TAX ALLOCATION AND INDEMNITY AGREEMENT
Agreement, dated as of October 31, 1997 and retroactively applied to
include the calendar year ended December 31, 1997, by and among Stellex
Industries, Inc., (formerly Stellex Holdings Corp.), a Delaware corporation
("Parent"), TSMD Acquisition Corp., a Delaware corporation, Stellex Microwave
Systems, Inc. (formerly X-X TSMD Inc.), a California corporation, (together
"Stellex Microwave") KII Holding Corp., a Delaware corporation, and KII
Acquisition Corp., Stellex Aerospace (formerly Xxxxxxxx Industries, Inc.), a
California corporation, and its direct subsidiaries (together " Stellex
Aerospace").
WITNESSETH
WHEREAS, the parties hereto are members of an affiliated group (the
"Affiliated Group") as defined in section 1504(a) of the Internal Revenue Code
of 1986, as amended (the "Code"); and
WHEREAS, it is the intent of the parties hereto that an agreement be
entered into (i) to allocate the consolidated Federal income tax liability of
the Affiliated Group between the Parent, Stellex Microwave and Stellex Aerospace
pursuant to a method specified in regulations of the Treasury Department that
would impose on Parent, Stellex Microwave and Stellex Aerospace, for the period
beginning January 1, 1997 through December 31, 1997 and for subsequent periods,
liability for an amount that approximates the liability that Parent, Stellex
Microwave and Stellex Aerospace each would incur if they filed Federal income
tax returns as separate affiliated groups; and (ii) to provide that Parent, and
Stellex Microwave and Stellex Aerospace each shall bear its appropriate portion
of the liability of the Affiliated Group for consolidated Federal income tax in
respect of prior periods.
NOW THEREFORE, in consideration of the mutual covenants and promises
contained herein, the parties hereto agree as follows:
1. Filing of Consolidated Returns. A consolidated Federal income tax
return shall be filed by Parent for the taxable year ending December 31, 1997,
and for each subsequent taxable period in respect of which this Agreement is in
effect and for which the Affiliated Group is required or permitted to file a
consolidated Federal income tax return.
2. Current and Future Taxable Periods. For the taxable year of the
Affiliated Group ending December 31, 1997 and for each taxable period
thereafter, the Affiliated Group shall be divided into three separate groups,
Parent, Stellex Microwave and Stellex Aerospace. The consolidated Federal income
tax liability of the Affiliated Group shall be allocated among the three groups
in accordance with the method set forth in Treasury regulation sections
1.1552-1(a)(2) and 1.1502-33(d)(3) (using a fixed percentage of 100%) by
considering each group as a separate affiliated group except that (i)
modifications to the separate taxable income will be made in accordance with
Treasury regulation section 1.1552-1(a)(2)(ii)(a) through (i) in the same manner
as if all
corporations were members of a single affiliated group, and (ii) carryforwards
and carrybacks of losses and credits shall be taken into account, and to the
extent of any reduction of tax liability of any separate group member to which
the losses or credits did not arise, the amount of tax credit utilized will be
remitted to the separate group member to which the losses or credits were
generated. The corporate surtax exemption shall be allocated to Parent. Any
liability of the Affiliated Group for alternative minimum tax, environmental tax
or any other Federal income tax imposed on the Affiliated Group on a
consolidated basis by any section of the Code other than Code section 11 shall
be allocated in accordance with any reasonable method that is consistent with
the principles of this Agreement and the provisions of any governing Treasury
regulations or other administrative pronouncements of the Internal Revenue
Service. In any event, no individual party to this tax allocation agreement
shall pay more income tax in any period of one or more taxable years than it
would have paid for the same period if it had filed a separate Federal income
tax return. However, any taxes not paid by reason of this limitation shall be
allocated to Stellex Microwave and Stellex Aerospace based on a proration using
taxable income.
3. Payments. Stellex Microwave and Stellex Aerospace shall pay to
Parent installments of estimated tax computed pursuant to the principles set
forth in section 2 above, on or before the due dates for payments of estimated
tax by the Affiliated Group. Any payments of estimated tax by Stellex Microwave
and Stellex Aerospace to Parent shall be taken into account in determining the
payment due from Stellex Microwave and Stellex Aerospace pursuant to section 2,
and any overpayment of estimated tax shall be refunded to Stellex Microwave and
Stellex Aerospace. A refund or payment of tax, calculated on the basis of the
amount of tax payable for the taxable year as calculated by Parent as of the due
date (without regard to extensions) for the Federal income tax return of the
Affiliated Group, shall be paid on or before that due date, and any adjustment
to the amount of refund or payment of tax, calculated on the basis of the amount
of tax payable for that taxable year as shown on the Federal income tax return
of the Affiliated Group as of the due date (with regard to extensions), shall be
paid on or before that due date. Stellex Microwave and Stellex Aerospace shall
pay to Parent all allocated costs associated with the preparation of tax returns
covered under this tax sharing agreement within ten days of receiving a xxxx.
4. Adjustments to Tax Liability. If the consolidated Federal income tax
liability of the Affiliated Group is adjusted for any taxable period, whether by
means of an amended return or claim for refund or after an audit by the Internal
Revenue Service, the Federal income tax liability of Stellex Microwave and
Stellex Aerospace pursuant to section 2 or section 4 of this Agreement shall be
recomputed, if necessary, to give effect to those adjustments as if they had
been part of the original computation pursuant to section 2 or section 4. The
obligation to make any payment of additional Federal income tax, interest and/or
penalties or the right to receive any refund of Federal income tax shall be
allocated between Parent, Stellex Microwave and Stellex Aerospace accordingly.
Any additional tax that Stellex Microwave and Stellex Aerospace is obligated to
pay shall be paid to Parent, and any refund of tax to which Stellex Microwave
and Stellex Aerospace is entitled to receive shall be paid by Parent, within ten
days of, respectively, the date
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Stellex Microwave and Stellex Aerospace receives notice from Parent or the date
Parent receives the refund from the Treasury Department.
5. Appointment of Parent as Agent. Parent shall prepare, or arrange for
outside consultants to prepare, and file the consolidated Federal and State
income tax returns of the Affiliated Group required to be filed with the
Internal Revenue Service or State Departments of Revenue. In its sole
discretion, Parent shall have the right in connection with any of those returns
to determine (i) the manner in which the return(s) shall be prepared and filed,
including, without limitation, the manner in which any item of income, gain,
loss, deduction, credit or any other item shall be reported, (ii) whether any
extension shall be requested and (iii) the elections that will be made by the
Affiliated Group or any members thereof. Each member of the Affiliated Group
shall execute and file those consents, elections, appointments, powers of
attorney and other documents that Parent determines may be necessary or
appropriate for the proper filing of those returns. Each member of the
Affiliated Group shall provide Parent or any other member of the Affiliated
Group, in a timely manner, any data necessary for the proper and timely filing
of returns, and otherwise shall cooperate as necessary to carry out the purposes
of this Agreement.
6. New Members. If during any taxable period Parent or any other
member of the Affiliated Group acquires or organizes another corporation that is
required to be included in the consolidated Federal income tax return of the
Affiliated Group, that corporation shall join in and be bound by this Agreement.
7. Indemnification.
a. General Principles. It is the intent of this Agreement that
Parent, Stellex Microwave and Stellex Aerospace each be liable for an amount in
respect of Federal income tax of the Affiliated Group as that amount is
determined pursuant to this Agreement and that Parent, Stellex Microwave and
Stellex Aerospace each receive its respective share, as so allocated, of any
reduction in Federal income tax liability of the Affiliated Group.
b. Indemnification. The Parent shall be responsible for, and
shall protect, defend, indemnify and hold harmless Stellex Microwave and Stellex
Aerospace from, any amount in respect of Federal income tax allocable to Parent
pursuant to this Agreement. Stellex Microwave and Stellex Aerospace shall be
responsible for, and shall protect, defend, indemnify and hold harmless the
Parent from, any amount in respect of Federal income tax allocable to Stellex
Microwave and Stellex Aerospace pursuant to this Agreement.
8. Retention of Books and Records. No member of the Affiliated Group
shall destroy or permit the destruction of any books, records or files
pertaining to any other member of the Affiliated Group without first having
offered in writing to deliver those books, records and files to the other
member, and the other member shall have the right upon prior notice to inspect
and to copy the same at any time during business hours for any proper purpose.
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9. Other Income and Franchise Taxes. The liability of Parent, Stellex
Microwave and Stellex Aerospace in respect of state, local and foreign income
and franchise taxes that are computed pursuant to provisions applicable to
affiliated, combined, unitary or other groups shall be determined and paid in a
manner consistent with the local taxing jurisdiction and the intent and
provisions of this Agreement. Calculation of the separate liability of Parent,
Stellex Microwave and Stellex Aerospace for these other taxes shall conform to
the appropriate state, local and foreign income and franchise tax provisions
governing affiliated, combined, unitary or other groups.
10. Entire Understanding. This Agreement constitutes the entire
agreement of the parties concerning the subject matter hereof and, effective as
of the date hereof and for the taxable periods to which this Agreement applies,
supersedes all other agreements. This Agreement shall allocate the tax
liabilities of the Affiliated Group for the period January 1, 1997 through
December 31, 1997, and all subsequent taxable years unless Parent, Stellex
Microwave and Stellex Aerospace mutually agree to terminate this Agreement.
Notwithstanding its termination, this Agreement shall continue in effect with
respect to any payment or refunds due for all taxable periods prior to
termination.
11. Successors and Assigns. This Agreement shall be binding upon and
inure to the benefit of any successor, whether by statutory merger, acquisition
of assets or otherwise, to any of the parties hereto, to the same extent as if
the successor had been an original party to the Agreement.
12. Expenses. Parent, Stellex Microwave and Stellex Aerospace each
shall bear any and all expenses that arise from its obligations under this
Agreement.
13. Notices. All notices and other communications hereunder shall be
in writing and shall be delivered by hand or mailed by registered or certified
mail (return receipt requested) to the parties at the following addresses (or at
such other addresses for a party as shall be specified by like notice) and shall
be deemed given on the date on which the notice is received.
If to Parent:
0000 Xxxxxxxx, 00xx Xxxxx
Xxx Xxxx, Xxx Xxxx 00000
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If to Stellex Microwave
Stellex Microwave Systems, Inc.
Xxxxxxx Research Park
0000 Xxxxxxxx Xxxxxx
Xxxx Xxxx, XX 00000-0000
If to Stellex Aerospace:
00000 Xxxxxx Xxxxxx, Xxxxx 000
Xxxxxxxx Xxxxx, XX 00000
14. Resolution of Dispute. Any dispute between the parties with
respect to this Agreement shall be resolved by a public accounting firm or a law
firm reasonably satisfactory to Parent, Stellex Microwave and Stellex Aerospace
or pursuant to an alternative dispute arrangement agreed to by the parties.
15. Legal Enforceability. Any provision of this Agreement that is
prohibited or unenforceable in any jurisdiction shall be ineffective as to that
jurisdiction to the extent of that prohibition or unenforceability without
invalidating the remaining provisions hereof. Any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable that provision in any other jurisdiction. Without prejudice to any
rights or remedies otherwise available to any party hereto, each party hereto
acknowledges that damages would be an inadequate remedy for any breach of the
provisions of this Agreement and agrees that the obligations of the parties
hereunder shall be specifically enforceable.
16. Controlling Law. This Agreement shall be governed by the laws of
the State of New York.
IN WITNESS WHEREOF, the Parties hereto have caused this Agreement to be
executed by their duly authorized representatives as of the date first written
above.
Stellex Industries, Inc.
By: /s/ Xxxxxxx X. Xxxxxx
Its: President
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TSMD Acquisition Corp.
By: /s/ Xxxxxxx X. Xxxxxx
Its: President
Stellex Microwave Systems, Inc.
By: /s/ Xxxxxxx X. Xxxxxx
Its: Treasurer
KII Holding Corp.
By: /s/ Xxxxxxx X. Xxxxxx
Its: Treasurer
KII Acquisition Corp.
By: /s/ Xxxxxxx X. Xxxxxx
Its: Treasurer
Stellex Aerospace
By: /s/ Xxxxxxx X. Xxxxxx
Its: Assistant Treasurer
Paragon Precision Products
By: /s/ Xxxxxxx X. Xxxxxx
Its: Assistant Treasurer
Xxxxx Machining International
By: /s/ Xxxxxxx X. Xxxxxx
Its: Assistant Treasurer
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Scanning Electron Analysis
Laboratories, Inc.
By: /s/ Xxxxxxx X. Xxxxxx
Its: Assistant Treasurer
General Inspection Laboratories, Inc.
By /s/ Xxxxxxx X. Xxxxxx
Its: Assistant Treasurer
