FINE AIR LINES, INC.
TAX ALLOCATION AND
INDEMNIFICATION AGREEMENT
THIS FINE AIR LINES, INC. TAX ALLOCATION AND INDEMNIFICATION AGREEMENT
is entered into as of this 28th day of July, 1997 between X. XXXXX FINE and
XXXXX XXXXXX FINE ("Stockholders"), and FINE AIR LINES, INC., a Florida
corporation (the "Company").
W I T N E S S E T H :
WHEREAS, Stockholders own five hundred (500) shares each of the sole
class of stock in the Company, constituting one hundred percent (100%) of the
total outstanding shares of stock in the Company;
WHEREAS, pursuant to a proposed contribution of 100% of the Agro Air
Associates, Inc. stock to the Company and the subsequent offering of the
Company's stock to the public, the Company's subchapter S corporation status
shall be terminated affirmatively as of the effective date of such public
offering;
WHEREAS, such termination, under Section 1362(e) of the Internal
Revenue Code of 1986, as amended (the "Code"), will result in the Company's 1997
calendar tax year being divided in two (2) separate tax years, the first of
which begins on January 1, 1997 and ends on the day immediately preceding the
day such termination is effective (the "1997 S Short Year") and the second of
which begins on the day such termination is effective and ends on December 31,
1997 (the "1997 C Short Year"); and
WHEREAS, pursuant to certain Board of Directors resolutions of even
date herewith, the Company shall make aggregate distributions (the
"Distributions") to Stockholders in amounts intended to equal the amount of the
Company's previously undistributed "accumulated adjustments account" (the "AAA
Amount"), as that term is defined in Code Section 1368(e)(1), calculated taking
into account all items of income, gain, deduction, loss and credit through the
last day of the Company's 1997 S Short Year (as that amount otherwise would be
shown on the Company's final Form 1120S immediately prior to any such additional
Distributions); and
WHEREAS, the Company and Stockholders have determined it to be in their
mutual best interests to set forth in this Agreement certain provisions designed
to clarify which adjustments to the AAA Amount shall be taken into account in
order to achieve the intended results of the Distributions totaling the amount
of Stockholders' respective shares of the Company's AAA Amount through the end
of its 1997 S Short Year; and
WHEREAS, in consideration for the past services of the Stockholders to
the Company which have not been fully compensated heretofore, the Company wishes
to indemnify the Stockholders for any net additional tax liabilities (1) that
arise from subsequent Audit adjustments of the Company by
any applicable taxing authority and (2) which tax liabilities are not (a)
attributable to the AAA Amount originally determined by the Company (upon the
filing of its 1997 S Short Year tax return) and (b) the subject of the
Distributions contemplated hereunder, PROVIDED, HOWEVER, that the Stockholders
also waive any claim to additional Distributions with respect to any such
increases in the AAA Amount pursuant to such Audit adjustments and the Company
correspondingly waives its right to receive a return of any net reductions in
the AAA Amount pursuant to any such Audit adjustments;
NOW, THEREFORE, in consideration of the mutual promises contained
herein, Stockholders and the Company hereby agree as follows:
SECTION 1. DEFINITIONS. For purposes of this Agreement:
1.1 "Additional Amounts" means any interest, penalties or additions to
tax imposed or assessed by the Internal Revenue Service (the "Service") or any
other taxing authority, as a result of any liability for Taxes and/or Additional
Taxes, as defined herein.
1.2 "Additional Taxes" means, for any Pre-Closing Date Period, as that
term is defined herein, the excess of (i) the product of (A) forty percent (40%)
and (B) the amount of income of the Company taxable to Stockholders under Code
Section 1366 as reported for federal income tax purposes on the Company's Forms
1120S for the 1997 S Short Year or any other tax year in the Pre-Closing Date
Period, as the case may be, calculated after taking into account the net amount
of any adjustment by the Service or any other taxing authority to such reported
amounts (including the benefits or costs of any Company Adjustment not taken
into account in determining the net Stockholder Adjustment, but excluding any
such net Stockholder Adjustment) constituting a "determination" within the
meaning of Code Section 1313 or comparable provision of state or city law over
(ii) an amount equal to the product of (x) forty percent (40%) and (y) the
amount of income of the Company taxable to the Stockholders as originally
reported on the Company's Forms 1120S for the 1997 S Short Year or any other tax
year in the Pre-Closing Date Period, as the case may be.
1.3 "Audit" means any audit, investigation or exam by the Service or
any other taxing authority (including, but not limited to, the current Service
Audit of the Company's 1993, 1994 and 1995 tax years).
1.4 "Company Adjustment" means any adjustment by the Service or any
other taxing authority of income, gain, deduction, loss, credit or other
allowance (i) that causes any item of net income of the Company that was taken
into account and reported by the Company on its Forms 1120S for federal income
tax purposes for the 1997 S Short Year or any other tax year in the Pre-Closing
Date Period, as the case may be, to be included in taxable income in a
Post-Closing Date Period and not to be included in taxable income in a
Pre-Closing Date period, (ii) that causes any deduction, loss, credit or other
allowance of the Company, which deduction, credit or other allowance has the
effect of reducing taxable income that was taken into account and reported by
the Company on its Form 1120 for federal income tax purposes in a Post-Closing
Date Period, to be taken into account in a Pre-Closing Date Period and not to be
taken into account in a Post-Closing Date Period, and/or (iii) which results in
Taxes and/or Additional Amounts in respect thereof being imposed on Company as a
result of the Company not qualifying as an S corporation for any Pre-Closing
Date Period.
2
1.5 "Indemnitees" means the Stockholders, PROVIDED, HOWEVER, that all
rights of the Indemnitees under SECTION 2 hereof may be exercised only by the
Stockholders Representative.
1.6 "Indemnitor" means the Company.
1.7 "Post-Closing Date Period" means any taxable year of the Company
ending after the first day of the 1997 C short tax year.
1.8 "Pre-Closing Date Period" means any taxable year of the Company
ending before the first day of the 1997 C short tax year .
1.9 "Stockholders Adjustment" means any net adjustment by the Service
or any other taxing authority of income, gain, deduction, loss, credit or other
allowance (i) that causes any item of net income of the Company that originally
was taken into account and reported by the Company on its Forms 1120 for federal
income tax purposes for any tax year in the Post-Closing Date Period to be
included in taxable income in any tax year in the Pre-Closing Date Period and
not to be included in taxable income in a Post-Closing Date period or (ii) that
causes any deduction, loss, credit or other allowance of the Company, which
deduction, credit or other allowance has the effect of reducing taxable income
that was taken into account and reported by the Company on its Form 1120S for
federal income tax purposes in any tax year in the Pre-Closing Date Period, to
be taken into account in any tax year in the Post-Closing Date Period and not to
be taken into account in a tax year in the Pre-Closing Date Period; provided,
however, that such Stockholders Adjustment shall be the net of such adjustment
amounts after taking into account any offsetting Company Adjustment which serves
to reduce the amount of the Stockholders Adjustment made pursuant to a
"determination" within the meaning of Code Section 1313 or comparable provision
of state or city law.
1.10 "Stockholders Representative" means XXXXX X. FINE, or such other
shareholder of the Company which all of the shareholders listed on Schedule A
designate to the Company as the Shareholder Representative.
1.11 "Tax Claim" means any written or oral claim or notice by the
Service or any other taxing authority for Taxes, Additional Taxes and/or
Additional Amounts including, without limitation, an assessment for Taxes.
1.12 "Taxes" means U.S. federal income tax and state and local income
taxes and other state and local taxes based on or measured by net income,
including franchise taxes.
SECTION 2. COMPANY INDEMNIFICATION OF STOCKHOLDERS AND AGREEMENT TO MAKE
DISTRIBUTIONS.
2.1 Company agrees to promptly indemnify Stockholders, as provided for
by this SECTION 2, for the amount of (i) any net Taxes and Additional Amounts
paid by Stockholders as a result of any Stockholders Adjustment, plus (ii) any
net Additional Taxes and any related Additional Amounts paid by Stockholders as
a result of any Audit adjustment by the Service or any other taxing authority
which
3
is not the result of a Stockholders Adjustment; PROVIDED, HOWEVER, that
the net amounts of Taxes, Additional Taxes and Additional Amounts related
thereto shall be determined by also taking into account any offsetting tax
refunds to Stockholders emanating from any of the adjustments otherwise covered
herein; PROVIDED, FURTHER, that, as part of the consideration for this
indemnity, the Stockholders agree to waive any claims to distributions that
otherwise might be deemed payable with respect to the deemed increase in the AAA
Amount arising from any such underlying Audit adjustments. This Section 2 shall
continue to apply to any successive Audit adjustments that fall within the terms
of this Indemnification Agreement.
2.2 The amount payable by the Company to Stockholders pursuant to
SECTION 2.1 shall be "grossed up" so as to provide Stockholders with an amount
that, on current after-tax basis and reflecting the tax consequences to the
Stockholders, equals the amount of Taxes, Additional Taxes and Additional
Amounts for which the Company is obligated to indemnify the Stockholders
pursuant to this Agreement. [For example, if the Taxes, Additional Taxes and
Additional Amounts payable by the Stockholders equals $1.2 million, the amount
payable to the Stockholders under this SECTION 2 would be approximately
$1,986,755, assuming no state income tax or social security taxes are applicable
(I.E., $1,986,755 x 39.6% = $786,755 current tax, for $1,200,000 "after-tax"
amount available to pay the Taxes, Additional Taxes and Additional Amounts of
the Stockholders. A further sample of the tax indemnification computation is
also set forth at Schedule B hereof. ]
2.3 Company agrees to pay promptly to the Stockholders the Initial
Distributions, Base Distributions and Residual Distributions in accordance with
the terms of the resolutions of the Board of Directors adopted at a duly held
meeting of even date herewith (the "Resolutions"), a copy of which is attached
hereto as Exhibit A.
SECTION 3. CONSENT PROVISIONS.
3.1 Stockholders shall not initiate, effect or permit any Stockholders
Adjustment (through an amended tax return or otherwise) without the written
consent of the Company. Company shall not initiate, effect or settle upon any
Company Adjustment (through an amended tax return or otherwise) without the
written consent of the Stockholders Representative.
3.2 If an Audit is commenced or a Tax Claim is made against the
Stockholders with respect to any amount of income, gain, deduction, loss or
credit of the Company included by the Stockholders under Code Section 1366,
Stockholders shall promptly notify the Company in writing of that Audit or Tax
Claim. If an Audit is commenced or a Tax Claim is made with respect to the
Company, the Company shall promptly notify Stockholders in writing of that Audit
or Tax Claim. The person against whom the Audit is commenced or Tax Claim is
made shall promptly provide all correspondence to the other person under this
Agreement, with respect to such Audit or Tax Claim. [The parties acknowledge
that the Company currently is the subject of a Service Audit for its 1993, 1994
and 1995 tax years.]
3.3 Indemnitor shall have the right at its option upon timely notice to
Indemnitees to assume control of the proceedings in connection with any Audit or
the defense of any suit, action or
4
proceeding with respect to any Tax Claim at its own expense and with its own
counsel, PROVIDED its counsel is reasonably satisfactory to Indemnitees.
3.4 Notwithstanding anything herein to the contrary, if Indemnitor
exercises the option of SECTION 3.3, (i) Indemnitor shall not agree to any
settlement with respect to any Taxes or Additional Amounts without Indemnitees'
consent if the effect of the settlement would be an increase in the liability of
Indemnitees for any Taxes or Additional Amounts and if the Indemnitor would not
be liable under this Agreement to pay Indemnitees the full amount of that
increase in liability for Taxes and any related Additional Amounts, (ii)
Indemnitor shall keep Indemnitees informed of all material developments and
events relating to such Audit or Tax Claim, and (iii) Indemnitees shall have the
right to participate in, but not to control, the defense of any Audit or Tax
Claim.
3.5 Indemnitor shall not agree to any settlement without Indemnitees'
express prior written consent which shall not be unreasonably withheld.
Indemnitor and Indemnitees shall fully cooperate with each other in their
efforts to litigate, defend or otherwise attempt to resolve any proceeding.
SECTION 4. PAYMENT DATES.
4.1 Any payment due pursuant to SECTION 2 of this Agreement shall be
made not later than thirty (30) days after receipt by the Company of written
notice from Stockholders stating that any Taxes, Additional Taxes and Additional
Amounts, for or with respect to which Stockholders are entitled to
indemnification hereunder, are payable by the Stockholders (regardless of
whether the Stockholders intend to pursue a refund of any such payments).
4.2 Any notice under this SECTION 4 with respect to a required
indemnification payment shall include an accurate and reasonably detailed
description, including correspondence, work papers, ETC., of the adjustment by
the subject taxing authority to taxable income, gain, deduction loss, or credit
of Indemnitees. Any indemnification payment required to be made hereunder that
is not made by the Indemnitor to the Indemnitees when due shall bear interest
until paid at the prime rate published by Citibank, N.A.
4.3 The amount of any Taxes, Additional Taxes or Additional Amounts, as
the case may be, with respect to which Indemnitees have received a payment from
Indemnitor pursuant to this Agreement which are subsequently refunded or
credited to Indemnitees by the subject taxing authority (the "Refunded Amount")
shall be reimbursed to Indemnitor by Indemnitees within thirty (30) days of
Indemnitees receiving such credit or refund. The amount of any Refunded Amount
not paid by Indemnitees to Indemnitor within the time period prescribed by this
SECTION 4.3 shall bear interest until paid at the prime rate published by
Citibank, N.A.
4.4 The obligation of the Indemnitor to make a payment under this
Agreement shall be subject to the Indemnitees providing Indemnitor with evidence
reasonably satisfactory to Indemnitor of the amount of the indemnification so
claimed.
5
SECTION 5. TRANSFER OF ASSETS; TERM.
Company's obligations under this Agreement shall continue and survive
notwithstanding any agreement of merger, acquisition, consolidation, asset
transfer or similar reorganization. Stockholders and the Company intend that the
rights and obligations of each party to this Agreement shall be in force until
all statutes of limitation for any tax adjustment which may give rise to
indemnification under this Agreement shall have expired.
SECTION 6. NOTICES.
Any notice, demand, claim or other communication under this Agreement
shall be in writing and shall be deemed to have been given upon the delivery or
mailing thereof, as the case may be, if delivered personally or sent by
certified mail, return receipt requested, postage prepaid, to the other party at
the following address (or at another address a party may specify by notice to
the other party):
If to Stockholders, to: X. XXXXX FINE
XXXXX XXXXXX FINE
X.X. Xxx 000000
Xxxxx, XX 00000
If to the Company, to: FINE AIR LINES, INC.
X.X. Xxx 000000
Xxxxx, XX 00000
SECTION 7. GOVERNING LAW.
This Agreement shall be governed by and construed in accordance with
the laws of the State of Florida.
SECTION 8. COUNTERPARTS.
This Agreement may be executed in one or more counterparts, each of
which shall be deemed to be an original, but all of which together shall
constitute one and the same instrument.
SECTION 9. ASSIGNMENTS.
This Agreement shall be binding upon and shall inure to the benefit of
the parties hereto and their respective successors and assigns.
SECTION 10. AMENDMENT AND MODIFICATION.
6
This Agreement may be amended, modified or supplemented only by a
written agreement executed by the parties hereto.
SECTION 11. ENTIRE AGREEMENT.
This Agreement embodies the entire agreement and understanding of the
parties hereto in respect of the subject matter contained herein. There are no
representations, promises, warranties, covenants or undertakings other than
those expressly set forth or referred to herein. This Agreement supersedes all
prior agreements and understandings between the parties with respect to the
subject matter contained herein.
IN WITNESS WHEREOF, the undersigned have executed this Agreement
effective as of the day and year first above written.
FINE AIR LINES, INC.
By:
--------------------------
Name:
------------------------
Title:
-----------------------
STOCKHOLDERS:
--------------------------
X. XXXXX FINE
--------------------------
XXXXX XXXXXX FINE
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SCHEDULE A
SHAREHOLDERS OF FINE AIR LINES, INC.
NUMBER OF SHARES
SHAREHOLDER OF COMMON STOCK
----------- ----------------
X. Xxxxx Fine 000
Xxxxx Xxxxxx Fine 500
SCHEDULE B
SAMPLE INDEMNIFICATION COMPUTATION
SECTION 2.1(I) AMOUNT:
---------------------
1994 1995 1996 1997
Stockholders Adjustment + 1,000,000 + 800,000 + 700,000 + 600,000
Corporate Adjustment (100,000) (200,00) (750,000) (50,000)
--------- -------- --------- --------
Net Stockholders Adjustment 900,000 600,000 (50,000) 550,000
Net Taxes/(Refunds) 356,400 237,600 (19,800) 217,800
Net Additional Amount 114,048 57,024 (2,772) 17,424
------- ------ ------- ------
Total Sec. 2.19i) Amounts 470,448 294,624 (22,572) 235,224
SECTION 2.1 (II) AMOUNT:
Other Adjustments - 0 - + 100,000 + 70,000 (40,000)
Additional Taxes/(Refunds) - 0 - 39,600 27,720 (15,840)
Additional Amounts - 0 - 9,504 4,435 (1,109)
----- ----- -------
Total Sec. 2.1 (ii) Amounts - 0 - 49,104 32,155 (16,949)
----- ------ ------ --------
OVERALL TOTAL SEC. 2.1 AMOUNTS $470,448 343,728 9,583 218,275
------------------------------ -------- ------- ----- -------
AGGREGATE TOTAL SEC. 2.1 AMOUNT: $1,042,034
------------------------------- ==========
SECTION 2.2 GROSS UP AMOUNT:
$1,042,034 = $1,725,221.80
---------- =============
.604
AGRO AIR ASSOCIATES, INC.
TAX ALLOCATION AND
INDEMNIFICATION AGREEMENT
THIS AGRO AIR ASSOCIATES, INC. TAX ALLOCATION AND INDEMNIFICATION
AGREEMENT is entered into as of this 28th day of July, 1997 between X. XXXXX
FINE and XXXXX XXXXXX FINE ("Stockholders"), and AGRO AIR ASSOCIATES, INC., a
Florida corporation (the "Company").
W I T N E S S E T H :
WHEREAS, Stockholders own five hundred (500) shares each of the sole
class of stock in the Company, constituting one hundred percent (100%) of the
total outstanding shares of stock in the Company;
WHEREAS, pursuant to a proposed contribution of all of the Company's
stock to Fine Air Lines, Inc. (the "Parent Company") and the subsequent offering
of the Parent Company's stock to the public, the Company's subchapter S
corporation status shall be terminated affirmatively as of the effective date of
such public offering;
WHEREAS, such termination, under Section 1362(e) of the Internal
Revenue Code of 1986, as amended (the "Code"), will result in the Company's 1997
calendar tax year being divided in two (2) separate tax years, the first of
which begins on January 1, 1997 and ends on the day immediately preceding the
day such termination is effective (the "1997 S Short Year") and the second of
which begins on the day such termination is effective and ends on December 31,
1997 (the "1997 C Short Year"); and
WHEREAS, pursuant to certain Board of Directors resolutions of even
date herewith, the Company shall make aggregate distributions (the
"Distributions") to Stockholders in amounts intended to equal the amount of the
Company's previously undistributed "accumulated adjustments account" (the "AAA
Amount"), as that term is defined in Code Section 1368(e)(1), calculated taking
into account all items of income, gain, deduction, loss and credit through the
last day of the Company's 1997 S Short Year (as that amount otherwise would be
shown on the Company's final Form 1120S immediately prior to any such additional
Distributions); and
WHEREAS, the Company and Stockholders have determined it to be in their
mutual best interests to set forth in this Agreement certain provisions designed
to clarify which adjustments to the AAA Amount shall be taken into account in
order to achieve the intended results of the Distributions totaling the amount
of Stockholders' respective shares of the Company's AAA Amount through the end
of its 1997 S Short Year; and
WHEREAS, in consideration for the past services of the Stockholders to
the Company which have not been fully compensated heretofore, the Company wishes
to indemnify the Stockholders for any net additional tax liabilities (1) that
arise from subsequent Audit adjustments of the Company by
any applicable taxing authority and (2) which tax liabilities are not (a)
attributable to the AAA Amount originally determined by the Company (upon the
filing of its 1997 S Short Year tax return) and (b) the subject of the
Distributions contemplated hereunder, PROVIDED, HOWEVER, that the Stockholders
also waive any claim to additional Distributions with respect to any such
increases in the AAA Amount pursuant to such Audit adjustments and the Company
correspondingly waives its right to receive a return of any net reductions in
the AAA Amount pursuant to any such Audit adjustments;
NOW, THEREFORE, in consideration of the mutual promises contained
herein, Stockholders and the Company hereby agree as follows:
SECTION 1. DEFINITIONS. For purposes of this Agreement:
1.1 "Additional Amounts" means any interest, penalties or additions to
tax imposed or assessed by the Internal Revenue Service (the "Service") or any
other taxing authority, as a result of any liability for Taxes and/or Additional
Taxes, as defined herein.
1.2 "Additional Taxes" means, for any Pre-Closing Date Period, as that
term is defined herein, the excess of (i) the product of (A) forty percent (40%)
and (B) the amount of income of the Company taxable to Stockholders under Code
Section 1366 as reported for federal income tax purposes on the Company's Forms
1120S for the 1997 S Short Year or any other tax year in the Pre-Closing Date
Period, as the case may be, calculated after taking into account the net amount
of any adjustment by the Service or any other taxing authority to such reported
amounts (including the benefits or costs of any Company Adjustment not taken
into account in determining the net Stockholder Adjustment, but excluding any
such net Stockholder Adjustment) constituting a "determination" within the
meaning of Code Section 1313 or comparable provision of state or city law over
(ii) an amount equal to the product of (x) forty percent (40%) and (y) the
amount of income of the Company taxable to the Stockholders as originally
reported on the Company's Forms 1120S for the 1997 S Short Year or any other tax
year in the Pre-Closing Date Period, as the case may be.
1.3 "Audit" means any audit, investigation or exam by the Service or
any other taxing authority (including, but not limited to, the current Service
Audit of the Company's 1993, 1994 and 1995 tax years).
1.4 "Company Adjustment" means any adjustment by the Service or any
other taxing authority of income, gain, deduction, loss, credit or other
allowance (i) that causes any item of net income of the Company that was taken
into account and reported by the Company on its Forms 1120S for federal income
tax purposes for the 1997 S Short Year or any other tax year in the Pre-Closing
Date Period, as the case may be, to be included in taxable income in a
Post-Closing Date Period and not to be included in taxable income in a
Pre-Closing Date period, (ii) that causes any deduction, loss, credit or other
allowance of the Company, which deduction, credit or other allowance has the
effect of reducing taxable income that was taken into account and reported by
the Company on its Form 1120 for federal income tax purposes in a Post-Closing
Date Period, to be taken into account in a Pre-Closing Date Period and not to be
taken into account in a Post-Closing Date Period, and/or (iii) which results in
Taxes and/or Additional Amounts in respect thereof being imposed on Company as a
result of the Company not qualifying as an S corporation for any Pre-Closing
Date Period.
2
1.5 "Indemnitees" means the Stockholders, PROVIDED, HOWEVER, that all
rights of the Indemnitees under SECTION 2 hereof may be exercised only by the
Stockholders Representative.
1.6 "Indemnitor" means the Company.
1.7 "Post-Closing Date Period" means any taxable year of the Company
ending after the first day of the 1997 C short tax year.
1.8 "Pre-Closing Date Period" means any taxable year of the Company
ending before the first day of the 1997 C short tax year .
1.9 "Stockholders Adjustment" means any net adjustment by the Service
or any other taxing authority of income, gain, deduction, loss, credit or other
allowance (i) that causes any item of net income of the Company that originally
was taken into account and reported by the Company on its Forms 1120 for federal
income tax purposes for any tax year in the Post-Closing Date Period to be
included in taxable income in any tax year in the Pre-Closing Date Period and
not to be included in taxable income in a Post-Closing Date period or (ii) that
causes any deduction, loss, credit or other allowance of the Company, which
deduction, credit or other allowance has the effect of reducing taxable income
that was taken into account and reported by the Company on its Form 1120S for
federal income tax purposes in any tax year in the Pre-Closing Date Period, to
be taken into account in any tax year in the Post-Closing Date Period and not to
be taken into account in a tax year in the Pre-Closing Date Period; provided,
however, that such Stockholders Adjustment shall be the net of such adjustment
amounts after taking into account any offsetting Company Adjustment which serves
to reduce the amount of the Stockholders Adjustment made pursuant to a
"determination" within the meaning of Code Section 1313 or comparable provision
of state or city law.
1.10 "Stockholders Representative" means XXXXX X. FINE, or such other
shareholder of the Company which all of the shareholders listed on Schedule A
designate to the Company as the Shareholder Representative.
1.11 "Tax Claim" means any written or oral claim or notice by the
Service or any other taxing authority for Taxes, Additional Taxes and/or
Additional Amounts including, without limitation, an assessment for Taxes.
1.12 "Taxes" means U.S. federal income tax and state and local income
taxes and other state and local taxes based on or measured by net income,
including franchise taxes.
SECTION 2. COMPANY INDEMNIFICATION OF STOCKHOLDERS AND AGREEMENT TO MAKE
DISTRIBUTIONS.
2.1 Company agrees to promptly indemnify Stockholders, as provided for
by this SECTION 2, for the amount of (i) any net Taxes and Additional Amounts
paid by Stockholders as a result of any Stockholders Adjustment, plus (ii) any
net Additional Taxes and any related Additional Amounts paid by Stockholders as
a result of any Audit adjustment by the Service or any other taxing authority
which
3
is not the result of a Stockholders Adjustment; PROVIDED, HOWEVER, that
the net amounts of Taxes, Additional Taxes and Additional Amounts related
thereto shall be determined by also taking into account any offsetting tax
refunds to Stockholders emanating from any of the adjustments otherwise covered
herein; PROVIDED, FURTHER, that, as part of the consideration for this
indemnity, the Stockholders agree to waive any claims to distributions that
otherwise might be deemed payable with respect to the deemed increase in the AAA
Amount arising from any such underlying Audit adjustments. This Section 2 shall
continue to apply to any successive Audit adjustments that fall within the terms
of this Indemnification Agreement.
2.2 The amount payable by the Company to Stockholders pursuant to
SECTION 2.1 shall be "grossed up" so as to provide Stockholders with an amount
that, on current after-tax basis and reflecting the tax consequences to the
Stockholders, equals the amount of Taxes, Additional Taxes and Additional
Amounts for which the Company is obligated to indemnify the Stockholders
pursuant to this Agreement. [For example, if the Taxes, Additional Taxes and
Additional Amounts payable by the Stockholders equals $1.2 million, the amount
payable to the Stockholders under this SECTION 2 would be approximately
$1,986,755, assuming no state income tax or social security taxes are applicable
(I.E., $1,986,755 x 39.6% = $786,755 current tax, for $1,200,000 "after-tax"
amount available to pay the Taxes, Additional Taxes and Additional Amounts of
the Stockholders. A further sample of the tax indemnification computation is
also set forth at Schedule B hereof. ]
2.3 Company agrees to pay promptly to the Stockholders the Initial
Distributions, Base Distributions and Residual Distributions in accordance with
the terms of the resolutions of the Board of Directors adopted at a duly held
meeting of even date herewith (the "Resolutions"), a copy of which is attached
hereto as Exhibit A.
SECTION 3. CONSENT PROVISIONS.
3.1 Stockholders shall not initiate, effect or permit any Stockholders
Adjustment (through an amended tax return or otherwise) without the written
consent of the Company. Company shall not initiate, effect or settle upon any
Company Adjustment (through an amended tax return or otherwise) without the
written consent of the Stockholders Representative.
3.2 If an Audit is commenced or a Tax Claim is made against the
Stockholders with respect to any amount of income, gain, deduction, loss or
credit of the Company included by the Stockholders under Code Section 1366,
Stockholders shall promptly notify the Company in writing of that Audit or Tax
Claim. If an Audit is commenced or a Tax Claim is made with respect to the
Company, the Company shall promptly notify Stockholders in writing of that Audit
or Tax Claim. The person against whom the Audit is commenced or Tax Claim is
made shall promptly provide all correspondence to the other person under this
Agreement, with respect to such Audit or Tax Claim. [The parties acknowledge
that the Company currently is the subject of a Service Audit for its 1993, 1994
and 1995 tax years.]
3.3 Indemnitor shall have the right at its option upon timely notice to
Indemnitees to assume control of the proceedings in connection with any Audit or
the defense of any suit, action or
4
proceeding with respect to any Tax Claim at its own expense and with its own
counsel, PROVIDED its counsel is reasonably satisfactory to Indemnitees.
3.4 Notwithstanding anything herein to the contrary, if Indemnitor
exercises the option of SECTION 3.3, (i) Indemnitor shall not agree to any
settlement with respect to any Taxes or Additional Amounts without Indemnitees'
consent if the effect of the settlement would be an increase in the liability of
Indemnitees for any Taxes or Additional Amounts and if the Indemnitor would not
be liable under this Agreement to pay Indemnitees the full amount of that
increase in liability for Taxes and any related Additional Amounts, (ii)
Indemnitor shall keep Indemnitees informed of all material developments and
events relating to such Audit or Tax Claim, and (iii) Indemnitees shall have the
right to participate in, but not to control, the defense of any Audit or Tax
Claim.
3.5 Indemnitor shall not agree to any settlement without Indemnitees'
express prior written consent which shall not be unreasonably withheld.
Indemnitor and Indemnitees shall fully cooperate with each other in their
efforts to litigate, defend or otherwise attempt to resolve any proceeding.
SECTION 4. PAYMENT DATES.
4.1 Any payment due pursuant to SECTION 2 of this Agreement shall be
made not later than thirty (30) days after receipt by the Company of written
notice from Stockholders stating that any Taxes, Additional Taxes and Additional
Amounts, for or with respect to which Stockholders are entitled to
indemnification hereunder, are payable by the Stockholders (regardless of
whether the Stockholders intend to pursue a refund of any such payments).
4.2 Any notice under this SECTION 4 with respect to a required
indemnification payment shall include an accurate and reasonably detailed
description, including correspondence, work papers, ETC., of the adjustment by
the subject taxing authority to taxable income, gain, deduction loss, or credit
of Indemnitees. Any indemnification payment required to be made hereunder that
is not made by the Indemnitor to the Indemnitees when due shall bear interest
until paid at the prime rate published by Citibank, N.A.
4.3 The amount of any Taxes, Additional Taxes or Additional Amounts, as
the case may be, with respect to which Indemnitees have received a payment from
Indemnitor pursuant to this Agreement which are subsequently refunded or
credited to Indemnitees by the subject taxing authority (the "Refunded Amount")
shall be reimbursed to Indemnitor by Indemnitees within thirty (30) days of
Indemnitees receiving such credit or refund. The amount of any Refunded Amount
not paid by Indemnitees to Indemnitor within the time period prescribed by this
SECTION 4.3 shall bear interest until paid at the prime rate published by
Citibank, N.A.
4.4 The obligation of the Indemnitor to make a payment under this
Agreement shall be subject to the Indemnitees providing Indemnitor with evidence
reasonably satisfactory to Indemnitor of the amount of the indemnification so
claimed.
5
SECTION 5. TRANSFER OF ASSETS; TERM.
Company's obligations under this Agreement shall continue and survive
notwithstanding any agreement of merger, acquisition, consolidation, asset
transfer or similar reorganization. Stockholders and the Company intend that the
rights and obligations of each party to this Agreement shall be in force until
all statutes of limitation for any tax adjustment which may give rise to
indemnification under this Agreement shall have expired.
SECTION 6. NOTICES.
Any notice, demand, claim or other communication under this Agreement
shall be in writing and shall be deemed to have been given upon the delivery or
mailing thereof, as the case may be, if delivered personally or sent by
certified mail, return receipt requested, postage prepaid, to the other party at
the following address (or at another address a party may specify by notice to
the other party):
If to Stockholders, to: X. XXXXX FINE
XXXXX XXXXXX FINE
X.X. Xxx 000000
Xxxxx, XX 00000
If to the Company, to: AGRO AIR ASSOCIATES, INC.
X.X. Xxx 000000
Xxxxx, XX 00000
SECTION 7. GOVERNING LAW.
This Agreement shall be governed by and construed in accordance with
the laws of the State of Florida.
SECTION 8. COUNTERPARTS.
This Agreement may be executed in one or more counterparts, each of
which shall be deemed to be an original, but all of which together shall
constitute one and the same instrument.
SECTION 9. ASSIGNMENTS.
This Agreement shall be binding upon and shall inure to the benefit of
the parties hereto and their respective successors and assigns, including,
without limitation, the Parent Company with respect to all rights and
obligations of the Company hereunder following the contribution of all of the
Company's stock to the Parent Company.
6
SECTION 10. AMENDMENT AND MODIFICATION.
This Agreement may be amended, modified or supplemented only by a
written agreement executed by the parties hereto.
SECTION 11. ENTIRE AGREEMENT.
This Agreement embodies the entire agreement and understanding of the
parties hereto in respect of the subject matter contained herein. There are no
representations, promises, warranties, covenants or undertakings other than
those expressly set forth or referred to herein. This Agreement supersedes all
prior agreements and understandings between the parties with respect to the
subject matter contained herein.
IN WITNESS WHEREOF, the undersigned have executed this Agreement
effective as of the day and year first above written.
AGRO AIR ASSOCIATES, INC.
By:
--------------------------
Name:
--------------------------
Title:
--------------------------
STOCKHOLDERS:
--------------------------
X. XXXXX FINE
--------------------------
XXXXX XXXXXX FINE
7
SCHEDULE A
SHAREHOLDERS OF AGRO AIR ASSOCIATES, INC.
NUMBER OF SHARES
SHAREHOLDER OF COMMON STOCK
----------- -----------------
X. Xxxxx Fine 000
Xxxxx Xxxxxx Fine 500
SCHEDULE B
SAMPLE INDEMNIFICATION COMPUTATION
SECTION 2.1(I) AMOUNT:
1994 1995 1996 1997
Stockholders Adjustment + 1,000,000 + 800,000 + 700,000 + 600,000
Corporate Adjustment (100,000) (200,00) (750,000) (50,000)
--------- -------- --------- --------
Net Stockholders Adjustment 900,000 600,000 (50,000) 550,000
Net Taxes/(Refunds) 356,400 237,600 (19,800) 217,800
Net Additional Amount 114,048 57,024 (2,772) 17,424
------- ------ ------- ------
Total Sec. 2.19i) Amounts 470,448 294,624 (22,572) 235,224
SECTION 2.1 (II) AMOUNT:
Other Adjustments - 0 - + 100,000 + 70,000 (40,000)
Additional Taxes/(Refunds) - 0 - 39,600 27,720 (15,840)
Additional Amounts - 0 - 9,504 4,435 (1,109)
----- ----- -------
Total Sec. 2.1 (ii) Amounts - 0 - 49,104 32,155 (16,949)
----- ------ ------ --------
OVERALL TOTAL SEC. 2.1 AMOUNTS $470,448 343,728 9,583 218,275
------------------------------ -------- ------- ----- -------
AGGREGATE TOTAL SEC. 2.1 AMOUNT: $1,042,034
------------------------------- ==========
SECTION 2.2 GROSS UP AMOUNT:
$1,042,034 = $1,725,221.80
---------- =============
.604
