EXHIBIT 10.4
TAX INDEMNIFICATION AGREEMENT
THIS TAX INDEMNIFICATION AGREEMENT (the "Agreement") is made and
entered into as of this 19th day of October, 1995, by and between Optical Cable
Corporation, a Virginia corporation (the "Company"), and Xxxxxx Xxxxxxxx, the
current sole shareholder of the Company (the "Shareholder"), to be effective as
of the date of the closing of the initial public offering of the Company's
common stock (the "Closing Date") pursuant to the Registration Statement No.
33-96476 on Form S-1 filed with the Securities and Exchange Commission under the
Securities Act of 1933, as amended.
INTRODUCTION
The Company elected to be taxed as an S Corporation pursuant to Section
1362 of the Internal Revenue Code of 1986, as amended (the "Code"), on November
1, 1987, and will be an S Corporation until the day before the date on which
such status terminates pursuant to Code Section 1362(d) (the "Termination
Date"). Accordingly, for the period from November 1, 1987, until the Termination
Date (the "S Corporation Period"), the Company incurred no federal income tax
liability and no state income tax liability in those states where the S election
was in force. Rather, the Company's items of income, loss and deductions were
passed through to the Shareholder. As a result of the public offering of the
Company's stock on the Closing Date, the Company will no longer be eligible to
be treated as an S Corporation for federal and state income tax purposes.
Therefore, the Company will elect within one week prior to the Closing Date to
terminate its status as an S Corporation
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pursuant to Code Section 1362(d), after which the Company will be a C
Corporation. Accordingly, the parties to this Agreement desire to set forth
their agreement with respect to certain income taxes which may be imposed upon
the Company after the Termination Date as a result of the conduct of the
Company's business during the S Corporation Period.
The Company and the Shareholder agree to the following:
1. Indemnification of Company.
a. In the event that any governmental taxing authority, including,
without limitation, the Internal Revenue Service and any state or
local taxing authority (a "Taxing Authority") in any jurisdiction
in which an S election was made or deemed to have been made by
operation of law, adjusts, for any reason whatsoever, the
Company's net income tax liability, tax credits or recapture of
tax credits for the S Corporation Period (a "Company
Adjustment"), the Shareholder shall pay on demand to the Company
a contribution to its capital which equals (i) the additional
federal, state and local income taxes payable by the Company in
connection with, or as a result of, a Company Adjustment, plus
(ii) the amount of any interest expense, penalties and additions
to tax payable by the Company in connection with, or as a result
of, a Company Adjustment, plus (iii) the amount of all expenses,
attorneys' fees and accountants' fees incurred by the Company in
connection with, or as a result of, a Company Adjustment, less
(iv) the amount of any reductions in tax payable by the Company
in connection with, or as a result of, the Company incurring any
such additional federal, state and local income taxes, any such
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interest expense, penalties and additions to tax payable by the
Company, and any such expenses, attorneys' fees and accountants'
fees incurred by the Company.
b. To the extent that it is determined that a payment to the Company
pursuant to Section 1(a) is taxable to the Company, the
Shareholder shall pay on demand to the Company an amount which,
after reduction for all additional federal, state and local
income taxes payable by the Company as a result of the payment
made under this Section 1(b), equals the sum of (i) the
additional federal, state and local income taxes payable by the
Company as a result of the payment pursuant to Section 1(a), plus
(ii) the aggregate amount of any interest, penalties or additions
to tax payable by the Company as a result of the taxation of the
payment pursuant to Section 1(a).
c. Notwithstanding any provision in this Agreement to the contrary,
the total liability of the Shareholder under this Agreement shall
not exceed an amount equal to the sum of all income tax refunds
and reductions to income tax otherwise currently payable received
by the Shareholder (collectively, "Shareholder Refunds") from all
Taxing Authorities attributable to the events causing a Company
Adjustment, decreased by any income tax liability incurred or to
be incurred by the Shareholder attributable to the events causing
a Company Adjustment. If the Shareholder does not receive a
Shareholder Refund attributable to a Company Adjustment then the
Shareholder shall have no liability under this Agreement.
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d. The Company shall make a demand for payment on the Shareholder
only upon the occurrence of both (1) the Company becoming
Obligated to Pay (as defined in Section 3 the amounts described
in Section 1(a)(i), (ii), (iii) or 1(b) and (2) upon the
Shareholder's receipt of a Shareholder Refund. The Company's
demand for payment shall not exceed the sum of Shareholder
Refunds actually received by the Shareholder prior to the time
demand for payment is made, less the sum of any prior demands for
payment made by the Company.
e. The Shareholder shall take such reasonable steps necessary to
claim Shareholder Refunds from any Taxing Authority that are
attributable to the events causing a Company Adjustment.
2. Contests; No Settlement.
a. The Shareholder shall be required to notify the Company in
writing and the Company shall be required to notify the
Shareholder in writing of all audits, examinations or other
investigations by any Taxing Authority of the Shareholder's or
the Company's income taxes for tax periods which include the S
Corporation Period. Additionally, the Shareholder shall be
required to notify the Company in writing and the Company shall
be required to notify the Shareholder in writing of any
adjustments proposed as a result of such audit, examination or
other investigation to the extent any such proposed adjustment
may constitute or affect any Company Adjustment within the
contemplation of this Agreement. Any notification required by
this Section 2(a) must be sent to
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the party to be notified within ten days from the occurrence of
the event giving rise to the obligation to notify.
b. The Shareholder may, upon written notice to the Company, demand
that the Company contest any Company Adjustment proposed by a
Taxing Authority (including pursuing all remaining administrative
proceedings and judicial appeals). Subject to the provisions of
Section 1(c), the Shareholder shall pay to the Company, on the
Company's demand, a contribution to its capital which equals (i)
the amount of any interest expense, penalties and additions to
tax payable by the Company in connection with, or as a result of,
contesting any proposed Company Adjustment, plus (ii) all costs,
damages and expenses (including attorneys' and accountants' fees)
in connection with, or as a result of, contesting any proposed
Company Adjustment, less (iii) the amount of any reductions in
tax payable by the Company in connection with, or as a result of,
the Company incurring any such costs, damages and expenses, and
any such interest expense, penalties and additions to tax payable
by the Company.
c. The Company shall not make, accept or enter into a settlement or
other compromise with respect to any Company Adjustment, or
forego or terminate any administrative proceeding or judicial
appeal involving any Company Adjustment, without the consent of
the Shareholder which shall not be unreasonably withheld.
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d. The Shareholder shall not make, accept or enter into a settlement
or other compromise with respect to a Shareholder Refund from any
Taxing Authority attributable to the events causing a Company
Adjustment, or an income tax liability incurred or to be incurred
by the Shareholder attributable to the events causing a Company
Adjustment, or forego or terminate any administrative proceeding
or judicial appeal involving any such Shareholder Refund or
income tax liability, without the consent of the Company which
shall not be unreasonably withheld.
3. Determination of Obligation to Pay.
a. The Shareholder shall be deemed Obligated to Pay for purposes of
Section 1 upon the earliest to occur of the following: (i) the
date on which the parties agree to a Company Adjustment proposed
by a Taxing Authority; (ii) the date on which the time to pursue
an appeal of the proposed Company Adjustment expires without the
Shareholder having requested a contest of the Company Adjustment
pursuant to Section 2(b); or (iii) the date on which payment is
required to be made in order to be able to litigate in the forum
selected for the contest, or in order to avoid some other
detrimental effect to the Company.
4. Cooperation.
a. Each party shall provide the other with such cooperation as may
reasonably be requested in connection with any contest,
proceeding, audit or appeal relating to any matter concerning
this Agreement, including, without limitation, making available
all relevant books, records and all employees having knowledge of
the matters concerned.
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b. The Company and the Shareholder shall retain all books and
records pertaining to any event which might relate to a Company
Adjustment until the expiration of the statute of limitations
applicable to a possible adjustment, audit or proceeding by any
Taxing Authority relating to the S Corporation Period.
5. Miscellaneous.
a. NOTICES. All notices, requests, demands and other communications
which are required or which may be given under this Agreement
shall be in writing.
b. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
between the parties with respect to all liabilities between the
Shareholder and the Company resulting from any income tax
adjustments by a Taxing Authority for the S Corporation Period
and supersedes all prior agreements and understandings, oral and
written, between the Shareholder and the Company relating to the
subject matter of this Agreement.
c. BINDING EFFECT. This Agreement shall inure to the benefit of and
be binding upon the Shareholder and the Company, and their
respective successors and assigns.
d. AMENDMENTS. No provision of this Agreement may be amended, waived
or otherwise modified without the prior written consent of the
Shareholder and the Company.
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e. GOVERNING LAW. This Agreement shall be governed by, and construed
in accordance with, the laws of the Commonwealth of Virginia.
f. COUNTERPARTS. This Agreement may be executed by any number of
counterparts, each of which shall be deemed to be an original and
all of which together shall be deemed to be one and the same
instrument.
g. CONSTRUCTION OF TERMS. Nothing expressed or implied in this
Agreement is intended, or shall be construed, to confer upon or
give any person, firm or corporation, other than the Shareholder,
the Company and their respective assigns and successors, any
rights or remedies under or by reason of this Agreement.
OPTICAL CABLE CORPORATION
BY: /s/ Xxxxxx Xxxxxxxx
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Xxxxxx Xxxxxxxx
Chairman of the Board, President
and Chief Executive Officer
/s/ Xxxxxx Xxxxxxxx
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Xxxxxx Xxxxxxxx, Individual
