CLOSING AGREEMENT
This Closing Agreement is made in quadruplicate under and pursuant to
Section 418 of the Puerto Rico Income Tax Act of 1954, as amended (hereinafter
the "ITA")
APPEAR
AS PARTY OF THE FIRST PART:
HONORABLE MANUEL DIAZ SALDANA, in his capacity of Secretary of the Treasury of
the Commonwealth of Puerto Rico (hereinafter referred to as the "Secretary");
AS PARTY OF THE SECOND PART:
HAMPSHIRE DESIGNERS, INC., a corporation organized under the laws of the State
of Delaware with principal offices in Anderson, South Carolina (hereinafter
referred to as "STOCKHOLDER") represented herein by its attorney-in-fact, Walter
F. Chow, who has been duly designated by STOCKHOLDER to act on its behalf and to
represent the same before the Puerto Rico Department of Treasury (the
"Department").
AS PARTY OF THE THIRD PART:
GLAMOURETTE FASHION MILLS, INC., a corporation organized under the laws of the
State of Delaware with principal offices in Quebradillas, Puerto Rico
(hereinafter referred to as "CORPORATION"), represented herein by its
attorney-in-fact, Walter F. Chow, who has been duly designated by CORPORATION to
act on its behalf and to represent the same before the Department.
WITNESSETH
The parties state that in accordance with the provisions of the ITA, they
have full legal capacity to enter into this agreement and they further state:
A. GENERAL REPRESENTATIONS
1. Stockholder represents to the Secretary that:
a. Its taxpayer identification number is 13-2949983.
b. It is the holder of all of the issued and outstanding common stock of
Corporation.
c. It is not authorized to do business in Puerto Rico and is not actually
engaged in trade or business in Puerto Rico.
d. Its taxable year is the calendar year.
2. Corporation represents to the Secretary that:
a. Its taxpayer identification number is 02-0333517.
b. It is duly registered to do business in Puerto Rico.
c. It computed its income on the basis of a 52-53 week period ending on the
Saturday nearest to the last day of April from 1977 to 1986, when it changed its
taxable year to a calendar year with the approval of the Department.
d. It conducts exempt operations in Quebradillas, Puerto Rico under Case
No. 92-8-IT-2 (77-57-I-80) originally issued under the 1963 Industrial
Incentives Acts (the "1963 IIA") effective on July 30, 1977 and extended
pursuant to Section 3 (m) of the 1987 Tax Incentive Act (the "TIA") effective
July 30, 1992.
e. Corporation's extended grant under Section 3(m) of the TIA provides the
following tollgate tax reduction schedule based on the employment level:
Tollgate Tax Tollgate Tax
Average Annual Rate Without Rate with 25%
Employment Investment Investment
---------------- --------------- ----------------
784 to 833 5% 2%
834 to 883 4% 1%
884 to 933 3% 0%
934 to 983 2% 0%
984 to 1033 1% 0%
1034 or more 0% 0%
This tollgate tax reduction schedule is applicable to distributions of IDI
accumulated during the extension period.
f. Corporation has issued and outstanding preferred stock which is owned
by employees who are residents of Puerto Rico.
B. REPRESENTATIONS REGARDING PRIOR DISTRIBUTIONS
1. Corporation represents to the Secretary that all of its income for the period
from July 30, 1977 to December 31, 1992 was derived from its exempt
manufacturing operations and that its net industrial development income for said
period is as shown in Schedule I attached hereto.
2. Corporation represents to the Secretary that from July 30, 1977 to December
31, 1992 it made distributions from industrial development income, including
dividends to preferred stockholders, as shown in Schedule I attached hereto.
Said dividends were duly designated as made out of industrial development
income; however the years from which the distributions were made were not
specifically designated at the time of the dividend distributions, except to the
extent described in paragraph B(6) below.
3. Corporation wishes to designate, with the Secretary's approval, that the
distributions of IDI made from July 30, 1977 to December 31, 1992, except for
the $200,000 distribution described in paragraph B(6) below, were made on a
first-in, first-out ("FIFO") basis for the years shown in said Schedule I,
attached hereto, so that the remaining accumulated industrial development income
is as shown in said Schedule I.
4. Corporation further represents that it paid a 10% tollgate tax on all the
distributions made to Stockholder from July 30, 1977 to July 29, 1992.
5. Corporation represents that it did not pay any tollgate tax on distributions
made to preferred stockholders who are residents of Puerto Rico from July 30,
1977 to December 31, 1992 pursuant to Section 3(a)(1) of the 1963 IIA.
6. Corporation represents that on December 31, 1992 it paid a $200,000 dividend
to Stockholder. Said dividend was designated as made out of IDI earned after the
effective date of the Section 3(m) extension. Corporation further represents
that on January 15, 1993 it paid to the Secretary a tollgate tax of 1% on said
dividend pursuant to its extended grant under Section 3(m) and based on an
annual employment of 845 persons for 1992 and on the investments shown in
Schedules III and VII attached hereto.
C. REPRESENTATIONS REGARDING DISTRIBUTIONS AT 7%
1. Corporation represents that it will make a $4,000,000 distribution to
Stockholder, $2,000,000 to be distributed on or before June 30, 1993 and
$2,000,000 to be distributed on or before January 31, 1994, of industrial
development income accumulated under the 1963 IIA (prior to the Section 3(m)
extension) as shown in Schedule V, attached hereto, for which it wishes the
Secretary to agree on the 7% tollgate tax rate applicable to the distribution of
IDI accumulated during taxable years ended December 31, 1987 and December 31,
1988. The total tollgate tax on the proposed distributions is $285,737 as shown
in said Schedule V.
2. Corporation represents that its investments in qualified assets under Section
231(a)(2)(D) of the ITA (the "Qualified Investments") are as indicated in
Schedule III attached hereto.
3. Corporation represents that it has increased its investment in assets
described in Section 231(a)(2)(C) of the ITA as shown in Schedule VI, attached
hereto.
4. Corporation further represents that it has never used the 3% investment
credit provided in Section 231(a)(2)(C) of the ITA. Corporation wishes to use
said 3% investment credit amounting to $60,060, as shown in Schedule VI attached
hereto, against the $285,737 withholding of tax on the distributions to be made
to Stockholder on or before June 30, 1993 and January 30, 1994.
5. Corporation will make the appropriate withholding of Tax on the distributions
described in paragraph C(1) above, file the appropriate forms and deposit
$225,677 ($285,737 tollgate tax less $60,060 investment tax credit) with the
Department on or before June 30, 1993.
6. Since the tollgate tax on the January, 1994 distribution will be paid on or
before June 30, 1993, Corporation will not withhold any tax upon the $2,000,000
distribution to be made on or before January 31, 1994.
D. AGREEMENTS
Based on the representations made by Stockholder and Corporation in the
preceding paragraphs, the Secretary hereby agrees that:
1. The distributions made by Corporation from July 30, 1977 to December 31,
1992, except for the $200,000 distribution to Stockholder made on December 31,
1992 and described in paragraph B(6) above, were made on a first-in first-out
("FIFO") basis from industrial development income for the years shown in
Schedule I attached hereto so that the remaining accumulated industrial
development income is as shown in said Schedule I.
2. Corporation may distribute as a dividend up to 75% of its IDI for the years
ended December 31, 1987 to the short year ended July 29, 1992 at a 7% tollgate
tax rate provided it complies with the investments requirements of Section 231
(a)(2)(D) of the ITA shown in Schedule II attached hereto.
3. Since all prior distributions to Stockholder, except for the $200,000
distribution to Stockholder made on December 31, 1992, have been made at the
regular 10% tollgate tax, all of the Qualified Investments made from July 30,
1977 to July 29, 1992 shown in Schedule III attached hereto are considered
excess investments for purposes of meeting the investment requirement of Section
231(a)(2)(D).
4. The excess investments shown in Schedule III, attached hereto shall be
available to Corporation to qualify dividend distributions from IDI earned in
fiscal years ended December 31, 1987 to the short year ended July 29, 1992, as
determined in Schedule IV attached hereto. The more than eight year investment
period shall be counted from the first day of the taxable year for which the IDI
is being qualified for the 7% tollgate tax rate, as shown in Schedule II
attached hereto.
5. On or after the termination date of the more than eight (8) year investment
period Corporation will be authorized to distribute to Stockholder the balance
of the undistributed IDI subject to a withholding tax of 7% without any further
investment requirements.
6. Corporation may distribute $4,000,000 to Stockholder, $2,000,000 on or before
June 30, 1993 and $2,000,000 on or before January 31, 1994, provided the total
tollgate shown in Schedule V, attached hereto, is deposited with the Secretary
on or before June 30, 1993.
7. Corporation is entitled to use the 3% investment credit provided by Section
231(a)(2)(C) of the ITA in the amount of $60,060 as shown in Schedule VI,
attached hereto, against the total tollgate tax shown in Schedule V, attached
hereto, to be paid on or before June 30, 1993 on distributions to be made on or
before June 30, 1993 and on or before January 30, 1994.
8. The $200,000 distribution made to Stockholder on December 31, 1992 qualifies
for the 1% tollgate tax rate provided the qualified investments shown in
Schedules III and VII are maintained until July 31, 1997.
9. This Agreement shall not be construed to limit in any way Corporation's right
to distribute tax-free upon liquidation all of its undistributed IDI accumulated
under the 1963 IIA.
10. Notwithstanding the provisions of Section 148 of the ITA, of Article
231-3(c) of the Regulations issued by the Secretary on December 1, 1977 and/or
the Master Closing Agreement, Corporation shall be deemed, by the execution of
this Agreement, to have complied with its notice and/or reporting obligation to
its Shareholder and/or to the Secretary with respect to: (1) the amount and
source of the dividend distributions to be made in accordance with this
Agreement, and (2) the investments made to comply with the investment
requirement of the dividends to be paid pursuant to this Agreement.
E. GENERAL PROVISIONS
1. As long as Stockholder is not engaged in the conduct of a trade or business
in Puerto Rico, dividends paid by it to its shareholders will not be subject to
tax nor withholding at source under Article 144-1(b) or the regulations under
the ITA. If Stockholder is engaged or in the future becomes engaged in the
conduct of business in Puerto Rico, dividends paid by it to its shareholders
will be subject to tax and withholding at source only to the extent such
dividends are Puerto Rico source income under Section 119 of the ITA.
2. The parties hereto further agree that should at any time after the date of
this closing Agreement, any portion of the earnings and profits of Corporation
be reallocated, assigned or adjusted pursuant to a firm and final order or
agreement with Stockholder or any related affiliate thereof under the provisions
of the United States Internal Revenue Code, including, but not limited to,
Sections 482, 61, 162, 351, 861, 862, 863, 864 and/or 936 or any successor
provision, the Corporation and/or Stockholder shall have the benefits of Article
41 of the Regulations under ITA Section 41 (in effect as of the date of this
Closing Agreement) as if said provisions were incorporated herein.
3. In no event will any technical adjustment or reallocation pursuant to the
preceding paragraph result in Corporation and/or Stockholder having to pay or
withhold a rate of tax on the earnings and profits distribution for the year
being adjusted, or any subsequent year affected by the adjustment, higher than
the one imposed on the dividend distributions being made hereunder. Nothing
contained herein shall prevent the Secretary from imposing any applicable
withholding tax on any fixed or determinable annual or periodical income from
Puerto Rico sources which is to be paid by Corporation to Stockholder as a
result of any such technical adjustment or reallocation.
4. If Corporation is merged with or completely liquidated into Stockholder or
any affiliate of stockholder prior to its complete satisfaction of the
investment requirements of Section 231(a)(2)(D) of the ITA that are applicable
to its dividend distributions, those investment requirements will be deemed to
be satisfied if Stockholder or any affiliate thereof maintains Qualified
Investments for the remainder of such periods and in such amounts as would
satisfy those investments requirements if maintained by Corporation.
5. The percentage requirements, limitations, investments and distributions
required by Section 231(a)(2)(D) of the ITA shall be measured solely by
reference to Corporation's IDI as it appears in Corporation's annual tax
returns, including any schedules therein or attachments or exhibits thereto
filed by corporation in Puerto Rico, and prior to adjustment, if any, by the
Puerto Rico Income Tax Bureau. Notwithstanding the foregoing sentence, such
requirements shall be modified as required by the applicable provisions of
paragraph E(2) hereof.
6. Notwithstanding the provisions hereof, Corporation and Stockholder shall have
the option of availing themselves of any benefits which may in the future become
generally available under the ITA, 1963 IIA or the TIA as these statues may be
amended from time to time, or under public rulings, regulations or
administrative determinations which may be approved pursuant to said statutes.
7. The parties hereto mutually agree that the matters determined in this Closing
Agreement shall be final and conclusive, subject, however, to reopening in the
event of fraud, malfeasance or misrepresentation of fact, in accordance with
Section 418 of the ITA.
IN WITNESS WHEREOF, the parties hereto subscribe and execute this Closing
Agreement at San Juan, Puerto Rico this 30th day of June 1993.
/s/ Raul Mallande
SECRETARY OF THE TREASURY
OF THE COMMONWEALTH
OF PUERTO RICO
HAMPSHIRE DESIGNERS, INC.
By: /s/ Walter Chow
GLAMOURETTE FASHION MILLS, INC.
By: /s/ Walter Chow
Schedule I
Glamourette Fashion Mills
Dividends Paid 1977-1992
Fiscal Manufact. Fiscal Year Fiscal Year Fiscal Year Fiscal Year FiscalYear
Year IDI 1978 Divid. 1979 Divid. 1980 Divid. 1981 Divid. 1982 Divid.
- ------ -------- ----------- ----------- ----------- ----------- -----------
04/29/78 $1,175,156 $20,0000 $50,000 $30,000 $505,000 $570,158
04/28/79 1,585,192 1,320,842
05/03/80 1,343,473
05/02/81 847,459
05/01/82 1,974,575
04/30/83 1,152,338
04/28/84 1,216,498
04/27/85 1,383,302
05/03/86 2,855,722
12/31/86 2,183,261
12/31/87 2,701,327
12/31/88 3,354,146
12/31/89 1,666,720
12/31/90 1,670,738
12/31/91 1,777,008
07/29/92 1,620,747
12/31/92 225,994
- ------ -------- ----------- ----------- ----------- ----------- -----------
Total $20,000 $50,000 $30,000 $505,000 $1,891,000
- ------ -------- ----------- ----------- ----------- ----------- -----------
Fiscal Manufact.Fiscal Year Fiscal Year
Year IDI 1983 Divid. 1984 Divid.
- ------- -------- ----------- -----------
04/29/78 $1,175,156
04/28/79 1,585,192 $264,350
05/03/80 1,343,473 727,650 $615,823
05/02/81 847,459 382,677
05/01/82 1,974,575
04/30/83 1,152,338
04/28/84 1,216,498
04/27/85 1,383,302
05/03/86 2,855,722
12/31/86 2,183,261
12/31/87 2,701,327
12/31/88 3,354,146
12/31/89 1,666,720
12/31/90 1,670,738
12/31/91 1,777,008
07/29/92 1,620,747
12/31/92 225,994
- ------ -------- ----------- -----------
Total $992,000 $998,500
- ------ -------- ----------- -----------
Fiscal Fiscal Year May 1986 Dec. 1986 Calendar Yr Calendar Yr Calendar Yr
Year 1985 Divid. Divid. Dividend 1987 Divid. 1988 Divid. 1989 Divid
- ------ ----------- --------- ---------- ----------- ----------- -----------
04/29/78 $1,175,156
04/28/79 1,585,192
05/03/80 1,343,473
05/02/81 847,459 $464,782
05/01/82 1,974,575 597,878 $965,080 $411,817
04/30/83 1,152,338 67,883 $962,625 $121,831
04/28/84 1,216,498 884,019
04/27/85 1,383,302
05/03/86 2,855,722
12/31/86 2,183,261
12/31/87 2,701,327
12/31/88 3,354,146
12/31/89 1,666,720
12/31/90 1,670,738
12/31/91 1,777,008
07/29/92 1,620,747
12/31/92 225,994
- ------ ----------- --------- ---------- ----------- ----------- -----------
Total $1,062,480 $965,080 $479,700 $962,625 $965,650
- ------ ----------- --------- ---------- ----------- ----------- -----------
Period Ended Period Ended
Fiscal Fiscal Yr Calendar Yr July 1992 December 1992 Accumulated
Year 1990 Divid. 1991 Divid. Dividend Dividend IDI
- ------- ------------ ------------- ------------- -------------- ------------
04/29/78 $1,175,156
04/28/79 1,585,192
05/03/80 1,343,473
05/02/81 847,459
05/01/82 1,974,575
04/30/83 1,152,338
04/28/84 1,216,498
04/27/85 1,383,302
05/03/86 2,855,722 $421,401
12/31/86 2,183,261 1,959,099 $22,217 $ 10,750 $ 191,195
12/31/87 2,701,327 2,701,327
12/31/88 3,354,146 3,354,146
12/31/89 1,666,720 1,668,720
12/31/90 1,670,738 1,870,739
12/31/91 1,777,008 1,777,006
07/29/92 1,620,747 1,620,747
12/31/92 225,994 200,000 25,994
- ------- ------------ ------------- ------------- -------------- ------------
Total $2,380,500 $22,217 $210,750 $13,209,874
- ------- ------------ ------------- ------------- -------------- ------------
Schedule II
Glamourette Fashion Mills
Accumulated Industrial Development Income
Prior to Section 3(m) Extension
Amount Available Date of Termination
Manufact. Investment for Immediate Qualified Date Investment
Fiscal Yr IDI Requirement Distribution Investments Period
- --------- --------- ----------- ---------------- ------------ ---------------
12/31/87 $2,701,327 $675,332 $2,025,995 1/1/87 1/1/95
12/31/88 3,354,146 838,537 2,515,609 1/1/88 1/1/96
12/31/89 1,668,720 417,180 1,251,540 1/1/89 1/1/97
12/31/90 1,870,739 467,685 1,403,054 1/1/90 1/1/98
12/31/91 1,777,006 444,252 1,332,754 1/1/91 1/1/99
07/29/92 1,620,747 405,187 1,215,560 1/1/92 1/1/00
- --------- ---------- ----------- ---------------- ------------ ---------------
$12,992,685 $3,248,173 $9,744,512
---------- ----------- ----------------
Schedule III
Glamourette Fashion Mills
Amounts Invested in Qualified Assets
Machinery, Equipment Total Amount
Fiscal Year and Fixtures at Cost * Invested
- ----------- ------------------------- ---------------
07/30/77 $ 224,316 $ 224,316
04/29/78 2,148,640 2,148,640
04/28/79 1,375,905 1,375,905
05/03/80 1,513,270 1,513,270
05/02/81 1,560,699 1,560,699
05/01/82 1,612,953 1,612,953
04/30/83 1,655,319 1,655,319
04/28/84 2,667,143 2,677,143
04/27/85 2,935,242 2,935,242
05/03/86 3,415,637 3,415,637
12/31/86 4,021,407 4,021,407
12/31/87 5,281,856 5,281,856
12/31/88 5,469,594 5,469,594
12/31/89 6,610,159 6,610,159
12/31/90 6,815,110 6,815,110
12/31/91 6,913,684 6,913,684
07/29/92 7,051,329 7,051,329
12/31/92 8,420,686 8,420,686
*includes Leasehold Improvements
Schedule IV
Glamourette Fashion Mills
Investment Requirements
And Qualified Assets Retained
Investment Total Amount Excess
Fiscal Year Requirement* Invested** Investments
- ------------ ---------------- ---------------- --------------
12/31/87 $675,332 $5,281,856 $4,606,524
12/31/88 838,537 5,469,594 3,955,725
12/31/89 417,180 6,610,159 4,679,110
12/31/90 467,685 6,815,100 4,416,376
12/31/91 444,252 6,913,684 4,070,698
07/29/92 405,187 7,051,329 3,803,156
*Amount Detailed in Schedule II
** Amount Detailed in Schedule III
Schedule V
Fiscal Year Amount of Distribution Rate of Tax Tax
- ----------- -------------------------- --------------- ------------
12/31/86 $ 191,195 10% $ 19,120
12/31/87 2,025,995 7% 141,820
12/31/88 1,782,810 7% 124,797
----------- -----------
Total $4,000,000 $285,737
----------- -----------
Schedule VI
Glamourette Fashion Mills
3% Investment Credit
Balance Sheet Leasehold Construction in Total Investment
Date Improvements Progress at Cost
- ------------- -------------- ---------------- -----------------
07/30/77 $ 35,667 $ 0 $ 35,667
04/29/78 365,509 14,944 380,453
04/28/79 431,000 7,830 438,830
05/03/80 519,360 3,742 523,102
05/02/81 531,019 2,306 533,325
05/01/82 532,413 54,896 587,309
04/30/83 532,413 599,913 1,132,326
04/28/84 1,255,508 70,796 1,326,304
04/27/85 1,346,887 18,844 1,365,731
05/03/86 1,374,569 37,422 1,361,123
12/31/86 1,269,700 91,423 1,287,477
12/31/87 1,269,700 17,777 1,287,477
12/31/88 1,278,867 31,554 1,310,421
12/31/89 1,437,070 0 1,437,070
12/31/90 1,450,747 15,534 1,466,281
12/31/91 1,473,927 195,925 1,669,852
12/31/92 1,849,552 152,432 2,001,984
------------- ---------------- -----------------
3% Investment Tax Credit $ 60,060
-----------------
Schedule VII
Glamourette Fashion Mills
Amounts Invested for Distributions at 1%
December 31, 1992
Period July 30, 1992 - December 31, 1992
Net IDI $225,994
Investment Requirement $56,499
Total Amount Invested in Qualified Assets* $8,420,686
Excess Investments** $5,116,014
Date of Investment July 30, 1992
Termination Date July 31, 1997
* Amount Detailed in Schedule III
** Amount determined after deducting Investment requirements
shown in Schedule IV and this schedule.