EXHIBIT 2.3
TAX ALLOCATION AND INDEMNIFICATION AGREEMENT
This Tax Allocation and Indemnification Agreement ("Agreement"), dated as
of September 18, 1997, is made and entered into by and among Xerox Financial
Services, Inc., a Delaware corporation ("Parent"), Talegen Holdings, Inc., a
Delaware corporation ("Seller"), Westchester Specialty Group, Inc., a Delaware
corporation ("Company"), and ACE Limited, a Cayman Islands corporation
("Buyer").
A. Seller and Buyer are parties to a Stock Purchase Agreement dated as of
September 18, 1997 ("Purchase Agreement"), pursuant to which Buyer or its
assigns will purchase from Seller, and Seller will sell to Buyer or its assigns,
all of the issued and outstanding capital stock of the Company.
B. The parties hereto wish to provide for indemnification against certain
liabilities for Taxes and for payments relating to certain Tax benefits, as set
forth herein. The parties also desire to allocate responsibility for the
preparation and filing of Tax Returns and the payment of Taxes, and provide for
related matters.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
contained herein and in the Purchase Agreement, the parties hereby agree as
follows:
1. Definitions. When used herein, the following terms shall have the
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following meanings:
"Additional Consideration " -- as defined in the Section (f)(ii)(C) hereof.
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"Affiliate " -- as defined in the Purchase Agreement.
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"Allocated AMT Credit " -- as defined in Section 5(f)(ii)(B) hereof.
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"Closing" -- as defined in the Purchase Agreement.
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"Closing Date" -- as defined in the Purchase Agreement.
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"Code" -- the Internal Revenue Code of 1986, as amended.
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"Company Federal Tax Settlement Payment Schedule" -- as defined in Section
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3(d)(i) hereof.
"Company GAAP Financial Statements" -- as defined in the Purchase
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Agreement.
"Company Group" -- Company and each other corporation that joins with
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Company in filing a consolidated federal Income Tax Return for the applicable
Taxable Year, and every other corporation that is, at any time after the Closing
Date, a direct or indirect United States Subsidiary of Buyer or any such
includable corporation.
"Company Pro Forma Alternative Minimum Taxable Income or Loss" -- Company
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Pro Forma Taxable Income or Loss modified as required under the provisions the
Code to determine alternative minimum taxable income.
"Company Pro Forma Taxable Income or Loss" -- as defined in Section 3(c)(i)
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hereof.
"Crostex/Camfex Leases" -- as defined in the Purchase Agreement.
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"Crostex/Camfex Purchase Money Documents" -- as defined in the Purchase
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Agreement.
"Federal Tax Settlement Payment" -- as defined in Section 3(b) hereof.
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"Final Company Federal Tax Settlement Payment Schedule"-- as defined in
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Section 3(d)(iii)(B) hereof.
"Final Parent Federal Tax Settlement Payment Schedule" -- as defined in
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Section 3(d)(iii)(B) hereof.
"Final Determination" -- (i) a decision, judgment, decree or other order by
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the United States Tax Court or any other court of competent jurisdiction, that
has become final and unappealable, (ii) a closing agreement under Section 7121
of the Code or a comparable provision of any state, local or foreign Tax law
that is binding against the Internal Revenue Service or other Taxing Authority,
(iii) any other final settlement with the Internal Revenue Service or other
Taxing Authority, or (iv) the expiration of an applicable statute of
limitations.
"Income Tax" -- with respect to any corporation or group of corporations,
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any and all Taxes based upon or measured by net income, including, but not
limited to any alternative or add-on minimum taxes, and any "special estimated
tax payment" made pursuant to Section 847 of the Code, imposed by the Internal
Revenue Service or any other Taxing Authority, together with interest, penalties
and other additions.
"Income Tax Return" -- with respect to any corporation or group of
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corporations, any Tax Return with respect to Income Tax.
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"Independent Accounting Firm" -- means any "Big Six" accounting firm or its
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successor, except for the respective independent public accountants of Seller,
Buyer or their respective Affiliates or Subsidiaries.
"Information Return" -- with respect to any corporation or group of
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corporations, any and all reports, returns, declarations or other filings (other
than Tax Returns), including but not limited to federal and state wage
reporting, employment, and unemployment Tax returns (e.g., IRS Forms 940, 941,
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W-2, W-3 and their state and local equivalents) as well as reports of payments
made (e.g., IRS Forms 1099 and 1042), that are required under applicable law to
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be supplied to any Taxing Authority.
"Insurance Subsidiaries" -- as defined in the Purchase Agreement.
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"1990 through 1994 Uncollectible Reinsurance Deductions" -- the net
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incremental deductions to which Company and its Subsidiaries are entitled for
uncollectible reinsurance recoverables for the 1990 through 1994 Taxable Years
applying the method for writing off uncollectible reinsurance recoverables
agreed to during the 1987 through 1989 Tax audit as set forth in Schedule 5(f)
hereto, whether such incremental deductions or the benefits arising from the
utilization thereof are secured or realized by the Company and its Subsidiaries
during the 1990 through 1994 Taxable Years or in subsequent Taxable Years.
"Overdue Rate" -- the prime rate of interest as reported in the "Money
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Rates" column of the Wall Street Journal (or the generally prevailing "prime
rate" as charged by major New York banks, if a prime rate is not so published in
the Wall Street Journal) on the first business day of the month for which
interest is computed.
"Parent Federal Tax Settlement Payment Schedule" -- as defined in Section
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3(d)(ii) of this Agreement.
"Post-1996 Straddle Period" -- the portion of a Straddle Period beginning
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on January 1, 1997.
"Post-Closing Taxable Year" -- a Taxable Year that begins after the Closing
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Date.
"Pre-1997 Straddle Period" -- the portion of a Straddle Period ending on
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and including December 31, 1996.
"Pre-Closing Taxable Year" -- a Taxable Year that begins before the Closing
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Date.
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"Pro Forma Adjustments" -- (i) the "additional deduction" allowable under
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Section 847(1) of the Code; (ii) the amount includable in gross income under
Section 847(5) of the Code; (iii) any income, deduction, gain, or loss
attributable to (1) the transfer to or from the Company (or any of its
Subsidiaries) of the Crostex/Camfex Leases and Crostex/Camfex Purchase Money
Documents pursuant to Section 6.11 of the Purchase Agreement; (2) any deferred
intercompany transaction (as determined under Reg. (S)(S) 1.1502-13 and -13T)
occurring on or prior to Closing that is recognized as a result of the sale of
Company stock under the Purchase Agreement, or (3) any excess loss account under
Reg. (S) 1.1502-19 that is recognized as a result of the sale of Company stock
under the Purchase Agreement; (iv) any employee compensation that Seller is
required to pay under the Purchase Agreement; and (v) for the Taxable Year
beginning on January 1, 1997, an amount of deductions equal to the excess of (1)
the amount of "losses incurred" determined under section 832(b)(5) of the Code
as of the end of such Taxable Year for the Company and its Subsidiaries over (2)
the amount of "losses incurred" determined under section 832(b)(5) of the Code
as of the end of such Taxable Year for the Company and its Subsidiaries without
regard to losses in the amounts, and according to the lines of business and
accident years, shown on Schedule 3(c) hereto.
"Pro Forma Subsidiaries Consolidated Return" -- as defined in Section
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5(f)(ii)(C) hereof.
"Purchase Agreement" -- as defined in Paragraph A of the Preamble to this
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Agreement.
"Reg. (S)" -- a provision of the Regulations promulgated under the Code.
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"Reinsurance Deduction" -- as defined in Section 2(c)(iii) hereof.
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"SAP Financial Statements" -- as defined in the Purchase Agreement.
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"Schedule" -- as defined in Section 5(f)(ii)(B) hereof.
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"Straddle Period" -- any Taxable Year of Company or of any of its
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Subsidiaries that begins on or before, and ends after, December 31, 1996.
"Subsidiary" -- as defined in the Purchase Agreement.
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"Stub Period" -- the Taxable Year of Company and its Subsidiaries beginning
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on January 1, 1997 and ending on and including the Closing Date.
"Tax" -- all taxes, charges, fees, and levies based upon gross income,
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gross receipts, premiums, profits, sales, use, value added, transfer, employment
or payroll, including, without limitation, any ad valorem, environmental,
excise, license, occupation, property, severance, stamp, withholding, or
windfall profit tax, any custom duty or other tax, and any Income Tax,
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together with any interest credit or charge, penalty, addition to tax or
additional amount imposed by any Taxing Authority.
"Tax Return" -- with respect to any corporation or group of corporations,
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all reports, estimates, extension requests, information statements and returns
(other than Information Returns) relating to, or required to be filed in
connection with, any payment of any Tax.
"Taxable Year" -- with respect to any Tax of any corporation, or any group
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of corporations filing a consolidated, combined or unitary return for federal,
state, local or foreign Tax purposes, the period for which the Tax is
computed.
"Taxing Authority" -- the Internal Revenue Service and any other domestic
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or foreign governmental authority responsible for the administration of any Tax.
"Xerox Affiliated Group" -- Xerox Corporation and each corporation (an
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includable corporation) that joins with Parent in filing a consolidated federal
Income Tax Return for the applicable Taxable Year.
"Xerox Group" -- the Xerox Affiliated Group and every other corporation
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that is, at any time after the Closing Date, a direct or indirect Subsidiary of
any member of the Xerox Affiliated Group.
2. Filing of Tax Returns; Payment of Taxes.
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(a) Filing of Tax Returns; Copies of Tax Returns.
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(i) Federal Income Tax Returns. Parent shall cause to be prepared
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and filed on a timely basis a consolidated federal Income Tax Return for the
Xerox Affiliated Group for the 1996 and 1997 Taxable Years and shall include
therein the income, gain, loss, deduction, expense and credits of Company and
its Subsidiaries, which items shall be determined, unless otherwise agreed by
the parties, on the basis of an interim closing of the books for the portion of
the 1997 Taxable Year during which the Company and its Subsidiaries were members
of the Xerox Affiliated Group. The amount of the discount under Section 846 of
the Code with respect to the unpaid losses, loss adjustment expenses, and
salvage and subrogation of Company and its Subsidiaries, as of the Closing Date,
shall be determined for the Stub Period according to the interpolation
methodology set forth in Schedule 2(a) hereto and by allocating such unpaid
losses, loss adjustment expenses, and salvage and subrogation to the lines of
business and accident years in accordance with a Seller report provided to Buyer
no later than 30 days prior to the filing of the Tax Return to which such report
relates. In determining the amounts and information included in such report,
Seller shall apply actuarial methods and assumptions which are consistent with
those applied by the Insurance Subsidiaries to estimate their liability for loss
and
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loss adjustment expenses net of retrocessional recoveries and salvage and
subrogation as of December 31, 1996 in the SAP Financial Statements, taking into
account the loss experience and operations of the Insurance Subsidiaries through
the Closing Date.
(ii) Tax Returns Other Than Federal Income Tax Returns. Company
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shall prepare and, subject to Section 2(d)(ii) hereof, shall file (or caused to
be filed) on a timely basis all federal, state, local, and foreign Tax Returns
that (A) include Company or any
of its Subsidiaries, or all of them, for all Pre-Closing Taxable Years but (B)
exclude all other members of the Xerox Group.
(iii) Parent Review of Tax Returns Prior to Filing. At least
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fifteen (15) business days before each due date for the filing of Tax Returns
required to be filed in respect of the Company or its Subsidiaries, or any of
them, pursuant to Section 2(a)(ii) hereof, Company shall provide Parent a
schedule listing all Tax Returns due as of such date (showing for each such Tax
Return the taxpayer, type of Tax, the Taxing Authority, the total amount of Tax
shown on the Tax Return, and the amount of Tax due or overpaid). The Company
shall, within three (3) business days after Parent's request, provide to Parent
a copy of any listed Tax Return. Within ten (10) business days after each due
date for the filing of any Tax Return required to be filed pursuant to Section
2(a)(ii) hereof, Company shall provide to Parent a statement signed by Company's
Chief Financial Officer affirming that, except as otherwise disclosed in detail
in such affirmation statement -- (A) all Tax Returns required to be filed as of
such date were included on the respective schedule of Tax Returns provided to
Parent pursuant to this Section 2(a)(iii), (B) each Tax Return copy provided to
Parent is an exact copy of the Tax Return as filed with the Taxing Authority,
and (C) each Tax Return for which no copy was provided to Parent reported the
same amounts of total Tax and Tax due or overpaid as shown on the schedule for
such Tax Return.
(b) Extensions Taken Into Account. For purposes of this Section 2,
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any Tax Return shall be considered to have been filed on a timely basis if it is
filed on or before the due date for such filing, and the due date for filing any
Tax Return shall take into account all valid extensions.
(c) Filing Information; Closing of Taxable Years.
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(i) Filing Information. Pursuant to Section 9(a)(i) hereof,
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Company shall (and shall cause its Subsidiaries, or any of them, to) submit to
Parent in a timely fashion in accordance with past practice all filing
information necessary for the preparation and filing of the Income Tax Returns
that are the responsibility of Parent pursuant to Section 2(a)(i) hereof,
provided that the filing information for the federal Income Tax Returns referred
to in Section 2(a)(i) hereof shall be submitted to Parent no later than July 15,
1998 for Taxable Years that begin on or after January 1, 1997.
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(ii) Closing of Taxable Years. Unless prohibited by applicable
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law, for state, local and foreign Income Tax purposes, the Taxable Year of
Company and those of its Subsidiaries that (A) are members of the Xerox
Affiliated Group or (B) are included in any state, local or foreign
consolidated, combined or unitary Income Tax Return with one or more members of
the Xerox Affiliated Group shall end on and include the Closing Date, and
Company and its Subsidiaries shall begin a new Taxable Year on the day after the
Closing Date. All Tax Returns referred to in Section 2(a) hereof shall be
prepared and filed consistent with this Section 2(c)(ii).
(iii) Reinsurance Expense. The parties recognize that the
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reinsurance premium paid pursuant to section 6.17(f) of the Purchase Agreement
is an expense that is properly allocable to the post-closing Tax period, and the
parties intend that such expense be treated consistently for Tax purposes. To
that end Buyer agrees that the deduction for such expense (the "Reinsurance
Deduction") shall be claimed by the Company and its Subsidiaries in the Taxable
Year that immediately follows the Closing, and Seller and Company agree that no
such deduction shall be claimed in a Pre-Closing Taxable Year.
(d) Consistent Preparation.
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(i) Preparation of Tax Returns. Company shall prepare (or cause
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to be prepared) all Tax Returns required to be prepared pursuant to Section
2(a)(ii) hereof and all information required to be submitted to Parent pursuant
to Section 2(c)(i) hereof, using the methods used in reporting items of income,
gain, loss, deduction, expense and credit of Company and its Subsidiaries, as
reflected on Tax Returns filed prior to the date hereof, taking into account any
adjustments resulting from any audit or other examination of such Tax Returns
and applicable law.
(ii) Disputes Over Treatment of Items. In the event that Parent
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disputes any item shown on any Tax Return prepared (or caused to be prepared) by
Company pursuant to Section 2(a)(ii) hereof, neither Company nor any of its
Subsidiaries shall file such Tax Return except as in accordance with the
provisions of this Section 2(d)(ii). If Parent and Company are unable to
resolve such dispute between themselves no later than ten (10) business days
before the due date of such Tax Return, then they shall jointly retain an
Independent Accounting Firm to resolve such dispute, and they shall each take
all reasonable and appropriate steps necessary to assist the Independent
Accounting Firm in resolving such dispute prior to such due date; provided,
however, that the filing of such Tax Return shall not be delayed beyond its due
date. If for any reason such dispute is not resolved by the Tax Return due
date, the Tax Return shall be filed as though the Parent prevailed in the
dispute and shall be amended, if necessary, after the dispute is resolved by the
Independent Accounting Firm. Notwithstanding anything to the contrary in the
provisions of Section 5(e) hereof, Company shall be entitled to
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retain, to the extent provided for by the Independent Accounting Firm in its
resolution decree with respect to such dispute, a refund of Taxes arising out of
the filing of an amended Tax Return associated with such dispute resolution. The
fees of the Independent Accounting Firm shall be borne equally by the parties.
The resolution of the Independent Accounting Firm under this Section 2(d)(ii)
shall be binding on both Parent and Company.
3. Payment of Taxes and Federal Tax Settlement Payment.
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(a) Payment of Taxes.
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(i) Parent shall pay (or cause to be paid) to the appropriate
Taxing Authority all Income Taxes shown to be due and payable on Income Tax
Returns that it is responsible for filing pursuant to Section 2(a)(i).
(ii) Company shall pay (or cause to be paid) to the appropriate
Taxing Authority all Taxes shown to be due on all state, local, foreign and
other federal Tax Returns that it is responsible for filing pursuant to Section
2(a)(ii) hereof.
(b) Liability for Federal Tax Settlement Payment. A Federal Tax
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settlement payment shall be computed and made for the Stub Period (the "Federal
Tax Settlement Payment") in accordance with the terms of this Agreement. There
shall be no Tax settlement payments during and attributable to the 1996 Taxable
Year and the Stub Period other than the Federal Tax Settlement Payment
determined under this Agreement and any Tax settlement payments made prior to
the date of this Agreement; provided, however, that if a Tax settlement payment
must be made prior to the Closing Date under another agreement between the
Company or any of its Subsidiaries, on the one hand, and Seller or any of its
Subsidiaries (other than the Company and its Subsidiaries), on the other hand,
then the required payment shall be made under such other agreement. Appropriate
credit shall be given in making Federal Tax Settlement Payment hereunder for any
Tax settlement payments, under any agreement other than this Agreement, made
prior to the Closing Date relating to either the 1996 Taxable Year or the Stub
Period (including repayments of any prior Tax settlement payments for the 1996
Taxable Year or the Stub Period in excess of the required Federal Tax Settlement
Payments hereunder).
(c) Amount of the Federal Tax Settlement Payment.
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(i) Company Pro Forma Taxable Income or Loss. For purposes of
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determining the amount of the Federal Tax Settlement Payment due under Section
3(b) for the Stub Period, the income or loss of Company and its Subsidiaries
shall be adjusted by excluding therefrom the Pro Forma Adjustments and shall be
determined on a pro forma basis as if Company and its eligible Subsidiaries
filed a consolidated federal Income Tax Return separate from the Xerox
Affiliated Group ("Company Pro Forma Taxable Income or Loss").
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(ii) Amount of Federal Tax Settlement Payment.
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(A) Where the calculation of either Company Pro Forma
Taxable Income or Loss or Company Pro Forma Alternative Minimum Taxable Income
or Loss results in income for Company and its Subsidiaries for a Taxable Year,
Company shall make a Federal Tax Settlement Payment to Parent, in accordance
with Section 3(e), which is equal to the greater of (I) the amount determined by
multiplying Company Pro Forma Taxable Income or Loss for such Taxable Year (if
greater than zero) by the maximum corporate Income Tax rate applicable under the
Code for such Taxable Year to ordinary income and capital gain, as the case may
be, and (II) the amount determined by multiplying Company Pro Forma Alternative
Minimum Taxable Income or Loss for such Taxable Year (if greater than zero) by
the maximum alternative minimum Tax rate applicable under the Code for such
Taxable Year.
(B) Where the calculation of both Company Pro Forma Taxable
Income or Loss and Company Pro Forma Alternative Minimum Taxable Income or Loss
result in losses for Company and its Subsidiaries for a Taxable Year, Parent
shall make a Federal Tax Settlement Payment to Company, in accordance with
Section 3(e), equal to the Tax benefit actually realized by the Xerox Affiliated
Group from such loss. Such Tax benefit shall be calculated as the difference in
Tax liability resulting when such loss is included in the calculation of the
Xerox Affiliated Group Tax liability for the Taxable Year and excluded from the
calculation of the Xerox Affiliated Group Tax liability for the Taxable Year.
(C) Where the conditions of Section 3(c)(ii)(A) are
satisfied for the Taxable Year that begins on January 1, 1997, the amount of the
Company's Federal Tax Settlement Payment shall be reduced by an amount equal to
35% of the Pro Forma Adjustments Item (v) and the Company shall make such
reduced payment to Parent in accordance with Section 3(e); provided, however,
that if, as a result of such reduction, the Federal Tax Settlement Payment
becomes a negative, the Parent shall make a Federal Tax Settlement Payment to
the Company in accordance with Section 3(e) equal to the absolute value of such
negative amount. Where the conditions of Section 3(c)(ii)(B) are satisfied for
the Taxable Year that begins on January 1, 1997, the amount of the Parent's
Federal Tax Settlement Payment shall be increased by an amount equal to 35% of
the Pro Forma Adjustments Item (v) and the Parent shall make such increased
payment to the Company in accordance with Section 3(e).
(d) Federal Tax Settlement Payment Reporting
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(i) Company Federal Tax Payment Schedule. Not later than sixty
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(60) days after the Closing Date, Company shall deliver to Parent a schedule
showing the amount of Company Pro Forma Taxable Income or Loss and the amount of
Company Pro Forma Alternative Minimum Taxable Income or Loss for the Stub Period
and, if either amount is
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positive, the Federal Tax Settlement Payment for the Stub Period. Such schedule
(a "Company Federal Tax Settlement Payment Schedule") shall be based on the Tax
Return filing information provided pursuant to Section 2(c)(i) (to the extent
available) and shall include all supporting workpapers and a brief explanation
of the basis on which Company Pro Forma Taxable Income or Loss and Company Pro
Forma Alternative Minimum Taxable Income or Loss were computed. Except as
otherwise expressly provided in this Agreement, the amount of Company Pro Forma
Taxable Income or Loss and Company Pro Forma
Alternative Minimum Taxable Income or Loss shall be determined, for all purposes
of this Agreement, in conformity with the information provided in Section
2(c)(i) hereof.
(ii) Parent Federal Tax Settlement Payment Schedule. Within
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thirty (30) days after Parent receives a Company Federal Tax Settlement Payment
Schedule for a Taxable Year that reflects losses in the computations of both
Company Pro Forma Taxable Income or Loss and Company Pro Forma Alternative
Minimum Taxable Income or Loss, Parent shall deliver to Company a revised
schedule (a "Parent Federal Tax Settlement Payment Schedule") showing the amount
of the Federal Tax Settlement Payment for the Taxable Year, taking into account
any Tax benefit actually realized by the Xerox Affiliated Group from such
losses.
(iii) Preliminary and Final Federal Tax Settlement Payment
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Schedules.
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(A) To the extent that any Federal Tax Settlement Payment
cannot be determined with finality due to a lack of information and/or the fact
that the Xerox Affiliated Group's consolidated federal Income Tax Return will
not have been filed, Company or Parent, as the case may be, shall estimate the
amount of the Federal Tax Settlement Payment as nearly as possible and shall
timely deliver either the Company Federal Tax Settlement Payment Schedule or the
Parent Federal Tax Settlement Payment Schedule, as the case may be, indicating
the amount of the Federal Tax Settlement Payment estimated in accordance with
this Section 3(d)(iii)(A). In the case of a Company estimate, Company shall
cause its independent public accountant to confirm to the Parent that each such
Company Federal Tax Settlement Payment Schedule provides a reasonable estimate
of the amount of Company Pro Forma Taxable Income or Loss and the amount of
Company Pro Forma Alternative Minimum Taxable Income or Loss for the applicable
Taxable Year determined in conformity with Section 2(c) hereof. In the case of a
Parent estimate, Parent shall cause its independent public accountant to confirm
to Buyer that each such Parent Federal Tax Settlement Payment Schedule provides
a reasonable estimate of the Federal Tax Settlement Payment.
(B) If a Company Federal Tax Settlement Payment Schedule
provided in accordance with Section 3(d)(i) is based on an estimate, the Company
shall prepare and provide a final schedule (a "Final Company Federal Tax
Settlement Payment Schedule") no later than July 15, 1998. If a Parent Federal
Tax Settlement Payment Schedule provided in
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accordance with Section 3(d)(ii) is based on an estimate, the Parent shall
prepare and provide a final schedule (a "Final Parent Federal Tax Settlement
Payment Schedule") no later than October 15, 1998.
(iv) Disputes. Within fifteen (15) days after receiving a Company
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Federal Tax Settlement Payment Schedule or a Final Company Federal Tax
Settlement Payment Schedule, Parent will notify Company of any disagreement with
any element of Company Pro Forma Taxable Income or Loss or Company Pro Forma
Alternative Minimum Taxable Income or Loss, or both, reflected therein. Within
fifteen (15) days after receiving a Parent Federal Tax Settlement Payment
Schedule or a Final Parent Federal Tax Settlement Payment Schedule, Company will
notify Parent of any disagreement with the Tax benefit calculation reflected
thereon. Company and Parent will promptly attempt to resolve any such
disagreement. If Company and Parent are unable to resolve any such disagreement
within forty-five (45) days after receipt of such notice, then the issues
remaining unresolved with respect to the amount of Company Pro Forma Taxable
Income or Loss or Company Pro Forma Alternative Minimum Taxable Income or Loss,
or both, or with respect to the Parent Federal Tax Settlement Payment Schedule
or a Final Parent Federal Tax Settlement Payment Schedule, or both, shall be
resolved as follows:
(A) Company and Parent shall jointly retain an Independent
Accounting Firm and, within fifteen (15) days following retention of the
Independent Accounting Firm, Company and Parent shall present or cause to be
presented to the Independent Accounting Firm the issue or issues that must be
resolved.
(B) Company and Parent shall encourage the Independent
Accounting Firm to render its decision as soon as is reasonably practicable,
including, without limitation, prompt compliance with all reasonable requests by
the Independent Accounting Firm for information, papers, books, records and the
like. All decisions of the Independent Accounting Firm with respect to the
issues presented by the parties shall be final and binding on the parties
hereto.
(C) The fees of such Independent Accounting Firm shall be
borne equally by the parties.
(D) Within thirty (30) days after a disputed Federal Tax
Settlement Payment is agreed to by Company and Parent or determined by the
Independent Accounting Firm, Company or Parent, as the case may be, shall pay to
Parent or Company, as the case may be, the amount of the Federal Tax Settlement
Payment for the Taxable Year less any Federal Tax Settlement Payment amount
previously paid in respect of such Taxable Year.
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(e) Timing of Federal Tax Settlement Payments.
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(i) Payment by Company. Any Federal Tax Settlement Payment due
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from Company to Parent shall be due and payable to Parent as of the date the
Company Federal Tax Settlement Payment Schedule or the Final Company Federal Tax
Settlement Payment Schedule, as the case may be, is required to be delivered to
the Parent in accordance with this Agreement, except to the extent that a
dispute with respect to any such Company Federal Tax Settlement Payment Schedule
or such Final Company Federal Tax Settlement Payment Schedule has occurred and
is continuing under Section 3(d)(iv) hereof. If such a dispute has occurred,
then the Federal Tax Settlement Payment shall become payable as provided in
Section 3(d)(iv)(D) hereof.
(ii) Payment by Parent. Any Federal Tax Settlement Payment due
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from Parent to Company shall be due to Company as of the date the Parent Federal
Tax Settlement Payment Schedule or the Final Parent Federal Tax Settlement
Payment Schedule, as the case may be, is required to be delivered to Company in
accordance with this Agreement, except to the extent that a dispute with respect
to any such Parent Federal Tax Settlement Payment Schedule or such Final Parent
Federal Tax Settlement Payment Schedule has occurred and is continuing under
Section 3(d)(iv) hereof. If such a dispute has occurred, then the Federal Tax
Settlement Payment shall become payable as provided in Section 3(d)(iv)(D)
hereof.
(iii) Interest on Additional Federal Tax Settlement Payments. Any
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additional Federal Tax Settlement Payment arising from adjustments shown on a
Company Federal Tax Settlement Payment Schedule, a Final Company Federal Tax
Settlement Payment Schedule, a Parent Federal Tax Settlement Payment Schedule,
or a Final Parent Federal Tax Settlement Payment Schedule, as the case may be,
including adjustments arising from any dispute, shall include interest from the
due date of the Company Federal Tax Settlement Payment Schedule as provided in
Section 3(d)(i) hereof, or the due date of the Parent Federal Tax Settlement
Payment Schedule as provided in Section 3(d)(ii), as the case may be, computed
at the Overdue Rate.
4. Information Returns.
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(a) Preparation of Information Returns. Parent shall prepare and file
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(or cause to be prepared and filed) all Information Returns which are required
under applicable law to be filed by Parent or Seller in respect of the Company
and its Subsidiaries, provided, however, that Company shall provide to Parent
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any and all information necessary or useful for the filing of such Information
Returns in an accurate and timely manner. Company shall prepare and file (or
cause to be prepared and filed), in a manner consistent with the prior practices
of Company and its Subsidiaries, as applicable, all Information Returns required
to be filed by Company and its Subsidiaries, or any of them for any period
ending before or including the Closing Date.
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(b) Extensions Taken Into Account. For purposes of this Section 4,
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any Information Return shall be considered to have been filed on a timely basis
if it is filed on or before the due date for such filing, and the due date for
filing any Information Return shall take into account all valid extensions.
(c) Payment of Charges and Fees; Indemnification. Any party required
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to file any Information Return pursuant to this Section 4 shall pay any related
fees or charges (including any such fees or charges that shall thereafter become
due and payable with respect to such Information Returns due to a Final
Determination) and shall indemnify and hold the other party harmless against any
related interest and penalties, as well as any such fees or charges which are
assessed against such party as the result of a failure by the party responsible
for such filing to file any Information Return in a timely and accurate manner.
5. Indemnification Relating to Taxes; Payment of Refunds; Other Payments.
---------------------------------------------------------------------
(a) Indemnification by Parent. Parent shall indemnify Buyer against,
-------------------------
and hold it harmless (on an after-Tax basis) from:
(i) all liability for Taxes with respect to Company and its
Subsidiaries assessed after the Closing Date for all Pre-Closing Taxable Years
ending on or before December 31, 1996 and any Pre-1997 Straddle Period, except
(A) to the extent of an amount equal to the Taxes accrued
as a current liability in the GAAP Financial Statements as of December 31, 1996
of the Company and its Subsidiaries (1) as reduced by an amount equal to any
federal Income Taxes accrued in such financial statements up to the amount of
any Federal Tax Settlement Payments that the Company ultimately is required to
make in respect of the 1996 Taxable Year pursuant to Section 3(c)(ii)(A), and
(2) as reduced by an amount equal to all Taxes other than federal Income Taxes
accrued in such financial statements up to the amount of any Tax payments made
with originally filed non-federal Tax Returns filed with respect to the 1996
Taxable year pursuant to Section 3(a)(ii);
(B) to the extent that any such Tax is attributable to an
adjustment that results in an increase in the taxable income of Company or its
Subsidiaries for any Pre-Closing Taxable Years ending on or before December 31,
1996 or any Pre-1997 Straddle Period and a related decrease in the taxable
income of Company or its Subsidiaries in a Post-Closing Taxable Year beginning
on or after January 1, 1997 or any Post-1996 Straddle Period; and
13
(ii) all liability for Taxes of any other member of the Xerox
Affiliated Group pursuant to any provision of joint and several liability
including, without limitation, Reg (S) 1.1502-6 and any corresponding provisions
of state, local or foreign law.
Notwithstanding anything in the foregoing that might otherwise be read
to the contrary, it is hereby understood and agreed that Parent shall have no
liability to indemnify Buyer against, or hold it harmless from: any Federal Tax
Settlement Payment the Company is required to make to Parent pursuant to Section
3(c)(ii)(A), or any Tax the Company is required to pay (or cause to be paid)
pursuant to Section 3(a)(ii) hereof.
(b) Obligation of the Buyer and Company to Indemnify. Buyer and
------------------------------------------------
Company shall indemnify (on an after Tax basis) the Parent and Seller against
all liability for Taxes with respect to Company and its Subsidiaries for which
the Parent is not required to indemnify the Buyer pursuant to Section 5(a)
hereof.
(c) Tax Obligations for Straddle Periods. Taxes relating to the
------------------------------------
Company and its Subsidiaries for any Straddle Period shall be the joint
responsibility of Buyer and Company, on the one hand, and Parent and Seller, on
the other hand, and shall be apportioned (based on an interim closing of the
books) between the Pre-1997 Straddle Period and the Post-1996 Straddle Period in
a fair and equitable manner consistent with past accounting practices as
properly adjusted to reflect applicable Tax principles, or in the case of real,
personal, and intangible property taxes or any similar Tax, in accordance with
the principles of Section 164(d) of the Code.
(d) Notice and Payment of Indemnified Amounts.
-----------------------------------------
(i) Duty to Notify. Buyer shall notify Parent of any Taxes
--------------
paid or incurred by Buyer, Company or its Subsidiaries which are subject to
indemnification by Parent under Section 5(a) hereof. Parent shall notify Buyer
of any Taxes paid or incurred by Parent or any other member of the Xerox Group
which are subject to indemnification by Buyer and Company under Section 5(b)
hereof.
(ii) Explanation of Claim. Any notice contemplated by this
--------------------
Section 5(d) shall include a detailed calculation (including, if applicable,
separate allocations of such Taxes between Pre-1997 and Post-1996 Straddle
Periods and supporting work papers) and a brief explanation of the basis for
such indemnification.
(iii) Time for Payment. Within twenty (20) days after the
----------------
receipt of a notice described in this Section 5(d), the notified party shall pay
to the notifying party the amount requested in such notice, but only to the
extent that the notified party agrees with such request. To the extent that the
notified party disagrees with such request, it shall, within the
14
applicable twenty (20) day period, so notify the notifying party. If the parties
are unable to settle such disagreement between themselves no later than fifteen
(15) days after notice of the disagreement in accordance with this Section 5(d),
then they shall jointly retain an Independent Accounting Firm to resolve such
dispute. The fees of the Independent Accounting Firm shall be borne equally by
the parties. The resolution of the Independent Accounting Firm under this
Section 5(d)(iii) shall be binding on Parent on the one hand and Buyer and
Company on the other hand. Within thirty (30) days after resolution of such
dispute, Buyer or Company on the one hand or Parent on the other hand, as the
case may be, shall pay to Parent on the one hand, or Buyer or Company on the
other hand, as the case may be, the amount determined by such Independent
Accounting Firm to be due pursuant to this Section 5 (d) together with interest
at the Overdue Rate from the date the payment was originally due.
(e) Parent's Right to Pursue and Retain Refunds. Parent and Seller
-------------------------------------------
shall have the right to pursue and shall be entitled to retain, or to receive
prompt payment from Buyer, Company or its Subsidiaries to the extent secured by
any of them, any overpayment, refund or credit of Taxes (including, without
limitation, refunds and credits arising by reason of Tax Returns as originally
filed or amended Tax Returns) relating to Company and its Subsidiaries for any
and all Pre-Closing Taxable Years ending on or before December 31, 1996 or any
Pre-1997 Straddle Period, including without limitation any refunds in respect of
the 1990 through 1994 Uncollectible Reinsurance Deductions. If Buyer (or any of
its Subsidiaries) or Parent (or any of its Subsidiaries) receives a Tax refund
to which the other party is entitled pursuant to this Agreement, the Buyer or
Parent, as the case may be, shall pay or cause the recipient to pay the amount
of such refund (including any interest received thereon) to such other party
within ten (10) days after receipt thereof. Within ninety (90) days after the
end of each Taxable Year following the Closing Date, Buyer shall have its Chief
Financial Officer tender to Parent a statement showing the aggregate amount of
all Tax refunds received to which Parent (or any of its Subsidiaries) is
entitled.
(f) Other Payments.
--------------
(i) Uncollectible Reinsurance Deductions. Any Tax benefit
------------------------------------
realized by the Company Group (or any member thereof) for any Post-Closing
Taxable Year with respect to the 1990 through 1994 Uncollectible Reinsurance
Deductions shall be paid to the Parent in accordance with the terms hereof
whether such Tax benefit results from (i) an originally filed or amended Tax
Return of the Company Group (or any member thereof), (ii) an audit or other
examination of, or claim for refund or amended Tax Return with respect to, any
Tax Return of (or including) any member of the Xerox Group for any Pre-Closing
Taxable Year or Pre-1997 Straddle Period, or (iii) otherwise. A deduction or
deductions for the 1990 through 1994 Uncollectible Reinsurance Deductions not
allowed as deductions for any Pre-Closing Taxable Year or Pre-1997 Straddle
Period shall be claimed by the Company and its Subsidiaries in the federal
Income Tax Return(s) for the first Taxable Year(s) in which such deduction(s)
become allowable to Company or its Subsidiaries, and within twenty (20) days
after the filing of a Tax
15
Return in which such deductions are claimed, Buyer shall pay (or cause to be
paid) to Parent an amount equal to the Tax benefit attributable to such
deductions. For purposes of this provision, the amount of such Tax benefit shall
be equal to the excess of the amount of the federal Income Tax liability of the
Company Group (or any member thereof, as the case may be) for all Taxable Years
affected computed without regard to the 1990 through 1994 Uncollectible
Reinsurance Deductions over the amount of the actual federal Income Tax
liability of the Company Group (or any member thereof, as the case may be) for
all Taxable Years affected after considering the 1990 through 1994 Uncollectible
Reinsurance Deductions. If the deductions claimed pursuant to this paragraph are
subsequently disallowed pursuant to a Final Determination, Parent shall pay to
Buyer the amounts previously paid hereunder with respect to such disallowance
(with interest at the Overdue Rate from the original date of payment until the
date repaid to Buyer).
(ii) Special Payments.
----------------
(A) At Closing, Seller shall make a payment of $13,200,000
to the Company.
(B) Within 30 (thirty) business days after the filing of
the consolidated federal Income Tax Return by the Xerox Affiliated Group for the
1997 Taxable Year that includes the Stub Period, Seller shall provide Buyer with
a schedule (the "Schedule") that sets forth the portion of the consolidated
alternative minimum tax credit of the Xerox Affiliated Group allocated to the
Company and its Subsidiaries upon Closing (the "Allocated AMT Credit"). Within
twenty (20) business days after the receipt of the Schedule, Buyer shall pay to
Seller an amount equal to the Allocated AMT Credit shown in the Schedule.
(C) Buyer shall pay to Seller an amount not to exceed the
excess of (1) $10,200,000 over (2) amounts paid to Seller pursuant to Section
5(f)(ii)(B) hereof (the "Additional Consideration") based on the Reinsurance
Deduction, as follows: Buyer shall pay to Seller 50 percent of the Tax benefit
of the deduction for the Reinsurance Deduction by the Insurance Subsidiaries in
excess of $22,500,000, calculated as if (1) the Insurance Subsidiaries file a
consolidated federal Income Tax Return as an "affiliated group" (as that term is
defined in Section 1504(a)(1) of the Code) (the "Pro Forma Subsidiaries
Consolidated Return") and (2) the deduction for the Reinsurance Deduction is
claimed on the Pro Forma Subsidiaries Consolidated Return in accordance with
Section 2(c)(iii) hereof. For purposes of this provision, the Insurance
Subsidiaries will be considered to receive a federal Income Tax benefit as a
result of the deduction of the Reinsurance Deduction as and when the
consolidated federal Income Tax liability that would be shown on the Pro Forma
Subsidiaries Consolidated Return for any Taxable
16
Year calculated without the deduction for the Reinsurance Deduction exceeds the
consolidated federal Income Tax liability that would be shown on the Pro Forma
Subsidiaries Consolidated Return for the same Taxable Year calculated with the
deduction for the Reinsurance Deduction in accordance with Section 2(c)(iii)
hereof.
Any amount payable by Buyer under the preceding
paragraph shall be paid within twenty (20) business days after the filing of any
consolidated federal Income Tax Return that includes the Insurance Subsidiaries
for the Taxable Year in which the Insurance Subsidiaries would be considered
under this provision to receive a federal Income Tax benefit as a result of the
deduction of the Reinsurance Deduction in accordance with Section 2(c)(iii)
hereof. Amounts paid pursuant to this provision shall be subject to subsequent
adjustment as the parties may agree.
Buyer agrees to provide Seller with an annual schedule
showing the calculation of the Pro Forma Subsidiaries Consolidated Return
showing the availability of payments under this provision (on a "with and
without" basis pursuant to this provision). Such schedule, which shall be
reviewed and confirmed as accurate by Buyer's independent public accountants,
shall be due within twenty (20) business days after the filing each year of the
consolidated federal Income Tax Return that includes the Insurance Subsidiaries.
6. Capital Loss, Net Operating Loss, and Credit Carrybacks.
-------------------------------------------------------
(a) Payments With Respect to Refund Claims.
--------------------------------------
(i) Filing of Claim for Refund; Payment of Tax Benefit. If
--------------------------------------------------
Company or any of its Subsidiaries realizes a capital loss or a credit in a
Post-Closing Taxable Year that is required, after application of paragraph (b),
below, to be carried back to a Taxable Year of the Xerox Affiliated Group (or
any member thereof), Parent shall promptly file (or shall cause promptly to be
filed) a claim for refund and shall pay (or cause to be paid) to Company the
full amount of any Tax benefit, net of any Tax due by the Xerox Affiliated Group
on account of such refund, within twenty (20) days of the date such Tax benefit
is realized. For purposes of this Section 6(a), the Tax benefit in any Taxable
Year shall be equal to the excess of (A) the Tax liability of the Xerox
Affiliated Group for such Taxable Year, computed without regard to the capital
loss or credit referred to above, over (B) the actual Tax liability of the Xerox
Affiliated Group for such Taxable Year after considering such capital loss or
credit.
(ii) Repayment of Tax Benefit. If Parent has paid an amount in
------------------------
respect of any refund pursuant to Section 6(a)(i) hereof, that amount shall be
repaid to Parent (with
17
interest at the Overdue Rate from the original date of payment until the date
repaid to Parent) within twenty (20) days after demand therefor by Parent (A) to
the extent that the Xerox Affiliated Group subsequently realizes capital losses,
credits, or net operating losses that could have been carried back but for the
carryback of capital losses or credits of the Company Group (or its members)
pursuant to this Section 6(a) or (B) to the extent that the Tax benefit to the
Xerox Affiliated Group is subsequently reduced pursuant to a Final
Determination.
(b) Election to Forgo Carrybacks of Losses, Etc. Company and its
-------------------------------------------
Subsidiaries shall elect, where permitted by law, to carry forward any net
operating loss, net capital loss, credit or other item arising after the Closing
Date that would, absent such election, be carried back to a Pre-Closing Taxable
Year of Company or any of its Subsidiaries that file a consolidated, combined,
or unitary Tax Return with any member of the Xerox Affiliated Group. If the
Xerox Affiliated Group has a consolidated net operating loss or consolidated net
capital loss for either the 1996 Taxable Year or 1997 Taxable Year, or both,
then Xerox Corporation may elect, pursuant to Reg. (S) 1.1502-20(g), to
reattribute to itself all or any portion of the net operating loss attributable
to the Company and/or its Subsidiaries, as determined under Reg. (S) 1.1502-
79A(a)(3) for the 1996 Taxable Year and Reg. (S) 1.1502-21T(b)(2)(iv) for the
1997 Taxable Year, and all or any portion of the net capital loss attributable
to the Company, as determined under Reg. (S) 1.1502-79A(b)(2) for the 1996
Taxable Year and Reg. (S) 1.1502-22T(b)(3) for the 1997 Taxable Year, and Buyer,
Company and its Subsidiaries will execute the documents necessary for the Parent
to so elect.
7. Payments.
--------
(a) Time and Manner of Payments. All payments made pursuant to
---------------------------
Sections 3, 4, 5 or 6 hereof shall be made in immediately available funds.
Except as otherwise provided herein, any payment not made when due hereunder
shall bear interest at the Overdue Rate from the due date until the date of
actual payment. In the absence of a specified date, a payment shall be due
twenty (20) days after the later of (i) the date on which the notifying party
actually realizes the expense, by incurring an economic detriment, with respect
to which such notice relates, or (ii) the date such notice is delivered.
(b) Nature of Payments. Any payment owing to the Buyer pursuant to
------------------
this Agreement shall be made to Company and (other than interest on a payment)
treated by all parties for all purposes as a payment to the Buyer made as a
reduction of purchase price for Company's stock followed by a contribution to
Company's capital by the Buyer. Any payment owing to the Parent (or any member
of the Xerox Group) shall be made to Parent and (other than interest on a
payment) treated by all parties for all purposes as a net adjustment to the
purchase price for Company's stock. Any liability or obligation with respect to
such payment shall be extinguished through payment to Company or Parent
respectively.
18
(c) Deferral of Payments Until Closing. Notwithstanding anything else
----------------------------------
to the contrary in this Agreement, any payment otherwise due hereunder prior to
the Closing Date shall become payable within thirty (30) days after the Closing
Date, and any such deferred payments shall bear interest at the Overdue Rate
from the date such payments would have been due under this Agreement absent the
provisions of this Section 7(c) through the date of actual payment.
8. Audits and Other Contests.
-------------------------
(a) Notice of Audits or Assessments. Buyer (and any member of the
-------------------------------
Company Group) shall promptly notify Parent, and Parent shall promptly notify
Buyer, in writing within ten (10) business days from the receipt of notice of
any pending or threatened Tax audits or assessments of Company or its
Subsidiaries for any Pre-Closing Taxable Year.
(b) Federal Income Taxes.
--------------------
(i) Parent shall have the sole right to represent the interests
of Company and its Subsidiaries, and to employ counsel of its choice at its
expense, in any audit or other examination or administrative or court proceeding
relating to federal Income Taxes for any Pre-Closing Taxable Year, provided that
-------- ----
Parent shall keep Buyer reasonably informed on an ongoing basis with respect to
issues affecting the Company and its Subsidiaries. Subject to Parent's rights
set forth in the preceding sentence, Buyer shall be entitled, at its expense, to
participate in the conduct of any Tax audit or any judicial or administrative
proceeding relating to any Tax audit described in the first sentence of this
Section 8(b).
(ii) Parent shall be entitled to settle any issue relating to
Taxes in connection with the contests described in this Section 8(b), provided
that Parent shall not settle any such issue or take any action that shall give
rise to an increase in Taxes (or a decrease in Tax benefit) for any Post-Closing
Taxable Year without informing Buyer, before finalization of such settlement or
action. It is hereby understood and agreed that any settlement with respect to
the 1990 through 1994 Uncollectible Reinsurance Deductions shall not be treated
as giving rise to an increase in Taxes (or a decrease in a Tax benefit) for any
Post-Closing Taxable Year.
(iii) If Buyer disagrees with any proposed settlement about which
Parent has informed Buyer in accordance with the preceding paragraph and
proposes a basis for a different settlement, Parent shall nevertheless be
entitled to settle the issue unless Buyer provides to Parent (1) an opinion from
a "Big Six" accounting firm that the issue has a material ongoing effect and (2)
an opinion of counsel from a law firm of national stature agreed upon by Parent
and Buyer stating that it is more likely than not that Buyer's proposed
settlement would be sustained upon a Final Determination, in which event Parent
may pay Buyer an amount equal to the excess of the Taxes attributable to the
settlement proposed by the Parent over the Taxes attributable to the settlement
proposed by Buyer, and therefore be free to settle such issues in its sole
discretion.
19
(c) Other Taxes. Parent shall have the sole right to represent the
-----------
interests of Company and its Subsidiaries and settle all issues, and to employ
counsel of its choice at its expense, in any audit or administrative or court
proceeding relating to Taxes other than federal Income Taxes for any Pre-Closing
Taxable Year ending on or before December 31, 1996. Notwithstanding the
foregoing and subject to Parent's rights set forth in the preceding sentence,
Buyer shall be entitled, at its expense, to participate in the conduct of any
Tax audit and any judicial or administrative proceeding relating to any Tax
audit described in this Section 8(c).
(d) Straddle Periods. All audits or administrative or court
----------------
proceedings relating to any Straddle Period shall be controlled jointly by
Parent and Buyer, each to employ counsel of its choice at its expense, provided,
however, that settlement (at the administrative level or during the course of
judicial proceedings) may only be entered into with the consents of both Parent
and Buyer. In the event of an issue arising pursuant to any contest referred to
in this Sections 8(d), if Parent or Buyer proposes to settle on terms acceptable
to a Taxing Authority, but the other party, Parent or Buyer as the case may be,
disagrees with the proposed settlement, then the party proposing to settle may
pay the other party its share of the amount of Taxes attributable to the
settlement proposed and, in that event, the other party shall have sole
responsibility for the settlement of such issue.
9. Cooperation, Record Retention, and Confidentiality.
--------------------------------------------------
(a) Cooperation.
-----------
(i) Buyer, Company and Subsidiaries to Cooperate. Upon Parent's
--------------------------------------------
request, Buyer shall promptly provide (and cause Company and its Subsidiaries,
and the other members of the Company Group to promptly provide) Parent with such
cooperation and assistance, documents and other information, without charge, as
Seller may reasonably request in connection with (A) the preparation of any Tax
Return or Information Return, (B) the conduct of any audit or other examination
or any judicial or administrative or court proceeding referred to in Section 8
hereof relating to liability for, refunds of or adjustments with respect to (or
any other matter relating to) Taxes or Tax Returns or Information Returns of the
Xerox Group or any member of such Group, or (C) the verification of an amount
payable or receivable hereunder.
(ii) Parent and Seller to Cooperate. Likewise, upon Buyer's
------------------------------
request, Seller shall promptly provide (and cause its Subsidiaries to promptly
provide) such cooperation and assistance, documents and other information
referred to in the preceding sentence, as Buyer may reasonably request in the
circumstances described in Section 9(a)(i) hereof.
(iii) Cooperation Defined. For purposes of this Agreement,
-------------------
cooperation and assistance shall include, without limitation: (A) providing all
relevant
20
information that is available to Buyer, Company and its Subsidiaries, as the
case may be, with respect to any audit or proceeding referred to in Section 8(a)
hereof; (B) executing and delivering any power of attorney necessary or other
documents or instruments to carry out the intent of this Agreement; (C) promptly
and timely filing appropriate claims for any refund; preparation of responses to
requests for information within the time frame given by the Taxing Authority for
responding to such requests for information, and (D) making available to any
party, during normal business hours (1) all books, records, returns of Company
and its Subsidiaries, relevant extracts from revenue agent reports that are
applicable to Company and its Subsidiaries, and (2) the services of officers and
employees (without substantial interruption of employment), necessary or
useful in connection with the matters referred to in this Section 9(a), provided
that the foregoing shall be done in a manner so as not to interfere unreasonably
with the conduct of the business of Buyer and Company and its Subsidiaries.
(b) Record Retention.
----------------
(i) Records to Be Retained; Time Periods. Parent, Seller,
------------------------------------
and Buyer shall each retain or cause to be retained all Tax Returns and
Information Returns and all books, records, schedules, workpapers, and other
documents relating thereto, including, without limitation, documents described
in the Record Retention Agreement (a copy of which is attached as Exhibit A),
until the expiration of the later of (A) all applicable statutes of limitations
(taking into account any waivers or extensions thereof), and (B) any retention
period required by law or pursuant to any record retention agreement with any
Taxing Authority.
(ii) Prior Notices Required. Parent and Buyer shall notify each
----------------------
other in writing of (A) any waivers, extension or expirations of applicable
statutes of limitations as referred to in Section 9(b)(i) hereof, and (B) of any
intended destruction, at least thirty (30) days prior thereto, of any of the
documents referred to in Section 9(b)(i) hereof. A party giving such a notice
under this Section 9(b)(ii) shall nonetheless refrain from disposing of any of
the materials referred to in Section 9(b)(i) hereof without first having offered
to transfer possession thereof to the notified party.
(c) Confidentiality. Except as required by law or with the prior
---------------
express written consent of all other parties to this Agreement, all Tax Returns
and Information Returns, documents, schedules, workpapers and other documents
relating thereto, as well as all information contained therein, shall be kept
confidential to the parties to this Agreement and their officers, employees,
agents and representatives, shall not be disclosed to any other Person, and
shall be used only for the purposes provided herein.
21
10. Subsequent Transferees. Except as provided in this Section 10,
----------------------
Buyer shall not sell, transfer, assign, or otherwise dispose of, whether
directly or indirectly, either the stock of Company and/or its Subsidiaries or
substantially all of Buyer's assets, or both, and Buyer shall prevent Company
and its Subsidiaries (determined as of the Closing Date) from selling,
transferring, assigning, or otherwise disposing of all or substantially all of
their assets, unless the purchaser, transferee, or assignee thereof expressly
assumes all of the obligations of the transferor under this Agreement or unless
prior to any such transfer, the transferor has made such other provisions for
the satisfaction of its obligations under this Agreement as shall be agreed to
by the other parties to this Agreement in their reasonable discretion. Provided
that the terms of this Section 10 are complied with, any transferee of all or
substantially all of the stock of Company shall succeed to its transferor's
rights under this Agreement.
11. Miscellaneous.
-------------
(a) Effectiveness. This Agreement shall be effective from and after
-------------
the date hereof, provided, however, that this Agreement shall terminate
immediately upon a termination of the Purchase Agreement in accordance with its
terms and thereafter this Agreement shall be of no further force and effect.
(b) Entire Agreement. This Agreement and the Purchase Agreement
----------------
contain the entire agreement among the parties hereto with respect to the
subject matter hereof.
(c) Binding Effect; No Third Party Beneficiary. This Agreement shall
------------------------------------------
be binding upon and inure to the benefit of the parties and their respective
successors, legal representatives and permitted assigns. Nothing expressed or
implied in this Agreement is intended or shall be construed to confer upon or
give any Person other than the Parent, Seller, Company, or the Buyer any rights
or remedies or by reason of this Agreement or any transaction contemplated
hereby.
(d) Termination of Prior Agreements. With respect to Company and its
-------------------------------
Subsidiaries, this Agreement terminates, as of the Closing Date, any and all
other agreements with respect to Taxes (other than the Purchase Agreement) to
which Company or any of its Subsidiaries, on the one hand, and Seller or any of
its Subsidiaries (other than Company and its Subsidiaries), on the other hand,
are or were parties at any time at or before the Closing Date. This Agreement
also extinguishes, as of the Closing Date, any and all intercompany liabilities
with respect to Taxes between Company or any of its Subsidiaries, on the one
hand, and Seller or any of its Subsidiaries (other than Company and its
Subsidiaries), on the other hand, that exist on the Closing Date. Subject to
the provisions of Section 3(b) hereof, the parties to this Agreement intend (i)
that there not be any payments by Parent or Seller to Company or any of its
Subsidiaries after the date of this Agreement under any existing agreement with
respect to Taxes
22
(other than the Purchase Agreement) and (ii) that payments with respect to Taxes
hereafter be pursuant only to this Agreement.
(e) No Double Recovery. Should it be necessary, equitable adjustments
------------------
will be made to prevent duplicate recovery for indemnification with respect to
the same item.
(f) Section 338(h)(10) Election. The parties hereto shall not make a
---------------------------
joint election under Section 338(h)(10) of the Code unless Buyer and Seller
agree otherwise.
(g) Guarantee of Performance. Parent, Buyer and Company hereby
------------------------
guarantee the complete and prompt performance by the members of the Xerox
Affiliated Group and the Company Group, respectively, of all of their
obligations and undertakings pursuant to this Agreement.
(h) Severability. In case any one or more of the provisions contained
------------
in this Agreement should be invalid, illegal or unenforceable, the
enforceability of the remaining provisions hereof shall not in any way be
affected or impaired thereby.
(i) Indulgences, etc. Neither the failure nor any delay on the part
-----------------
of any party hereto to exercise any right under this Agreement shall operate as
a waiver thereof, nor shall any single or partial exercise of any right preclude
any other further exercise of the same or any other right, nor shall any waiver
of any right with respect to any occurrence be construed as a waiver of such
right with respect to any other occurrence.
(j) Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED
-------------
IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO
THE CONFLICT OF LAW PRINCIPLES THEREOF, EXCEPT WITH RESPECT TO MATTERS OF LAW
CONCERNING THE INTERNAL CORPORATE AFFAIRS OF ANY CORPORATE ENTITY WHICH IS A
PARTY TO OR SUBJECT OF THIS AGREEMENT, AND AS TO THOSE MATTERS THE LAW OF THE
JURISDICTION UNDER WHICH THE RESPECTIVE ENTITY DERIVES ITS POWERS SHALL GOVERN.
(k) Notices. All notices, requests, demands and other communications
-------
required or permitted under this Agreement to be made to the Buyer or Company
shall be made in the manner provided in Section 10.5 of the Purchase Agreement.
All notices, requests, demands and other communications required or permitted
under the Agreement to be made to the Parent or Seller shall be made to:
23
To Parent:
Xerox Financial Services, Inc.
▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇▇▇ ▇▇▇▇▇
▇▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇
Facsimile: (▇▇▇) ▇▇▇-▇▇▇▇
Attn: ▇▇▇▇ ▇▇▇▇▇▇▇▇▇▇▇
Vice President, Taxes
To Seller:
Talegen Holdings, Inc.
▇▇▇▇ ▇▇▇▇▇▇▇ ▇▇▇▇▇▇
▇▇▇▇▇ ▇▇▇▇
▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇
Facsimile: (▇▇▇) ▇▇▇-▇▇▇▇
Attn: ▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇, Esq.
General Counsel
With copies to:
LeBoeuf, Lamb, ▇▇▇▇▇▇ & ▇▇▇▇▇▇, L.L.P.
▇▇▇▇ ▇▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇, ▇.▇.
▇▇▇▇▇▇▇▇▇▇, ▇.▇. ▇▇▇▇▇-▇▇▇▇
Facsimile: (▇▇▇) ▇▇▇-▇▇▇▇
Attn: ▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇▇▇
To Buyer:
ACE Limited
The ACE ▇▇▇▇▇▇▇▇
▇▇ ▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇
▇▇▇▇▇▇▇▇, ▇▇ ▇▇ ▇▇▇▇▇▇▇
▇▇▇▇▇▇▇▇▇: (▇▇▇) ▇▇▇-▇▇▇▇
Attn: ▇▇▇▇▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇
24
With copies to:
▇▇▇▇▇, ▇▇▇▇▇ & ▇▇▇▇▇
▇▇▇ ▇. ▇▇▇▇▇▇▇ ▇▇▇▇▇▇
▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇ ▇▇▇▇▇
Facsimile: (▇▇▇) ▇▇▇-▇▇▇▇
Attn: ▇▇▇▇▇ ▇. ▇▇▇▇▇
with a copy to the appropriate persons designated in Section 11.5 of the
Purchase Agreement for receiving notice on behalf of Parent and Seller.
(l) Waivers and Amendments; Non-Contractual Remedies; Preservation of
-----------------------------------------------------------------
Remedies. This Agreement may be amended, superseded, canceled, renewed or
--------
extended, and the terms hereof may be waived, only by a written instrument
executed and delivered by duly authorized officers of Buyer and Parent, or, in
the case of waiver, by the party waiving compliance. No delay on the part of
any party in exercising any right, power or privilege hereunder shall operate as
a waiver thereof, nor shall any waiver on the part of any party of any such
right, power or privilege nor any single or partial exercise of any such right,
power or privilege, preclude any further exercise thereof or the exercise of any
such right, power or privilege. The rights and remedies herein provided are
cumulative and are not exclusive of any rights or remedies that any party may
otherwise have at law or in equity. The rights and remedies of any party based
upon, arising out of or otherwise in respect of any inaccuracy in or breach of
any covenant contained in this Agreement shall in no way be limited by the fact
that the act, omission, occurrence or other state of facts upon which any claim
of any such inaccuracy or breach is based may also be the subject matter of any
other representation, warranty, covenant or agreement contained in this
Agreement (or in any other agreement between the parties) as to which there is
no inaccuracy or breach.
(m) Survival of Obligations. The agreements, covenants and
-----------------------
obligations contained in this Agreement shall survive the consummation of the
transactions contemplated by the Purchase Agreement, and shall expire only when
claims arising therefrom are barred by all applicable statutes of limitation (as
may be extended from time to time).
(n) Variations in Number and Gender. All terms used in this
-------------------------------
Agreement, and any variations of such terms, refer to the masculine, feminine or
neuter, singular or plural, as the context may require.
(o) Counterparts. This Agreement may be executed in any number of
------------
counterparts, each such counterpart being deemed to be an original instrument,
and all of such counterparts shall together constitute one and the same
instrument.
25
(p) Headings. The Section and paragraph captions herein are for
--------
convenience or reference only, do not constitute part of this Agreement and
shall not be deemed to limit or otherwise affect any of the provisions hereof.
(q) Delayed Closing. This Agreement has been drafted on the
---------------
assumption that Closing will occur in 1997. The parties hereto recognize that
there may be circumstances which cause the Closing to occur in 1998. If Closing
is in fact delayed until 1998, the parties hereto intend that, on a basis
consistent with the spirit of this Agreement and, subject to the following
sentence: (1) the provisions included in this Agreement with respect to the
Stub Period shall be applied to the Taxable Year of the Company and its
subsidiaries that begins on January 1, 1998 and ends on the Closing Date; (2)
the provisions included in this Agreement with respect to the Straddle Period
shall be interpreted as applying to the period that begins before, and ends
after, December 31, 1997; and (3) the Company's 1997 Taxable Year shall be
subject as nearly as practicable to the provisions herein that apply to the Stub
Period. Notwithstanding anything to the contrary in the preceding sentence, it
is understood that (1) the provisions of Section 3(c)(ii)(C) shall only be
applicable to the Taxable Year that begins on January 1, 1997, and (2) the
provisions of paragraphs (a), (b), (c) and (d) of Section 5 hereof shall be
unchanged by any delay in the Closing Date to 1998.
26
IN WITNESS WHEREOF, this Agreement has been duly executed and delivered by
the duly authorized officers of the parties hereto on the date first hereinabove
written.
Xerox Financial Services, Inc.
By:___________________________
Talegen Holdings, Inc.
By:___________________________
Westchester Specialty Group, Inc.
By:___________________________
ACE Limited
By:___________________________
27
Exhibit A
RECORD RETENTION AGREEMENT
--------------------------
28
Schedule 2(a)
INTERPOLATION METHODOLOGY PURSUANT TO SECTION 2(a)(1)(B)
--------------------------------------------------------
For purposes of this Agreement, any discounting of unpaid losses (within the
meaning of Section 846 of the Code) and of salvage and subrogation required for
the Stub Period shall be done in accordance with the following interpolation
method:
The discount factor for AY + 0 shall be determined (with reference to
the development of losses for the portion of 1997 up to and including
the Closing Date) by adding to the industry discount factor (published
by the IRS for 1997) for AY + 0, a percentage of the excess (whether
positive or negative) of the industry factor for AY + 0 over the
industry factor for AY + 1 equal to the number of full months in 1997
following the Closing Date divided by 12, provided that the resulting
discount factor shall not be greater than one nor less than zero.
The discount factor for AY + 1 shall be determined by subtracting from
the industry discount factor for AY + 0, a percentage of the excess
(whether positive or negative) of the industry factor for AY + 0 over
the industry factor AY + 1 equal to 1 minus the percentage determined
pursuant to the preceding sentence.
Similar interpolative adjustments should be made for AY + 2, AY + 3,
and each succeeding accident year, in turn, with the resulting factors
applied to unpaid losses reflected in the books and records of the
Company for each accident year.
It is understood and agreed that the source of the above method of computing
discount factors for unpaid losses is the letter submitted by the American
Insurance Association on April 24, 1989 to the Internal Revenue Service, and
that the method of computing part year discount factors for unpaid losses
reflected in that letter is intended to be applied for purposes of this
Agreement.
29
Schedule 3(c)
WESTCHESTER SPECIALTY GROUP
1997 RESERVE ACTIONS -- BY LINE OF BUSINESS AND ACCIDENT YEAR
Westchester
Other Liability Combined Fire WSLIC
--------------- ---------- ---- -----
1987 & Prior 68,312,000 59,077,000 9,235,000
1988 2,107,000 1,004,000 1,103,000
1989 3,441,000 1,866,000 1,575,000
1990 4,581,000 2,493,000 2,088,000
1991 6,446,000 2,793,000 3,653,000
1992 6,670,000 2,641,000 4,029,000
1993 21,387,000 19,969,000 1,418,000
1994 22,657,000 21,158,000 1,499,000
1995 16,558,000 16,558,000 0
1996 12,040,000 12,040,000 0
----------- ----------- ----------
Subtotal 164,199,000 139,599,000 24,600,000
=========== =========== ==========
Uncollectible Reinsurance Reserves:*
------------------------------------
1987 & Prior 30,000,000 30,000,000 0
1988 1,000,000 500,000 500,000
1989 1,750,000 750,000 1,000,000
1990 1,750,000 750,000 1,000,000
1991 2,750,000 1,750,000 1,000,000
1992 1,750,000 750,000 1,000,000
1993 750,000 250,000 500,000
1994 750,000 750,000 0
1995 750,000 750,000 0
1996 750,000 750,000 0
----------- ----------- ----------
Subtotal 42,000,000 37,000,000 5,000,000
=========== =========== ==========
Special Property:
-----------------
1992 (28,000) (28,000) 0
1993 (205,000) (95,000) (110,000)
1994 (4,343,000) (1,653,000) (2,690,000)
1995 (1,791,000) (l,750,000) (41,000)
1996 (6,832,000) (6,673,000) (159, 000)
----------- ----------- ----------
Subtotal (13,199,000) (10,199,000) (3,000,000)
=========== =========== ==========
Workers Comp.
-------------
1987 & Prior 100,000 500,000 (400,000)
__________________________________
* Reserve additions for accident years through 1993 will be discounted
using the 1997 discount factor applicable to the Other Liability line
of business for the 1997 accident year. Reserve additions for the 1994
through 1996 accident years will actually appear as loss reserves
under the Other Liability line of business for those accident years on
Schedule P of the Annual Statement.
30
CMP
---
1987 & Prior (90,000) (90,000) 0
1990 26,000 26,000 0
1991 120,000 120,000 0
1992 332,000 332,000 0
1993 510,000 510,000 0
1994 1,743,000 1,743,000 0
1995 2,993,000 2,993,000 0
1996 2,867,000 2,867,000 0
----------- ----------- ----------
Subtotal 8,501,000 8,501,000 0
=========== =========== ==========
Auto
----
1991 (966,000) (966,000) 0
1992 (604,000) (604,000) 0
----------- ----------- ----------
GRAND TOTAL 200,031,000 173,831,000 26,200,000
----------- =========== =========== ==========
31
Schedule 5(f)
1990 through 1994 Uncollectible Reinsurance Deductions
------------------------------------------------------
--------------------------------------------------------------------------------
INCOME/(DEDUCTION)
------------------
--------------------------------------------------------------------------------
COMPANY 1990 1991 1992 1993 1994 TOTAL
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Westchester -4,135,320 297,972 -8,057,076 11,153,927 0 -740,497
--------------------------------------------------------------------------------
WSLIC 0 0 0 -74,400 0 -74,400
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
TOTAL -4,135,320 297,972 -8,057,076 11,079,527 0 -814,897
--------------------------------------------------------------------------------
32
-----------------------------------
-CENTRAL SECRETARIAL CONTROL SHEET- JOB #:
---------------------------------------------------------------------------------------------------------------------------
PLEASE COMPLETE THIS FORM IN ENTIRETY.
WRITE OUT ALL SPECIAL INSTRUCTIONS TO ASSURE THAT YOUR WORK WILL BE COMPLETED.
---------------------------------------------------------------------------------------------------------------------------
ATTORNEY:▇▇▇▇▇▇ ATTORNEY #:1515 EXT.: 8093
---------------------------------------------------------------------------------------------------------------------------
CLIENT:TALEGEN CLIENT #: 19350 FLOOR:
----------------------------------------------------------------------------------------===================================
MATTER:TAX PLANNING MATTER #: 769 OVERTIME
----------------------------------------------------------------------------------------
DOCUMENT TITLE: WESTCHESTER TAX AGREEMENT [_] Yes [_] No
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