Exhibit 10.6
TAX DISAFFILIATION AGREEMENT
This Agreement is entered into as of the __ day of ____, ____ between
Western Resources, Inc., a Kansas corporation (the "Company"), and Westar
Industries, Inc., a Kansas corporation ("Westar").
WITNESSETH:
WHEREAS, the Company, Public Service Company of New Mexico, a New Mexico
corporation, HVOLT Enterprises, Inc., a Delaware corporation ("Parent"), [HVK,
Inc.], a Kansas corporation and a wholly owned subsidiary of Parent, and [HVNM,
Inc.], a Kansas corporation and a wholly owned subsidiary of Parent, have
entered into an Agreement and Plan of Restructuring and Merger dated as of
November 8, 2000 (the "Merger Agreement");
WHEREAS, the Company and Westar intend to enter into an Asset Allocation
and Separation Agreement dated November 8, 2000 (the "Allocation and Separation
Agreement"), providing for the distribution by the Company to its shareholders
of all of the common stock of Westar (the "Split-Off");
WHEREAS, the Company and Westar desire to set forth their agreement on the
rights and obligations of the Company, Westar and their respective Affiliates
with respect to various Tax matters and the handling and allocation of federal,
state, and local Taxes incurred in certain Taxable periods;
NOW, THEREFORE, in consideration of the mutual covenants and agreements
hereinafter set forth, the parties agree as follows:
1 Definitions.
-----------
(a) As used in this Agreement:
"Affiliate" (and the correlative meaning, "Affiliation") of any person
shall mean any individual, corporation, partnership or other entity,
directly or indirectly, controlling, controlled by or under common control
with such person.
"After-Tax Amount" is defined in Section 5(g).
"Business Day" shall mean any day other than a Saturday, Sunday or one
on which banks are authorized or required by law to close in New York, New
York.
"Code" shall mean the Internal Revenue Code of 1986, as amended, or
any successor thereto.
"Combined Kansas Tax" shall mean the combined, unitary or other
similar Kansas Tax of the Company Consolidated Group or determined on the
basis of any member included in the Company Group and any member included
in the Westar Group.
"Combined State/Local Tax" shall mean the combined, unitary or other
similar state (other than Kansas) or local Tax of the Company Consolidated
Group or determined on the basis of any member included in the Company
Group and any member included in the Westar Group.
"Company Consolidated Group" shall mean, with respect to any Taxable
period, the corporations which are members of the affiliated group of
corporations of which the Company is the common parent (within the meaning
of Section 1504 of the Code).
"Company Group" shall mean the corporations which are members of the
Company Consolidated Group during any Taxable period, excluding the
corporations which are the members of the Westar Group.
"Consolidated Federal Tax" shall mean, with respect to income Taxes,
the Federal Tax liability of the Company Consolidated Group determined on a
consolidated basis.
"Effective Tax Rate" is defined in Section 5(g).
"Federal Tax" shall mean any United States Federal Tax.
"Final Determination" shall mean (i) with respect to Federal Taxes,
(A) a "determination" as defined in Section 1313(a) of the Code, or (B) the
date of acceptance by or on behalf of the Internal Revenue Service of Form
870-AD (or any successor form thereto), as a final resolution of Federal
Tax liability for any Taxable period, except that a Form 870-AD (or
successor form thereto) that reserves the right of the taxpayer to file a
claim for refund and/or the right of the Internal Revenue Service to assert
a further deficiency shall not constitute a Final Determination with
respect to the item or items so reserved; (ii) with respect to Taxes other
than Federal Taxes, any final determination of liability in respect of a
Tax provided for under applicable law; (iii) any final disposition by
reason of the expiration of the applicable statute of limitations; and (iv)
the payment of Tax by the Company, Westar, or any Affiliate of the Company
or Westar, whichever is responsible for payment of such Tax under
applicable law, with respect to any item disallowed or adjusted by a Taxing
Authority, provided that the provisions of Section 8 hereof have been
complied with, or, if such section is inapplicable, that the party
responsible under the terms of this Agreement for such Tax is notified by
the party paying such Tax that it has determined that no action should be
taken to recoup such disallowed item, and the other party agrees with such
determination.
"Final Liability" is defined in Section 8(c).
"Gross-Up Payment" shall have the meaning set forth in the employment
agreements listed in Item 10 of Section 7.9 of the Company Disclosure
Letter to the Merger Agreement.
2
"Kansas Tax" shall mean any Kansas state Tax.
"Other Taxes" are defined in Section 4.
"Pre-Split-Off Combined Kansas Tax Return" shall mean the combined
Kansas Tax Return to be filed on behalf of the Company Consolidated Group
for any Pre-Split-Off Period that has not been filed prior to the Split-Off
Date.
"Pre-Split-Off Combined State/Local Tax Return" shall mean the
combined, unitary or other similar State/Local Tax Return (other than a
Pre-Split-Off Combined Kansas Tax Return) to be filed on behalf of the
Company Consolidated Group (or any member thereof) and which includes
members of the Westar Group for any Pre-Split-Off Period that has not been
filed prior to the Split-Off Date.
"Pre-Split-Off Consolidated Federal Tax Return" shall mean the
consolidated Federal Tax Return to be filed on behalf of the Company
Consolidated Group for any Pre-Split-Off Period that has not been filed
prior to the Split-Off Date.
"Post-Split-Off Period" shall mean any Taxable period beginning after
the Split-Off Date.
"Pre-Split-Off Period" shall mean any Taxable period ending before or
including the Split-Off Date.
"Pre-Split-Off Tax Liability" shall mean the Tax liability of the
Company and each corporation included in the Company Consolidated Group for
all Pre-Split-Off Periods or portions thereof ending on or before the
Split-Off Date regardless of whether any such liability has been previously
assessed in whole or in part or is assessed in whole or in part after the
date hereof, or whether such liability is or was imposed on the Company
Consolidated Group collectively or on any corporation included within any
such group separately.
"Preliminary Kansas Tax Return" shall mean any preliminary Pre-Split-
Off Combined Kansas Tax Return provided to Westar pursuant to Section 2(e).
"Preliminary State/Local Tax Return" shall mean any preliminary Pre-
Split-Off Combined State/Local Tax Return (other than a Preliminary Kansas
Tax Return) provided to Westar pursuant to Section 2(f).
"Preliminary Federal Tax Return" shall mean any preliminary Pre-Slit-
Off Consolidated Federal Tax Return provided to Westar pursuant to Section
2(d).
"Prepaid Amount" is defined in Section 8(c).
"Prime" shall mean the rate announced from time to time as "prime" by
The Chase Manhattan Bank as its prime rate in New York City.
3
"Pro Forma Kansas Return" means any pro forma Kansas Tax Return
setting forth the Combined Kansas Tax liability of the Westar Group
attributable to a Pre-Split-Off Combined Kansas Tax Return.
"Pro Forma State/Local Return" means any pro forma state or local Tax
Return setting forth the Combined State/Local Tax liability of the Westar
Group attributable to a Pre-Split-Off Combined State/Local Tax Return.
"Pro Forma Federal Return" means any pro forma Federal Tax Return
setting forth the Consolidated Federal Tax liability of the Westar Group
attributable to a Pre-Split-Off Consolidated Federal Tax Return.
"Referee" is defined in Section 15.
"Return" shall mean any Tax Return, statement, report or form
(including any consolidated, combined or unitary Returns, estimated Tax
Returns and reports, and information Returns and reports) required to be
filed with any Taxing Authority.
"Split-Off Date" shall mean the date on which the Company distributes
to its shareholders the common stock of Westar held by the Company on such
Split-Off Date.
"State Parent" shall mean any member of the Company Group that is
required to file a Pre-Split-Off Combined State/Local Tax Return.
"State/Local Tax" shall mean any state or local Tax.
"Stock Purchase Option Agreement" shall mean the stock option purchase
agreement for Westar Generating, Inc. between the Company and Westar dated
as of [ ], 2000.
"Tax" (and the correlative meaning, "Taxes," "Taxing" and "Taxable")
shall mean (i) any net income, gross income, gross receipts, alternative or
add-on minimum, sales, use, ad valorem, franchise, profits, license,
withholding, payroll, employment, excise, transfer, recording, severance,
stamp, occupation, premium, property, environmental, custom duty, or other
tax, governmental fee or other like assessment or charge of any kind
whatsoever, together with any interest and any penalty, addition to Tax or
additional amount imposed by a Taxing Authority; (ii) any liability of the
Company, Westar or any Affiliate of the Company or Westar (or, in each
case, any predecessor or successor in interest thereto by merger or
otherwise), as the case may be, for the payment of any amounts of the type
described in clause (i) for any Taxable period resulting from the
application of Treasury Regulation Section 1.1502-6 or, in the case of any
similar provision applicable under state, local or foreign law; and (iii)
any liability of the Company, Westar or any Affiliate of the Company or
Westar (or, in each case, any predecessor or successor in interest thereto
by merger or otherwise) for the payment of any amounts described in clause
(i) as a result of any express or implied obligation to indemnify any other
party; provided, however, that Tax shall include all
4
or any portion of the Gross-Up Payment attributable to any Tax described in
clause (i) above or the loss of any Tax deductions attributable thereto
only for purposes of Section 7 and 8 and, for those purposes, only as a Tax
shared by both parties for a Pre-Split-Off Period.
"Tax Asset" shall mean any net operating loss, net capital loss,
investment Tax credit, foreign Tax credit, charitable deduction or any
other credit or Tax attribute, including additions to basis of property,
which could reduce Federal Taxes including, without limitation, deductions,
credits, or alternative minimum net operating loss carryforwards related to
alternative minimum Taxes.
"Taxing Authority" shall mean any governmental authority responsible
for the imposition of any Tax.
"Tax Settlement" is defined in Section 8(b).
"Westar Combined Kansas Tax Allocation Statement" is defined in
Section 2(e).
"Westar Combined State/Local Tax Allocation Statement" shall mean the
statement setting forth the amount of the overpaid or underpaid portion of
the Westar Group's allocable share of the total Combined State/Local Tax
liability shown on the Preliminary State/Local Return.
"Westar Consolidated Federal Tax Allocation Statement" is defined in
Section 2(d).
"Westar Group" shall mean the corporations which are members of the
affiliated group of corporations of which Westar is the common parent
(within the meaning of Section 1504 of the Code) immediately after the
Split-Off Date and any successors thereto.
(b) Whenever this Agreement specifies that consent is not to be
unreasonably withheld, the determination shall take into account, among
other things, the relative amount of potential Tax exposure or refund
involved for the members of the Company Group on the one hand and the
members of the Westar Group on the other hand, and if the consent relates
to bringing proceedings in one venue rather than another, the impact on
such decision on such interests of each Group. Any controversy over refusal
of a consent shall be resolved pursuant to Section 15(b).
(c) Any term used in this Agreement which is not defined in this Agreement
shall, to the extent the context requires, have the meaning assigned to it
in the Code or the applicable Treasury regulations thereunder.
5
2 Administrative and Compliance Matters.
-------------------------------------
(a) Sole Tax Sharing Agreement. The parties acknowledge that there has not
been a Final Determination of all Pre-Split-Off Tax Liabilities, and that
the members of the Westar Group are includible in the Company Consolidated
Group for the Pre-Split-Off Period. Any and all existing Tax sharing
agreements or arrangements, written or unwritten, between any members of
the Company Group, on the one hand, and any members of the Westar Group, on
the other hand, shall be terminated as of the Split-Off Date, and after
such date this Agreement shall constitute the sole Tax sharing agreement
between any members of the Company Group, on the one hand, and any members
of the Westar Group, on the other hand.
(b) Designation of Authority. Treasury regulations (and, by incorporation
of such Treasury regulations, Kansas state Tax rules) designate the Company
as the sole agent of all members of the Company Consolidated Group with
respect to all Consolidated Federal Tax matters (and, to the extent
provided by Kansas Tax law, Combined Kansas Tax matters, respectively) for
Pre-Split-Off Periods. The Company, as agent, shall be responsible to see
that all such administrative matters relating thereto shall be handled in a
timely and appropriate manner. The Company shall be Westar's agent with
respect to making payments to, or collecting Refunds from, any Taxing
Authority with respect to Pre-Split-Off Tax Liabilities relating to any
Consolidated Federal Taxes or Combined Kansas Taxes that are due from or to
the Westar Group hereunder. Westar shall reimburse the Company, or the
Company shall reimburse Westar, as the case may be, for the Westar
allocable share. In so acting as agent, the Company shall not take any
action on behalf of any member of the Westar Group, including, without
limitation, strategies relating to waivers of any statute of limitations
without the prior written consent of Westar (which consent shall not be
unreasonably withheld) if such action is reasonably likely to materially
increase the amount of Tax liability of the Westar Group not subject to
indemnification under Section 5(b) over the amount it would have been
without such action. In the event of disagreement over whether consent is
required or is being unreasonably withheld, the parties shall resolve their
disagreement in accordance with Section 15.
(c) Westar Authority. Notwithstanding Section 2(b) hereof, if the Internal
Revenue Service District Director (or a corresponding state official) deals
directly with any member of the Westar Group in respect of its Consolidated
Federal Tax, Combined Kansas Tax or Combined State/Local Tax liability for
a Pre-Split-Off Period, Westar shall have full authority to act or to
designate such authority to such member of the Westar Group; provided,
however, that Westar shall notify the Company, or such member of the Westar
Group shall notify the Company and Westar, as the case may be, of any such
communications or dealings and, with respect to any matters involving any
Consolidated Federal Tax, Combined Kansas Tax or Combined State/Local Tax
for any Pre-Split-Off Period not subject to indemnification under Section
5(b), shall deal with any such Tax Authority only as the Company specifies
pursuant to Section 2(b) hereof
6
(subject to the limitations contained in this Agreement including the
second to last sentence of Section 2(b)).
(d) Pre-Split-Off Consolidated Federal Tax Returns.
(i) The Company shall prepare and file the consolidated Federal Tax
Return for any Pre-Split-Off Period that has not been filed prior to the
Split-Off Date (a "Pre-Split-Off Consolidated Federal Tax Return").
(ii) Westar shall deliver to the Company the Pro Forma Federal
Return 55 days prior to the due date for filing the Pre-Split-Off
Consolidated Federal Tax Return (including extensions). The Company shall
deliver to Westar the Preliminary Federal Tax Return 35 days prior to the
due dates for filing (including extensions) and a statement setting forth
the amount of the unpaid or overpaid portion of the Westar Group's
allocable share of the total Consolidated Federal Tax liability, if any,
shown on such Preliminary Federal Tax Return along with any related
calculations used by the Company in determining such liability (the "Westar
Consolidated Federal Tax Allocation Statement"). Such Pro Forma Federal
Return and such Preliminary Federal Tax Return shall set forth all
necessary and required information (including, without limitation,
schedules, statements and such supporting documentation as the Company or
Westar may reasonably request from time to time) in such form as would be
required for filing with the Internal Revenue Service and shall correctly
reflect the facts regarding the income, properties, operations and status
of any entity required to be shown thereon. Except as otherwise required by
law, such Pro Forma Federal Return or Preliminary Federal Tax Return shall
be prepared making the elections and using the methods of accounting that
were made or used by the Company Consolidated Group on the consolidated
Federal Tax Return most recently filed with respect to a Tax period ending
prior to the Split-Off Date unless the parties agree to make or use some
other elections or methods of accounting (which agreement shall not be
unreasonably withheld). The Company and Westar may (at their own expense)
review all work papers and procedures used to prepare each Pro Forma
Federal Return or Preliminary Federal Tax Return.
(iii) Westar shall notify the Company in writing of any proposed
adjustments to a Preliminary Federal Tax Return including the Westar
Consolidated Federal Tax Allocation Statement within 15 days of the date
upon which it receives such Preliminary Federal Tax Return from the
Company. In the event that the Company shall, within 5 days following the
receipt of such notification from Westar, disagree with any proposed
adjustment made under the above provision, such disagreement shall be
resolved in accordance with Section 15(b). Upon agreement by the parties as
to proposed adjustments, if any, to a Preliminary Federal Tax Return
including the Westar Consolidated Federal Tax Allocation Statement, or upon
a decision of the Referee, the Preliminary Federal Tax Return as adjusted
(if at all) shall be deemed to be a final Pre-Split-Off Consolidated
Federal Tax Return for purposes of this Agreement.
7
(iv) Prior to the due date of the Pre-Split-Off Consolidated Federal
Tax Return (including any extensions), the Company shall pay to Westar or
Westar shall pay to the Company the overpayment or underpayment,
respectively, of the Westar Group allocation shown on the Westar
Consolidated Federal Tax Allocation Statement taking into account any
payments made by Westar or any member of the Westar Group to the Company,
any member of the Company Group or any Taxing Authority.
(e) Pre-Split-Off Combined Kansas Tax Return.
----------------------------------------
(i) The Company shall prepare and file the Combined Kansas Tax
Return for any Pre-Split-Off Period that has not been filed prior to the
Split-Off Date (a "Pre-Split-Off Combined Kansas Tax Return").
(ii) Westar shall deliver to the Company the Pro Forma Kansas Return
55 days prior to the due date for filing the Pre-Split-Off Combined Kansas
Tax Return (including extensions). The Company shall deliver to Westar the
Preliminary Kansas Tax Return 35 days prior to the due dates for filing
(including extensions) and a statement setting forth the amount of the
unpaid or overpaid portion of the Westar Group's allocable share of the
total Combined Kansas Tax liability, if any, shown on such Preliminary
Kansas Tax Return along with any related calculations used by the Company
in determining such liability (the "Westar Combined Kansas Tax Allocation
Statement"). Such Pro Forma Kansas Return or Preliminary Kansas Tax Return
shall set forth all necessary and required information (including, without
limitation, schedules, statements and such supporting documentation as the
Company or Westar may reasonably request from time to time) in such form as
would be required for filing with the applicable Kansas Taxing Authority
and shall correctly reflect the facts regarding the income, properties,
operations and status of any entity required to be shown thereon. Except as
otherwise required by law, such Pro Forma Kansas Return or Preliminary
Kansas Tax Return shall be prepared making the elections and using the
methods of accounting that were made or used by the Kansas Company combined
group on the combined Kansas Tax Return most recently filed with respect to
a Tax period ending prior to the Split-Off Date unless the parties agree to
make or use some other elections or methods of accounting (which agreement
shall not be unreasonably withheld). The Company and Westar may (at their
own expense) review all work papers and procedures used to prepare each Pro
Forma Kansas Return or Preliminary Kansas Tax Return.
(iii) Westar shall notify the Company in writing of any proposed
adjustments to a Preliminary Kansas Tax Return including the Westar
Combined Kansas Tax Allocation Statement within 15 days of the date upon
which it receives such Preliminary Kansas Tax Return from the Company. In
the event that the Company shall, within 5 days following the receipt of
such notification from Westar, disagree with any proposed adjustment made
under the above provision, such disagreement shall be resolved in
8
accordance with Section 15(b). Upon agreement by the parties as to proposed
adjustments, if any, to a Preliminary Kansas Tax Return including the
Westar Combined Kansas Tax Allocation Statement or upon a decision of the
Referee, the Preliminary Kansas Tax Return as adjusted (if at all) shall be
deemed to be a final Pre-Split-Off Combined Kansas Tax Return for purposes
of this Agreement.
(iv) Prior to the due date of the Pre-Split-Off Combined Kansas Tax
Return (including any extensions), the Company shall pay to Westar or
Westar shall pay to the Company the overpayment or underpayment,
respectively, of the Westar Group allocation shown on the Westar Combined
Kansas Tax Allocation Statement taking into account any payments made by
Westar or any member of the Westar Group to the Company, any member of the
Company Group or any Taxing Authority.
(f) Pre-Split-Off Combined State/Local Tax Returns (other than the Pre-
Split-Off Combined Kansas Tax Returns).
(i) In the event that the Company or any member of the Company
Group (the "State Parent") is required to prepare and file a combined,
unitary or other similar Return with a state (other than Kansas) or local
Taxing Authority relating to a Pre-Split-Off Period in which any member of
the Westar Group is required to be included (a "Pre-Split-Off Combined
State/Local Tax Return"), the State Parent shall prepare and file such
Return in accordance with the principals set forth in Section 2(e) hereof
(and the parties shall make payments in accordance with the same principles
as set forth in Section 2(e)(iv)) substituting the terms Combined
State/Local Tax, Pro Forma State/Local Return, Preliminary State/Local Tax
Return and Westar Combined State/Local Tax Allocation Statement for the
terms Combined Kansas Tax, Pro Forma Kansas Return, Preliminary Kansas Tax
Return and Westar Combined Kansas Tax Allocation Statement, respectively.
Where possible, the Pro Forma State/Local Return or the Preliminary
State/Local Tax Return shall be prepared making the elections and using the
methods of accounting that are consistent with those made or used by the
Company Consolidated Group on the Consolidated Federal Tax Return most
recently filed with respect to a Tax period ending prior to the Split-Off
Date unless the parties agree to make or use some other elections or
methods of accounting (which agreement shall not be unreasonably withheld).
3 Consolidated, Combined, Unitary or Other Similar Tax Returns.
------------------------------------------------------------
(a) Federal Taxes. In its capacity as agent, the Company shall pay within
the time and manner prescribed by law all Consolidated Federal Taxes due in
connection with the filing of any Pre-Split-Off Consolidated Federal Tax
Return.
(b) State or Local Taxes. The Company or the State Parent, as the case may
be, shall pay within the time and manner prescribed by law all Combined
Kansas Taxes or
9
Combined State/Local Taxes due in connection with the filing of any Pre-
Split-Off Combined Kansas Tax Return or Pre-Split-Off Combined State/Local
Tax Return.
(c) Amended Returns and Refunds.
(i) The Company shall not file or cause or permit any State Parent
to file any amended Pre-Split-Off Consolidated Federal Tax Return, Pre-
Split-Off Combined Kansas Tax Return or Pre-Split-Off Combined State/Local
Tax Return if such Return results in an increase in the Tax liability
attributable to any member of the Westar Group or any Westar Affiliate for
any Tax period without the prior written consent of Westar (which consent
shall not be unreasonably withheld).
(ii) The Company or the State Parent shall upon receipt of a written
request by Westar file an amended Pre-Split-Off Consolidated Federal Tax
Return, Pre-Split-Off Kansas Tax Return or Pre-Split-Off Combined
State/Local Tax Return if such Return results in a decrease in the Tax
liability attributable to any member of the Westar Group or any Westar
Affiliate for any Taxable period and does not result in an increase in the
Tax liability attributable to any member of the Company Group or any
Company Affiliate for any Tax period (other than an increase for which it
would be unreasonable to withhold consent).
(iii) Refunds. Any refund of Tax or Tax credit received by the
Company or any State Parent relating to a Pre-Split-Off Period, to the
extent attributable to a decrease in the Westar share of such Tax shall be
the property of Westar and shall be paid by the Company or such State
Parent to Westar within 30 days of receipt of payment or other credit for
such refund. Upon such receipt or credit the Company or such State Parent
shall provide to Westar within 5 Business Days a statement setting forth
the amount of such refund together with any supporting documentation. If
the Company or such State Parent disputes the fact or the amount of any
Westar claim, the Company or such State Parent shall pay the amount not in
dispute, and no payment of the amount in dispute shall be required, until
any such dispute is resolved in accordance with Section 15; provided,
however, that any amount not paid within 30 days of receipt of the refund
shall bear interest as provided in Section 6.
4 Other Taxes.
-----------
(a) The responsibility for the filing of all Returns that have not been
filed on or prior to the Split-Off Date relating to Taxes other than
Consolidated Federal Taxes, Combined Kansas Taxes or Combined State/Local
Taxes ("Other Taxes") attributable to any member of the Westar Group shall
be the sole responsibility of the Westar Group. The responsibility for the
filing of all Returns relating to such Other Taxes attributable to any
member of the Company Group shall be the sole responsibility of the Company
Group.
10
(b) The Westar Group shall be entitled to all refunds and credits of Other
Taxes attributable to any member of the Westar Group, and the Company Group
shall be entitled to all refunds and credits of Other Taxes attributable to
any member of the Company Group.
5 Indemnities.
-----------
(a) Westar Indemnity. Westar and each member of the Westar Group shall
jointly and severally indemnify the Company and each member of the Company
Group against and hold them harmless from Westar's share of any
Consolidated Federal Tax, Combined Kansas Tax or Combined State/Local Tax
shown on any Pre-Split-Off Period Return filed after the Split-Off Date or
assessed after the Split-Off Date pursuant to a Final Determination with
respect to any Pre-Split-Off Period, to the extent not previously paid or
credited to the Company, any member of the Company Group or any applicable
Taxing Authority.
(b) Company Indemnity. The Company and each member of the Company Group
shall jointly and severally indemnify Westar and each member of the Westar
Group against and hold them harmless from any Consolidated Federal Tax,
Combined Kansas Tax or Combined State/Local Tax liability for any
Pre-Split-Off Period (including any Tax liability realized by Westar
pursuant to Section 311(b) of the Code in connection with the Split-Off)
other than any such liabilities described in Section 5(a) hereof.
(c) Discharge of Indemnity. Except as otherwise provided herein, Westar
and each member of the Westar Group, and the Company and each member of the
Company Group, shall discharge their obligations under Sections 5(a) and
5(b) hereof, respectively, by paying the relevant amount within 30 days of
demand therefor. Within 20 days of a Final Determination of an obligation
of Westar and each member of the Westar Group under Section 5(a), the
Company shall send a statement to Westar showing the amount due thereunder.
Within 20 days of a Final Determination of an obligation of the Company and
each member of the Company Group under Section 5(b), Westar shall send a
statement to the Company showing the amount due thereunder. Calculation and
payment mechanics relating to items described in Section 5(a) and (b) are
set forth in Section 6. Notwithstanding the foregoing, and except as
otherwise provided herein, if either Westar or the Company disputes in good
faith the fact or the amount of its obligation under Section 5(a) or
Section 5(b), such party shall pay the amount not in dispute, and no
payment of the amount in dispute shall be required until any such good
faith dispute is resolved in accordance with Section 15; provided, however,
that any amount not paid within 30 days of demand therefor shall bear
interest as provided in Section 6.
(d) Method of Calculation. Except as otherwise provided, the amount of
Westar's liability under Section 5(a) and the Company's liability under
Section 5(b) shall be
11
calculated pursuant to the methods described in Schedule I hereto with
adjustment as provided in Section 5(f).
(e) Duplicative Payments Not Required. Notwithstanding any other provision
of this Agreement, no payment shall be required under this Section 5 to the
extent it is duplicative of (i) any payment required by any other provision
of this Agreement, or (ii) any explicit Tax indemnity provided in the
Allocation and Separation Agreement, the Stock Purchase Option Agreement or
the Merger Agreement, and any such payment(s) shall be made as required by
such other provisions or agreements.
(f) If any increase in Tax for any period for which indemnification is
provided under Section 5(a) or 5(b) gives rise to a Tax Asset to an
indemnified party or its Affiliate, the amount of the indemnity payment
shall be reduced by the present value of such Tax Asset computed as of the
end of the Tax year with respect to which the indemnified Tax arises. For
this purpose, the present value of the Tax Asset shall be computed by (x)
treating the Tax Asset as utilized as and to the extent it first becomes
available (e.g., as any increase in Tax basis could be depreciated) to
reduce Tax at the maximum rate applicable for that Tax for the Tax year
with respect to which the indemnified Tax arises and then (y) discounting
the resulting Tax savings to present value using a discount rate of the
higher of the Prime Rate or the interest rate applicable to deficiencies at
the end of the Tax year with respect to which the indemnified Tax arises.
(g) After-Tax Amount. Any indemnity payment made pursuant to this Section
shall be increased by an amount equal to the product of (i) the amount of
any indemnified Tax calculated without regard to this Section 5(g) and (ii)
a fraction, the numerator of which is the highest applicable combined
federal and state Tax rate in effect with respect to the person receiving
the indemnity payment expressed as a decimal (the "Effective Tax Rate") and
the denominator of which is one minus the Effective Tax Rate (the "After-
Tax Amount").
6 Calculation and Payments of Amounts Due.
---------------------------------------
(a) Method of Calculation. Except as otherwise provided herein, Westar's
share of any Consolidated Federal Tax, Combined Kansas Tax or Combined
State/Local Tax, as the case may be, shall be calculated pursuant to the
methods described in Schedule I hereto.
(b) Payments. Except as otherwise provided herein, all payments required
by this Agreement shall be due 30 days after the payment by a party to a
Taxing Authority or a receipt of a refund or credit by a party from a
Taxing Authority, whichever is applicable, of the relevant item. All
payments to be made hereunder shall be made in immediately available funds.
Payments shall be deemed made when received.
12
(c) Interest. Any amount not paid when due under this Agreement shall bear
interest at Prime until the date on which payment is made.
7 Communication and Cooperation.
-----------------------------
(a) Consult and Cooperate. Westar and the Company shall consult and
cooperate (and shall cause each of their Affiliates to cooperate) fully at
such time and to the extent reasonably requested by the other party in
connection with all matters subject to this Agreement. Such cooperation
shall include, without limitation,
(i) the retention and provision on reasonable request of any and
all information including all books, records, documentation or other
information, any necessary explanations of information, and access to
personnel, until the expiration of the applicable statute of limitation for
additional assessments of Tax for the Tax period for which such document or
other information arises (giving effect to any extension, waiver, or
mitigation thereof);
(ii) within the limits otherwise set forth herein, the execution of
any document that may be necessary or helpful in connection of any required
Return or in connection with any audit, proceeding, suit or action; and
(iii) the use of the parties' best efforts to obtain any
documentation from a governmental authority or a third party that may be
necessary or helpful in connection with the foregoing.
(b) Provide Information. The Company and Westar shall keep each other
fully informed with respect to any material development relating to all
matters subject to this Agreement.
(c) Tax Attribute Matters. The Company and Westar shall advise and consult
with each other with respect to any tax election or the tax treatment of
any item (including the treatment of any item that would be affected by a
proposed Tax adjustment relating to a Consolidated Federal Tax, Combined
Kansas Tax or Combined State/Local Tax which is the subject of an audit or
investigation, or are the subject of any proceeding or litigation) which
could affect any Tax attribute of the other party or its Affiliate
(including, but not limited to, basis in an asset or the amount of earnings
and profits).
8 Audits and Contests.
-------------------
(a) Notice. The Company shall promptly notify Westar in writing of any
inquiries from the Internal Revenue Service or any other Taxing Authority
which relate or may relate to matters described in Sections 3(c) or 5(a).
Westar shall promptly notify the Company in writing of any inquiries from
the Internal Revenue Service or other Taxing Authority which relate or may
relate to matters described in Section 3(c) or 5(b). Each
13
party shall forward to the other party relevant portions of any reports or
other communications which relate to such matters.
(b) Settlement of Issues. The Company shall not settle, compromise or
otherwise resolve any Tax matter relating to Pre-Split-Off Taxes (a "Tax
Settlement") without the prior written consent of Westar (which consent
shall not be unreasonably withheld) if such Tax Settlement is reasonably
likely to materially increase the Tax paid by Westar with respect to any
Tax not subject to indemnification under Section 5(b); provided, however,
that in the event that Westar does not consent and the Company believes
that the withholding of consent was unreasonable, or the Company believes
that no consent of Westar is required, the parties shall resolve their
disagreement in accordance with Section 15. The provisions of this Section
8(b) shall continue to apply to any settlement of any proceeding to which
Section 8(c) or 8(d) applies.
(c) Venue. In the event that a notice of deficiency (or similar notice) is
received from the Internal Revenue Service or other Taxing Authority by any
member of the Company Group for a Pre-Split-Off Period and such notice
relates in whole or in part to a matter for which Westar would be entitled
to withhold its consent under the standards set forth in Section 8(b) and
for which the amount in controversy that is described in Section 5(a) is in
excess of $75,000, then:
(i) Subject to the consent of the Company as to such venue (which
consent shall not be unreasonably withheld) and to Westar giving the
Company sufficient notice for the petition to be prepared and timely filed,
Westar shall be entitled to have a petition filed in the United States Tax
Court by the Company for those items causing the liability for which Westar
would be required to indemnify the Company. Upon a Final Determination of
any such petition, Westar shall pay to the Company in accordance with
Section 6 the amount, if any, of resulting Tax for which Westar is required
to provide indemnity pursuant to Section 5(a).
(ii) If (A) Westar does not request the Company to file a petition
in the United States Tax Court for redetermination of the deficiency
pursuant to Section 8(c)(i), (B) the Company does not, on its own
initiative, timely file such a petition, and (C) Westar requests that the
Company file a claim for refund, then, subject to the consent of the
Company (which consent shall not be unreasonably withheld), the Company
shall pay the deficiency, file a claim for refund thereof, and, if the
claim is denied, bring an action in a court of competent jurisdiction
seeking such refund; provided that, in such case, Westar shall pay to the
Company, (I) on or before the date on which the deficiency is paid by the
Company, the amount as if the notice of deficiency were a Final
Determination (that Westar would otherwise be responsible for with respect
to matters described in Section 5(a)) and any such payment shall be (a)
credited against any payment required (with appropriate adjustment as
provided in Section 6) in connection with a Final Determination if the
result is an underpayment of Tax by Westar, or (b) treated as a refund
pursuant to Section 3(c)(iii) if the amount is
14
an overpayment due Westar, and (II) within 30 days of demand, any
reasonable out-of-pocket costs incurred by the Company in the prosecution
of such refund claim with respect to the matter Westar requests be
contested.
(d) Judicial Appeals. In the event that a judgment of the United States
Tax Court or other court of competent jurisdiction results in an adverse
determination with respect to a matter described in Section 5(a) then,
subject to Section 8(b):
(i) In the case of an appeal of an adverse determination which
involves no material issues other than matters described in Section 5(a),
Westar shall have the right to cause the Company to appeal from such
adverse determination.
(ii) In the case of an appeal of any other adverse determination
which involves material issues other than those described in Section 5(a),
Westar shall have the right to cause the Company to appeal from such
adverse determination if Westar delivers to the Company an opinion from an
independent tax counsel selected by Westar and reasonably acceptable to the
Company that it is more likely than not that such appeal will succeed and
the amount in controversy exceeds $100,000.
(iii) In the case of an adverse determination which involves matters
described in Section 5(b) and within such determination material matters
described in Section 5(a) were favorably disposed, Westar shall have the
right to prevent the Company from appealing from such adverse determination
unless the Company delivers to Westar an opinion from an independent tax
counsel selected by the Company and reasonably acceptable to Westar that it
is more likely than not that such appeal will succeed.
(iv) If Westar causes the Company to appeal any adverse
determination pursuant to this Section 8(d), Westar shall pay the
reasonable out-of-pocket costs of the Company incurred in such appeal.
(e) Participation and Closing.
(i) Westar and its representatives, at Westar's expense, shall be
entitled to attend and be represented in connection with all conferences,
meetings, or proceedings with any Taxing Authority, the subject matter of
which is or includes matters described in Section 5(a) provided that the
amount of the total of annual proposed adjustment attributable to matters
described in Section 5(a) is greater than $100,000.
(ii) Westar and its representatives, at Westar's expense, shall be
entitled to attend and be represented in connection with all appearances
before any court, the subject matter of which includes matter described in
Section 5(a) provided that the amount of the total of annual proposed
adjustments attributable to matters described in Section 5(a) is greater
than $100,000.
15
(iii) The representation referred to in Sections 7(e)(i) and (ii)
shall include the right to participate in the preparation of documentation,
protests, memoranda of fact and law and briefs, oral arguments or
presentations, stipulations of facts and the selection of witnesses with
respect to a matter described in Section 5(a) and shall include the right
to control such matters if the matters in controversy involve only matters
described in Section 5(a). With respect to matters described in both
Section 5(a) and 5(b), the parties agree to consult in good faith to
determine the submission and content of documentation, protests, memoranda
of fact and law and brief, the conduct of oral arguments and presentations,
the selection of witnesses and the negotiation of stipulations of fact. If
the parties cannot agree with respect to the matters described in the
preceding sentence, such dispute shall be referred to the Referee and
resolved in accordance with Section 15.
9 Notices.
-------
Any notice, demand, claim, or other communication under this Agreement
shall be in writing and shall be deemed to have been given upon the delivery or
two Business Days after mailing thereof, as the case may be, if delivered
personally or sent by express certified mail, return receipt requested, postage
prepaid, to the parties at the following addresses (or at such other address as
a party may specify by notice to the other):
(a) If to the Company, to:
Western Resources, Inc.
000 Xxxxx Xxxxxx Xxxxxx
Xxxxxx, Xxxxxx 00000
Attention: Xxxxxxx X. Xxxxxxx
Executive Vice President and
General Counsel
Facsimile: (000) 000-0000
with a copy to:
LeBoeuf, Lamb, Xxxxxx & XxxXxx, L.L.P.
0000 Xxxx 00xx Xxxxxx
Xxx Xxxx, XX 00000
Attention: Xxxxxxx X. Xxxx
Facsimile: (000) 000-0000
(b) If to Westar, to:
Westar Industries, Inc.
000 Xxxxx Xxxxxx Xxxxxx
Xxxxxx, Xxxxxx 00000
Attention: President
Facsimile: (000) 000-0000
16
with a copy to:
LeBoeuf, Lamb, Xxxxxx & XxxXxx, L.L.P.
0000 Xxxx 00xx Xxxxxx
Xxx Xxxx, XX 00000
Attention: Xxxxxxx X. Xxxx
Facsimile: (000) 000-0000
and with a copy to:
Winthrop, Stimson, Xxxxxx & Xxxxxxx
Xxx Xxxxxxx Xxxx Xxxxx
Xxx Xxxx, XX 00000
Attention: Xxxxxxx Toy
Facsimile: (000) 000-0000
10 Costs and Expenses.
------------------
Except as expressly set forth in this Agreement, each party shall bear its
own costs and expenses incurred pursuant to this Agreement. For purposes of this
Agreement, "out-of-pocket" expenses shall include reasonable attorney fees,
accountant fees and other related professional fees and disbursements.
11 Effectiveness; Termination and Survival.
---------------------------------------
This Agreement shall become effective upon the consummation of the Split-
Off. Notwithstanding anything in this Agreement to the contrary, this Agreement
shall remain in effect and its provisions shall survive for the full period of
all applicable statutes of limitation (giving effect to any extension, waiver or
mitigation thereof).
12 Section Headings.
----------------
The headings contained in this Agreement are inserted for convenience only
and shall not constitute a part hereof or in any way affect the meaning or
interpretation of this Agreement.
13 Entire Agreement, Amendments and Waivers.
----------------------------------------
(a) Entire Agreement. This Agreement contains the entire understanding of
the parties hereto with respect to the subject matter contained herein. No
alteration, amendment, modification, or waiver of any of the terms of this
Agreement shall be valid unless made by an instrument signed by an
authorized officer of the Company and
17
Westar, or in the case of a waiver, by the party against whom the waiver is
to be effective.
(b) Waiver. No failure or delay by any party in exercising any right,
power or privilege hereunder shall operate as a waiver hereof nor shall any
single or partial exercise thereof preclude any other or further exercise
thereof or the exercise of any right, power or privilege.
14 Governing Law and Interpretation.
--------------------------------
This Agreement has been made in and shall be construed and enforced in
accordance with the laws of the State of Kansas.
15 Dispute Resolution.
------------------
(a) CEOs/CFOs. If the parties hereto are unable to resolve any
disagreement or dispute, except with respect to any matter described in
Section 2(d), 2(e) or 2(f), either party may refer the matter to the Chief
Executive Officers (CEOs) or Chief Financial Officers (CFOs) of the parties
by giving the other party written notice ("Notice") within 60 days of the
failure of the parties to resolve such dispute. Within 20 days after
delivery of Notice, the CEOs or CFOs of both parties shall meet at a
mutually acceptable time and place to exchange relevant information and
attempt to resolve the dispute within 30 days after delivery of Notice. All
negotiations pursuant to this Section 15(a) shall be confidential and shall
be treated as compromise and settlement negotiations for purposes of the
Federal Rules of Evidence and state rules of evidence.
(b) Referees. Any disagreement not resolved by mutual agreement of the
parties or under Section 15(a) shall be resolved by an independent referee
that is mutually acceptable to the parties hereto (a "Referee"). In the
event the parties cannot agree on a Referee within 10 days of the date of
the Notice described in paragraph (a) above (or 3 Business Days in the case
of a matter described in Section 2(d), 2(e) or 2(f)), each party shall
select within 5 days (2 Business Days in the case of a matter described in
Section 2(d), 2(e) or 2(f)) an independent nationally recognized law firm
or accounting firm expert in tax matters and such firms shall jointly
choose the Referee. A Referee so chosen shall consider the magnitude and
size of the item in question, the impact of the resolution on other Taxable
periods of the Westar and the Company Groups and the likelihood of a
Group's position ultimately prevailing, and otherwise shall resolve any
such disagreement pursuant to such procedures as it may deem advisable. The
Referee shall render its decision within 30 days (5 Business Days in the
case of any matter described in Section 2(d), 2(e) or 2(f)) unless another
time period is specified herein or is mutually agreed upon by the Company
and Westar. Any such resolution shall be binding on the parties hereto
without further recourse.
18
(c) Costs. The costs of any Referee shall be apportioned between the
Company and Westar as determined by such Referee in such manner as the
Referee deems reasonable, taking into account the circumstances of the
dispute, the conduct of the parties and the result of the dispute.
16 Counterparts.
------------
This Agreement may be executed in one or more counterparts, each of which
shall be deemed an original, but all of which together shall constitute one and
the same instrument.
17 Assignments; Third Party Beneficiaries.
--------------------------------------
This Agreement shall be binding upon and shall inure only to the benefit of
the parties hereto and their respective successors and assigns. Upon
consummation of the Merger, Parent shall succeed to the rights and obligations
of the Company under this Agreement. This Agreement is not intended to benefit
any person other than the parties hereto and such successors and assigns, and no
such other person shall be a third party beneficiary hereof.
19
IN WITNESS WHEREOF, the parties have executed and delivered this Agreement
as of the day and year first written above.
Company on its own behalf and on
behalf of the companies
listed on Schedule 1 hereto.
By: ..................................
Title: ...............................
Westar on its own behalf and on
behalf of the companies
listed on Schedule 2 hereto.
By: ..................................
Title: ...............................
20
Schedule I
1. If a Consolidated Federal Tax, Combined Kansas Tax or Combined State/Local
Tax liability is assessed after the Split-Off Date pursuant to a Final
Determination, to the extent that such Tax liability is attributable to an
adjustment of any item of income, loss, credit deduction or other Tax
attribute of any member of the Westar Group, then such liability shall be
the sole responsibility of the Westar Group.
2. In preparing a Pro Forma Federal, Kansas or State/Local Return, or a
Preliminary Federal, Kansas or State/Local Return, the "closing of the
books" method shall be used so that Tax liability will be calculated on the
basis of actual Taxable income to the Closing Date as if the Tax year of
each member and Affiliate of the Westar Group terminated on the Split-Off
Date. Any real or personal property Tax for a period shall be attributed to
the Pre-Split-Off Period on the basis of the number of days in such Pre-
Split-Off Period to the total number of days in such entire period. Any
adjustment required by Section 481 of the Code (including adjustments for
marking receivables to market) shall be allocated to the deductions or
credits (or lack thereof) giving rise to the Section 481 adjustment.
3. The Westar Group's allocable share of any Consolidated Federal Tax
liability, Combined Kansas Tax or Combined State/Local Tax liability, as the
case may be, for any Pre-Split-Off Period shall be (a) calculated on a
separate return basis (i.e., as if the Westar Group had filed a separate
Return for such period), and (b) reduced by the amount of any Tax savings to
the Company Group resulting from the utilization during that period of a
Westar Group Tax Asset. If the amount of the Westar Group's share of any
Consolidated Federal Tax, Combined Kansas Tax or Combined State/Local Tax
liability, as the case may be, determined pursuant to the preceding
sentence, is a negative amount, such amount shall be treated as an
overpayment of Tax by the Westar Group.
4. For purposes of paragraphs 1 and 2 above, "Tax liability" (a) shall exclude
any liability for the payment of alternative minimum Tax, if applicable; and
(b) shall refer to an actual out-of-pocket payment to any Taxing Authority,
after taking into account the utilization of net operating losses and any
other Tax Assets.
5. Any alternative minimum Tax liability (and any Tax Assets attributable to
such liability), if applicable, shall be allocated to Westar in the event
that the preference items giving rise to such alternative minimum Tax
liability are attributable to any member of the Westar Group, and shall be
allocated to the Company in the event that the preference items giving rise
to such alternative minimum Tax liability are attributable to any member of
the Company Group.
