TAX INDEMNIFICATION AGREEMENT
THIS TAX INDEMNIFICATION AGREEMENT (this "AGREEMENT") is made this 16th
day of October, 1997, between Pacific Trim & Belt, Inc., a California
corporation (the "COMPANY"), and Xxxxxx Xxxx, Xxxxxxxx Xxxxxxxx, Xxxxxxx Xxxxx
and Xxxx Xxxxxx (collectively, the "SHAREHOLDERS") (the Company and the
Shareholders are hereinafter referred to individually as a "PARTY" and
collectively as the "PARTIES").
WHEREAS, the Shareholders contemplate the contribution of their stock in
the Company to a limited liability company as a means to combine the business of
the Company with other commonly owned businesses (the "Exchange").
WHEREAS, the execution of this Agreement by the Company and the
Shareholders is a condition to the closing (the "CLOSING") of the contemplated
Consolidation;
WHEREAS, the Company is and will continue to be an S corporation under the
Internal Revenue Code of 1986, as amended (the "CODE") through the consummation
of the Exchange, after which it will become a C corporation under the Code (and
under the corresponding provisions of state income tax law);
WHEREAS, following the Exchange, the Company will elect under Section
1362(e)(3) of the Code to have the rules of Section 1362(e)(2) not apply for its
S Termination year (as hereinafter defined); and
WHEREAS, the Company and the Shareholders wish to provide for a tax
indemnification agreement in connection with the Company's termination as an S
corporation.
NOW, THEREFORE, the parties agree as follows:
ARTICLE I
DEFINITIONS
1.1 DEFINITIONS. The following terms, as used herein, have the following
meanings:
"C CORPORATION TAXABLE YEAR" means any taxable year or portion thereof
during which the Company is taxable as a C Corporation.
"C SHORT YEAR" means that portion of the S Termination Year of the
Company defined in Section 1362(e)(1)(B) of the Code.
"S CORPORATION TAXABLE INCOME" means the taxable income of the Company
from all sources through and including the close of business on the last day of
the S Short Year of the Company.
"S CORPORATION TAXABLE YEAR" means any taxable year or portion thereof
during which the Company is taxable as an S corporation.
"S SHORT YEAR" means that portion of the S Termination Year of the
Company defined in Section 1362(e)(1)(A) of the Code.
"S TERMINATION YEAR" shall have the meaning set forth in Section
1362(e)(4) of the Code.
ARTICLE II
TAXES
2.1 SHAREHOLDERS' FILING OF TAX RETURNS AND PAYMENT OF TAXES. Each
Shareholder, severally and not jointly, represents, covenants and agrees that:
(i) such Shareholder has duly included, or shall duly include, in his or her own
federal and state income tax returns his or her share of all items of income,
gain, loss, deduction or credit attributable to the S Short Year of the Company
or any prior period (or that portion of any period) during which the Company was
an S corporation as required by applicable law; (ii) such returns have included,
or shall include, his or her allocable share of S Corporation Taxable Income;
and (iii) such Shareholder has paid, or shall pay, any and all taxes he or she
is required to pay with respect to such allocable share of S Corporation Taxable
Income for all taxable periods (or that portion of any period) during which the
Company was an S corporation.
2.2 COMPANY'S FILING OF TAX RETURNS AND PAYMENT OF TAXES. The Company
represents, covenants and agrees that: (i) the Company is and shall be
responsible for and has effected, or shall effect, the filing of all federal,
state, foreign and local returns for the Company with respect to any and all
taxable periods; (ii) such Company returns have included, or shall include, the
Company's income from all sources for all periods covered by the returns; and
(iii) the Company has paid, or shall pay, any and all taxes required to be paid
by the Company for all periods covered by the returns as required by applicable
law.
2.3 COMPANY'S INDEMNIFICATION FOR TAX LIABILITIES. The Company hereby
indemnifies and agrees to hold each Shareholder harmless from, against and in
respect of any federal and state income tax liability (including interest and
penalties and any taxes resulting from payments under this Section 2.3, but
reduced by the benefit received from the deduction for state income taxes
paid against taxable income for federal income tax purposes), if any,
incurred by such Shareholder resulting from a final determination of an
adjustment (by reason of an amended return, claim for refund, audit or
otherwise) to the Company's taxable income resulting in a decrease in the
Company's taxable income and a corresponding increase in the federal or
state, as the case may be, taxable income of such Shareholder with respect to
such Shareholder's allocable share of S Corporation Taxable Income; PROVIDED,
HOWEVER, that in no event shall the Company's liability to any one of the
Shareholders under this Section 2.3 exceed the amount of the income tax
liability (including interest and penalties and any taxes resulting from
payments under this Section 2.3) of such Shareholder arising from the
increase in S Corporation Taxable Income
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allocated to such Shareholder shifted from a C Corporation Taxable Year to an
S Corporation Taxable Year.
2.4 SHAREHOLDER INDEMNIFICATION FOR TAX LIABILITIES.
(a) The Shareholders, severally (according to the percentage of
the outstanding shares of the Company's Common Stock owned by each
Shareholder during the applicable S Corporation Taxable Year from which there
is a shift of S Corporation Taxable Income, as referred to hereinbelow, pro
rated by number of days of ownership in the case of partial periods of
ownership) and not jointly, hereby indemnify and agree to hold the Company
harmless from, against and in respect of any federal and state income tax
liability (including interest and penalties and any taxes resulting from
payments under this Section 2.4(a)), if any, resulting from a final
determination of any adjustment (by reason of an amended return, claim for
refund, audit or otherwise) to the Shareholders' taxable income resulting in
a decrease in the Shareholders' S Corporation Taxable Income and a
corresponding increase in the federal or state, as the case may be, taxable
income of the Company; PROVIDED, HOWEVER, the amount of any such indemnified
tax liability shall be reduced by an amount equal to the refund of state
income tax, including interest, received by the Company for state income
taxes paid by the Company in respect of any taxable income shifted from an S
Corporation Taxable Year to a C Corporation Taxable Year of the Company which
is subject to indemnification hereunder; and PROVIDED, FURTHER, that in no
event shall any Shareholder's liability under this Section 2.4(a) exceed the
amount of any credit or refund of taxes and interest actually received by
such Shareholder as a result of such final determination, related final
determination or claim for refund.
(b) The Shareholders, severally (according to the percentage of
the outstanding shares of the Company's Common Stock owned by each
Shareholder during the applicable taxable period ending prior to September
16, 1997, with respect to which it is determined that the Company was not an
S Corporation) and not jointly, hereby indemnify and agree to hold the
Company harmless from, against and in respect of any federal and state income
tax liability (including penalties, interest and any taxes resulting from the
payments under this Section 2.4(b)) incurred by the Company as a result of a
final determination that the Company was not an S corporation for federal or
state income tax purposes for any taxable period ending prior to September
16, 1997 (including a short taxable period ending the day before September
16, 1997); PROVIDED, HOWEVER, that in no event shall any Shareholder's
liability under this paragraph 2.4(b) exceed the amount any credit or refund
of taxes and interest actually received by such Shareholder as a result of
such final determination, related final determination or claim for refund.
2.5 PAYMENTS. The party (or parties) providing the indemnity under either
Section 2.3 or Section 2.4 (the "INDEMNIFYING PARTY") shall make any payment
required to be paid under this Agreement to the party being indemnified under
Section 2.3 or Section 2.4, respectively (the "INDEMNIFIED PARTY"), within
thirty (30) days after the later to occur of (i) the receipt of notice from the
Indemnified Party that a payment is due by the Indemnified Party to the
appropriate taxing authority pursuant to the applicable final determination and
(ii) the receipt
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by the Indemnifying Party of the credit or refund of taxes, if any, resulting
from the corresponding applicable final determination, related final
determination or claim for refund.
2.6 SUBROGATION. The Indemnifying Party shall be subrogated to all rights
of recovery that the Indemnified Party may have against any person or
organization in respect of the tax liabilities for which the Indemnifying Party
is providing indemnity. Such right of subrogation shall not exceed the amount
paid by the Indemnifying Party to the Indemnified Party. The Indemnified Party
shall execute and deliver instruments and papers and such other items, and take
such actions, as are reasonably necessary to secure such rights of subrogation
for the Indemnifying Party and to permit the Indemnifying Party to pursue such
rights of recovery.
ARTICLE III
MISCELLANEOUS
3.1 NOTICES. All notices and other communications made in connection with
this Agreement shall be in writing and shall be deemed given when delivered
personally or sent by facsimile transmission to the numbers indicated below (if
physical confirmation of transmission is retained) or on the third succeeding
business day after being mailed by registered or certified mail, deposited in
the United States mail, postage prepaid, return receipt requested, to the
appropriate party at its, his or her address below or at such other address for
such party (as shall be specified by written notice when in fact delivered
pursuant hereto):
If to the Company, at:
Pacific Trim & Belt, Inc.
0000 Xxxxx Xxxx Xxxxxx
Xxx Xxxxxxx, Xxxxxxxxxx 00000
Attention: President
If to the Shareholders, at:
Xx. Xxxxxx Xxxx
c/o Pacific Trim & Belt, Inc.
0000 Xxxxx Xxxx Xxxxxx
Xxx Xxxxxxx, Xxxxxxxxxx 00000
3.2 COUNTERPARTS. This Agreement may be executed in several counterparts,
each of which shall be deemed an original, but all of which counterparts
collectively shall constitute an instrument representing the agreement between
the parties hereto.
3.3 CONSTRUCTION OF TERMS. Nothing herein expressed or implied is
intended, or shall be construed, to confer upon or give any person, firm or
corporation, other than the parties
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hereto or their respective successors and assigns, any rights or remedies under
or by reason of this Agreement.
3.4 GOVERNING LAW. This Agreement and the legal relations between the
parties hereto shall be governed by and construed in accordance with the
substantive laws of the State of California without regard to California choice
of law rules.
3.5 AMENDMENT AND MODIFICATION. This Agreement may be amended by the
agreement of the Company and Shareholders holding a majority of the shares of
Common Stock outstanding on the date of this Agreement; PROVIDED, HOWEVER, that
no amendment may adversely affect any particular Shareholder in a manner not
equally applicable to the other Shareholders unless such amendment is approved
by such Shareholder.
3.6 ASSIGNMENT. This Agreement and all of the provisions hereof shall be
binding upon and inure to the benefit of the parties hereto and their respective
successors and permitted assigns, but neither this Agreement nor any of the
rights, interests or obligations hereunder shall be assigned by any of the
parties hereto without the prior written consent of the other parties, nor is
this Agreement intended to confer upon any other person except the parties, any
rights or remedies hereunder; PROVIDED, HOWEVER, nothing in this Section shall
be construed as prohibiting an assignment of this Agreement by the Company to a
successor by operation of law.
3.7 INTERPRETATION. The title, articles and section headings contained in
this Agreement are solely for the purpose of reference, are not part of the
agreement of the parties and shall not in any way affect the meaning or
interpretation of this Agreement.
3.8 SEVERABILITY. In the event that any one or more of the provisions of
this Agreement shall be held to be illegal, invalid or unenforceable in any
respect, the same shall not in any respect affect the validity, legality or
enforceability of the remainder of this Agreement, and the parties shall use
their best efforts to replace such illegal, invalid or unenforceable provisions
with an enforceable provision approximating, to the extent possible, the
original intent of the parties.
3.9 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 the understandings between the
parties with respect to such subject matter.
3.10 ARBITRATION. Any action to enforce or interpret this Agreement or to
resolve disputes arising in connection with this Agreement shall be settled by
arbitration in accordance with the rules of the American Arbitration
Association. Any party may commence arbitration by sending a written demand for
arbitration to the other parties. Such demand shall set forth the nature of the
matter to be resolved by arbitration. The substantive law of the State of
California shall be applied by the arbitrator to the resolution of the dispute.
The Company, on the one hand, and the Shareholders, on the other hand, shall
share equally all initial costs of
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arbitration. The prevailing party or parties shall be entitled to reimbursement
of attorney fees, costs, and expenses incurred in connection with the
arbitration. All decisions of the arbitrator shall be final, binding, and
conclusive on all parties. Judgment may be entered upon any such decision in
accordance with applicable law in any court having jurisdiction thereof.
IN WITNESS WHEREOF, each of the parties hereto has executed or caused this
Agreement to be executed on its behalf all as of the day and year first above
written.
PACIFIC TRIM & BELT, INC., a
California corporation
By: /s/ Xxxxxx Xxxx
-----------------------------------
Xxxxxx Xxxx
Its: President
SHAREHOLDERS:
/s/ Xxxxxx Xxxx
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Xxxxxx Xxxx
/s/ Xxxxxxxx Xxxxxxxx
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Xxxxxxxx Xxxxxxxx
/s/ Xxxxxxx Xxxxx
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Xxxxxxx Xxxxx
/s/ Xxxx Xxxxxx
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Xxxx Xxxxxx
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