EXHIBIT 10.6
S CORPORATION TAX ALLOCATION
AND INDEMNIFICATION AGREEMENT
THIS S CORPORATION TAX ALLOCATION AND INDEMNIFICATION AGREEMENT (the
"Agreement") is made and entered into this ____ day of _____________, 1997
between OMEGA RESEARCH, INC., a Florida corporation (the "Company"), and XXXXXXX
X. XXXX, XXXXX X. XXXX, XXXXXXXX X. XXXX, THE XXXXXXX X. XXXX 1997 GRANTOR
RETAINED ANNUITY TRUST #1 and THE XXXXX X. XXXX GRANTOR RETAINED ANNUITY TRUST
#1 (collectively, the "Stockholders") (the Company and the Stockholders are
hereinafter referred to individually as a "party" and collectively as the
"parties").
W I T N E S S E T H
WHEREAS, the Company contemplates a public offering the principal purposes
of which are to establish a public market for its stock, to provide enhanced
equity incentives to attract and retain key employees, to increase visibility in
its markets, to facilitate future access to public capital markets and to obtain
additional working capital (the "Public Offering");
WHEREAS, immediately prior to the completion of such Public Offering, the
Company plans to distribute a dividend to the Stockholders equal to the
Company's undistributed Accumulated Adjustments Account as defined in Section
1368(e)(1) of the Code (as hereinafter defined);
WHEREAS, the Company and the Stockholders have entered into this Agreement
as a condition to the foregoing distribution and the contemplated Public
Offering;
WHEREAS, from its inception through March 31, 1988, the Company was taxed
as a C corporation (as defined in the Code), and the Company became an S
corporation (as defined in section 1361 of the Code) on April 1, 1988 and will
continue to be an S corporation until the Termination Date (as hereinafter
defined), after which it will again be taxed as a C corporation;
WHEREAS, the Stockholders currently are the only stockholders of the
Company, and will continue to be so until the closing of the Public Offering
(the "Closing");
WHEREAS, in July 1997, the Company voluntarily filed a request on Form
3115 (the "Form 3115") with the Internal Revenue Service (the "IRS") to change
its method of accounting from the cash method of accounting to the accrual
method of accounting (the "Accounting Change") effective on January 1, 1997;
WHEREAS, as a result of the filing Form 3115 and the Accounting Change,
the Company is required to include in its income over three taxable years an
amount equal to the excess of the income it should have reported as taxable
income under the accrual method of accounting for years prior to 1997 and the
amount it did report as taxable income under the cash method for such years;
WHEREAS, the Company and the Stockholders wish to provide for
indemnifications specifically pertaining to the Accounting Change; and
WHEREAS, the Company and the Stockholders wish to provide for a tax
allocation and indemnification agreement in connection with the Company's
termination as an S corporation.
NOW, THEREFORE, the parties agree as follows:
ARTICLE 1
DEFINITIONS
1.1 DEFINITIONS. The following terms, as used herein, have the following
meanings:
"C Short Year" means that portion of the S Termination Year of the Company
defined in Section 1362(e)(1)(B) of the Code.
"Code" means the Internal Revenue Code of 1986, as amended.
"S Corporation Period" means the period commencing April 1, 1988 and
ending on the day before the Termination Date.
"S Corporation Taxable Income" means the taxable income of the Company
from all sources during the S Corporation Period.
"S Short Year" means that portion of the S Termination Year of the Company
defined in Section 1362(e)(1)(A) of the Code.
"S Termination Year" shall have the meaning set forth in Section
1362(e)(4) of the Code.
"Termination Date" means the effective date of the Company's termination
of its status as an S corporation pursuant to Section 1362(d)(1) of the Code.
ARTICLE 2
ELECTION TO TERMINATE; S TERMINATION YEAR
2.1 TERMINATION OF S STATUS. The parties intend to terminate the Company's
status as an S corporation by electing to do so under Code Section 1362(d)(1).
2.2 EFFECTIVE DATE. Pursuant to Section 1362(d)(1) of the Code, the
election to terminate the Company's status as an S corporation shall be
effective on the date immediately preceding the date of the effective date of
the Company's Registration Statement on Form S-1 relating to the Public
Offering, which date shall be the "Termination Date".
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2.3 S TERMINATION YEAR. The Company's fiscal year in which the S
corporation status of the Company is terminated will be an S Termination Year
for federal tax purposes.
2.4 S SHORT YEAR. Pursuant to Section 1362(e)(1) of the Code, the S
Termination Year of the Company shall be divided into two short taxable years:
an S Short Year and a C Short Year. The S Short Year of the Company shall be
that portion of the Company's S Termination Year beginning on the first day of
such fiscal year and ending on the day immediately preceding the Termination
Date. For federal income tax purposes, the Company will be treated as an S
corporation during its S Short Year.
2.5 C SHORT YEAR. Pursuant to Section 1362(e)(1)(B) of the Code, that
portion of the S Termination Year of the Company beginning on the Termination
Date and ending on the last day of the 1997 fiscal year shall be the C Short
Year of the Company. For federal income tax purposes, the Company will be taxed
as a C corporation during its C Short Year.
ARTICLE 3
ALLOCATION OF INCOME
3.1 ALLOCATION ELECTION. The Company intends to allocate tax items to its
S Short Year and C Short Year using normal accounting rules pursuant to the
election method contained in Section 1362(e)(3) of the Code, and the
Stockholders covenant and agree to consent to such election method.
ARTICLE 4
TAXES
4.1 LIABILITY FOR TAXES INCURRED DURING S CORPORATION YEARS INCLUDING S
SHORT YEAR. Subject to any indemnification and/or distribution otherwise
required herein, the Stockholders, severally and not jointly, covenant and agree
that they shall pay any and all taxes attributable to their allocable shares of
taxable income of the Company they are required to pay for all taxable periods
(or that portion of any period including the S Short Year) during which the
Company was an S corporation.
4.2 LIABILITY FOR TAXES INCURRED DURING C CORPORATION YEARS INCLUDING C
SHORT YEAR. Subject to any indemnification otherwise required herein, the
Company covenants and agrees that the Company shall pay any and all taxes
attributable to taxable income of the Company required to be paid by the Company
for the C Short Year and all taxable periods thereafter during which the Company
is a C corporation.
4.3 COMPANY'S INDEMNIFICATION FOR TAX LIABILITIES. The Company hereby
agrees to indemnify, defend and hold harmless each Stockholder from and against
all liability with respect to all
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federal and state income taxes of any kind whatsoever (computed at the highest
federal and/or state income tax rate in effect for the year of adjustment)
including interest, penalties and additions to taxes, imposed upon a Stockholder
as a result of any final determination of an adjustment (by reason of an amended
return, claim for refund, audit or otherwise)to the Stockholders' taxable income
resulting in an increase in the Stockholders' S corporation taxable income and a
corresponding decrease in the federal or state, as the case may be, income tax
liability payable by the Company, provided, however, the Company's
indemnification shall be limited to the reduction, if any, in its tax liability
(including interest, penalties and additions to taxes) as a result of any such
determination. The amount of the foregoing indemnity shall be adjusted as
required by Section 4.7 (requiring the gross-up of the indemnification amount)
and Section 5.1(b) (providing for the payment of a Special Dividend in lieu of
the indemnification hereunder) and shall be further limited with respect to an
adjustment arising from the Accounting Change to an amount such that the
aggregate indemnification payments for the Accounting Change plus the federal
and states taxes payable by the Company as the result of the Accounting Change
does not exceed in the aggregate $1,800,000; provided, however, that any
indemnity payment made to the Stockholders arising from the Accounting Change
shall not be grossed-up as otherwise required by Section 4.7.
The Company acknowledges further that it shall be solely responsible for
any federal, state and local taxes (including interest and penalties, if any)
relating to the Built-In Gains tax imposed by Section 1374 of the Code and the
tax on Excess Passive Investment Income imposed by Section 1375 of the Code.
4.4 STOCKHOLDERS' INDEMNIFICATION FOR TAX LIABILITIES. The Stockholders,
severally (according to the percentage of the outstanding shares of the
Company's Common Stock owned by each Stockholder for the years of adjustment)
and not jointly, hereby agree to indemnify, defend and hold harmless the Company
from and against all liability with respect to all federal and state income
taxes of any kind whatsoever (computed at the highest federal and/or state
income tax rate in effect for the year of adjustment) including interest,
penalties and additions to taxes resulting from any final determination of an
adjustment (by reason of an amended return, claim for refund, audit or
otherwise) to the Stockholders' taxable income resulting in a decrease in the
Stockholders' S corporation taxable income and a corresponding increase in the
federal or state, as the case may be, income tax liability payable by the
Company; provided, however, the Stockholder's indemnifi cation shall be limited
to the reduction, if any, in his/her tax liability (including interest,
penalties and additions to taxes) as a result of such determination.
In addition to the foregoing, the Stockholders, severally (according to
the percentage of the outstanding shares of the Company's Common Stock owned by
each Stockholder for the years of adjustment) and not jointly, hereby agree to
indemnify, defend and hold harmless the Company from and against all tax
liability
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directly attributable to the Accounting Change to the extent and in an amount by
which all federal and state income taxes of any kind whatsoever (including
interest, penalties and additions to taxes) for tax years subsequent to the S
Corporation Period exceed $1,800,000.00 dollars.
4.5 PAYMENTS. The Stockholders or the Company, as the case may be, shall
make any payment required under this Agreement within thirty (30) calendar days
after receipt of notice from the other party that a payment is due by such party
to the appropriate taxing authority.
4.6 SUBROGATION. The party (or parties) providing the indemnity under
either Section 4.3 or Section 4.4 (defined solely for purposes of this Section
4.6 as the "Indemnifying Party") shall be subrogated to all rights of recovery
(the "Subrogation Claims") that the party (or parties) being indemnified under
Section 4.3 or Section 4.4, respectively (defined solely for purposes of this
Section 4.6 as the "Indemnified Party") may have against any person or
organization in respect of the tax liabilities for which the Indemnifying Party
is providing indemnity. Such right of subrogation shall not exceed the amount
paid by the Indemnifying Party to the Indemnified Party. The Indemnified Party
shall execute and deliver instruments and papers and do whatever else is
reasonably necessary to secure such rights of subrogation for the Indemnifying
Party. The Indemnified Party shall provide all reasonable assistance as
requested by the Indemnifying Party in order for the Indemnifying Party to
pursue the Subrogation Claims. The Indemnified Party shall do nothing after any
Subrogation Claim arises to prejudice the rights of the Indemnifying Party.
4.7 PAYMENTS AFTER POST-TERMINATION TRANSITION PERIOD. If any Stockholder
is required to include any payment received pursuant to this Agreement after the
expiration of the "post-termination transition period" (as defined in Section
1377(b) of the Code) in computing his gross income in a tax return, other than
any payment made under Section 4.3 where the Stockholder failed to give the
Company timely notice to allow the Company to make such payment prior to the
expiration of the "post-termination transition period" or any payment related to
the Accounting Change, then (i) the Stockholder shall notify the Company of such
inclusion in income, and (ii) in addition to all other payments made under this
Agreement, the Company shall also pay to the Stockholder an amount which, when
added to the payment so included, will place the recipient Stockholder in the
same net after-tax position that he would have been in had the payment not been
so included.
4.8 NOTICES OF AUDITS AND ADJUSTMENTS.
(a) If any Stockholder receives notice after the date hereof of an
intention by a taxing authority to audit any return of the Stockholder that
includes any item of income, gain, deduction, loss or credit reported by the
Company with respect to the Company's S Corporation Period, such Stockholder
shall inform the Company, in writing, of the audit promptly after receipt of
such
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notice. If any Stockholder receives notice from a taxing authority of any
proposed adjustment for which the Company may be required to indemnify (or pay
an additional distribution pursuant to Section 5.1(b) hereto) the Stockholder
hereunder (a "Proposed Adjustment"), the Stockholder shall give notice to the
Company of the Proposed Adjustment promptly after receipt of such notice from a
taxing authority. Upon receipt of such notice from a Stockholder, the Company
may, by in turn giving prompt written notice to each of the Stockholders,
request that the Stockholders contest such Proposed Adjustment. If the Company
shall request that any Proposed Adjustment be contested, then the Stockholders
shall, at the Company's expense, contest the Proposed Adjustment or permit the
Company and its representatives, at the Company's request and expense, to
contest the Proposed Adjustment (including pursuing all administrative and
judicial appeals and processes). The Company shall pay to the Stockholders on
demand all costs and expenses (including attorneys' and accountants' fees) that
the Stockholders may incur in contesting such Proposed Adjustments. No
Stockholder shall make, accept or enter into a settlement or other compromise
with respect to any taxes indemnified hereunder, or forego or terminate any
proceeding undertaken hereunder without the consent of the Company, which
consent shall not be unreasonably withheld.
(b) If the Company receives notice after the date hereof of an
intention by a taxing authority to audit any return of the Company that includes
any item of income, gain, deductions, loss or credit reported by the Company
with respect to the period during which the Company was a S corporation, the
Company shall inform the Stockholders, in writing, of the audit promptly after
receipt of such notice. If the Company receives notice from a taxing authority
of any proposed adjustment for which any of the Stockholders may be required to
indemnify the Company hereunder (a "Company Proposed Adjustment"), the Company
shall give notice to each of the Stockholders of the Company Proposed Adjustment
promptly after receipt of such notice from a taxing authority. Upon receipt of
such notice from the Company, any of the Stockholders may, by in turn giving
prompt written notice to the Company, request that the Company contest such
Company Proposed Adjustment. If any of the Stockholders shall request that any
Company Proposed Adjustment be contested, then the Company shall contest the
Company Proposed Adjustment (including pursuing all administrative and judicial
appeals and processes) at the Company's expense and shall permit the Stockholder
to participate in such proceeding. The Company shall not make, accept or enter
into a settlement or other compromise with respect to any taxes indemnified
hereunder, or forego or terminate any proceeding undertaken hereunder without
the consent of the Stockholders, which consent shall not be unreasonably
withheld.
ARTICLE 5
DISTRIBUTIONS
5.1 DISTRIBUTION OF ACCUMULATED ADJUSTMENTS ACCOUNT. (a) Prior to the
consummation of the Public Offering, the Company's board of directors shall
declare a cash dividend (the "Special
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Dividend") payable to the Stockholders. The Special Dividend will be equal to
the Company's estimated accumulated adjustments account (as the term is defined
in Section 1368 of the Code) (the "AAA") as of the Termination Date. The Company
agrees to pay the Special Dividend to the Stockholders immediately prior to the
Termination Date and that: (a) if the Special Dividend exceeds the AAA as
reported by the Company on its originally filed federal S corporation income tax
return for calendar year 1997 (the "Final AAA"), such excess shall be paid by
the Stockholders to the Company, and (b) if the Final AAA exceeds the Special
Dividend, such excess shall be paid by the Company to the Stockholders, in
either case, within thirty (30) days of the date of such determination and
together with interest thereon, at the Applicable Federal Rate (as defined in
Section 1274 of the Code) in effect as of the date of such payment, for the
period from the date the Special Dividend was paid to the date of such payment.
The Final AAA shall be determined by the Company's tax return for the Company's
S Short Year in a manner consistent with prior practice.
(b) Notwithstanding the filing of the Company's tax returns for the
1997 year and the determination of the Final AAA, if the Company is required to
indemnify the Stockholders pursuant to Section 4.3 and such indemnification
amount is required to be paid by the Company to the Stockholders prior to the
expiration of the post-termination period, in lieu of such indemnity payment,
the Company shall increase the Special Dividend payable to the Stockholders by
the amount of such indemnity payment and distribute such amount prior to the
expiration of the post-termination period.
ARTICLE 6
MISCELLANEOUS
6.1 COUNTERPARTS. This Agreement may be executed in several counterparts,
each of which shall be deemed an original, but all of which counterparts
collectively shall constitute one instrument representing the Agreement between
the parties hereto.
6.2 CONSTRUCTION OF TERMS. Nothing herein expressed or implied is
intended, or shall be construed, to confer upon or give any person, firm or
corporation, other than the parties hereto or their respective successors and
assigns, any rights or remedies under or by reason of this Agreement.
6.3 COST OF ENFORCEMENT; INTEREST. If, within thirty (30) days after
demand to comply with the obligations of one of the parties to this Agreement
served in writing on the other, compliance or reasonable assurance of compliance
is not forthcoming, and the other party engages the services of an attorney to
enforce rights under this Agreement, the prevailing party in any action shall be
entitled to recover all reasonable costs and expenses (including reasonable fees
of attorneys and legal assistants, whenever incurred, whether before trial or
appellate proceeding, at trial, on appeal or otherwise).
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6.4 GOVERNING LAW. This Agreement shall be governed by, and construed and
enforced in accordance with the laws of the State of Florida, other than those
provisions relating to the conflict of laws of different jurisdictions if the
effect of the application of such provisions would be to cause the laws of a
jurisdiction other than Florida to apply hereto.
6.5 JURISDICTION; VENUE. The parties agree that jurisdiction for any
litigation arising out of this Agreement or any document delivered in connection
herewith shall be in Miami, Florida.
6.6 NOTICES. All notices and other communications required or permitted to
be given hereunder shall be in writing and shall be deemed to have been duly
given when received, if personally delivered; when transmitted, if transmitted
by electronic fax, telecopy or similar electronic transmission method; the day
after it is sent, if sent by recognized expedited delivery service; and five
days after it is sent, if mailed, first class mail, postage prepaid. In each
case notice shall be sent to the parties at 0000 Xxxx Xxxxxxx Xxxxxx, Xxxxx 000,
Xxxxx, Xxxxxxx 00000, or to such other address as any party shall have specified
by notice in writing to the other parties.
6.7 AMENDMENT AND MODIFICATION. This Agreement may be amended, modified or
supplemented only by a written agreement executed by all of the parties hereto.
6.8 ASSIGNMENT. This Agreement and all of the provisions hereof shall be
binding upon and inure to the benefit of the parties hereto and their respective
heirs, successors and permitted assigns, but neither this Agreement nor any of
the rights, interests or obligations hereunder shall be assigned by any of the
parties hereto without the prior written consent of the other parties, nor is
this Agreement intended to confer upon any other person except the parties any
rights or remedies hereunder.
6.9 INTERPRETATION. The title, article and section headings contained in
this Agreement are solely for the purpose of reference, are not part of the
agreement of the parties and shall not in any way affect the meaning or
interpretation of this Agreement.
6.10 SEVERABILITY. In the event that any one or more of the provisions of
this Agreement shall be held to be illegal, invalid or unenforceable in any
respect, the same shall not in any respect affect the validity, legality, or
enforceability of the remainder of this Agreement, and the parties shall use
their best efforts to replace such illegal, invalid or unenforceable provisions
with an enforceable provision approximating, to the extent possible, the
original intent of the parties.
6.11 ENTIRE AGREEMENT. This Agreement embodies the entire agreement and
understanding of the parties hereto in respect of the subject matter contained
herein. There are no representations, promises, warranties, covenants, or
undertakings, other than those
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expressly set forth or referred to herein. This Agreement supersedes all prior
agreements and the understandings between the parties with respect to such
subject matter.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
OMEGA RESEARCH, INC.,
a Florida corporation
By:
--------------------------------
Name:
------------------------------
Title:
-----------------------------
-----------------------------------
XXXXXXX X. XXXX
-----------------------------------
XXXXX X. XXXX
-----------------------------------
XXXXXXXX X. XXXX
THE XXXXXXX X. XXXX 1997 GRANTOR
RETAINED ANNUITY TRUST #1
By:
--------------------------------
Xxxxx X. Xxxx, as Trustee
THE XXXXX X. XXXX 1997 GRANTOR
RETAINED ANNUITY TRUST
By:
--------------------------------
Xxxxxxx X. Xxxx, as Trustee
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