EXHIBIT 10(XV)
TAX ALLOCATION AGREEMENT
This AGREEMENT, dated as of November __, 1997, by and between BRASS EAGLE
INC. ("Brass Eagle"), a Delaware corporation, and NEW DAISY MANUFACTURING
COMPANY ("New Daisy"), a Delaware corporation.
WHEREAS, prior to the consummation of the reorganization effected in
contemplation of the initial public offering of capital stock of Brass Eagle
(the "Reorganization"), Brass Eagle and New Daisy operated as separate operating
divisions of the same corporation; and
WHEREAS, in contemplation of the Reorganization, New Daisy was incorporated
and capitalized as a wholly owned subsidiary of Brass Eagle; and
WHEREAS, pursuant to the Reorganization, Brass Eagle is transferring to New
Daisy and New Daisy is assuming from Brass Eagle, all of Brass Eagle's
nonpaintball related assets, operations, liabilities and obligations (the
"Drop"); and
WHEREAS, New Daisy and Brass Eagle will become members of an "affiliated
group" as defined in (S)1504(a) of the Internal Revenue Code of 1986, as amended
(the "Code"), and will file a consolidated United States Federal income tax
return with respect to the current taxable year; and
WHEREAS, pursuant to the Reorganization and following the Drop, Brass Eagle
is making a distribution to its stockholders of all of the issued and
outstanding shares of the common stock of New Daisy in a reorganization
structured in accordance with (S) 355 of the Code; and
WHEREAS, it is the intent and desire of the parties hereto that a method be
established for allocating the Federal and state tax liabilities between New
Daisy and Brass Eagle as separate divisions and as separate members of the
affiliated group prior to the Reorganization, for reimbursing Brass Eagle for
the payment of any tax liability attributable to New Daisy, for compensating any
party for the use of its losses or tax credits, and to provide for the
allocation and payment of any refund arising from a carryback of losses or tax
credits from subsequent taxable years.
NOW, THEREFORE, in consideration of the mutual covenants and promises
contained herein, the parties hereto agree as follows:
1. Brass Eagle shall file a U.S. income tax return including the income
or loss of New Daisy as a division and as a separate corporation through the
effective date of the Reorganization. New Daisy shall execute and file such
consents, elections and other documents that may be required or appropriate for
the proper filing of such return. The items of income, deduction, credit and
losses of New Daisy from and after the effective date of the Reorganization
shall be reported on a separate return filed by New Daisy. Thus, the parties
will treat the taxable year of New Daisy as consisting of two short tax years,
the first of which shall have begun on the first day of New Daisy's tax year and
ending on the effective date of the Reorganization ("Pre-Reorganization Short
Year"), and the second of which shall have begun on the day after the effective
date of the Reorganization and end on the last day of New Daisy's taxable year.
2. For each taxable period, Brass Eagle and New Daisy shall compute their
separate Federal and state tax liabilities ("Separate Return Liability") as if
each had filed separate tax returns. To the extent that there is taxable income
and tax of New Daisy for the Pre-Reorganization Short Year, New Daisy shall
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reimburse and pay to Brass Eagle the amount of its separately computed tax
liability attributable to such income included on Brass Eagle's consolidated
return. Such Separate Return Liability shall be computed in a manner consistent
with the principals of Reg. (S) 1.1502-33(d)(3) (using 100%) as if the New Daisy
division had been a separate subsidiary for the entire taxable year.
3. For purposes of computing New Daisy's Separate Return Liability for
Federal and state tax purposes for the Pre-Reorganization Short Year, any gain
or loss recognized by Brass Eagle in connection with the Drop shall be
considered the gain of New Daisy.
4. For purposes of computing the Separate Return Liabilities and
consolidated tax liabilities of New Daisy and Brass Eagle no consideration will
be given to alternative minimum taxes due for 1997.
5. For purposes of computing the Separate Return Liabilities of New Daisy
and Brass Eagle, all loss and credit carryovers from 1996 and prior years
including but not limited to Federal net operating losses, state net operating
losses, charitable contribution deduction carryovers and any credits shall be
deemed to have been incurred by New Daisy. In addition, any loss incurred by New
Daisy in the Pre-Reorganization Short Year and in excess of the consolidated net
income for the full year shall be a loss of New Daisy.
6. Payment of the tax liability for a taxable period in which Dairy and
Brass Eagle file a consolidated return shall include the payment of estimated
tax installment due for such taxable period and New Daisy shall pay and
reimburse Brass Eagle for New Daisy's share of each payment within ten (10) days
of receiving notice of such payment from Brass Eagle, but in no event later than
the due date for each such estimated tax installment payment. Any overpayment of
estimated tax attributable to the Pre-Reorganization Short Year taxable income
of New Daisy shall be refunded to New Daisy.
7. If New Daisy's Separate Return Liability for the Pre-Reorganization
Short Year exceeds the consolidated tax liability of New Daisy and Brass Eagle
for the Pre-Reorganization Short Year as a result of the use of any losses or
tax credits of Brass Eagle then New Daisy shall pay to Brass Eagle such excess
within ten (10) days after the filing of the Brass Eagle return for the calendar
year.
8. If Brass Eagle's Separate Return Liability for the entire year exceeds
the consolidated tax liability for such year as a result of the use of any
losses or tax credits of New Daisy, then Brass Eagle shall pay to New Daisy such
excess within ten (10) days after the filing of the return for the calendar
year.
9. If, and to the extent, that any loss or credit allocable to New Daisy
hereunder, including any tax deductions relating to options issued prior to the
Reorganization to purchase stock of New Daisy, that arises with respect to any
tax period through December 31, 2001, is carried back or forward by Brass Eagle
and results in a reduction in Federal or state taxes payable by Brass Eagle,
then Brass Eagle shall pay to New Daisy an amount equal to the difference
between taxes computed without consideration of the carryback or carryforward
and the taxes actually due and paid; provided, however, that the amount, if any,
payable by Brass Eagle pursuant to this sentence shall be reduced by the tax
required to be recognized by Brass Eagle with respect to the Drop. For this
purpose, any utilization of the credit for alternative minimum taxes previously
paid in 1996 and prior years shall be a credit for which payment is due New
Daisy. The amount so computed shall be paid to New Daisy within ten (l0) days
after the filing of the Brass Eagle return for the year in which the loss or
credit is utilized. Notwithstanding the previous provision, no amount shall be
payable pursuant to this provision as long as amounts are due Brass Eagle
pursuant to Section 10 below. Other than as
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provided in this Section 9, no refund or reduction in tax liability arising from
the carryback or carryover of any unused loss or tax credit allocable to Brass
Eagle shall be paid to New Daisy. Any such benefit shall be retained by Brass
Eagle and Brass Eagle shall have sole and absolute discretion in determining
whether or not an election, where allowable, should be made not to carryback
part or all of any separate or consolidated net operating loss or credit for any
taxable year.
10. Brass Eagle and New Daisy understand that it is Brass Eagle's intent
to terminate its LIPO election effective January 1, 1997. To the extent the LIFO
reserve is includable in income ("Section 481(a) adjustment") as a result of the
termination then New Daisy shall pay to Brass Eagle the Federal and state taxes
due as a result of the inclusion. For purpose of computing the amount due Brass
Eagle, any Section 481(a) adjustment includable in Brass Eagle's consolidated
return for the current taxable year shall be considered to be New Daisy's income
for the Pre-Reorganization Short Year and shall be included in New Daisy's
income for purposes of computing New Daisy's Separate Return Liability. To the
extent any Section 481(a) adjustment is includable in Brass Eagle's income in
any subsequent taxable year, the amount due from New Daisy shall be equal to the
difference between the actual regular tax due and the regular tax liability
computed on the income of Brass Eagle before inclusion of the Section 481(a)
adjustment. To the extent taxable income when reduced by the Section 481(a)
adjustment is negative, the recomputed tax liability of Brass Eagle shall be a
refund amount computed by multiplying the negative income by the highest
combined marginal Federal and state tax rates to which Brass Eagle could be
subject in the year the calculation under this Section 10 is being made. Net
operating loss carryforwards and credit carryforwards, but not carrybacks, if
any, will be considered in computing the amount due from New Daisy. For this
purpose, no consideration will be given to any alternative minimum tax nor to
any credits for alternative minimum tax paid to the extent generated in years
subsequent to 1996. The amount due Brass Eagle shall be paid by New Daisy within
ten (10) days of the filing of the returns for Brass Eagle for the year in which
the Section 481(a) adjustment is included in income.
Notwithstanding provisions of Sections 9 and 10 to the contrary, if any
amount is due to New Daisy by Brass Eagle pursuant to Section 9 above while any
Section 481(a) adjustment remains to be includable in the income of Brass Eagle
and for which an amount will be due Brass Eagle, then no amount will be paid to
either party by the other until the carryovers of losses and credits for which
New Daisy is to be reimbursed have been fully absorbed by Brass Eagle.
11. If Brass Eagle's tax liability is adjusted for the Pre-Reorganization
Short Year or any prior taxable year, whether by means of an amended return,
claim for refund or after tax audit by the Internal Revenue Service, the
liability of each member shall be recomputed to give effect to such adjustments,
and, in the case of a refund, Brass Eagle shall make payment to New Daisy for
its proportionate share of the refund, if any, determined in the same manner as
described in Paragraph 2 above, within ten (10) days after the refund is
received by Brass Eagle. In the case of an increase in Brass Eagle's tax
liability, New Daisy shall pay and/or reimburse Brass Eagle for its allocable
share of such increased tax liability attributable to adjustments of New Daisy
within ten (10) days after receiving notice of such liability from Brass Eagle.
12. To the extent that any payment made hereunder results in the
recognition of income by the receiving party with respect thereto, the amount of
such payment shall be increased or "grossed up" by an amount necessary to take
account of any Federal, state or local income taxes payable by such receiving
party as a result of the receipt of such payment, such that the receiving party,
after the imposition of any such tax and the payment of any such "gross up"
amount, shall not incur any out-of-pocket expense with respect thereto.
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13. This Agreement shall be binding upon and inure to the benefit of any
successor, whether by statutory merger, acquisition of substantially all of the
assets or otherwise, to any of the parties hereto, to the same extent as if such
successor had been an original party hereto.
14. The parties agree to timely provide each other with that information,
including, but not limited to, tax returns and workpapers necessary to verify
the amounts due pursuant to this Agreement.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
as of the day and year first written above.
BRASS EAGLE INC.
By:
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E. Xxxx Xxxxx, President
DAISY MANUFACTURING COMPANY
By:
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Xxxxxx Xxxxxxx, President
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