EXHIBIT 10.5
TAX INDEMNIFICATION AGREEMENT
THIS TAX INDEMNIFICATION AGREEMENT (this "Agreement") is made this ___ day
of March 2000, between Future Media Productions, Inc., a California corporation
(the "Company"), and Xxxx Xxxxxx and Xxxxx Xxxxxxxx (collectively, the
"Shareholders") (the Company and the Shareholders are hereinafter referred to
individually as a "party" and collectively as the "parties").
WHEREAS, the Company contemplates a public offering of its stock in order
to raise additional equity capital for the expansion of the Company's business
operations (the "Public Offering");
WHEREAS, the execution of this Agreement by the Company and the
Shareholders is a condition to the closing (the "Closing") of the contemplated
Public Offering;
WHEREAS, from the date of its organization through the date prior to the
date of the Closing, the Company has been and will continue to be an S
corporation under the Internal Revenue Code of 1986, as amended (the "Code"),
after which it will become a C corporation under the Code (and under the
corresponding provisions of state income tax law);
WHEREAS, the Company will elect under Section 1362(e)(3) of the Code to
have the rules of Section 1362(e)(2) not apply for its S Termination year (as
hereinafter defined), to which election the Shareholders will consent; and
WHEREAS, the Company and the Shareholders wish to provide for a tax
indemnification agreement in connection with the Company's termination as an S
corporation.
NOW, THEREFORE, the parties agree as follows:
1. DEFINITIONS
1.1 Definitions. The following terms, as used herein, have the following
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meanings:
"C Corporation Taxable Year" means any taxable year or portion thereof
during which the Company is taxable as a C Corporation.
"C Short Year" means that portion of the S Termination Year of the
Company defined in Section 1362(e)(1)(B) of the Code.
"S Corporation Taxable Income" means the taxable income of the Company
from all sources through and including the close of business on the last
day of the S Short Year of the Company.
"S Corporation Taxable Year" means any taxable year or portion thereof
during which the Company is taxable as an S corporation.
"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.
2. TAXES
2.1 Shareholders' Filing of Tax Returns and Payment of Taxes. Each
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Shareholder represents, covenants and agrees that: (i) such Shareholder has duly
included, or shall duly include, in his own federal and state income tax returns
his share of all items of income, gain, loss, deduction or credit attributable
to the S Short Year of the Company or any prior period (or that portion of any
period) during which the Company was an S corporation as required by applicable
law; (ii) such returns have included, or shall include, his allocable share of S
Corporation Taxable Income; and (iii) such Shareholder has paid, or shall pay,
any and all taxes he is required to pay with respect to such allocable share of
S Corporation Taxable Income for all taxable periods (or that portion of any
period) during which the Company was an S corporation.
2.2 Company's Filing of Tax Returns and Payment of Taxes. The Company
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represents, covenants and agrees that: (i) the Company is and shall be
responsible for and has effected, or shall effect, the filing of all federal,
state, foreign and local returns for the Company with respect to any and all
taxable periods; (ii) such Company returns have included, or shall include, the
Company's income from all sources for all periods covered by the returns; and
(iii) the Company has paid, or shall pay, any and all taxes required to be paid
by the Company for all periods covered by the returns as required by applicable
law.
2.3 Company's Indemnification for Tax Liabilities. The Company hereby
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indemnifies and agrees to hold each Shareholder harmless from, against and in
respect of any federal and state income tax liability (including interest and
penalties and any taxes resulting from payments under this Section 2.3, but
reduced by the benefit received from the deduction for state income taxes paid
against taxable income for federal income tax purposes), if any, incurred by
such Shareholder resulting from or arising out of a final determination of an
adjustment (by reason of an amended return, claim for refund, audit or
otherwise) to the Company's income tax return for any S Corporation Taxable Year
resulting in a current or future decrease in the Company's federal or state, as
the case may be, taxable income for any C Corporation Taxable Year (by way of
additional or increased deduction, credit, depreciation, amortization or other
tax benefit, whether realized currently or to be realized in the future or over
a period of years) and a corresponding increase in the federal or state, as the
case may be, taxable income of such Shareholder with respect to such
Shareholder's allocable share of S Corporation Taxable Income; provided,
however, that in no event shall the Company's liability to any one of the
Shareholders under this Section 2.3 exceed the amount of the income tax
liability (including interest and penalties and any taxes resulting from
payments under this Section 2.3) of such Shareholder arising from such increase
in S Corporation Taxable Income allocated to such Shareholder.
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2.4 Shareholder Indemnification for Tax Liabilities.
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2.4.1 Each Shareholder hereby separately and proportionately
(according to the percentage of the outstanding shares of the Company's Common
Stock owned by such Shareholder during the applicable S Corporation Taxable Year
from which there is a shift of S Corporation Taxable Income, as referred to
herein below, pro rated by number of days of ownership in the case of partial
periods of ownership) indemnifies and agrees to hold the Company harmless from,
against and in respect of any federal and state income tax liability (including
interest and penalties and any taxes resulting from payments under this Section
2.4.1), if any, resulting from or arising out of a final determination of any
adjustment (by reason of an amended return, claim for refund, audit or
otherwise) to such Shareholders' federal or state, as the case may be, taxable
income resulting in a decrease in such Shareholders' S Corporation Taxable
Income and a corresponding increase in the federal or state, as the case may be,
taxable income of the Company; provided, however, the amount of any such
indemnified tax liability shall be reduced by an amount equal to the refund of
state income tax, including interest, received by the Company for state income
taxes paid by the Company in respect of any taxable income shifted from an S
Corporation Taxable Year to a C Corporation Taxable Year of the Company which is
subject to indemnification hereunder; and provided, further, that in no event
shall such Shareholder's liability under this Section 2.4.1 exceed the amount of
any credit or refund of taxes and interest actually received by such Shareholder
as a result of such final determination, related final determination or claim
for refund.
2.4.2 Each Shareholder hereby separately and proportionately
(according to the percentage of the outstanding shares of the Company's Common
Stock owned by such Shareholder during the applicable taxable period ending
prior to the Closing with respect to which it is determined that the Company was
not an S Corporation) indemnifies and agrees to hold the Company harmless from,
against and in respect of any federal and state income tax liability (including
penalties, interest and any taxes resulting from the payments under this
Section 2.4.2) incurred by the Company as a result of a final determination that
the Company was not an S corporation for federal or state income tax purposes
for any taxable period ending prior to the Closing (including a short taxable
period ending the day before the Closing).
2.5 Payments. The party (or parties) providing the indemnity under
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either Section 2.3 or Section 2.4 (the "Indemnifying Party") shall make any
payment required to be paid under this Agreement to the party being indemnified
under Section 2.3 or Section 2.4, respectively (the "Indemnified Party"), within
thirty (30) days after the receipt of notice from the Indemnified Party that a
payment is due by the Indemnified Party to the appropriate taxing authority
pursuant to the applicable final determination; provided, however, that in no
event shall an Indemnifying Party providing the indemnity under Section 2.4 be
required to pay any such indemnified amount prior to thirty (30) days after the
receipt by the Indemnifying Party of the credit or refund of taxes, if any,
resulting from the corresponding applicable final determination, related final
determination or claim for refund.
2.6 Subrogation. The Indemnifying Party shall be subrogated to all
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rights of recovery that 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 such other items, and take
such actions,
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as are reasonably necessary to secure such rights of subrogation for the
Indemnifying Party and to permit the Indemnifying Party to pursue such rights of
recovery.
3. MISCELLANEOUS
3.1 Notices. All notices and other communications made in connection
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with this Agreement shall be in writing and shall be deemed given when delivered
personally or sent by facsimile transmission to the numbers indicated on the
signature page hereto (if physical confirmation of transmission is retained) or
on the third succeeding business day after being mailed by registered or
certified mail, deposited in the United States mail, postage prepaid, return
receipt requested, to the appropriate party at its, his address set forth on the
signature page hereto or at such other address for such party (as shall be
specified by written notice when in fact delivered pursuant hereto).
3.2 Counterparts. This Agreement may be executed in several counterparts,
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each of which shall be deemed an original, but all of which counterparts
collectively shall constitute an instrument representing the agreement between
the parties hereto.
3.3 Construction of Terms. Nothing herein expressed or implied is
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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.
3.4 Governing Law. This Agreement and the legal relations between the
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parties hereto shall be governed by and construed in accordance with the
substantive laws of the State of California without regard to California choice
of law rules.
3.5 Amendment and Modification. This Agreement may be amended by the
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agreement of the Company and Shareholders holding a majority of the shares of
Common Stock outstanding on the date of this Agreement; provided, however, that
no amendment may adversely affect any particular Shareholder in a manner not
equally applicable to the other Shareholders unless such amendment is approved
by such Shareholder.
3.6 Assignment. This Agreement and all of the provisions hereof shall be
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binding upon and inure to the benefit of the parties hereto and their respective
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; provided, however, nothing in this Section shall
be construed as prohibiting an assignment of this Agreement by the Company to a
successor by operation of law.
3.7 Interpretation. The title, articles and section headings contained
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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.
3.8 Severability. In the event that any one or more of the provisions of
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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
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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.
3.9 Entire Agreement. This Agreement embodies the entire agreement and
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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 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.
3.10 Arbitration. Any action to enforce or interpret this Agreement or to
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resolve disputes arising in connection with this Agreement shall be settled by
arbitration in accordance with the rules of the American Arbitration
Association. Any party may commence arbitration by sending a written demand for
arbitration to the other parties. Such demand shall set forth the nature of the
matter to be resolved by arbitration. The substantive law of the State of
California shall be applied by the arbitrator to the resolution of the dispute.
The Company, on the one hand, and the Shareholders, on the other hand, shall
share equally all initial costs of arbitration. The prevailing party or parties
shall be entitled to reimbursement of attorney fees, costs, and expenses
incurred in connection with the arbitration. All decisions of the arbitrator
shall be final, binding, and conclusive on all parties. Judgment may be entered
upon any such decision in accordance with applicable law in any court having
jurisdiction thereof.
3.11 No Third Party Benficiary; No Release of Obligations. No former
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shareholder of the Company or other person not a party hereto is an intended
third party beneficiary of this Agreement; and no former shareholder of the
Company or other person not a party hereto shall in any manner be released by
this Agreement from any liability or obligation whatsoever, including but not
limited to any liability or obligation to the Company.
IN WITNESS WHEREOF, each of the parties hereto has executed or caused this
Tax Indemnification Agreement to be executed on its behalf all as of the day and
year first above written.
"Company"
Future Media Productions, Inc.,
a California corporation
By:___________________________________
Its:__________________________________
Address: 00000 Xxxx Xxxxx
Xxxxxxxx, Xxxxxxxxxx 00000
Facsimile number: ___________________
"Shareholders"
______________________________________
Xxxx Xxxxxx
Address: ____________________________
____________________________
Facsimile number: ____________________
______________________________________
Xxxxx Xxxxxxxx
Address: ____________________________
____________________________
Facsimile number: ____________________
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