TAX INDEMNITY AGREEMENT
This
Tax
Indemnity Agreement (“Agreement”) is dated for reference purposes only December
28, 2006, and is by and between OraLabs, Inc., a Colorado corporation
(“OraLabs”), China Precision Steel, Inc., formerly known as OraLabs Holding
Corp., a Colorado corporation (“Holding”) and Partner Success Holdings Limited,
a British Virgin Islands international business company (“PSHL”).
WHEREAS,
Holding and PSHL entered into a Stock Exchange Agreement (the “Exchange
Agreement”) dated as of March 31, 2006, as amended by First Amendment to Stock
Exchange Agreement (“First Amendment”) and the Second Amendment to Stock
Exchange Agreement, dated October 12, 2006, under which, among other things,
PSHL became on even date herewith (the “Closing Date”) a wholly-owned subsidiary
of Holding in consideration for the issuance to the principals of PSHL and
their
designees of controlling ownership of Holding; and
WHEREAS,
under the Exchange Agreement, such acquisition of the ownership of PSHL was
followed immediately on the Closing Date by the redemption by Holding of all
of
the stock of Holding owned individually by Xxxx X. Xxxxxxxxx (“Xxxxxxxxx”) in
exchange for the conveyance to Xxxxxxxxx of all of the stock of OraLabs owned
by
Holding (the “Redemption Transaction”); and
WHEREAS,
the parties agree that the Redemption Transaction is a taxable transaction
under
the Internal Revenue Code of 1986, as amended, (the “Code”), calculated upon the
excess, if any, of the value of OraLabs (“OraLabs Value”) on the Closing Date
over Holding’s basis in the OraLabs’ common stock owned by Holding immediately
prior to the distribution of those shares of common stock to Xxxxxxxxx (the
“Basis”), and that income taxes assessed by a State may also be payable with
respect to the Redemption Transaction; and
WHEREAS,
on the Closing Date, OraLabs estimated that the Basis is $7,006,586 and the
OraLabs Value is $8,542,000, (as determined from a fairness opinion from
Capitalink, L.C.); and
WHEREAS,
on the Closing Date, the Spinoff Tax Liability (defined below) was estimated
to
be $522,041, and to pay the same, OraLabs purchased 100,000 shares of common
stock from Holding for the total purchase price of $450,690, and paid to Holding
an additional sum of $71,351 (the “Cash Payment”) (collectively, the “Estimated
Tax”) plus a Gross-Up Amount (as defined in Section 5B below) on the Cash
Payment of $36,756.25, to provide the public company with the funds to pay
the
Estimated Tax and taxes thereon; and
WHEREAS,
Holding and PSHL have required an indemnity from OraLabs to the extent that
the
amount of Spinoff Tax Liability owing with respect to the Redemption Transaction
is Finally Determined to be more than the Estimated Tax, and OraLabs is willing
to provide an indemnity in accordance with the provisions of this
Agreement.
NOW,
THEREFORE, in consideration of the foregoing recitals and for other good and
valuable consideration, the receipt and sufficiency of which is acknowledged
by
the parties, the parties agree as follows:
1. For
the
purposes of this Agreement, the capitalized terms set forth below have the
meanings set forth in this Section:
1.1 “Final
Determination” or “Finally Determined” means with respect to any liability for
Taxes for any period, (a) a final, unappealable decision by a court of competent
jurisdiction, (b) the expiration of applicable statutes of limitations on
assessment of Taxes or filing of claims for refund, (c) the execution of a
closing agreement under section 7121 of the Code or the acceptance by the IRS
of
an offer in compromise pursuant to section 7122 of the Code (or similar
agreements with tax authorities entered into under applicable state or local
tax
law), but excluding any agreement or compromise that reserves (whether by its
terms or by operation of law) the right of the taxpayer to file a claim for
refund and/or the right of the Taxing Authority to assert a further deficiency,
or (d) any other final, irrevocable and unappealable determination of Taxes
for
such period.
1.2 “IRS”
means the United States Internal Revenue Service or any successor
thereto.
1.3 “Income
Tax” or “Income Taxes” means Taxes based upon or measured by net
income.
1.4 “Income
Tax Return” means a Tax Return relating to the payment or receipt of any refund
of any Income Tax.
1.5 “Neutral
Auditors” means a firm of nationally or regionally recognized independent
accountants who shall not have had a material relationship with OraLabs, Holding
or PSHL.
1.6 “Preclosing
Taxable Period” means a Taxable Year that ends on or before the Closing
Date.
1.7 “Spinoff
Tax Liability” means the excess of the OraLabs Value (as finally determined)
over the Basis (as finally determined) multiplied by 34% plus the state income
tax rate, if applicable.
1.8 “Tax”
or
“Taxes” means any taxes imposed by any federal, state or local government or
agency thereof within the United States.
1.9 “Tax
Practices” means the most recently applied policies, procedures and practices
employed by Holding in the preparation and filing of, and positions taken on,
any Tax Returns of Holding for any Preclosing Taxable Period.
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1.10 “Tax
Return” means all returns and other filings relating to, or required to be filed
by any taxpayer in connection with, the payment or receipt of any refund of
any
Income Tax.
1.11 “Taxable
Year” means a taxable year (which may be shorter than a full calendar or fiscal
year) or similar period with respect to which any Tax may be imposed.
1.12 “Taxing
Authority” means the IRS or any other governmental authority responsible for the
administration of any Tax.
2. Holding
has the responsibility to file the Income Tax Return(s) that will report the
Redemption Transaction for the Taxable Year during which the Closing Date
occurs. Holding will prepare the Tax Return(s) with respect thereto in a manner
consistent with past Tax Practices except as otherwise required by changes
in
applicable law or material underlying facts. Holding will report the Redemption
Transaction in the Income Tax Return(s) for said Taxable Year and agrees that
the basis in its OraLabs stock and the value of OraLabs will be reported as
the
Basis and OraLabs Value stated above. However, the Basis calculation (but not
the OraLabs Value) may be adjusted as required by changes in applicable law
or
material underlying facts, or by a determination by Holding after Holding’s
compliance with Section 4 below of a different amount of Basis. The parties
agree that OraLabs has no indemnity obligation with respect to the amount of
Income Tax owed with respect to the Redemption Transaction except to the extent
that the amount of Spinoff Tax Liability exceeds the Estimated Tax. Prior to
Holding’s filing any Income Tax Return that reports the Redemption Transaction,
Holding will comply with the provisions of Section 4 of this Agreement, and
if
the amount of Basis reported in said Income Tax Return is lower than the Basis
used to compute the Estimated Tax, OraLabs will pay to Holding, within 30 days
after filing the Income Tax Return, the additional amount of Estimated Tax
calculated upon the lower Basis, plus the applicable Gross-Up Amount defined
in
Section 5B. If the amount of Basis reported in said Income Tax Return is higher
than used to calculate the Estimated Tax at Closing, then to the extent of
any
Cash Payment (and Gross-Up Amount thereon) made at Closing, Holding will refund
to OraLabs an amount equal to the sum of the overpayment portion of the Cash
Payment made at Closing, plus the applicable Gross-Up Amount on the refunded
amount.
3. In
the
event that Holding does not comply with its obligations under this Agreement,
then notwithstanding any provision of this Agreement to the contrary, OraLabs
will be relieved of all of its indemnity obligations under this Agreement.
4. OraLabs
will cooperate and assist Holding in the preparation and filing of all Tax
Returns required to be filed for Holding after the date hereof that relate
to a
Preclosing Taxable Period. At least 45 days prior to the filing of any Tax
Return (including amendments thereto) for Holding for a Preclosing Taxable
Period, Holding will provide OraLabs with a copy of those portions of the
proposed Tax Return that relate to the Redemption Transaction and/or any Tax
claimed to be payable in connection therewith, and OraLabs will have the right
to review all related work papers prior to the filing of any such Tax Return.
Holding will consult with OraLabs regarding its comments with respect to such
portions of the Tax Returns, will in good faith consult with OraLabs in an
effort to resolve any differences with respect to the preparation and accuracy
of such portions of the Tax Returns and their consistency with past Tax
Practices, and will consider OraLabs’ recommendations for alternative positions
with respect to items reflected on such portions of the Tax Returns.
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5. A. Subject
to the provisions of this Agreement, OraLabs agrees to indemnify and hold
harmless Holding and PSHL, and their respective officers, agents and directors,
from and against any obligation of Holding to pay an amount of federal and
state
(if applicable) Income Tax attributable to the Redemption Transaction in an
amount equal to the excess of the Spinoff Tax Liability over the Estimated
Tax.
However, the parties agree that the amount of Spinoff Tax Liability will be
determined without regard to the actual Income Tax that may be payable by
Holding for any Taxable Year. Provided that Holding and PSHL comply with their
obligations under this Agreement, OraLabs will pay to Holding the amount
indemnified hereunder that is due with the filing of the Tax Return that reports
the Redemption Transaction, or that results from a Final Determination that
an
indemnified amount is due with respect to the Redemption Transaction. If an
amount representing state Income Tax is payable by OraLabs to Holding under
this
paragraph, the amount of federal Income Tax payable by Holding will give effect
to any reduction of federal taxes due to the payment of state
taxes.
B. The
parties agree that any payment made to Holding under Section 5A above will
be a
taxable transaction to Holding. OraLabs agrees that when it pays the amount
(“Tax Amount”) of indemnified Spinoff Tax Liability required to be paid under
Section 5A, it will simultaneously pay to Holding an amount (a “Gross-Up
Amount”) that will enable Holding to net the amount of the Tax Amount after
paying United States federal and any state income tax due (giving effect to
any
reduction of federal taxes due to the payment of state taxes) with respect
to
OraLabs’ payment to Holding of the Tax Amount. The Gross-Up Amount shall be
calculated by using a 34% federal income tax rate plus the state income tax
rate, if applicable and shall be determined without regard to the actual Income
Tax that may be payable with respect to such Tax Amount. The parties agree
that
the payment made by OraLabs to Holding under the preceding sentence will be
deemed to be in full satisfaction of any Income Tax that may be payable by
Holding that arises from OraLabs’ payment of the Tax Amount, and shall be a full
and final settlement between the parties.
6. Holding
and OraLabs will endeavor in good faith to resolve any dispute under this
Agreement, including without limitation any dispute about a reporting position
in connection with the Redemption Transaction. If any such dispute is not so
resolved, then either party may deliver to the other a written notice detailing
such party’s objections. If the parties are unable to resolve the dispute within
15 days after such notice is given, then either party shall have the right
to
refer the dispute for resolution to Neutral Auditors selected by the parties
within 10 days after the expiration of such 15-day period. If the parties do
not
agree upon the Neutral Auditors within that time, then either party has the
right to request that the American Arbitration Association appoint the Neutral
Auditors, and any costs in connection therewith will be shared equally by the
parties. Each party agrees to execute, if requested by the Neutral Auditors,
a
reasonable engagement letter. All fees and expenses relating to the work, if
any, to be performed by the Neutral Auditors shall be borne equally by the
parties. The Neutral Auditors shall act as an arbitrator to determine, based
solely on presentations by OraLabs and Holding, and not by independent review,
only those issues that remain in dispute between the parties. The Neutral
Auditors’ determination shall be made within 30 days of such firm’s selection,
shall be set forth in a written statement delivered to the parties, and shall
be
final, binding and conclusive.
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7. A. In
the
event that Holding is notified of any audit, examination or other controversy
(any such proceeding will be referred to as a “Proceeding”) before a Taxing
Authority with respect to the amount of Income Tax due from the Redemption
Transaction, Holding will within 15 business days thereafter give written notice
to OraLabs of the Proceeding. The notification required by this Section must
include, insofar as relevant to the Redemption Transaction, copies of any
correspondence between the Taxing Authority and Holding and, as applicable,
written summaries of any oral communications, as well as a detailed statement
of
the reasons why Holding believes that the Proceeding may result in an
indemnification obligation under this Agreement. To the extent known by Holding,
the notice will also include a calculation of the estimated amount of Spinoff
Tax Liability in excess of the Estimated Tax that may be payable.
B. Holding
and OraLabs will comply with the provisions of Section 4 with respect to any
Proceeding described in the previous paragraph. Holding will deliver to OraLabs
copies of any correspondence between the Taxing Authority and Holding and,
as
applicable, written summaries of any subsequent oral communications, that occur
throughout the course of the Proceeding, , insofar as relevant to the Redemption
Transaction. OraLabs will have ultimate control over whether to settle a
Proceeding, the amount of any settlement, and whether to challenge the
Proceeding until a Final Determination, but only to the extent that the
Proceeding relates to the Redemption Transaction. Holding will execute a power
of attorney to facilitate OraLabs’ direct communications with the Taxing
Authority. In no event will Holding or PSHL take any action with any Taxing
Authority that Holding or PSHL could reasonably foresee would have a material
and adverse effect upon any indemnification obligation of OraLabs under this
Agreement.
C. OraLabs
will reimburse Holding for its reasonable costs and fees incurred in connection
with the conduct and resolution of a Proceeding, but if the Proceeding involves
any Tax matter other than the Redemption Transaction, the obligation of OraLabs
under this sentence will only apply to the reasonable costs and fees incurred
by
Holding that relate to the Redemption Transaction. Promptly upon resolution
of
the Proceeding, the parties will in good faith seek to agree upon how the costs
and fees incurred by Holding will be allocated on the one hand to OraLabs and
on
the other hand to Holding. If the parties do not agree upon the allocation,
then
either party may deliver to the other a written notice detailing such party’s
objections. Thereafter, the resolution procedure in Section 6 above will be
undertaken to resolve the disagreement. The Neutral Auditors will act as an
arbitrator to determine, based solely on presentations by OraLabs and Holding,
and not by independent review, the allocation of the costs and fees, and the
Neutral Auditors shall (i) assess to OraLabs the costs and fees that are found
to be solely attributable to the Reimbursement Transaction, (ii) assess to
Holding the costs and fees that are found to be solely attributable to matters
other than the Redemption Transaction, and (iii) allocate the costs and fees
incurred in the Proceeding in general, not specifically allocable to a specific
Tax matter that is addressed in the Proceeding, as determined to be appropriate.
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8. Holding
shall retain all Tax Returns relating to the Redemption Transaction and any
Proceeding involving the Redemption Transaction, and all books, records,
schedules, work papers and other documents relating thereto, until the
expiration of the later of (i) all applicable statutes of limitations (including
any waivers or extensions thereof), and (ii) any retention period required
by
law or pursuant to any record retention agreement. OraLabs has the right to
review and copy any of such books and records of the Proceeding relating to
the
Redemption Transaction from time to time upon reasonable advance notice to
Holding. Holding shall notify OraLabs in writing of any waivers, extensions
or
expirations of applicable statutes of limitations, and shall provide at least
30
days prior written notice of any intended destruction of the documents referred
to in the preceding sentence. Holding shall not dispose of any of the foregoing
materials without first obtaining the written approval of OraLabs, which may
not
be unreasonably withheld.
9. Except
as
required by law or with a prior written consent of the other parties, all Tax
Returns, documents, schedules, work papers and similar items and all information
contained therein, which Tax Returns and other materials are within the scope
of
this Agreement, shall be kept confidential by the parties and their
representatives, shall not be disclosed to any other person or entity and shall
be used only for the purposes provided in this Agreement.
10. This
Agreement contains the entire agreement among the parties with respect to the
indemnification by OraLabs of Taxes arising from the Redemption Transaction.
In
the event of a conflict between any provision of this Agreement and any
provision of the Exchange Agreement, First Amendment, or Indemnification
Agreement attached to the First Amendment, the provision of this Agreement
controls. Notices
under this Agreement shall be given only in the same manner described in the
Indemnification Agreement attached to the First Amendment, to the addresses
specified therein or to such other address as any party may designate by proper
written notice to the other.
11. The
Parties agree that this Agreement shall be construed in accordance with the
laws
of the State of Colorado and that exclusive jurisdiction and venue for any
controversy, claim or suit arising out of or connected with this Agreement
shall
be in the courts located in Denver, Colorado. This Agreement may be executed
in
counterparts, each such counterpart being deemed to be an original instrument,
and all of such counterparts shall together constitute one and the same
instrument. Facsimile signatures will be accepted as originals.
12. This
Agreement may be amended only by written agreement executed and delivered by
all
of the parties. This Agreement is solely for the benefit of the parties to
this
Agreement and shall not be deemed to confer upon third parties any remedy,
claim, liability, reimbursement, claim of action or other right. Except as
otherwise stated in this Agreement, each party agrees to pay its own costs
and
expenses (including without limitation attorneys fees) resulting from the
fulfillment of its respective obligations hereunder. Any ambiguities in this
Agreement shall be resolved without regard to which party drafted this
Agreement.
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13. The
parties acknowledge that irreparable damage would occur in the event that any
of
the provisions of this Agreement were not performed in accordance with its
specific terms or were otherwise breached. The parties shall be entitled to
an
injunction or injunctions to prevent breaches of this Agreement and to enforce
specifically the terms and provisions hereof in any court having jurisdiction.
Any such remedy shall be in addition to any other remedy available at law or
in
equity.
[Remainder
of page intentionally left blank. Signatures on following page.]
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CHINA
PRECISION STEEL, INC., formerly known as ORALABS
HOLDINGS CORP., a Colorado corporation
By:
/s/ Wo Xxxx Xx
Wo
Xxxx Xx, President and CEO
Date:
December 28, 2006
|
PARTNER
SUCCESS HOLDINGS LIMITED, a British Virgin Islands international
business
company
By:
/s/ Wo Xxxx Xx
Wo
Xxxx Xx, President and CEO
Date:
December 28, 2006
|
|
ORALABS,
INC., a Colorado corporation
By:
/s/ Xxxx X. Xxxxxxxxx
Xxxx
X. Xxxxxxxxx, President
Date:
December 28, 2006
|
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