TAX SHARING AGREEMENT
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Tax Sharing Agreement ("Agreement") dated this
twenty-first day of April, 1998, by and among Diamond Brands
Incorporated ("Holdings") and Diamond Brands Operating Corp.
(the "Borrower").
RECITALS
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1. Holdings, Borrower, and the Borrower subsidiaries
listed on Schedule I hereto (each a "Subsidiary") are 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. For
purposes of applying the provisions of this Agreement, Borrower
shall cause to be prepared hypothetical estimated and final
United States federal income tax returns showing the estimated
and final United States federal income tax liability of the
Borrower and its Subsidiaries (the "Borrower Sub-Group")
calculated as if the Borrower Sub-Group filed a separate
consolidated return. 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 Holdings
on the one hand and the Borrower Sub-Group on the other, for
reimbursing Holdings 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
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Now, therefore, in consideration of the mutual
covenants and promises contained herein, the parties hereto agree
as follows:
1. Filing of Returns. A U.S. consolidated income tax
return and estimated tax returns shall be filed by Holdings for
the taxable year ended December 31, 1998, and shall be filed for
each subsequent taxable period in respect of which the Affiliated
Group is required or permitted to file a consolidated tax return.
Borrower shall and shall cause the other members of the Borrower
Sub-Group to execute and file such consents, elections, and other
documents as Holdings determines are required or appropriate for
the proper filing of such returns and shall furnish to Holdings
any and all information reasonably requested by Holdings in order
to carry out the provisions of this Agreement.
2. Allocation of Tax Liability. Holdings and Borrower
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 Holdings and the
Borrower Sub-Group (each of them a "Member") 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 each of the two 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 both 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 to
the other Member 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. Borrower shall pay to Holdings 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 Borrower Sub-Group'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 the Borrower
Sub-Group (before interest or penalties) and the denominator of
which equals the Affiliated Group's tax liability (before
interest or penalties)) less (where the Borrower Sub-Group is
also 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, Holdings
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 the Borrower or any Subsidiary, to the extent
permitted by Treasury Regulations Section 1.1502-20(g). The
Borrower agrees to join with Holdings 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
payment due at the time any extension of time is sought for the
filing of the Affiliated Group's federal income tax return), the
Borrower shall, if requested by Holdings, pay to Holdings, no
later than ten business days before the date each estimated tax
payment is to be made by Holdings, that percentage of the
estimated tax payment that equals the percentage which the
estimated separate return tax liability of the Borrower Sub-
Group bears to the aggregate of the Borrower Sub-Groups'
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 Holdings. Any
estimated tax payments made by the Borrower under this paragraph
5 with respect to any taxable year shall be applied to reduce the
amount, if any, owed by the Borrower under paragraph 3 hereof
with respect to such year. Any excess of such estimated payments
by the Borrower over the amount described in paragraph 3 for such
year shall be repaid by Holdings to the Borrower 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, Holdings shall make
payment to the Borrower for the Borrower Sub-Group's share of the
refund, determined in the same manner as in paragraph 2 above,
within twenty business days after the refund is received by
Holdings, and in the case of an increase in tax liability, the
Borrower shall pay to Holdings the Borrower Sub-Group's allocable
share of such increased tax liability (including interest and
penalties) within ten business days after receiving notice of
such liability from Holdings. 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 Holdings or the Borrower Sub-Group
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 Holdings and the Borrower Sub-Group unless Holdings and
the Borrower 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, Holdings 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, Holdings 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.
10. Audits and Refund Claims. Holdings 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. Holdings 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 Holdings and a Former Member with respect to the
operation or interpretation of this Agreement shall be decided by
three arbitrators. Holdings 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 Holdings and the Former Member.
12. Elections. Holdings 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 INCORPORATED
By:________________________
Name:
Title:
DIAMOND BRANDS OPERATING CORP.
By:__________________________
Name:
Title:
SCHEDULE I
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Subsidiaries
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Xxxxxxx, Inc.
Empire Candle, Inc.
