect with respect to all taxable
periods prior to termination, including any payments or refunds
relating to such periods.
9. Post-Consolidated Return Period. Notwithstanding
the termination of this Agreement with respect to one or more
Subsidiaries, Borrower and any Former Member shall furnish each
other with all information and assistance as shall reasonably be
requested (including, without limitation, returns, supporting
schedules, work papers, correspondence and other documents)
relating to the tax liability of the Affiliated Group or such
Former Member for any taxable year in which the Former Member was
included in the Affiliated Group. Moreover, Borrower and the
Former Member shall furnish each other with information and
assistance required, and shall take all steps necessary, to apply
for and obtain the benefit of any carryback of a net operating or
capital loss or any investment, foreign tax or other credit of
the Former Member to a taxable year in which the former Member
was included in the Affiliated Group and a consolidated federal
income tax return was filed with respect to the income of the
Affiliated Group.
10. Audits and Refund Claims. Borrower and a Former
Member shall also consult and furnish each other with information
concerning the status of any tax audit or tax refund claim
relating to a taxable year in which the Former Member was
included in the
Affiliated Group and a consolidated federal income tax was filed
with respect to the income of the Affiliated Group. Borrower
shall have the right to make the final determination as to the
response of the Affiliated Group to any audit and shall have the
sole right to control, at its own expense, any contest of any
change proposed and any proposed disallowance of a refund claim
by the Internal Revenue Service through the Appeals Office of the
Internal Revenue Service and the courts in connection with any
taxable year for which this Agreement is in effect.
11. Settlement of Disputes. A dispute or difference
between Borrower and a Former Member with respect to the
operation or interpretation of this Agreement shall be decided by
three arbitrators. Borrower and the Former Member shall each
select one arbitrator and the arbitrators selected by the parties
shall select a third arbitrator. The decision of such arbitrators
shall be final. The fees of such arbitrators shall be borne
equally by Borrower and the Former Member.
12. Elections. Borrower shall have the sole authority
to make any or all elections available under the Code, Treasury
Regulations and any applicable state or local income tax code,
law or statute.
13. State and Local Income Taxes. The principles
underlying the rights and obligations hereunder of the Members in
respect of federal income taxes shall be applied in respect of
any state or local tax (however denominated) based on or measured
by all or any part of the net income or loss of the Affiliated
Group or several of its Members (a "Combined Tax"). All of the
procedural and timing requirements of this Agreement applicable
to federal income taxes shall be equally applicable to any
Combined Tax, with appropriate adjustments thereto to reflect the
differences, if any, in corresponding provisions of the
applicable income tax code, law or statute governing any such
Combined Tax and any administrative provisions relating thereto.
14. Entire Agreement. This Agreement contains the
entire understanding of the parties hereto with respect to the
subject matter contained herein. No alteration, amendment or
modification of any of the terms of this Agreement shall be valid
unless made by an instrument signed in writing by an authorized
officer of each party and in accordance with the provisions set
forth in Section 7.15 of the Credit Agreement, dated as of April
21, 1998 (as amended, supplement or otherwise modified from time
to time) among the Borrower, the lenders from time to time party
thereto, Xxxxx Fargo Bank, N.A., as administrative agent, DLJ
Capital Funding, Inc., as syndication agent, and Xxxxxx Xxxxxxx
Senior Funding, Inc., as Documentation Agent.
15. Binding Agreement. This Agreement shall be binding
upon and inure to the benefit of each party hereto and its
respective successors and assigns.
16. Governing Law. This Agreement shall be governed by
and interpreted in accordance with the laws of the State of New
York.
17. Counterparts. This Agreement may be executed
simultaneously 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.
IN WITNESS WHEREOF, the parties hereto have caused
their names to be subscribed and executed by their respective
authorized officers on the date first appearing above.
DIAMOND BRANDS OPERATING CORP.
By:___________________________
Name:
Title:
EACH OF THE SUBSIDIARIES
LISTED ON SCHEDULE I HERETO
By:_________________________
Name:
Title:
SCHEDULE I
----------
Subsidiaries
------------
Xxxxxxx, Inc.
Empire Candle, Inc.
