EXHIBIT 10.3
TAX SHARING AND INDEMNIFICATION AGREEMENT
PREAMBLE
This Tax Sharing and Indemnification Agreement (this "Agreement"),
dated as of June 26, 2000, is made and entered into by and between Methode
Electronics, Inc., a Delaware corporation ("Methode"), and Stratos Lightwave,
Inc., a Delaware corporation ("Stratos") (each, a "Party," and, collectively,
the "Parties").
RECITALS
WHEREAS, the Parties have entered into the Public Offering and
Distribution Agreement, dated as of June 26, 2000 (the "Distribution
Agreement"), pursuant to which Methode expects to distribute to its stockholders
all of the issued and outstanding common stock of Stratos owned by Methode (the
"Distribution");
WHEREAS, the Distribution is intended to qualify as a tax-free
distribution (except with respect to cash in lieu of fractional shares) under
sections 355 and 361 of the Code (as defined below);
WHEREAS, in connection with the Distribution, the Parties and certain
of their Affiliates (as defined below) have engaged and will engage in certain
internal restructuring transactions (the "Internal Restructuring") (the
Distribution and the Internal Restructuring, collectively, the
"Reorganization");
WHEREAS, Methode expects to receive an advance letter ruling from the
Internal Revenue Service setting forth certain United States federal income tax
consequences of the Reorganization;
WHEREAS, the Parties wish to (a) provide for the payment of tax
liabilities and entitlement to refunds thereof, (b) allocate responsibility for
and provide for their cooperation in the filing of tax returns, (c) provide for
certain other matters relating to taxes, and (d) set forth certain covenants and
indemnities relating to the preservation of the tax treatment of the
Reorganization ultimately set forth in the Letter Ruling (as defined below);
NOW, THEREFORE, in consideration of their mutual promises, the
Parties hereby agree as follows:
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ARTICLE I
DEFINITIONS, CONSTRUCTION AND CONSENTS
Section 1.01. CERTAIN DEFINITIONS. As used in this Agreement, the
following terms shall have the following meanings:
"Affiliate" means, with respect to a specified Person, any other
Person that (i) directly, or indirectly through one or more intermediaries,
controls or is controlled by or is under common control with such Person or (ii)
to the extent not already covered under clause (i), is a member of the same
consolidated, combined or unitary group as the specified Person for Tax
purposes.
"Agreement" has the meaning set forth in the Preamble hereof.
"Ancillary Agreements" has the meaning set forth in the Master
Separation Agreement.
"Benefited Party" has the meaning set forth in Section 3.05 of
this Agreement.
"Class A Common Stock" means Methode Class A Common Stock.
"Class B Common Stock" means Methode Class B Common Stock.
"Code" means the Internal Revenue Code of 1986, as amended, or
any successor thereto, as in effect for the taxable period in question.
"Contribution" means the transfer of assets and liabilities from
Methode to Stratos pursuant to the Master Separation Agreement.
"Contribution Date" means the date on which the Master Separation
Agreement was executed.
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"Contribution Straddle Period" means a taxable period that begins
on or before and ends after the Contribution Date.
"Detrimented Party" has the meaning set forth in Section 3.05 of
this Agreement.
"Distribution" has the meaning set forth in the Recitals of this
Agreement.
"Distribution Agreement" has the meaning set forth in the
Recitals of this Agreement.
"Distribution Date" means the date as of which the Distribution
will be effected, as determined by the Board of Directors of Methode.
"Distribution Straddle Period" means a taxable period that begins
on or before and ends after the Distribution Date.
"Federal Consolidated Return" means any Tax Return with respect
to Federal Income Taxes filed on a consolidated basis wherein both one or more
members of the Stratos Group and one or more members of the Methode Group join
in the filing of such Tax Return (for any taxable period or portion thereof).
"Federal Income Tax" means any tax imposed under Subtitle A of
the Code (including the taxes imposed by sections 11, 55, 59A, 1201(a) and 1502
of the Code and the Treasury Regulations promulgated thereunder), and any other
income-based United States federal tax that is hereinafter imposed, plus any
interest, additions to tax or penalties applicable or related thereto.
"Final Determination" means the final resolution of liability of
a Party or any of its relevant Affiliates for any Tax for a taxable period (i)
by Internal Revenue Service Form 870 or 870-AD (or any successor forms thereto),
on the date of acceptance by
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or on behalf of the IRS, or by a comparable form under the laws of other
jurisdictions, on the date of acceptance by or on behalf of the Taxing Authority
of such jurisdiction, except that a Form 870 or 870-AD or comparable form 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 IRS or other Taxing Authority
to assert a further deficiency shall not constitute a Final Determination; (ii)
by a decision, judgment, decree, or other order by a court of competent
jurisdiction, which has become final and unappealable; (iii) by a closing
agreement or accepted offer in compromise under section 7121 or 7122 of the
Code, or comparable agreements under the laws of other jurisdictions; (iv) by
any allowance of a refund or credit in respect of an overpayment of Tax, but
only after the expiration of all periods during which such refund may be
recovered (including by way of offset) by the jurisdiction imposing the Tax; or
(v) by any other final disposition, including by reason of the expiration of the
applicable statute of limitations.
"Indemnified Parties" has the meaning set forth in Section
5.02(a) of this Agreement.
"Indemnifying Parties" has the meaning set forth in Section
5.02(a) of this Agreement.
"Internal Restructuring" has the meaning set forth in the
Recitals of this Agreement.
"IRS" means the Internal Revenue Service.
"Letter Ruling" means the advance letter ruling expected to be
issued by the IRS to Methode setting forth certain Federal Income Tax
consequences of the Reorganization, and any supplemental or additional letter
rulings that may be issued by the IRS to any of the Parties or their Affiliates
with respect to the Reorganization or any part thereof in response to a ruling
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request by Methode or Stratos that received Stratos Sole Discretion Consent or
Methode Sole Discretion Consent, respectively.
"Liability Issue" has the meaning set forth in Section 6.01(b) of
this Agreement.
"Master Separation Agreement" means the Master Separation
Agreement entered into by and between Methode and Stratos, dated as of May 28,
2000.
"Master Transitional Services Agreement" means the Master
Transitional Services Agreement entered into by and between Methode and Stratos,
dated as of May 28, 2000.
"Methode" has the meaning set forth in the Preamble of this
Agreement.
"Methode Deduction Restricted Stock" means Restricted Stock that
(i) vests after the Contribution Date and on or before the Distribution Date or
(ii) vests after the Distribution Date while held by an employee of a member of
the Methode Group.
"Methode Group" means, (i) with respect to any taxable period or
portion thereof ending on or prior to the Contribution Date, Methode and its
Affiliates and (ii) with respect to any taxable period or portion thereof
beginning after the Contribution Date, Methode and its Affiliates other than any
member of the Stratos Group.
"Methode Reasonable Discretion Consent" means the advance,
written consent of Methode, which consent may be granted or withheld in
Methode's reasonable discretion.
"Methode Returns" has the meaning set forth in Section 2.02(a) of
this Agreement.
"Methode Sole Discretion Consent" means the advance, written
consent of Methode, which consent may be granted or withheld in Methode's sole
and absolute discretion.
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"Non-Federal Combined Tax" means any tax, other than a Federal
Income Tax, with respect to which a combined, consolidated or unitary return is
filed or required to be filed wherein both one or more members of the Stratos
Group and one or more members of the Method Group join in or are required to
join in the filing of such Tax Return (for any taxable period or portion
thereof).
"Non-Federal Combined Tax Return" means any Tax Return relating
to any Non-Federal Combined Tax.
"Non-Qualified Methode Options" means all options to acquire
stock of Methode.
"Notifying Party" has the meaning set forth in Section 6.01(b) of
this Agreement.
"Opinion of Counsel" means an opinion of independent tax counsel
of recognized national standing and experienced in the issues to be addressed,
which independent tax counsel is acceptable to both Stratos and Methode.
"Original Ruling Request" means the ruling request submission
(together with all exhibits and appendices thereto) that was submitted to the
IRS on behalf of Methode on June 23, 2000.
"Party" and "Parties" has the meaning set forth in the Preamble
of this Agreement.
"Paying Party" has the meaning set forth in Section 3.09 of this
Agreement.
"Person" means any natural person, corporation, business trust,
joint venture, association, company, partnership, limited liability company or
other entity (regardless of whether such entity is disregarded as an entity
separate from its owner for Federal Income Tax purposes).
"Post-Contribution Period" means a taxable period that begins
after the Contribution Date.
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"Post-Distribution Period" means a taxable period that begins
after the Distribution Date.
"Pre-Contribution Period" means a taxable period that ends on or
before the Contribution Date.
"Pre-Distribution Period" means a taxable period that ends on or
before the Distribution Date.
"Public Offering" means the initial public offering by Stratos of
shares of Stratos common stock pursuant to the S-1.
"Pro Forma Stratos Group Combined Return" means a pro forma
Non-Federal Combined Tax Return or other schedule prepared with respect to the
Stratos Group pursuant to Section 3.04 of this Agreement.
"Pro Forma Stratos Group Consolidated Return" means a pro forma
consolidated Federal Income Tax Return or other schedule prepared with respect
to the Stratos Group pursuant to Section 3.04 of this Agreement.
"Receiving Party" has the meaning set forth in Section 3.09(c) of
this Agreement.
"Registration Rights Agreement" means the Registration Rights
Agreement entered into by and between Methode and Stratos, dated as of June 26,
2000.
"Reorganization" has the meaning set forth in the Recitals of
this Agreement.
"Representative" means with respect to any Person, any of such
Person's directors, officers, employees, agents, consultants, advisors,
accountants, attorneys, and representatives.
"Restricted Period" means the period beginning on the
Distribution Date and ending two years and one day thereafter.
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"Restricted Stock" means stock issued under the Methode
Electronics, Inc. Incentive Stock Award Plan, including any shares of Stratos
stock distributed to holders of shares of restricted Methode stock in connection
with the Distribution.
"Ruling Request" means the Original Ruling Request and any
supplemental letter ruling requests submitted to the IRS by Methode or Stratos
(after obtaining Stratos Sole Discretion Consent or Methode Sole Discretion
Consent, as applicable), pursuant to which the Letter Ruling is issued.
"Stratos" has the meaning set forth in the Preamble of this
Agreement.
"Stratos Deduction Restricted Stock" means Restricted Stock that
vests after the Distribution Date while held by an employee of a member of the
Stratos Group.
"Stratos Group" means, with respect to any taxable period or
portion thereof, Stratos and any Person that directly, or indirectly through one
or more intermediaries, is controlled by Stratos.
"Stratos Group Combined Tax Liability" has the meaning set forth
in Section 3.04 of this Agreement.
"Stratos Group Federal Income Tax Liability" has the meaning set
forth in Section 3.04 of this Agreement.
"Stratos LLC" means Stratos Lightwave, LLC, a Delaware limited
liability company.
"Stratos Reasonable Discretion Consent" means the advance,
written consent of Stratos, which consent may be granted or withheld in Stratos'
reasonable discretion.
"Stratos Returns" has the meaning set forth in Section 2.02(b) of
this Agreement.
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"Stratos Sole Discretion Consent" means the advance, written
consent of Stratos, which consent may be granted or withheld in Stratos' sole
and absolute discretion.
"Subsequent Benefit Decrease Event" has the meaning set forth in
Section 3.08 of this Agreement.
"Subsequent Benefit Increase Event" has the meaning set forth in
Section 3.08 of this Agreement.
"Subsequent Restricted Stock Benefit Decrease Event" has the
meaning set forth in Section 3.09 of this Agreement.
"Subsequent Restricted Stock Benefit Increase Event" has the
meaning set forth in Section 3.09 of this Agreement.
"S-1" means the registration statement on Form S-1, Registration
No. 333-34864, originally filed by Stratos with the Securities and Exchange
Commission on April 14, 2000 in connection with the initial public offering of
Stratos common stock, as it has been or may be amended.
"Tainting Act" has the meaning set forth in Section 5.02(a) of
this Agreement.
"Tax" means any form of taxation imposed by a national,
municipal, governmental, administrative, judicial, state, federal, foreign, or
other body (a "Taxing Authority"), regardless of when such form of taxation was
or is created or imposed, including any net income, alternative or add-on
minimum, gross income, sales, use, ad valorem, escheat, gross receipts, value
added, franchise, profits, license, transfer, recording, withholding, payroll,
employment, excise, severance, stamp, occupation, premium, property, windfall
profit, custom duty, or other tax, government fee or other like assessment or
charge of any kind whatsoever,
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together with any related interest, penalties, or other additions to tax, or
additional amount imposed by any such Taxing Authority.
"Tax Asset" means any Tax Item that has accrued for Tax purposes,
but has not been used during a taxable period, and that could reduce a Tax in
another taxable period, including a net operating loss, net capital loss,
investment tax credit, foreign tax credit, charitable deduction or credit
related to alternative minimum tax.
"Tax Benefit" means an amount by which the Tax liability of an
Indemnified Party is reduced (including by (i) deduction, (ii) reduction of
income by virtue of increased tax basis or otherwise, or (iii) entitlement to a
Tax refund, credit or otherwise).
"Tax Controversy" has the meaning set forth in Section 6.02(a) of
this Agreement.
"Tax Detriment" means an amount by which the Tax liability of an
Indemnified Party is increased (including by decreases in Tax refunds and
credits).
"Tax Item" means any item of income, gain, loss, deduction,
credit, recapture of credit, or any other item that may have the effect of
increasing or decreasing Taxes paid or payable.
"Tax Practices" has the meaning set forth in Section 2.01 of this
Agreement.
"Tax Return" means any return, filing, questionnaire or other
document required to be filed or that may be filed (including requests for
extensions of time, filings made with estimated Tax payments, claims for refund,
elections or amended returns) for any taxable period with any Taxing Authority
in connection with any Tax (whether or not a payment is required to be made with
respect to such return, filing, questionnaire or other document).
"Taxing Authority" has the meaning set forth in the definition of
the term "Tax" in this Section 1.01.
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"Treasury Regulations" means the regulations promulgated under
the Code, and any successor provisions thereof, as in effect for the relevant
taxable period.
Section 1.02. INTERPRETATION AND CONSTRUCTION OF THIS AGREEMENT. The
definitions in Section 1.01, above, shall apply equally to both the singular and
plural forms of the terms defined. Whenever the context may require, any pronoun
shall include the corresponding masculine, feminine or neuter form. The words
"include," "includes" and "including" when used in this Agreement shall be
deemed to be followed by the phrase "without limitation." The headings contained
in this Agreement are inserted for convenience only and shall not constitute a
part hereof. This Agreement shall be construed in accordance with its fair
meaning and shall not be construed strictly against the drafter.
Section 1.03. CONSENTS. Methode and Stratos each agree to use their
best efforts to respond to any request for Methode Sole Discretion Consent or
Methode Reasonable Discretion Consent, or Stratos Sole Discretion Consent or
Stratos Reasonable Discretion Consent, respectively, within 30 days of the
receipt of a written request from the other Party for such consent.
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ARTICLE II
PREPARATION AND FILING OF TAX RETURNS
Section 2.01. MANNER OF FILING. All Tax Returns filed by any Party
(including any Affiliate of any Party) after the date of this Agreement shall be
prepared on a basis that is consistent with the Letter Ruling and shall be filed
on a timely basis (including extensions) by the Party responsible for such
filing under this Agreement. All Tax Returns filed after the date of this
Agreement by Stratos or any other member of the Stratos Group with respect to
taxable periods beginning prior to the end of the Restricted Period shall
(except to the extent of Stratos' receipt of Methode Reasonable Discretion
Consent) be prepared in a manner that is consistent with past practices,
elections, accounting methods, conventions, and principles of taxation
(collectively, "Tax Practices") used by Methode and its Affiliates for the most
recent taxable period ending on or before May 1, 1999 for which Tax Returns
involving similar items have been or are filed by the applicable member of the
Methode Group; PROVIDED, HOWEVER, that Stratos and other members of the Stratos
Group may make such new Tax elections or adopt such new methods of accounting
for Post-Distribution Periods as are permitted under applicable Tax laws, and
PROVIDED, FURTHER, that Stratos and other members of the Stratos Group shall not
be required to follow a Tax Practice that is determined by a Final Determination
to be unlawful.
Section 2.02. RESPONSIBILITY FOR FILING.(a) Methode shall have the sole
and exclusive responsibility for the preparation and filing of (i) all Tax
Returns for Pre-Distribution Periods and, except as provided to the contrary in
Section 2.02(b) below, any Distribution Straddle Period, and (ii) all Tax
Returns for (or that relate to the businesses, assets or activities of) the
Methode Group for Post-Distribution Periods (the Tax Returns described in (i)
and (ii), collectively, the "Methode Returns").
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(b) Stratos shall have the sole and exclusive responsibility for
the preparation and filing of all Tax Returns for (or that relate to the
businesses, assets or activities of) the Stratos Group (i) for Post-Distribution
Periods and (ii) for any Distribution Straddle Period, PROVIDED that such
Distribution Straddle Period Tax Return does not relate to or include any Tax
Item attributable to any business, asset or activity of any member of the
Methode Group, and PROVIDED, FURTHER, that, to the extent Methode is responsible
pursuant to Article III hereof for any Taxes shown on the Distribution Straddle
Period Tax Return, Stratos shall provide to Methode for its review a copy of any
such Distribution Straddle Period Tax Return at least 45 days prior to the due
date thereof (including extensions), and Methode shall provide comments to
Stratos within 30 days after its receipt thereof (the Tax Returns described in
(i) and (ii), collectively, the "Stratos Returns").
(c) The preparation and/or filing by Methode or one of its
Affiliates of any Stratos Return under the Master Transitional Services
Agreement or any other Ancillary Agreement shall not cause such Tax Return to be
characterized as a Methode Return for purposes of this Agreement, and shall not
otherwise affect the rights, responsibilities, obligations or liabilities of the
Parties under this Agreement.
Section 2.03. AMENDED RETURNS AND OTHER MATTERS PERTAINING TO TAXES FOR
PRE-DISTRIBUTION PERIODS AND DISTRIBUTION STRADDLE PERIODS. (a) Unless requested
by Methode (in which event Stratos shall comply with such request, and Methode
shall reimburse Stratos for reasonable third-party costs and expenses directly
related thereto), neither Stratos nor any of its Affiliates shall file or permit
to be filed any amended Tax Return with respect to any Pre-Distribution Period
or any Distribution Straddle Period without obtaining Methode Reasonable
Discretion Consent.
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(b) Unless required by applicable law, neither Methode nor any of its
Affiliates on the one hand, nor Stratos nor any of its Affiliates on the other
hand, shall, with respect to any Tax relating to (i) any Pre-Distribution Period
or any Distribution Straddle Period or (ii) any matter that is the subject of
this Agreement, the Distribution Agreement or any of the Ancillary Agreements,
take any position, initiate (or permit to be initiated) any claim or otherwise
take (or fail to take) any action that might adversely affect Stratos or any of
its Affiliates or Methode or any of its Affiliates, respectively, with respect
to Taxes without obtaining Stratos Reasonable Discretion Consent or Methode
Reasonable Discretion Consent, respectively.
Section 2.04. TREATMENT OF PAYMENTS. The Parties agree that any
indemnity payments made among the Parties pursuant to this Agreement, Article 5
of the Distribution Agreement, Article 5 of the Master Separation Agreement,
Section 2.9 of the Registration Rights Agreement, Section 8.2 of the Master
Transitional Services Agreement, or any other similar provision of any Ancillary
Agreement, the Distribution Agreement or the Master Separation Agreement shall
be treated for all Tax purposes as nontaxable payments (dividends or capital
contributions, as the case may be) made immediately prior to the Distribution,
unless, and then only to the extent, (i) otherwise required by a Final
Determination or the Letter Ruling or (ii) in the judgment of Methode and
Stratos the payment may not reasonably be so treated.
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ARTICLE III
ALLOCATION AND PAYMENT OF TAXES
Section 3.01. IN GENERAL. The Parties agree to (i) allocate their
respective shares of Taxes, and (ii) make payments to Taxing Authorities and
each other with respect to Taxes, in each case, as provided in this Agreement.
Section 3.02. ALLOCATION AND PAYMENT OF TAXES, GENERALLY. Except as
otherwise provided in this Agreement:
(a) Methode shall (i) pay or cause to be paid to the relevant
Taxing Authority, or to Stratos, if Stratos has responsibility for filing the
relevant Tax Return, (ii) indemnify and hold the Stratos Group harmless against,
and (iii) be entitled to all refunds of (x) all Taxes for Pre-Contribution
Periods (including the portion of Taxes that is allocated to Pre-Contribution
Periods pursuant to Section 3.03, below) and (y) all Taxes for Post-Contribution
Periods (including the portion of Taxes that is allocated to Post-Contribution
Periods pursuant to Sections 3.03 and 3.04, below) that are allocable to the
Methode Group; and
(b) Stratos shall (i) pay or cause to be paid to the relevant
Taxing Authority, or to Methode, if Methode has responsibility for filing the
relevant Tax Return, (ii) indemnify and hold the Methode Group harmless against,
and (iii) be entitled to all refunds of all Taxes for Post-Contribution Periods
(including the portion of Taxes that is allocated to Post-Contribution Periods
pursuant to Sections 3.03 and 3.04, below) that are allocable to the Stratos
Group.
Section 3.03. ALLOCATION OF CERTAIN STAND ALONE TAXES. For purposes of
this Agreement, in the case of Taxes (i) with respect to which Tax Returns are
not filed on a consolidated, combined or unitary basis that include both one or
more members of the Methode
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Group and one or more members of the Stratos Group and (ii) that are
attributable to a Contribution Straddle Period, the following allocations shall
apply:
(a) In the case of periodic Taxes that are not based on income
or receipts (E.G., property taxes), the Contribution Straddle Period shall be
treated as if it were divided into a Pre-Contribution Period and a
Post-Contribution Period and such periodic Taxes shall be allocated between such
Pre-Contribution Period and such Post-Contribution Period based upon the ratio
of (i) the number of days in the taxable period (x) before and including the
Contribution Date (with respect to the Pre-Contribution Period) or (y) following
the Contribution Date (with respect to the Post-Contribution Period) and (ii)
the number of days in the entire taxable period. Methode shall pay or cause to
be paid (to Stratos, with respect to Stratos Returns, and to the relevant Taxing
Authority with respect to Methode Returns) and shall indemnify and hold the
Stratos Group harmless against those Taxes that are allocated in accordance with
this Section 3.03(a) to (1) a Pre-Contribution Period or (2) the Methode Group
with respect to a Post-Contribution Period. Stratos shall pay or cause to be
paid (to Methode, with respect to any Methode Returns, and to the relevant
Taxing Authority, with respect to any Stratos Returns), and shall indemnify and
hold the Methode Group harmless against those Taxes that are allocated in
accordance with this Section 3.03(a) to the Stratos Group with respect to a
Post-Contribution Period.
(b) In the case of Taxes that are not described in Section
3.03(a), above, the Contribution Straddle Period shall be treated as if it were
divided into a Pre-Contribution Period comprised of the portion of the
Contribution Straddle Period ending on the Contribution Date and a
Post-Contribution Period comprised of the portion of the Contribution Straddle
Period following the Contribution Date and such Taxes shall be allocated between
such Pre-Contribution Period and such Post-Contribution Period by allocating Tax
Items between such
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Pre-Contribution Period and Post-Contribution Period based upon an actual
closing of the books as of the close of business on the Contribution Date,
PROVIDED, HOWEVER, that (i) any Tax Items attributable to transactions or events
not in the ordinary course of business occurring on the Contribution Date prior
to or at the time of the Contribution will be allocated to the Pre-Contribution
Period, and any Tax Items attributable to transactions or events not in the
ordinary course of business occurring on the Contribution Date after the
Contribution shall be allocated to the Post-Contribution Period, in each case in
accordance with the principles of Treasury Regulation section 1.1502-76(b)(1)
and (ii) any Tax Items attributable to Non-Qualified Methode Options and Methode
Deduction Restricted Stock will be allocated to the Pre-Contribution Period.
Methode shall pay or cause to be paid (to Stratos, with respect to any Stratos
Returns, and to the relevant Taxing Authority, with respect to any Methode
Returns), and shall indemnify and hold the Stratos Group harmless against, the
amount of Taxes attributable to those Tax Items allocated in accordance with
this Section 3.03(b) to (i) a Pre-Contribution Period or (ii) to the Methode
Group with respect to a Post-Contribution Period. Stratos shall pay or cause to
be paid (to Methode, with respect to any Methode Returns, and to the relevant
Taxing Authority, with respect to any Stratos Returns), and shall indemnify and
hold the Methode Group harmless against, the amount of Taxes attributable to
those Tax Items allocated in accordance with this Section 3.03(b) to the Stratos
Group with respect to a Post-Contribution Period.
Section 3.04. ALLOCATION OF CERTAIN CONSOLIDATED TAXES. (a) For any
Post-Contribution Period and any Contribution Straddle Period with respect to
which Tax Returns are filed on a consolidated, combined or unitary basis, which
Tax Returns include both one or more members of the Methode Group and one or
more members of the Stratos Group, for purposes of determining the amount of
Stratos' payment to Methode under Section 3.02(b) hereof, Stratos
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shall owe an amount equal to the sum of the Stratos Group Federal Income Tax
Liability and the Stratos Group Combined Tax Liability for such taxable period.
(b) No later than 30 days after the filing of any Federal
Consolidated Return for any Post-Contribution Period, or Contribution Straddle
Period, as the case may be, Methode and Stratos shall prepare a Pro Forma
Stratos Group Consolidated Return. The Stratos Group Federal Income Tax
Liability shall be the Stratos Group's liability for Federal Income Taxes for
such taxable period, as determined on such Pro Forma Stratos Group Consolidated
Return prepared: (i) on the basis of the Federal Consolidated Return for such
period, determined by (x) including only Tax Items of members of the Stratos
Group which are included in the Federal Consolidated Return other than any Tax
Items relating to Non-Qualified Methode Options and Methode Deduction Restricted
Stock, (y) allocating Tax Assets to the Stratos Group to the extent that the Tax
Asset was created by a member of the Stratos Group after the Contribution Date
and such Tax Asset was actually utilized on the relevant Federal Consolidated
Return, and (z) in the case of any Contribution Straddle Period, taking into
account only the Tax Items of the Stratos Group relating to the portion of such
taxable period following the Contribution Date, calculated employing the closing
of the books methodology described in Section 3.03(b) above and (ii) applying
the actual federal corporate Tax rate of the combined Methode Group and Stratos
Group for such taxable period (or portion thereof).
(c) No later than 30 days after the filing of each Non-Federal
Combined Tax Return for any Post-Contribution Period or Contribution Straddle
Period, as the case may be, Methode and Stratos shall prepare a Pro Forma
Stratos Group Combined Return. The Stratos Group Combined Tax Liability shall be
the sum for such taxable period of the Stratos Group's liability for each
Non-Federal Combined Tax, as determined on such Pro Forma Stratos Group Combined
Return, which Pro Forma Stratos Group
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Combined Return shall be prepared in a manner consistent with the principles and
procedures set forth in Section 3.04(b) above, for preparing the Pro Forma
Stratos Group Consolidated Return.
(d) In accordance with Section 3.02(b) hereof, Stratos shall
promptly pay to Methode its Stratos Group Federal Income Tax Liability and
Stratos Group Combined Tax Liability as reflected on the Pro Forma Stratos Group
Consolidated Return or Pro Forma Stratos Group Combined Return. If the Pro Forma
Stratos Group Consolidated Return or the Pro Forma Stratos Group Combined Return
reflects a loss for the Post-Contribution Period, or Contribution Straddle
Period, as the case may be, Methode shall promptly pay to Stratos the actual Tax
benefit, if any, obtained by reason of such loss by members of the Methode
Group.
Section 3.05. ADJUSTMENTS. If any adjustment is made to any Tax Return
relating to a Party or any of its Affiliates (whether such adjustment is the
result of or in settlement of any audit, other administrative proceeding or
judicial proceeding or the filing of an amended return to reflect the
consequences of any determination made in connection with any such audit or
proceeding or otherwise) and there is a correlative adjustment applicable to
another Party or any of its Affiliates for any taxable period (or portion
thereof) ending after the Contribution Date, the Party whose adjustment is
favorable (I.E., the Party to which there inures, directly or indirectly, a net
Tax Benefit as a result of any adjustment) (the "Benefited Party") shall pay to
the Party whose adjustment is unfavorable (I.E., the Party which suffers,
directly or indirectly, a net Tax Detriment as a result of any adjustment) (the
"Detrimented Party"), the amount of such net Tax Benefit, at such time or times
as and to the extent that such benefit is realized through a refund of Tax or
actual reduction in the amount of Tax that the Benefited Party otherwise would
have paid if such adjustment had not been made; provided, that the Benefited
Party shall not be obligated
20
to make any payment pursuant to this Section 3.05 in respect of a net Tax
Benefit to the extent that the amount of such payment would exceed (a) the
aggregate amount of all prior net Tax Detriments suffered by the Detrimented
Party with respect to adjustments that are the subject of this Section 3.05 less
(b) the aggregate amount of all prior payments made by the Benefited Party under
this Section 3.05.
Upon notice from any Party hereto regarding any event (including the
filing of an amended Tax Return or the occurrence of an audit or other
proceeding) that could give rise to a Tax Detriment to such Party, a Party
having a potential Tax Benefit with respect to the same underlying adjustment
shall take all actions as may be necessary to maximize any correlative
adjustment that might ultimately result in payments by the Benefited Party to
the Detrimented Party hereunder, and shall coordinate with the Party with the
potential Tax Detriment with respect to the taking of such actions.
Section 3.06. MANNER OF PAYMENT. Except as otherwise provided in this
Agreement, any payment required to be made among the Parties pursuant to this
Article III with respect to any Tax Return shall be made by the Party obligated
to make such payment (i) in the case of a refund of Tax (whether by way of
payment, credit, or offset against any payments due or otherwise), within 30
business days after receipt of such refund, (ii) in the case of the payment of
Tax with respect to any Tax Return other than a Contribution Straddle Period Tax
Return, within 30 days after the later of such payment of Tax to the relevant
Taxing Authority (including a deemed payment through the use of a Tax loss,
credit, deduction or other allowance) and the delivery of written demand for the
payment hereunder to the Party obligated to make such payment and (iii) in the
case of the payment of Tax with respect to any Contribution Straddle Period Tax
Return, on or before the later of the date such Contribution Straddle Period Tax
Return is filed or 15 days
21
following the delivery of written demand for the payment hereunder to the Party
obligated to make such payment. Any payment described in clause (i), above, and
any demand for payment described in clause (ii) or (iii), above, shall be
accompanied by a calculation setting forth the basis for the amount paid or
demanded. Any payment that is required under this Agreement that is not made
within the prescribed time period shall thereafter bear interest at a
fluctuating rate per annum equal to the prime commercial lending rate publicly
announced by Bank of America or any successor thereto at its principal office
(or any alternative rate substituted therefor by such bank).
Section 3.07. CARRYBACKS. Stratos shall be entitled to any refund for
any Tax obtained by the Methode Group as a result of the carryback of losses or
credits of any member of the Stratos Group from any taxable period (or portion
thereof) beginning after the Contribution Date to any taxable period (or portion
thereof) ending on or before the Contribution Date (without duplication of any
amounts pursuant to this Agreement including Section 3.04 hereof), provided that
Stratos has received Methode Reasonable Discretion Consent with respect to such
carryback. Such refund shall be limited to the net amount received by the
Methode Group (by refund, offset against other Taxes or otherwise), net of any
net Tax cost and other expenses incurred by the Methode Group with respect to
such refund, and shall be paid within 30 days after payment is received (or
deemed received by reason of the reduction of Taxes otherwise payable) by
Methode from a Taxing Authority. The application of any such carrybacks by
Stratos and/or any Affiliate of Stratos shall be in accordance with the Code and
the consolidated return regulations promulgated thereunder or other applicable
Tax laws. Stratos shall reimburse and indemnify Methode for any costs (including
any interest, fines and penalties) resulting from the carryback of any item
under this paragraph. Notwithstanding this Section 3.07, Stratos and
22
any member of the Stratos Group shall have the right, in its sole discretion, to
make any election regarding any such carrybacks, including the election under
section 172(b)(3) of the Code, that would eliminate or limit the carryback from
a Post-Distribution Period of any loss or credit to any taxable period ending on
or before the Distribution Date.
Section 3.08. DEDUCTIONS ATTRIBUTABLE TO NON-QUALIFIED METHODE OPTIONS.
Stratos agrees to pay to Methode any benefit received by the Stratos Group that
is attributable to any transactions or items relating to the Non-Qualified
Methode Options to the extent that such transactions or items relating to
Non-Qualified Methode Options have not already been taken into account under
Section 3.03 or Section 3.04 in determining the allocation of Taxes among the
Parties. The benefit payable by Stratos to Methode under this Section 3.08 with
respect to any taxable period shall equal the excess of (i) the amount of Taxes
that the Stratos Group would have paid in the absence of any transactions or
items with respect to the Non-Qualified Methode Options over (ii) the amount of
Taxes actually payable by the Stratos Group. Payment of such benefit shall be
made within 30 days after the filing of the Tax Return for any taxable period in
which a benefit is realized by the Stratos Group with respect to the
Non-Qualified Methode Options (including through the use of a net operating loss
that is created or increased by any transaction or item relating to the
Non-Qualified Methode Options). If subsequent to Stratos' payment of any such
amount, there is (A) a Final Determination under applicable law to the effect
that all or part of the deduction giving rise to such payment was not allowable
or available, or (B) a reduction in the amount of the benefit the Stratos Group
realizes as a result of a Final Determination increasing the amount of income or
gain associated with those transactions, Methode shall repay to Stratos within
30 days of any event described in (A) or (B) (a "Subsequent Benefit Decrease
Event") any amount that would have not been payable to Methode
23
pursuant to this Section 3.08 had the amount of the benefit been initially
determined in light of the Subsequent Benefit Decrease Events, together with the
amount of any interest and penalties payable to any Taxing Authority with
respect to those amounts. If subsequent to Stratos' payment of any amount under
this Section 3.08, there is (A) a Final Determination under applicable law to
the effect that a deduction giving rise to such payment exceeded the amount
claimed or (B) an increase in the amount of the benefit Stratos realizes as a
result of a Final Determination decreasing the amount of income or gain
associated with those transactions, Stratos shall pay to Methode within 30 days
of any event described in (A) or (B) (a "Subsequent Benefit Increase Event") any
additional amount that would have been payable to Methode pursuant to this
Section 3.08 had the amount of the benefit been initially determined in light of
the Subsequent Benefit Increase Events. Stratos shall take all actions as shall
be necessary to maximize the amounts payable by Stratos to Methode under this
Section 3.08 and shall coordinate with, and follow the instruction of, Methode
with respect to the taking of such actions.
Section 3.09. DEDUCTIONS ATTRIBUTABLE TO RESTRICTED STOCK. (a) Stratos
agrees to pay to Methode any benefit received by the Stratos Group that is
attributable to any transactions or items relating to Methode Deduction
Restricted Stock to the extent that such transactions or items have not already
been taken into account under Section 3.03 or Section 3.04 in determining the
allocation of Taxes among the Parties.
(b) Methode agrees to pay to Stratos any benefit received by the
Methode Group that is attributable to any transactions or items relating to
Stratos Deduction Restricted Stock.
24
(c) The benefit payable under this Section 3.09 by one Party
(the "Paying Party") to another Party (the "Receiving Party") with respect to
any taxable period shall equal the excess of (i) the amount of Taxes that the
Paying Party would have paid in the absence of any transactions or items
relating to the Restricted Stock in question over (ii) the amount of Taxes
actually payable by the Paying Party. Payment of such benefit shall be made
within 30 days after the filing of the Tax Return for any taxable period in
which a benefit is realized by the Paying Party with respect to the Restricted
Stock in question (including through the use of a net operating loss that is
created or increased by any transaction or item relating to the Restricted
Stock). If subsequent to the Paying Party's payment of any such amount, there is
(A) a Final Determination under applicable law to the effect that all or part of
the deduction giving rise to such payment was not allowable or available, or (B)
a reduction in the amount of the benefit the Paying Party realizes as a result
of a Final Determination increasing the amount of income or gain associated with
those transactions, the Receiving Party shall repay to the Paying Party within
30 days of any event described in (A) or (B) (a "Subsequent Restricted Stock
Benefit Decrease Event") any amount that would have not been payable to the
Receiving Party pursuant to this Section 3.09 had the amount of the benefit been
initially determined in light of the Subsequent Restricted Stock Benefit
Decrease Events, together with the amount of any interest and penalties payable
to any Taxing Authority with respect to those amounts. If subsequent to the
Paying Party's payment of any amount under this Section 3.09, there is (A) a
Final Determination under applicable law to the effect that a deduction giving
rise to such payment exceeded the amount claimed or (B) an increase in the
amount of the benefit the Paying Party realizes as a result of a Final
Determination decreasing the amount of income or gain associated with those
transactions, the Paying Party shall pay to the Receiving Party within 30 days
of any
25
event described in (A) or (B) (a "Subsequent Restricted Stock Benefit Increase
Event") any additional amount that would have been payable to the Receiving
Party pursuant to this Section 3.09 had the amount of the benefit been initially
determined in light of the Subsequent Restricted Stock Benefit Increase Events.
The Paying Party shall take all actions as shall be necessary to maximize the
amounts payable by the Paying Party to the Receiving Party under this Section
3.09 and shall coordinate with, and follow the instruction of, the Receiving
Party with respect to the taking of such actions.
Section 3.10. CERTAIN DISPUTES REGARDING TAX LIABILITIES. In the event
of a dispute regarding (i) the acceptance or rejection of comments provided by
Methode to Stratos pursuant to the second proviso of Section 2.02(b), (ii) the
treatment of indemnity payments pursuant to Section 2.04, (iii) the allocation
of liability pursuant to the provisions of this Article III, (iv) a payment for
the use of losses or credits attributable to the Stratos Group pursuant to
Section 3.04 or 3.07, above, or (v) a payment pursuant to Section 3.08 or 3.09,
above, the Parties to the dispute shall employ (and equally share the expense
of) a mutually acceptable and jointly engaged nationally recognized public
accounting firm to determine the proper allocation of such liability or amount
of such payment. In the event the Parties are unable to agree to a mutually
acceptable nationally recognized accounting firm within 10 days, the Parties
shall each select a nationally recognized accounting firm, which accounting
firms shall select a third nationally recognized accounting firm, which third
nationally recognized accounting firm shall be jointly engaged by the Parties to
determine the proper allocation of such liability or amount of such payment.
26
ARTICLE IV
REPRESENTATIONS AND COVENANTS
Section 4.01. STRATOS REPRESENTATIONS. (a) Stratos has reviewed the
Original Ruling Request and, to the best of Stratos' knowledge, these materials,
including any representations and statements concerning Stratos, its business
operations, capital structure and/or organization, are true, complete and
accurate in all material respects. Stratos shall, and shall cause each member of
the Stratos Group to, comply in all material respects with each representation
and statement concerning Stratos and/or the Stratos Group made in the Ruling
Request and in the Letter Ruling, including statements relating to actions
intended to facilitate (i) Stratos' use of the proceeds of the initial public
offering of its stock, (ii) Stratos' improvement of operations and management
focus with respect to its business and (iii) line-of-sight compensation. Without
limiting the generality of the foregoing, with respect to any representation or
statement made by, on behalf of, or with respect to Stratos or the Stratos Group
in connection with the Ruling Request or the Letter Ruling, and to the extent
such representation or statement relates to future actions or events under their
control, neither Stratos nor any member of the Stratos Group will take (or fail
to take) any action during the Restricted Period that would have caused such
representation or statement to be untrue if Stratos or any member of the Stratos
Group had planned or intended to take (or fail to take) such action at the time
such representation or statement was made by or on behalf of Stratos or the
Stratos Group.
(b) Stratos hereby represents and warrants that it has no
intention to undertake any of the transactions set forth in Section 4.02(a)(ii),
below, nor does Stratos or any member of the Stratos Group have any intention to
cease to engage directly in the active conduct of its trade
27
or business (within the meaning of section 355(b)(2) of the Code), including the
ownership and operation of the plant and facilities currently located on ▇▇▇▇▇▇
Avenue.
Section 4.02. STRATOS COVENANTS. (a) Stratos covenants and agrees on
behalf of itself and each other member of the Stratos Group that during the
Restricted Period:
(i) Stratos and the members of the Stratos Group will continue
to engage in the optical products business (including the design and
manufacture of fiberoptic products and optical subsystems) and will
continue to maintain a substantial portion of their respective assets
and business operations as they existed immediately prior to the
Distribution.
(ii) Except as provided in Section 4.02(d), below, neither
Stratos nor any of its Affiliates nor any of its or their respective
Representatives will undertake, authorize, approve, recommend, permit,
facilitate, enter into negotiations or any contract, or consummate,
any transaction or series of related or unrelated transactions with
respect to:
(1) the issuance of stock, or any instrument that could
constitute equity for Federal Income Tax purposes, of Stratos or
any Affiliate thereof (or any instrument or contract with respect
to either, including options, warrants, rights or securities
exercisable for, or convertible into, stock, or any instrument
that could constitute equity for Federal Income Tax purposes, of
Stratos or an Affiliate of Stratos) other than (i) in the Public
Offering and (ii) options and restricted and unrestricted stock
(A) issued pursuant to the Stratos Lightwave, Inc. 2000 Stock
Plan, in an amount not to exceed, in the aggregate, 3,750,000
shares or options to acquire shares of Stratos common stock or
(B) the issuance (or in the case of an
28
option, issuance and exercise) of which is not treated, pursuant
to the Letter Ruling, as an "acquisition" of stock for purposes
of section 355(e) of the Code;
(2) the capital stock of, or other equity interest in,
Stratos or any of its Affiliates, including any redemptions,
repurchases, stock acquisitions or stock dispositions or the
dissolution, merger, consolidation or complete or partial
liquidation of Stratos or any of its Affiliates (or any
announcement of any such action), other than (A) stock
acquisitions permitted under Section 4.02(a)(ii)(1), above, and
(B) normal market trading;
(3) the transfer of assets to any Person in which Stratos or
any of its Affiliates holds, directly or indirectly, any stock,
option, debt or other interest;
(4) any disposition of assets that is outside the ordinary
course of business;
(5) the effectuation of any recapitalization of Stratos or
any of its Affiliates, including any stock split, reverse stock
split, stock dividend or other change in capital structure (other
than the repayment of any indebtedness outstanding immediately
after the Distribution); and
(6) the making of any election under Treasury Regulations
promulgated under Code Section 7701, or any successor regulation
or provision, or the taking of any action or the failure to take
any action that could cause an entity disregarded as an entity
separate from its owner for Federal Income Tax purposes not to be
disregarded (including the transfer of any interest in Stratos
LLC by Stratos).
(b) Stratos covenants and agrees, on behalf of itself and each
other member of the Stratos Group, that neither Stratos nor any other member of
the Stratos Group will take any
29
position (on a Tax Return, in a Tax proceeding or audit, or otherwise) that is
inconsistent with the Ruling Request or the Letter Ruling.
(c) Stratos covenants and agrees, on behalf of itself and each
other member of the Stratos Group, that, in addition to the other
representations, warranties, covenants and agreements set forth in this
Agreement, Stratos and each member of the Stratos Group will take, or refrain
from taking, as the case may be, such actions as Methode may require as
necessary to ensure that the Reorganization qualifies for the intended Tax
treatment, including such actions as Methode determines may be necessary to
preserve the Tax treatment set forth in the Letter Ruling. Without limiting the
generality of the foregoing, Stratos covenants and agrees, on behalf of itself
and each other member of the Stratos Group, that Stratos and each member of the
Stratos Group shall cooperate with Methode if Methode determines to obtain
additional IRS rulings with respect to the Reorganization or any portion
thereof, including rulings pertaining to whether any actual or proposed change
in facts and circumstances affects the Tax treatment of the Reorganization or
any portion thereof, and Methode shall reimburse Stratos for reasonable
third-party costs and expenses directly related to requests for additional IRS
rulings that are initiated by Methode.
(d) Following the Distribution Date, Stratos and its Affiliates
may take any action or engage in conduct otherwise prohibited by this Section
4.02 so long as prior to such action or conduct, as the case may be, Stratos
obtains Methode Sole Discretion Consent and, if Methode so requires, Methode or
Stratos receives (A) a ruling from the IRS in form and substance satisfactory to
Methode, in its sole and absolute discretion, and upon which Methode can rely,
to the effect that the proposed action or conduct, as the case may be, will not
cause the Reorganization or any portion thereof to fail to qualify for the Tax
treatment stated in the Letter
30
Ruling, or (B) an Opinion of Counsel that is in form and substance satisfactory
to Methode, in its sole and absolute discretion, and upon which Methode can rely
(which ruling or Opinion of Counsel, as the case may be, shall be obtained at
the sole cost and expense of Stratos), to the effect that the proposed action or
conduct, as the case may be, will not cause the Reorganization or any portion
thereof to fail to qualify for the Tax treatment stated in the Letter Ruling.
(e) Notwithstanding any other provision of this Agreement,
Stratos covenants, on behalf of itself and each other member of the Stratos
Group, that neither Stratos nor any member of the Stratos Group will apply for
any additional IRS ruling pertaining to the Reorganization or any portion
thereof unless, prior to so applying, Stratos obtains Methode Sole Discretion
Consent. Methode shall be entitled to review and approve any request for, or
document relating to, any such ruling prior to its submission to the IRS.
(f) Stratos recognizes that any failure by it or any of its
Affiliates to comply with their obligations under this Section 4.02 may result
in additional Taxes which could cause irreparable harm to Methode, the Methode
Affiliates and their stockholders, and that such Persons may be inadequately
compensated by monetary damages for such failure. Accordingly, if Stratos or any
Stratos Affiliate shall fail to comply with any obligation under this Section
4.02, then the Parties agree that Methode and each Methode Affiliate shall be
entitled to specific performance by Stratos or any Stratos Affiliate, as the
case may be, of their obligations set forth in this Section 4.02 and/or
injunctive relief in addition to any other remedies.
Section 4.03. METHODE REPRESENTATIONS. (a) Methode has reviewed the
Original Ruling Request and, to the best of Methode's knowledge, these
materials, including any representations and statements concerning Methode, its
business operations, capital structure and/or organization, are complete and
accurate in all material respects. Methode shall, and shall
31
cause each member of the Methode Group to, comply in all material respects with
each such representation and statement concerning Methode and/or the Methode
Group made in the Ruling Request and in the Letter Ruling. Without limiting the
generality of the foregoing, with respect to any representation or statement
made by, or on behalf of, Methode or the Methode Group in connection with the
Ruling Request or the Letter Ruling, and to the extent such representation or
statement relates to future actions or events under their control, neither
Methode nor any member of the Methode Group will take (or fail to take) any
action during the Restricted Period that would have caused such representation
or statement to be untrue if Methode or any member of the Methode Group had
planned or intended to take (or fail to take) such action at the time such
representation or statement was made by or on behalf of Methode or the Methode
Group.
(b) Methode hereby represents and warrants that it has no
intention to undertake any of the transactions set forth in Section 4.04(a)(ii),
below, nor does Methode or any member of the Methode Group have any intention to
cease to engage directly in the active conduct of its trade or business (within
the meaning of section 355(b)(2) of the Code), including the ownership and
operation of the plant and facilities currently located in Carthage, Illinois.
Section 4.04. METHODE COVENANTS. (a) Methode covenants and agrees on
behalf of itself and each other member of the Methode Group that during the
Restricted Period:
(i) Methode and the members of the Methode Group will continue
to engage in the automotive products business and will continue to
maintain a substantial portion of their respective assets and business
operations as they existed immediately prior to the Distribution;
(ii) Except as provided in Section 4.04(d), below, neither
Methode nor any of its Affiliates nor any of its or their respective
Representatives will undertake, authorize,
32
approve, recommend, permit, facilitate, or enter into negotiations or
any contract, or consummate, any transaction or series of related or
unrelated transactions with respect to:
(1) the issuance of stock, or any instrument that could
constitute equity for Federal Income Tax purposes, of Methode or
any Affiliate thereof (or any instrument or contract with respect
thereto, including options, warrants, rights or securities
exercisable for, or convertible into, stock, or any instrument
that could constitute equity for Federal Income Tax purposes, of
Methode or an Affiliate of Methode) in a single transaction or in
a series of related or unrelated transactions other than (x)
options and stock (A) issued pursuant to the Methode Electronics,
Inc. 1997 Stock Plan, as approved by the Board of Directors of
Methode on June 27, 1997 (without regard to subsequent amendments
thereto), in an amount not to exceed, in the aggregate, 2,000,000
shares or options to acquire shares of Class A Common Stock (such
number to be adjusted immediately after the Distribution in a
manner consistent with the spread and ratio tests set forth in
Treasury Regulation section 1.425-1(a)(4)(i) in order to preserve
the value of options issued under the Plan in light of Methode's
diluted value after the Distribution) or (B) the issuance (or in
the case of an option, issuance and exercise) of which is not
treated, pursuant to the Letter Ruling, as an "acquisition" of
stock for purposes of section 355(e) of the Code and (y) Class A
Common Stock issued to a holder of Class B Common Stock upon the
holder's conversion of such Class B Common Stock into Class A
Common Stock pursuant to the terms of such Class B Common Stock;
33
(2) the capital stock of, or other equity interest in,
Methode or any of its Affiliates, including any redemptions,
repurchases, stock acquisitions or stock dispositions or the
dissolution, merger, consolidation or complete or partial
liquidation of Methode or any of its Affiliates (or any
announcement of any such action), other than (A) stock
acquisitions permitted under Section 4.04(a)(ii)(1), above, (B)
normal market trading and (C) the acquisition of Class B Common
Stock upon a holder's conversion into Class A Common Stock
pursuant to the terms of such Class B Common Stock;
(3) the transfer of assets to any Person in which Methode or
any of its Affiliates holds, directly or indirectly, any stock,
option, debt or other interest;
(4) any disposition of assets that is outside the ordinary
course of business;
(5) the effectuation of any recapitalization of Methode or
any of its Affiliates, including any stock split, reverse stock
split, stock dividend or other change in capital structure (other
than the repayment of any indebtedness outstanding immediately
after the Distribution) other than upon a holder's conversion of
Class B Common Stock into Class A Common Stock pursuant to the
terms of such Class B Common Stock; and
(6) the making of any election under Treasury Regulations
promulgated under Code Section 7701, or any successor regulation
or provision, or the taking of any action or the failure to take
any action that could cause an entity disregarded as an entity
separate from its owner for Federal Income Tax purposes not to be
disregarded.
34
(b) Methode covenants and agrees, on behalf of itself and each
other member of the Methode Group, that neither Methode nor any other member of
the Methode Group will take any position (on a Tax Return, in a Tax proceeding
or audit, or otherwise) that is inconsistent with the Ruling Request or the
Letter Ruling.
(c) Methode covenants and agrees, on behalf of itself and each
other member of the Methode Group, in addition to the other representations,
warranties, covenants and agreements set forth in this Agreement, Methode and
each member of the Methode Group will take, or refrain from taking, as the case
may be, such actions as Methode may require as necessary to ensure that the
Reorganization qualifies for the intended Tax treatment, including such actions
as Methode determines may be necessary to preserve the Tax treatment set forth
in the Letter Ruling. Without limiting the generality of the foregoing, Methode
covenants and agrees, on behalf of itself and each other member of the Methode
Group, that Methode and each member of the Methode Group shall cooperate with
Stratos if Stratos determines to obtain additional IRS rulings with respect to
the Reorganization or any portion thereof, including rulings pertaining to
whether any actual or proposed change in facts and circumstances affects the Tax
treatment of the Reorganization or any portion thereof, and Stratos shall
reimburse Methode for reasonable third-party costs and expenses directly related
to requests for additional IRS rulings that are initiated by Stratos.
(d) Following the Distribution Date, Methode and its Affiliates
may take any action or engage in conduct otherwise prohibited by this Section
4.04 so long as (i) prior to such action or conduct, as the case may be, Methode
obtains Stratos Sole Discretion Consent and, if Stratos so requires, Methode or
Stratos receives (A) a ruling from the IRS in form and substance satisfactory to
Stratos, in its sole and absolute discretion, and upon which Stratos can rely,
to the
35
effect that the proposed action or conduct, as the case may be, will not cause
the Reorganization or any portion thereof to fail to qualify for the Tax
treatment stated in the Letter Ruling, or (B) an Opinion of Counsel that is in
form and substance satisfactory to Stratos, in its sole and absolute discretion,
and upon which Stratos can rely (which ruling or Opinion of Counsel, as the case
may be, shall be obtained at the sole cost and expense of Methode), to the
effect that the proposed action or conduct, as the case may be, will not cause
the Reorganization or any portion thereof to fail to qualify for the Tax
treatment stated in the Letter Ruling or (ii) such action or conduct consists of
the disposition of certain non-active trade or business assets that Methode has
indicated to the IRS in connection with the Original Ruling Request may be
disposed of following the Distribution.
(e) Notwithstanding any other provision of this Agreement,
Methode covenants, on behalf of itself and each other member of the Methode
Group, that neither Methode nor any member of the Methode Group will apply for
any additional IRS ruling pertaining to the Reorganization or any portion
thereof unless, prior to applying, Methode obtains Stratos Sole Discretion
Consent. Stratos shall be entitled to review and approve any request for, or
document relating to, any such ruling prior to its submission to the IRS.
(f) Methode recognizes that any failure by it or any of its
Affiliates to comply with their obligations under this Section 4.04 may result
in additional Taxes which could cause irreparable harm to Stratos, the Stratos
Affiliates and their stockholders, and that such Persons may be inadequately
compensated by monetary damages for such failure. Accordingly, if Methode or any
Methode Affiliate shall fail to comply with any obligation under this Section
4.04, then the Parties agree that Stratos and each Stratos Affiliate shall be
entitled to specific
36
performance by Methode or any Methode Affiliate, as the case may be, of their
obligations set forth in this Section 4.04 and/or injunctive relief in addition
to any other remedies.
Section 4.05. REDETERMINATION. If, after the date hereof, the IRS
issues Treasury Regulations under, or other guidance regarding, Section 355(e)
of the Code, the Parties hereby agree to meet to review the conditions,
requirements and covenants set forth in this Article IV, and to consider making
appropriate revisions to this Article IV as well as seeking any additional
rulings as may be appropriate in light of such regulations or other guidance.
37
ARTICLE V
INDEMNITY OBLIGATIONS
Section 5.01. BREACH. Methode and Stratos shall each indemnify and hold
harmless the other Party and its Affiliates from and against the breach by any
member of the Methode Group or the Stratos Group, as the case may be, of any
representation, covenant, statement, promise or obligation under this Agreement.
Section 5.02. TAX INDEMNIFICATION. Notwithstanding any other provision
of this Agreement to the contrary:
(a) If any Party or any of its Affiliates (collectively, jointly
and severally, the "Indemnifying Parties") takes any action prohibited by
Article IV, above, or violates a representation or covenant contained in Article
IV, above, or takes or fails to take any other action (any such action, failure
to act or violation, a "Tainting Act") and the Reorganization or any portion
thereof fails to qualify for the Tax treatment stated in the Letter Ruling in
whole or in part as a result of such Tainting Act, then the Indemnifying Parties
shall (jointly and severally) indemnify and hold harmless the other Party and
its Affiliates (collectively, the "Indemnified Parties") against any and all
Taxes and any other costs and liabilities imposed upon or incurred by the
Indemnified Parties as a result of the Tainting Act, including any liability of
the Indemnified Parties arising from Taxes imposed on shareholders of a Party to
the extent (i) any shareholder or the IRS or other Taxing Authority successfully
seeks recourse against the Indemnified Parties on account of any such Tainting
Act, or (ii) the Indemnified Parties assume or otherwise incur any liability for
such Taxes or other costs or liabilities of such shareholders;
(b) Stratos and its Affiliates shall (jointly and severally)
indemnify and hold harmless Methode and its Affiliates for any Tax imposed
upon or incurred by Methode and its
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Affiliates as a direct or indirect result of any action taken after the
Distribution by Stratos or any of its Affiliates. In addition, if (i) the
Distribution is ultimately determined to be taxable to Methode and/or
Methode's shareholders other than (x) in connection with cash in lieu of
fractional shares or (y) as a result of an action with respect to which
Methode or its Affiliates would be required to indemnify Stratos and its
Affiliates pursuant to Section 5.02(a) or 5.04 of this Agreement, and (ii)
Stratos or its Affiliates are not otherwise required to indemnify and hold
Methode and its Affiliates harmless with respect to that determination under
the other provisions of this Agreement, then Stratos and its Affiliates will
indemnify and hold Methode and its Affiliates harmless for 50% (fifty
percent) of any such Tax or other liability payable by Methode and its
Affiliates as a result of that determination.
Section 5.03. GROSS-UP. Any payment under this Agreement shall be (i)
increased to take account of any Tax Detriment incurred from the receipt or
accrual of payments hereunder (I.E., grossed-up for any Tax incurred on such
payment, accrual and/or increase) and (ii) reduced to take account of any Tax
Benefit attributable to the items to which such payments relate.
Section 5.04. TENDER OFFER OR PURCHASE OFFER. Notwithstanding anything
to the contrary set forth in this Agreement, if, during the Restricted Period,
any Person or group of Persons acquires beneficial ownership of Stratos or
Methode common stock (or any other class of outstanding Stratos or Methode
stock) or commences a tender or other purchase offer for the capital stock of
Stratos or Methode or initiates any other form of transaction to acquire
directly or indirectly Stratos or Methode stock, upon consummation of which such
Person or group of Persons would acquire beneficial ownership of Stratos or
Methode common stock (or any other class of outstanding Stratos or Methode
stock) such that the Reorganization or any portion thereof shall fail to qualify
for the Tax treatment stated in the Letter Ruling as a result of such
39
acquisition, tender or other purchase offer, or other form of transaction, then
the Party whose stock is the subject of the acquisition, tender or other
purchase offer, or other form of transaction shall indemnify and hold harmless
the other Party and its Affiliates against any and all Taxes and any other costs
and liabilities imposed upon or incurred by the other Party, its Affiliates and
their shareholders as a result of the failure of the Reorganization or any
portion thereof to so qualify.
Section 5.05. TAX INDEMNITY PAYMENTS. An Indemnifying Party shall make
any payment or indemnity required by this Article V no later than 30 days after
receipt of written notice from the Indemnified Parties of such payment or
indemnity obligation, which notice shall be accompanied by a computation of the
amounts due.
Section 5.06. EFFECT OF SECTIONS 4.02(d) AND 4.04(d) OF THIS AGREEMENT.
The Indemnified Parties shall be indemnified and held harmless under this
Article V without regard to the fact that any Indemnifying Party or Indemnified
Party may have received Methode Sole Discretion Consent or Stratos Sole
Discretion Consent, as the case may be, a ruling from the IRS or an Opinion of
Counsel, as contemplated by Sections 4.02(d) and 4.04(d), above, or otherwise.
The Indemnified Parties shall be indemnified and held harmless under Section
5.04, above, without regard to whether an acquisition of beneficial ownership
results from a transaction that is not prohibited under Article IV, above.
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ARTICLE VI
COOPERATION AND EXCHANGE OF INFORMATION
Section 6.01. COOPERATION. (a) Each Party shall cooperate (and shall
cause its Affiliates to cooperate) fully at such time and to the extent
reasonably requested by the other Party in connection with the preparation and
filing of any Tax Return or the conduct of any audit, dispute, proceeding, suit
or action concerning any issues or any other matter contemplated hereunder. Such
cooperation shall include (i) the retention and provision on demand of books,
records, documentation, other information, or copies thereof relating to any Tax
Return until the later of (x) a Final Determination regarding liability for
Taxes to which such Tax Return relates and (y) in the event any claim has been
made under this Agreement for which such information is relevant, a final
resolution with respect to such claim, (ii) the provision of additional
information with respect to an explanation of Tax Practices and material
provided under clause (1) of this Section 6.01(a), (iii) the execution of any
document (including powers of attorney) that may be necessary or reasonably
helpful in connection with the filing of any Tax Return by any member of the
Methode Group or the Stratos Group, or in connection with any audit, dispute,
proceeding, suit or action addressed in the preceding sentence, (iv) the use of
the Party's reasonable best efforts to obtain any documentation from a
governmental authority or a third party that may be necessary or helpful in
connection with the foregoing, (v) the completion of such tax packages and other
work papers as requested, and within the reasonable time specified, by the
requesting party (including the provision of such information in electronic
format, if so specified by the requesting party), and (vi) the satisfaction of
applicable withholding requirements. Each Party shall make its employees and
facilities available on a mutually convenient basis to facilitate such
cooperation.
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(b) Each Party (a "Notifying Party") shall use reasonable
efforts to keep the other Party advised as to the status of Tax audits and
litigation involving any issue (a "Liability Issue") that (i) relates to a Tax
of the other Party (or its Affiliates), or (ii) could give rise to liability of
the other Party (or its Affiliates) under this Agreement. The Notifying Party
shall promptly furnish such other Party copies of any inquiries or requests for
information from any Taxing Authority concerning any Liability Issue. If
applicable under Section 6.02, below, the other Party shall have the right to
consult with the Notifying Party regarding any responses to such requests and
the Notifying Party shall provide such other Party with copies of any such
written responses before such responses are given to any Taxing Authority.
Without limiting the generality of the foregoing, each Party shall promptly
furnish to the other Party, upon receipt, a copy of any revenue agent's report
or similar report, notice of proposed adjustment or notice of deficiency
received by such Party or any of its Affiliates, as the case may be, relating to
any Liability Issue or any adjustment referred to in Section 6.01(c), below.
(c) Methode shall advise and consult with Stratos with respect
to any proposed Tax adjustments relating to the Methode Group that are the
subject of an audit or investigation of a Taxing Authority or are the subject of
litigation and that may affect any Tax Item of any member of the Stratos Group
after the Distribution Date.
Section 6.02. CONTEST PROVISIONS. (a) Subject to the cooperation
provisions in Section 6.01, above, Methode shall have the full responsibility
and control over the handling of any Tax controversy, including an audit, a
protest to the Appeals Division of the IRS, litigation in the Tax Court or any
other court of competent jurisdiction, and any other federal, state, local or
foreign hearing or administrative proceeding, (a "Tax Controversy"), involving
any Methode Return, except to the extent the Tax Controversy relates to the
Reorganization or any portion
42
thereof, with respect to which Methode and the Stratos shall have joint control.
Upon request by Stratos, however, and subject to Methode Reasonable Discretion
Consent and the cooperation provisions in Section 6.01, above, Stratos shall, at
Stratos' expense and in its sole discretion, be allowed to participate in and
share control over the handling of any Tax Controversy with respect to any item
that would give rise to a payment of Tax for which Stratos would be liable, or a
refund of Tax for which Stratos would be entitled to receive payment, under this
Agreement.
(b) Subject to the cooperation provisions in Section 6.01,
above, Stratos shall have the full responsibility and control over the handling
of any Tax Controversy involving any Stratos Return; PROVIDED, HOWEVER, that
Methode shall, at Methode's expense and in its sole discretion, be allowed to
participate in and share control over the handling of any Tax Controversy with
respect to any item that would give rise to a payment of Tax for which Methode
would be liable, or a refund of Tax for which Methode would be entitled to
receive payment, under this Agreement.
(c) Each Party shall promptly notify the other Party of any
inquiries by any Taxing Authority that relate to any Tax that may be imposed on
the other Party or any of its Affiliates or that might give rise to any
liability on any of the part of the other Party or any of its Affiliates under
this Agreement.
Section 6.03. NOTICES. Any notice, demand, claim or other communication
under this Agreement shall be in writing and shall be deemed given upon delivery
if delivered personally, upon mailing if sent by certified mail, return receipt
requested, postage prepaid, or upon completion of transmission if sent by
telecopy or facsimile, to the Parties at the following address (or such other
address as may be provided in writing from time to time by one Party to the
other Party after the date hereof):
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To Methode or any member of the Methode Group:
Methode Electronics, Inc.
▇▇▇▇ ▇▇▇▇ ▇▇▇▇▇▇ ▇▇▇▇▇▇
▇▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇
Attention: ▇▇▇▇▇ ▇▇▇▇▇, Chief Financial Officer
To Stratos or any member of the Stratos Group:
Stratos Lightwave, Inc.
▇▇▇▇ ▇▇▇▇ ▇▇▇▇▇▇ ▇▇▇▇▇▇
▇▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇
Attention: ▇▇▇▇▇ ▇▇▇▇▇, Chief Financial Officer
In each case, with copies to:
▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇▇ LLP
▇▇▇▇ ▇▇▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇, ▇.▇.
▇▇▇▇▇▇▇▇▇▇, ▇.▇. ▇▇▇▇▇-▇▇▇▇
Attention: ▇▇▇▇▇▇ ▇. ▇▇▇▇
Section 6.04. COMPLETE AGREEMENT. This Agreement, together with the
Distribution Agreement, the Master Separation Agreement, and all Ancillary
Agreements, constitutes the entire agreement of the Parties concerning the
subject matter hereof, and supersedes all other agreements, whether or not
written, in respect of any Tax between or among any member or members of the
Methode Group or the Stratos Group. In the event and to the extent there is a
conflict between the provisions of this Agreement and the Distribution
Agreement, the Master Separation Agreement or any Ancillary Agreement, the
provisions of this Agreement shall control. This Agreement may not be amended
except by an agreement in writing, signed by the Parties.
Section 6.05. DISPUTES. Except as otherwise provided in Section 3.10,
above, resolution of any and all disputes arising from or in connection with
this Agreement shall be in accordance with the provisions of Section 6.1 of the
Distribution Agreement.
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Section 6.06. GOVERNING LAW. This Agreement shall be governed by, and
construed in accordance with, the laws of the state of Illinois.
Section 6.07. PARTIES IN INTEREST, SUCCESSORS AND ASSIGNS. This
Agreement is being entered into by Methode and Stratos on behalf of themselves
and their respective Affiliates following the Contribution. This Agreement shall
constitute a direct obligation of each such Person and shall be deemed to have
been readopted and affirmed on behalf of any Person that becomes an Affiliate of
Methode or Stratos in the future. All of the provisions of this Agreement shall
be binding upon and inure to the benefit of the Parties and their Affiliates and
their respective successors and permitted assigns. A Party's rights and
obligations under this Agreement may not be assigned without the prior written
consent of the other Party.
Section 6.08. NO THIRD-PARTY BENEFICIARIES. This Agreement is solely
for the benefit of the Parties and their respective Affiliates and shall not be
deemed to confer upon third parties any remedy, claim, liability, reimbursement,
claim of action or other right in excess of those existing without this
Agreement.
Section 6.09. LEGAL ENFORCEABILITY. Any provision of this Agreement
that is prohibited or unenforceable in any jurisdiction shall, as to that
jurisdiction, be ineffective to the extent of the prohibition or
unenforceability without invalidating the remaining provisions. Any prohibition
or unenforceability of any provision of this Agreement in any jurisdiction shall
not invalidate or render unenforceable the provision in any other jurisdiction.
Section 6.10. EXPENSES. Unless otherwise expressly provided in this
Agreement or in the Distribution Agreement, each Party shall bear any and all
expenses that arise from its respective obligations under this Agreement.
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Section 6.11. CONFIDENTIALITY. Except as required by law or with the
prior written consent of the other Party, 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, and any
other information that is obtained by a Party or any of its Affiliates pursuant
to this Agreement, shall be kept confidential by such Party and its Affiliates
and Representatives, shall not be disclosed to any other Person and shall be
used only for the purposes provided herein. If a Party or any of its Affiliates
is required by law to disclose any such information, such Party shall give
written notice to the other Party prior to making such disclosure.
Section 6.12. COUNTERPARTS. This Agreement may be signed in any number
of counterparts, each of which shall be an original, with the same effect as if
the signature thereto and hereto were upon the same instrument.
* * *
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IN WITNESS WHEREOF, the Parties have executed and delivered this Agreement as of
the date first above written.
METHODE ELECTRONICS, INC.
By: /s/ ▇▇▇ ▇. ▇▇▇▇▇▇▇
-------------------------------
Name: ▇▇▇ ▇. ▇▇▇▇▇▇▇
Title: Director of Taxes
STRATOS LIGHTWAVE, INC.
By: /s/ ▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇
--------------------------------
Name: ▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇
Title: Vice President, Administration
47