EXHIBIT 10.3
TAX SHARING AGREEMENT
---------------------
THIS TAX SHARING AGREEMENT ("Agreement") is dated as of _____________,
1997, by and between XXXXXX, INC. ("XxxXxx"), a Delaware corporation, and AURA
------------ ----
SYSTEMS, INC. ("Aura"), a Delaware corporation.
-------------
RECITALS:
A. Aura currently owns approximately ninety-four percent (94%) of the
issued and outstanding shares of XxxXxx'x common stock, $0.001 par value (the
"Common Stock").
B. Based on Aura's ownership of the Common Stock (i) XxxXxx has been a
member of an affiliated group (within the meaning of section 1504(a) of the
Internal Revenue Code of 1986, as amended (the "Code")) of which Aura is the
common parent corporation (the "Group"), and (ii) Aura has included and, prior
to a Deconsolidation Date (as defined herein), will continue to include XxxXxx
in its consolidated federal income tax returns (in accordance with Code sections
1501 and 1502).
C. Sections 1503 and 1552 of the Code provide that earnings and profits
of the members of an affiliated group are to be determined by allocating the tax
liability of the group for a particular taxable year among the members of the
group in accordance with whichever of the several allowable methods the group
shall have adopted in the group's consolidated federal income tax returns.
X. XxxXxx anticipates that, in connection with an initial public offering
(the "IPO") of its securities, XxxXxx will offer to the public up to
approximately 1,700,000 shares of Common Stock.
E. After the IPO, Aura will own less than eighty percent (80%) of the
issued and outstanding shares of Common Stock and, accordingly, XxxXxx will
cease to be a member of the Group.
F. The parties hereto deem it equitable that, with respect to all taxable
years (or shorter periods) encompassing the period commencing June 1, 1997 up to
and including the Deconsolidation Date for which a consolidated or combined
return is filed on behalf of the Group, any Separate Company Tax Liability of
XxxXxx (as hereinafter defined) shall be handled pursuant to the terms hereof.
G. The parties hereto wish to set forth in this Agreement the agreement
between Aura and XxxXxx with respect to the allocation and settlement of the
federal, state and local taxes of the Group with respect to each taxable period
ending on or after the date hereof prior to the Deconsolidation Date (the
"Affiliation Periods").
-1-
NOW, THEREFORE, in consideration of the mutual covenants contained herein,
the parties agree as follows:
1. Filing of Returns. Prior to a Deconsolidation Date, with respect to
-----------------
each Affiliation Period, Aura shall file, and XxxXxx shall agree to join in the
filing of, consolidated federal income tax returns on behalf of the Group. For
the purposes hereof, a "Deconsolidation Date" shall mean such date on which Aura
owns less than eighty percent (80%) of the outstanding Common Stock. XxxXxx
shall execute and file such consents, elections and other documents as Aura
reasonably requests with respect to the filing of the Group's consolidated
federal income tax returns, and shall, consistent with Section 4 hereof, timely
provide to Aura such information as may be necessary for the filing of such
returns or for the determination of amounts due under this Agreement. XxxXxx
acknowledges and agrees that the rights conferred upon Aura in connection with
the filing of the Group's returns include, without limitation, the right to
reasonably determine the allocation of income (or loss) of Aura and any other
subsidiary between the last Affiliation Period and the next taxable period.
XxxXxx shall file all federal, state, local and foreign tax returns with respect
to all periods for which XxxXxx is not includable on a return of Aura, and
XxxXxx shall be responsible for the payment of all taxes in connection
therewith. XxxXxx shall file any such tax returns in a manner consistent with
the manner in which Aura filed its returns for Affiliation Periods (except as
required by law or to the extent any inconsistency would not adversely affect
the returns of the Group).
2. Tax Payments and Reimbursements.
-------------------------------
(a) Due Dates. Except as otherwise provided herein, for any Affiliation
---------
Period prior to the Deconsolidation Date, (i) XxxXxx will pay to Aura the amount
due Aura, as determined under Section 2(b) below, on the Deconsolidation Date;
and (ii) Aura will pay XxxXxx the amount due XxxXxx, as determined under Section
2(c) below, no later than the due date for the filing of any federal income tax
return of the Group that includes XxxXxx; provided, however, that no later than
each estimated federal income tax payment date of the Group for which the Group
actually incurs a federal income tax liability with respect to an Affiliation
Period, [XXXXXX SHALL PAY TO AURA THE MINIMUM AMOUNT REQUIRED TO BE PAID TO
AVOID THE IMPOSITION OF ANY PENALTIES OR ADDITIONS TO TAX UNDER THE CODE,
DETERMINED ON THE SAME BASIS AS THE TOTAL AMOUNT DUE FOR AN AFFILIATION PERIOD
UNDER SECTION 2(b).; ALTHOUGH AN UNLIKELY SCENARIO, SHOULD WE INCLUDE THE
BRACKETED LANGUAGE?] The amount of any overpayment or underpayment pursuant to
this Section 2(a) shall be credited against, or added to, as the case may be,
the amount otherwise required to be paid for the period within which the amount
of such overpayment or underpayment first becomes reasonably ascertainable. The
settlement of any amount due Aura, as determined under Section 2(b), shall be
satisfied only by the recordation by XxxXxx on its books of a capital
contribution by Aura to XxxXxx of such amount. The settlement of any amount due
XxxXxx, as determined under Section 2(c), may be satisfied by check, wire
transfer or through intercompany accounts as the parties may mutually agree.
(b) Amount Due to Aura. XxxXxx shall pay Aura in the time and manner
------------------
described in Section 2(a) an amount equal to any "Separate Company Tax
Liability" of
-2-
XxxXxx. The "Separate Company Tax Liability" for any Affiliation Period shall
be the amount, if any, of the federal income tax liability (including, without
limitation, liability for any penalty, fine, additions to tax, interest, minimum
tax and other items applicable to a subsidiary in connection with the
determination of the subsidiary's tax liability) allocable pursuant to Treas.
Reg. Section 1.1552-1(a)(2).
The Separate Company Tax Liability for XxxXxx shall be determined by Aura
(with the cooperation and assistance of XxxXxx) in a manner consistent with (i)
general tax accounting principles, (ii) the Code and regulations thereunder and
(iii) so long as a reasonable legal basis exists therefor, prior custom and
practice. Notwithstanding anything to the contrary herein, Separate Company Tax
Liability shall be construed to include XxxXxx'x federal or applicable state
income or franchise tax liability, including any applicable alternative minimum
tax liability, but only to the extent that such alternative minimum tax
liability is incurred by the consolidated (combined) filing group, as the case
may be (including any liability attributable to any items of recapture)
determined for tax reporting purposes on a quarterly basis.
In addition, transactions or items between Aura and XxxXxx that are
deferred under the federal income tax return shall also be deferred for purposes
of this Agreement until such time as they are restored or otherwise triggered
into income under the Code or regulations.
(c) Amount due to XxxXxx. In the event XxxXxx does not have Separate
--------------------
Company Tax Liability for an Affiliation Period, but instead either incurs net
losses or credits for such period, Aura shall pay XxxXxx in the time and manner
prescribed in Section 2 the amount by which the Group's federal income tax
liability for such period is actually reduced by reason of the actual use of
such losses or credits in the Group's federal income tax return attributable to
XxxXxx.
In the event XxxXxx incurs any tax losses or tax credits that, as permitted
under the Code and the regulations, are carried back or forward to one or more
Affiliation Periods, Aura shall pay XxxXxx an amount equal to the amount by
which the Group's federal income tax liability is actually reduced by reason of
the actual use of such carried over losses or credits in the Group's federal
income tax return. Any payment from Aura to XxxXxx required on account of such
carryover shall be paid within 15 days of the date the benefit of the carryover
is realized by Aura by reason of the receipts of a refund or credit of taxes.
Notwithstanding the foregoing, XxxXxx will relinquish the carryback of any
net operating losses under section 172(b)(3) of the Code (or any successor
provision) to Affiliation Periods unless Aura expressly agrees to such
carryback; further, XxxXxx will not be entitled to any payments under this
Agreement or otherwise if it (or any Subsidiary, as defined in Section 5)
sustains losses or credits in taxable periods that are eligible to be carried
back to Affiliation Periods, unless (i) Aura, in its sole and absolute
discretion, elects to file a claim for refund with respect to such carryback
items or agrees to permit XxxXxx to file such claim, (ii) Aura actually receives
a refund or credit of taxes with respect thereto
-3-
(in which event, any other provision herein notwithstanding, XxxXxx shall be
entitled to the amount determined in the previous paragraph including any
interest actually paid by the taxing authority attributable thereto less the
amount reasonably determined by Aura to be equal to the present value
(determined at the then applicable short-term federal rate under the Code) of
any tax benefit of the Group that may be deferred or eliminated and any future
increase in tax liability of the Group that may be incurred because of such
carryback) and (iii) Aura is indemnified by XxxXxx in a form satisfactory to
Aura for its reasonable costs and expenses incurred in pursuing such refund
(which costs shall be paid by XxxXxx regardless of whether any refund is
obtained). Any subsequent adjustment to a loss or credit carry back shall be
treated as an adjustment to tax liability in Section 3 below.
(d) Paying Agent. Aura agrees to make all required payments to the
------------
Internal Revenue Service ("IRS") of the consolidated federal income tax
liability, if any, of the Group.
3. Adjustments to Tax Liability.
----------------------------
(a) Adjustment-Related Payments. If the consolidated federal income tax
---------------------------
liability of the Group or any of its members is adjusted for any taxable period
for any reason other than a loss or credit carryback to the extent already
provided for in Section 2, whether by means of an amended return, judicial
decision, claim for refund or tax audit by the IRS, Separate Company Tax
Liability shall be recomputed to give effect to such adjustment, and the amount
of any payments due under Section 2 hereof shall be appropriately adjusted.
Any additional payment between Aura and XxxXxx required by reason of such
recomputed Separate Company Tax Liability or Group tax refund or credit shall
include an allocable share of any refunded interest received from the IRS, if
applicable, or deficiency interest, penalties and additions to tax, if
applicable (such allocable share of refunded interest or deficiency interest,
penalties and additions to tax shall be paid or charged, respectively, to XxxXxx
to the extent such amount relates to (i) reduced Group tax liability due to
decreased Separate Company Tax Liability or increased Group tax refund or credit
resulting from increased use of XxxXxx losses or credits, on the one hand, or
(ii) increased Group tax liability due to increased Separate Company Tax
Liability or decreased Group tax benefits arising from decreased use of XxxXxx
losses or credits, on the other hand).
(b) Timing of Payments. Any payments to be paid to or by NewCom under this
------------------
Section 3 shall be made on or before the earliest to occur of (i) a decision by
a court of competent jurisdiction that is not subject to further judicial review
(by appeal or otherwise) and has become final, (ii) the expiration of the time
for (A) filing a claim for refund or (B) instituting suit in respect to a claim
for refund disallowed in whole or in part by the IRS or for which the IRS took
no action, (iii) the execution of a closing agreement under section 7121 of the
Code or the acceptance by the IRS or its counsel of an offer in compromise under
section 7122 of the Code (or any successor provisions), (iv) the expiration of
30 days after (A) IRS acceptance of a Waiver of Restrictions on Assessment and
Collection of Deficiency in Tax on Overassessment on Internal Revenue Form 870
or 870-AD (or any successor or comparable form), or (B) the expiration of the
ninety-day period after receipt of the statutory notice of deficiency resulting
in immediate assessment, unless within such 30
-4-
days Aura notifies XxxXxx of its intent to attempt recovery of any relevant
amounts paid under the waiver by filing a timely claim for refund or XxxXxx has
requested that Aura attempt recovery of relevant amounts paid and complied with
and subject to Section 7 hereof, (v) the expiration of the statute of
limitations with respect to the relevant period or (vi) any other event the
parties reasonably agree is a final determination of the tax liability at issue.
4. Books and Records. Aura and XxxXxx agree that the preparation of the
-----------------
federal income and other tax returns, amended returns, claims for refund or IRS
examination or litigation relating to the foregoing may require the use of
records and information that is within the exclusive possession and control of
either of Aura and XxxXxx. Aura and XxxXxx will provide such records,
information and assistance (which may include making employees of any of the
foregoing entities available to provide additional information and explanation
material hereunder) as are requested by Aura or XxxXxx, as the case may be,
during regular business hours, in connection with any of the developments
described in the preceding sentence; provided, however, that XxxXxx shall
provide Aura with all information necessary to enable Aura to file the Group
consolidated federal income tax return for each Affiliation Period as soon as
practicable (but in no event later than five months) after the last day of such
Affiliation Period, and on the date the Group federal income tax returns that
include XxxXxx are filed Aura shall provide XxxXxx with those portions of such
returns relating to XxxXxx. Each of the parties agrees that it shall retain,
until the expiration of the applicable statute of limitations (including
extensions), copies of any tax returns for any Affiliation Periods and for any
other periods that might be subject to adjustment under this Agreement, and
supporting work schedules and other records or information, that may be relevant
to the tax returns of the parties hereto, and that it will not destroy or
otherwise dispose of such records and information without providing the other
party with a reasonable opportunity to review and copy such records and
information.
5. Assignment. This Agreement shall not be transferable or assignable by
----------
either party hereto without the prior written consent of the other party hereto.
The rights and obligations hereunder of the parties shall be binding upon and
inure to the benefit of the parties and their respective permitted successors
and assigns. This Agreement shall be binding upon each corporation in which
XxxXxx owns, directly or indirectly, stock meeting the requirements of section
1504(a)(2) of the Code (a "Subsidiary"), whether or not XxxXxx owns stock in
such corporation upon the execution of this Agreement or at any time during
Affiliation Periods, and XxxXxx shall cause each such corporation as soon as
practicable to assent formally to the terms hereof. Except as herein otherwise
specifically provided, nothing in this Agreement shall confer any right or
benefit upon any person or entity other than the parties hereto and their
respective successors and permitted assigns.
6. Disputes. Any dispute concerning the interpretation of a Section or
--------
amount of payment due under this Agreement shall be resolved by Aura's regular
outside accounting firm, whose judgment shall be conclusive and binding on the
parties and who shall act in consultation with Aura's tax counsel.
-5-
7. Tax Controversies. If any party receives notice of a tax examination,
-----------------
audit or challenge involving amounts subject to this Agreement, such party shall
timely notify the other party of the information and shall provide the other
party a written copy of any relevant letters, forms or schedules received from
the IRS or otherwise in its possession and shall provide notice and information
relating to all material proceedings in connection therewith. In any audit
conference or other proceeding with the IRS or in any judicial proceedings
concerning the determination of the federal income tax liabilities of the Group
or any of its members, including XxxXxx, the Group and each of its members shall
be represented by persons selected by Aura. Except as otherwise expressly
provided in Section 6, the settlement and terms of settlement of any issues
relating to such proceeding shall be in the sole discretion of Aura, and NewCom
hereby appoints Aura as its agent for the purpose of proposing and concluding
any such settlement. Notwithstanding anything to the contrary in this
Agreement, in no event shall Aura be obligated to file any amended returns or
claims for refund with respect to Affiliation Periods.
8. State and Local Taxes. To the extent appropriate, all provisions of
---------------------
this Agreement shall apply with the same force and effect to any state or local
income tax liabilities that are computed on a combined, consolidated or unitary
method; provided, however, that appropriate adjustments shall be made to the
provisions hereof, including computation of Separate Company Tax Liability, with
respect to any period within an Affiliation Period during which XxxXxx or XxxXxx
items were not included on a return of Aura or other members of the Group, or
were included on a return of members of the Group other than Aura. [LWC: THE
PROSPECTUS, AT P. 48, SAYS THAT IT IS EXPECTED THAT AURA AND XXXXXX WILL
CONTINUE TO FILE COMBINED REPORTS IN CALIFORNIA. I AM SORRY TO CONFESS THAT I
AM UNCLEAR HOW TO HANDLE THIS STATEMENT IN THIS AGREEMENT]
9. Apportionment For Tax Purposes. For each taxable year of the Group,
------------------------------
the group's consolidated federal tax liability shall be apportioned for purposes
of computing earnings and profits in accordance with the method provided in
Section 1552(a)(2) of the Code and Treas. Reg. Section 1.1552-1(a)(2).
10. Excess Loss Account Income. If the amount of any excess loss account
--------------------------
(as defined in Treas. Reg. Section 1.1502-32(e)) in the stock of a Subsidiary is
required for any reason to be included in the consolidated federal taxable
income of the Group, XxxXxx or other applicable Subsidiary shall pay to Aura the
amount of any income or franchise tax liability resulting from such inclusion.
Such payment shall be made within ten (10) days following the end of the taxable
year in which such inclusion occurred.
11. Additional Group Members. If at any time Aura or XxxXxx acquires or
------------------------
forms one or more subsidiary corporations that are includable corporations in
the Group consolidated federal income tax returns, Aura or XxxXxx, as the case
may be, shall cause such corporations to become subject to this Agreement and
all references to Subsidiary or Subsidiaries herein, where appropriate, shall
thereafter be interpreted to refer to XxxXxx and such Subsidiaries as a group.
-6-
12. Indemnity. If any party to this Agreement other than Aura is required
---------
to pay tax to the IRS or any state taxing authority in excess of its Separate
Company Tax Liability as determined hereunder, such party shall be entitled to
reimbursement of the excess liability payment from the party to whom the excess
is properly allocable under this Agreement.
13. Miscellaneous.
-------------
(a) Injunction. The parties acknowledge that irreparable damage would
----------
occur in the event that any of the provisions of this Agreement were not
performed in accordance with its specific terms or was otherwise breached. The
parties hereto shall be entitled to an injunction or injunctions to prevent
breaches of the provisions of this Agreement and to enforce specifically the
terms and provisions hereof in any court having jurisdiction, such remedy being
in addition to any other remedy to which they may be entitled at law or equity.
(b) Severability. If any term, provision, covenant or restriction of this
------------
Agreement is held by a court of competent jurisdiction to be invalid, void or
unenforceable, the remainder of the terms, provisions, covenants and
restrictions set forth herein shall remain in full force and effect and shall in
no way be affected, impaired or invalidated. It is hereby stipulated and
declared to be the intention of the parties that they would have executed the
remaining terms, provisions, covenants and restrictions without including any of
such which may be hereafter declared invalid, void or unenforceable. In the
event that any such term, provision, covenant or restriction is held to be
invalid, void or unenforceable, the parties hereto shall use their best efforts
to find and employ an alternate means to achieve the same or substantially the
same result as that contemplated by such term, provision, covenant or
restriction.
(c) Further Assurances. Subject to the provisions hereof, the parties
------------------
hereto shall make, execute, acknowledge and deliver such other instruments and
documents, and take all such other actions, as may be reasonably required in
order to effectuate the purposes of this Agreement and to consummate the
transactions contemplated hereby. Subject to the provisions hereof, each of the
parties shall, in connection with entering into this Agreement, performing its
obligations hereunder and taking any and all actions relating hereto, comply
with all applicable laws, regulations, orders and decrees, obtain all required
consents and approvals and make all required filings with any governmental
agency, other regulatory or administrative agency, commission or similar
authority and promptly provide the parties with all such information as they may
reasonably request in order to be able to comply with the provisions of this
sentence.
(d) Parties in Interest. Except as herein otherwise specifically provided,
-------------------
nothing in this Agreement expressed or implied is intended to confer any right
or benefit upon any person, firm or corporation other than the parties and their
respective successors and permitted assigns.
(e) Waivers. No failure or delay on the part of the parties in exercising
-------
any power or right hereunder shall operate as a waiver thereof, nor shall any
single or partial
-7-
exercise of any such right or power, or any abandonment or discontinuance of
steps to enforce such a right or power, preclude any other or further exercise
thereof or the exercise of any other right or power. No modification or waiver
of any provision of this Agreement nor consent to any departure by the parties
therefrom shall in any event be effective unless the same shall be in writing,
and then such waiver or consent shall be effective only in the specific instance
and for the purpose for which given.
(f) Setoff. All payments to be made by any party under this Agreement
------
shall be made without setoff, counterclaim or withholding, all of which are
expressly waived.
(g) Change of Law. If, due to any change in applicable law or regulations
-------------
or the interpretation thereof by any court of law or other governing body having
jurisdiction subsequent to the effective date of this Agreement, performance of
any provision of this Agreement or any transaction contemplated thereby shall
become impracticable or impossible, the parties hereto shall use their best
efforts to find and employ an alternative means to achieve the same or
substantially the same result as that contemplated by such provision.
(h) Confidentiality. Subject to any contrary requirement of law and the
---------------
right of each party to enforce its rights hereunder in any legal action, each
party agrees that it shall keep strictly confidential, and shall cause its
employees and agents to keep strictly confidential, any information which it or
any of its agents or employees may acquire pursuant to, or in the course of
performing its obligations under, any provision of this Agreement; provided,
however, that such obligation to maintain confidentiality shall not apply to
information which (i) at the time of disclosure was in the public domain not as
a result of acts by the receiving party or (ii) was in the possession of the
receiving party at the time of disclosure.
(i) Headings. Descriptive headings are for convenience only and shall not
--------
control or affect the meaning or construction of any provision of this
Agreement.
(j) Counterparts. For the convenience of the parties, any number of
------------
counterparts of this Agreement may be executed by the parties hereto, and each
such executed counterpart shall be, and shall be deemed to be, an original
instrument.
(k) Governing Law. This Agreement shall be governed by and construed in
-------------
accordance with the laws of the State of California, without regard to its
conflict of law provisions.
(l) Effect of Agreement. This Agreement shall supersede any other tax
-------------------
sharing arrangement or agreement in effect between the parties. Nothing in this
Agreement is intended to change or otherwise affect any election made by or on
behalf of the Group with respect to the calculation of earnings and profits
under section 1552 of the Code.
-8-
(m) Interest. Any payment required to be made hereunder and not made when
--------
due shall bear interest at the rate per annum determined, from time to time, by
the prevailing average borrowing rate of the party required to make payment.
(n) Term of Agreement. This Agreement shall become effective as of the
-----------------
date hereof and shall continue, unless earlier terminated by mutual agreement of
the parties, until expiration of the statute of limitations for all Affiliation
Periods.
(o) Modifications. This Agreement may be modified or amended only pursuant
-------------
to an instrument in writing executed by all the parties hereto.
(p) Entire Agreement. This Agreement constitutes the entire agreement
----------------
among the parties relating to the allocation of the consolidated and combined
tax liabilities of the Group between or among the parties.
(q) Notices. All notices, consents, requests, instructions, approvals and
-------
other communications provided for herein shall be validly given, made or served,
if in writing and delivered personally, by telegram or sent be registered mail,
postage prepaid to:
If to Aura: Aura Systems, Inc.
0000 Xxxxxx Xxxxxx
Xx Xxxxxxx, XX 00000
Attn: Xxxxxx X. Xxxxxxxx
If to XxxXxx: XxxXxx, Inc.
00000 Xxx Xxxxxxx
Xxxxxxxx Xxxxxxx, XX 00000
Attn: Sultan X. Xxxx
or to such other address as any party may have furnished to the other parties in
writing in accordance with this Section 13(q).
IN WITNESS WHEREOF, the undersigned parties have caused this Agreement to
be executed by their duly authorized officers on ________, 1997.
AURA SYSTEMS, INC.
By ____________________________
President
-9-
XXXXXX, INC.
By ______________________________
President
-10-
