EXHIBIT 10.26
S CORPORATION TERMINATION, TAX ALLOCATION AND
INDEMNIFICATION AGREEMENT
This Tax Allocation and Indemnification Agreement, dated as of
September , 1996 (the "Agreement"), is made by and between Information
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Management Resources, Inc., a Florida corporation (the "Company"), and the
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persons identified on the signature pages hereto who constitute all of the
shareholders of the Company on the date hereof (each individually, a
"Shareholder," and collectively, the "Shareholders").
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RECITALS:
A. The Company is an S corporation, within the meaning of section 1361 of
the Internal Revenue Code of 1986, as amended (the "Code"), and the Shareholders
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are its only shareholders as of the date of this Agreement.
B. The Company intends to enter into an underwriting agreement to sell
shares of its common stock to the public in an initial public offering
registered under the Securities Act of 1933, as amended (the "Public Offering").
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C. The Shareholders are currently the only shareholders of the Company and
will continue to be so until immediately before the Closing (as defined below)
of the Public Offering.
D. In connection with the Public Offering, and in order to induce the
investment by the public in the Company, the Company and the Shareholders desire
to provide for an S corporation termination, tax allocation and indemnification
agreement in connection with tax periods prior to and following the Termination
Date (as defined below).
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AGREEMENT:
NOW, THEREFORE, for mutual consideration, the receipt and sufficiency
of which are hereby acknowledged, the Company and the Shareholders do hereby
covenant and agree as follows:
ARTICLE I
DEFINITIONS
The following terms, as used herein, have the following meanings:
"Accumulated Adjustments Account" shall have the meaning assigned to that
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term by section 1368(e)(1) of the Code.
"Closing" shall mean the closing and completion of the offering by the
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Company of shares of its stock, as described in the Form S-1 registration
statement initially filed by the Company with the Securities and Exchange
Commission on September 13, 1996.
"Code" shall have the meaning set forth in Recital A.
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"C Short Year" shall have the meaning set forth in Section 1362(e)(1)(B) of
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the Code.
"Public Offering" shall have the meaning set forth in Recital B.
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"S corporation" shall have the meaning set forth in Section 1361 of the
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Code.
"S corporation Taxable Income" shall mean, for periods beginning on or
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after the date the Company became an S corporation and ending with the close of
the last day of the S Short Year, the sum of (i) the Company's items of
separately stated income and gain (within the meaning of Section 1366(a)(1)(A)
of the Code) reduced, to the extent applicable, by the Company's separately
stated items of deduction and loss (within the meaning of Section 1366(a)(1)(A)
of the Code) and (ii) the Company's nonseparately computed net income (within
the meaning of Section 1366(a)(1)(B) of the Code).
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"S Short Year" shall have the meaning set forth in Section 1362(e)(1)(A)
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of the Code.
"Termination Date" shall mean the date on which the Company's status as
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an S corporation is terminated by reason of revocation of the election for the
Company to be an S corporation pursuant to Section 1362(d)(1) of the Code, which
date shall be not earlier than the date the registration statement related to
the Public Offering is declared effective by the Securities and Exchange
Commission and not later than two days prior to the date of the Closing, as
designated by the Company.
ARTICLE II
THE TERMINATION; TERMINATION PAYMENTS
2.1 Termination of S Corporation Status. The Company shall terminate
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its status as an S corporation pursuant to an election, as permitted pursuant to
Section 1362(d)(1) of the Code, which election shall be made by the Company and
the Shareholders and shall be effective on the Termination Date.
2.2 Termination Payments to Shareholders. Immediately prior to the
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Termination Date, the Company shall distribute to the Shareholders (pro rata in
accordance with the relative number of shares of stock of the Company held by
each Shareholder) an amount equal to the "accumulated adjustments account" of
the Company as of the Termination Date. Such distribution shall take the form
of a promissory note of the Company in the form set forth as Exhibit A. For
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purposes of this Section 2.2, the term "accumulated adjustments account" shall
have the meaning set forth in Section 1368(e) of the Code as determined by the
Chief Financial Officer of the Company in accordance with the Company's books
and records and without regard to any future adjustments to the Company's
taxable income as described in Section 2.3.
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2.3 Future Adjustments. In the event that any future examination of
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any tax return by any taxing authority results in a final determination
increasing the taxable income of the Company for the S Short Year, or for any
period ending prior to the Termination Date, the Company shall distribute to the
Shareholders (pro rata in accordance with the relative number of shares of stock
of the Company held by each Shareholder) within 30 days of such final
determination, cash in an amount equal to the product of (i) the amount of such
increase in the taxable income of the Company resulting from such final
determination, multiplied by (ii) the highest marginal federal income tax rate
applicable to individuals for the taxable year to which such adjustment relates.
2.4 Short Taxable Years. The parties acknowledge that the taxable
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year in which the S corporation status of the Company is terminated will be an S
Termination Year for tax purposes, as defined in Section 1362(e)(4) of the Code.
Pursuant to Section 1361(e)(1) of the Code, the S Termination Year of the
Company shall be divided into two short taxable years: an "S Short Year" and a
"C Short Year." As defined in Section 1362(e)(1)(A) of the Code, the S Short
Year shall be that portion of the Company's S Termination Year ending on the day
immediately preceding the Termination Date. Pursuant to Section 1362(e)(1)(B)
of the Code, that portion of the S Termination Year beginning on the Termination
Date and ending on the last day of the taxable year shall be the C Short Year of
the Company.
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ARTICLE III
ALLOCATION OF INCOME
The Company and the Shareholders agree that for tax purposes
(including for purposes of determining the Company's S corporation Taxable
Income for its fiscal year ending December 31, 1996) the Company shall allocate
its items of income, gain, loss, deduction and credit for its fiscal year ending
December 31, 1996 between the S Short Year and the C Short Year in accordance
with normal tax accounting rules (the so-called "closing of the books method"),
as permitted by Section 1362(e)(3) of the Code. The Company will make the
election permitted by Section 1362(e)(3) in a timely manner. The Shareholders
agree to consent to such election and to provide the Company with the statement
of consent of all shareholders described in Section 1.1362-6(b) of the Treasury
Regulations. The Company and the Shareholders agree to make, and to provide
such information and obtain such consents as are necessary to make, any
comparable election required under applicable state and local income tax laws.
ARTICLE IV
TAXES
4.1 Liability for Taxes Incurred During the S Short Year and for Tax
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Periods Ending Prior to the Termination Date. The Shareholders, severally and
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not jointly, each covenant and agree that: (i) the Shareholders have duly
included, or will duly include, in their own federal, state, and local income
tax returns their respective allocable shares of all items of income, gain,
loss, deduction, or credit attributable to the S Short Year of the Company or to
any prior period (or that portion of any period) during which the Company was an
S corporation to the extent required by applicable law; (ii) such returns shall,
to the extent required by applicable law, include their allocable share of S
corporation 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, and
(iii) the Shareholders shall, to the extent required by applicable law, pay any
and all taxes they are required to pay, as a result of being a shareholder of
the Company, for all taxable periods (or that portion of any period) during
which the Company was an S corporation.
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4.2 Shareholder Indemnification for Tax Liabilities. The
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Shareholders, severally (according to the relative percentage of the outstanding
shares of Company common stock owned by each Shareholder on the last day of any
applicable period to which a liability described below relates) and not jointly,
each hereby indemnify and hold the Company harmless from, against and in respect
of any unpaid income tax liabilities of the Company (including interest and
penalties imposed thereon) (i) which are attributable to the S Short Year or any
period ending prior to the Termination Date, or (ii) which are incurred by the
Company as a result of a final determination of an adjustment (by reason of an
amended return, claim for refund, audit, judicial decision or otherwise) to the
taxable income of the Shareholders for any period (including, without
limitation, the S Short Year) which (in the case of this clause (ii)) results in
a decrease for any period in the Shareholders' taxable income and a
corresponding increase for any period in the taxable income of the Company.
4.3 Company Indemnification for Tax Liabilities. The Company hereby
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indemnifies and agrees to hold the Shareholders harmless from, against and in
respect of income tax liabilities (including interest and penalties imposed
thereof), if any, incurred by the Shareholders as a result of a final
determination of an adjustment (by reasons of an amended return, claim for
refund, audit, judicial decision or otherwise) to the taxable income of the
Company for any period ending after the Termination Date (including, without
limitation, the C Short Year) which results in a decrease for any period in the
Company's taxable income and a corresponding increase for any period in the
taxable income of the Shareholders.
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4.4 Payments. The Shareholders or the Company, as the case may be,
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shall make any payment required under Section 4.3 of this Agreement within 30
days after receipt of notice from the other party that a final determination has
occurred and a payment is due by such party to the appropriate taxing authority.
4.5 Refunds. If the Company receives a refund of any income tax
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(including penalties and interest) for any period prior to the Termination Date,
or as to which it has previously been indemnified by the Shareholders, it shall
pay an amount equal to such refund, within 30 days after receipt thereof, to the
Shareholders in accordance with the percentage of the outstanding shares of
Company common stock owned by each such Shareholder on the last day of any
applicable period which the refund relates. If the Shareholders receive a
refund of any income tax (including penalties and interest) as to which they
have previously been indemnified by the Company, they shall, within 30 days
after receipt thereof, remit an amount equal to such refund to the Company.
4.6 Notice and Control of Proceedings. Each of the Company and the
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Shareholders agree that (i) within 10 days of receiving written notice of any
income tax examinations, claims, settlements, proposed adjustments or related
matters that may affect in any way the income tax liability of a party under
this Agreement, such person shall provide written notice thereof to such each
other party hereto, and (ii) the party or parties who would be responsible for
the payment of the applicable taxes if the matter in question were to be
resolved adversely shall be entitled, in his or its reasonable discretion and at
his or its sole expense, to handle, control and compromise or settle the defense
thereof, so long as such party or parties are acting diligently and in good
faith. Such party or parties shall keep the other party(ies) apprised of the
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status thereof and shall consult with such other party(ies) concerning the
conduct of the defense thereof. Notwithstanding the foregoing, however, the
party handling such matters shall not compromise or settle any matter which
could adversely affect the tax liability of another party without such other
party's prior written consent, which shall not be unreasonably withheld. The
parties hereto shall execute all instruments required to effectuate the
provisions of this Section 4.6.
4.7 Cooperation. The parties will make available to one another, as
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reasonably requested, and to any taxing authority, all information, records or
documents relating to the liability for taxes covered by this Agreement and will
preserve any such information, records or documents until the expiration of the
applicable statute of limitations or extensions thereof. The party requesting
such information shall reimburse the other party for all reasonable out-of-
pocket costs incurred in producing such information.
4.8 Costs. Except as otherwise provided herein, each party shall
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bear his or its own costs in administering this Agreement.
4.9 Conduct of the Company in the Ordinary Course of Business. From
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the date hereof until the Termination Date, the Company will be conducted in the
ordinary course of business, consistent with past practices (including, without
limitation, its receivables collection and expense payment practices).
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ARTICLE V
MISCELLANEOUS
5.1 Counterparts. This Agreement may be executed in counterparts,
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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.
5.2 Construction of Terms. Nothing herein expressed or implied is
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intended, or shall be construed, to confer upon or give any person, firm or
corporation, other than the parties hereto or their respective successors, any
rights or remedies under or by reason of this Agreement.
5.3 Intent of Parties. It is the parties' intent that the liability
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for income taxes arising from the operations of the Company will be borne by the
Shareholders for all periods through and including the S Short Year and by the
Company for periods beginning with the C Short Year, and this Agreement shall be
construed so as most equitably to achieve such intent.
5.4 Governing Law. This Agreement between the parties hereto shall
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be governed by and construed in accordance with the substantive laws of the
State of Florida without regard to its choice of law rules.
5.5 Severability. In the event that any one or more of the
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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.
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5.6 Notices. Unless otherwise provided, any notice required or
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permitted under this Agreement shall be given in writing and shall be deemed
effectively given upon personal delivery or telecopy (receipt confirmed, with a
copy to be sent by reputable overnight courier as set forth herein) to the party
to be notified, or one business day after delivery to a reputable overnight
courier, postage prepaid, and addressed to the party to be notified at the
address indicated for such party on the signature pages hereof, or at such other
address as such party may designate by ten (10) days' advance written notice to
the other parties.
5.7 Amendments and Waivers. Any term of this Agreement may be
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amended, and the observance of any term of this Agreement may be waived (either
generally or in a particular instance and either retroactively or
prospectively), only with the written consent of each of the parties hereto;
provided, however, that no consent of the Company shall be effective unless
approved by a majority of the disinterested members of its Board of Directors.
5.8 Full Understanding. Each Shareholder represents and agrees that
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such Shareholder fully understands his or her right to discuss all aspects of
this Agreement with such Shareholder's private attorney, and that to the extent,
if any, that the Shareholder desired, has availed himself or herself of such
right. Each Shareholder further represents that he or she has carefully read
and fully understands all of the provisions of this Agreement, that such
Shareholder is competent to execute this Agreement, that the Shareholder's
agreement to execute this Agreement has not been obtained by any duress and that
he or she freely and voluntarily enters into it, and that he or she has read
this document in its entirety and fully understands the meaning, intent and
consequences of this document.
(Signature Pages Follow)
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of this
first date set forth above.
INFORMATION MANAGEMENT RESOURCES, INC.
By:
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Xxxxxx X. Xxxxx
Chief Executive Officer
Address for Notice:
Xxxxx 000
00000 XX Xxxxxxx 00 Xxxxx
Xxxxxxxxxx, Xxxxxxx 00000
Telecopy: 813/791-8152
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Xxxxxx X. Xxxxx
Address for Notice:
c/o Information Management Resources, Inc.
Suite 500
00000 XX Xxxxxxx 00 Xxxxx
Xxxxxxxxxx, Xxxxxxx 00000
Telecopy: 813/791-8152
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Xxxxxxx X. Xxxxxxxxx
Address for Notice:
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D.P. Raju
Address for Notice:
S-1
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Xxxxx Xxxxxxx
Address for Notice:
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Xxxxxxxxxxx Xxxxxxxxx
Address for Notice:
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Xxxxxxxx Xxxxx
Address for Notice:
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Xxxxx X. Xxxxxxxx
Address for Notice:
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Xxxxxxx X. Xxxxxxxxx
Address for Notice:
S-2
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Xxxxxx X. Xxxxx and Xxxx Xxxxx
(Tenants by the Entirety)
Address for Notice:
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Xxxxx X. Xxxxxxx
Address for Notice:
S-3
EXHIBIT A
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DEMAND PROMISSORY NOTE
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Executed at Clearwater, Florida
October , 1996
FOR VALUE RECEIVED, INFORMATION MANAGEMENT RESOURCES, INC., a Florida
corporation ("Maker"), promises to pay the persons identified on Exhibit 1
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hereto (each a "Payee" and, collectively, the "Payees"), the Principal (as
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defined herein), with interest on the balance of the Principal outstanding from
time to time at a rate per annum equal to the Interest Rate (as defined herein),
compounded annually, on the following terms and conditions:
1. Definitions. For purposes of this Demand Promissory Note, the
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following capitalized terms shall have the meaning ascribed thereto:
(a) "Agreement" shall mean that certain S Corporation Termination,
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Tax Allocation and Indemnification Agreement, dated as of September ,
1996 by and among Maker and Payees, a copy of which is attached hereto as
Exhibit 2 and is incorporated herein by this reference.
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(b) "Interest Rate" shall mean the prime rate of interest as
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published by the Wall Street Journal under the caption "Money Rates" on the
Termination Date (as defined in the Agreement).
(c) "Principal" shall mean a dollar amount not previously paid to
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Payees equal to the amount payable by Maker to Payees pursuant to Section
2.2 of the Agreement.
2. Payment . The entire Principal balance (together with all accrued
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and unpaid interest) shall be due and payable immediately upon the presentment
of written demand therefore by Payees to Maker; provided, however, that no such
demand may be made prior to _________________, 1996 (45 days after issuance of
the Note). Principal and interest accrued hereunder shall be payable in lawful
money of the United States of America to Payees, at Suite 500, 00000 X.X.
Xxxxxxx 00 Xxxxx, Xxxxxxxxxx, XX 00000, or at such other address as Payees may
designate in writing from time to time to Maker. All payments to Payees
hereunder shall be made pro rata to each Payee in proportion to the number of
shares of stock of the Company held by each Payee on the Termination Date as set
forth on Exhibit 1.
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3. Prepayments. The indebtedness evidenced by this Demand Promissory
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Note may be prepaid in full or in part without penalty at the option of Maker at
any time.
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4. Events of Default. The occurrence of any of the following shall
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constitute an Event of Default under this Note:
(a) Failure by Maker to pay Principal or interest under this Demand
Promissory Note when and as the same becomes due and payable and the
continuation of such failure for a period of five (5) days thereafter; or
(b) Maker shall: (i) be generally unable or admit in writing the
inability to pay Maker's debts as they become due; (ii) have an order for
relief entered in any case commenced by Maker under the federal bankruptcy
laws, as now or thereafter in effect; (iii) commence a proceeding under any
federal or state bankruptcy, insolvency, reorganization or similar law, or
have such a proceeding commenced against Maker and either have an order of
insolvency or reorganization entered against Maker or have the proceeding
remain undismissed and unstayed for ninety (90) days; (iv) make an
assignment for the benefit of creditors; or (v) have a receiver, trustee or
custodian appointed for Maker for the whole or any substantial party of
Maker's properties.
5. Penalty Interest. Upon the occurrence of an Event of Default, and
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to the extent permitted by applicable law, interest shall accrue on the amount
of unpaid Principal and interest at a rate per annum equal to the Interest Rate,
plus two percent (2%), until said Principal and interest is paid in full to
Payees.
6. Waiver. Maker agrees (i) that the failure of Payees to exercise any
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rights or remedies granted hereunder shall not constitute a waiver of such
rights or remedies or any other rights or remedies, or preclude the exercise of
such rights or remedies or any other rights or remedies at any time, and (ii)
that failure of Payees to exercise any rights or remedies granted hereunder, in
the event of a breach thereof or an Event of Default hereunder, shall not be
deemed a waiver of such breach or Event of Default or of any other or further
breaches of Events of Default. In addition, Maker hereby waives demand,
presentment for payment, notice of dishonor, protest and notice of protest, and
diligence in collection and bringing suit and agrees that Payee may extend the
time for payment, accept partial payment, or take, exchange, or release security
without discharging or releasing Maker.
7. Governing Law. This Note shall be construed and enforced in
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accordance with the laws of the State of Florida, without giving effect to
principles of conflicts of law.
8. Rights and Remedies. The rights and remedies set forth herein shall
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be cumulative and in addition to any other or further rights and remedies
available at law or in equity. The invalidity or unenforceability of any term
or provision of this Demand Promissory Note, or the application of such term or
provision to any person or circumstance, shall not impair or affect the
remainder of this Demand Promissory Note and its application to other persons
and circumstances and the remaining terms and provisions hereof shall not be
invalid, but shall remain in full force and effect.
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9. Assignment by Maker. Assignment by Maker and the assumption by any
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third party of Maker's obligations hereunder shall be made only with the written
consent of Payees.
IN WITNESS WHEREOF, this Demand Promissory Note has been executed by
Maker as of the day and year first above written.
MAKER:
INFORMATION MANAGEMENT RESOURCES, INC.
By:
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Xxxxxx X. Xxxxx, President
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