1
EXHIBIT 10.2
TAX MATTERS AGREEMENT
THIS TAX MATTERS AGREEMENT (the "Agreement") is made as of May __, 1996, by
and among PolyMedica Industries, Inc., a Massachusetts corporation ("Parent"
and, together with its subsidiaries existing immediately following the
Distribution, the "Parent Group"), and CardioTech International, Inc., a
Massachusetts corporation and a 91.7%-owned subsidiary of Parent ("CardioTech"
and, together with its subsidiaries existing immediately following the
Distribution, the "CardioTech Group").
WHEREAS, Parent and CardioTech have entered into the Distribution Agreement
(as defined below) providing for the distribution of all of the CardioTech stock
owned by Parent to Parent's shareholders in accordance with the Distribution
Agreement; and
WHEREAS, Parent and CardioTech desire to set forth their agreement
regarding the allocation between the Parent Group and the CardioTech Group of
all responsibilities, liabilities and benefits affecting Taxes (as defined
below) paid or payable by either of them for all taxable periods.
NOW, THEREFORE, in consideration of their mutual promises, the parties
hereby agree as follows:
1. Definitions. Capitalized terms used herein and not otherwise defined
shall have the meanings given them in the Distribution Agreement. As used in
this Agreement, the following terms shall have the following meanings:
(a) "Affiliate" of any person means any person, corporation,
partnership or other entity directly or indirectly controlling, controlled by or
under common control with such person.
(b) "CardioTech" has the meaning set forth in the preamble hereto.
(c) "CardioTech-Caused Taxes" means any liability for Taxes,
including interest and penalties, incurred by the Parent Group or the CardioTech
Group arising from or attributable to any of the transactions that are directly
related to the Distribution (including, without limitation, the contribution
and/or licensing of technology to CardioTech by Parent, the recapitalization of
CardioTech and the Distribution itself) failing to qualify under Code Sections
351, 355 or 368 (or any comparable provisions of state law), but only if such
failure (i) was caused by an act that
2
occurred after the Distribution and in which CardioTech participated or (ii) was
otherwise attributable to one or more of the representations contained in
Section 8 hereof failing to be true. For purposes of this definition, if any
failure to so qualify occurs and CardioTech has participated in a Post-
Distribution Act, such failure shall be deemed to have been caused by
CardioTech's participation in the Post-Distribution Act unless established to
the contrary by clear and convincing evidence that the Post-Distribution Act did
not cause the failure to qualify under Code Sections 351, 355 or 368.
CardioTech-Caused Taxes shall include any increase in Taxes of the Parent Group
or the CardioTech Group for any period to the extent such increase in Taxes
would not have occurred but for the transactions directly related to the
Distribution failing to qualify under Sections 351, 355 or 368 of the Code (or
comparable provisions of state law). Thus, for example, if the failure of any of
the transactions to so qualify results in additional income being realized by
the Parent Group in its 1996 taxable year, but such income is substantially
offset by operating losses or net operating loss carryovers, CardioTech-Caused
Taxes will include (to the extent the other requirements of this definition are
met) any increase in Taxes realized by any member of the Parent Group in
subsequent years to the extent such increase in Taxes would not have been
realized had the loss or loss carryovers not been used in 1996.
(d) "CardioTech Group" has the meaning set forth in the preamble
hereto.
(e) "Code" means the Internal Revenue Code of 1986, as amended or, as
the context may require, the Internal Revenue Code applicable to the taxable
year in question.
(f) "Distribution" has the meaning set forth in the Distribution
Agreement.
(g) "Distribution Agreement" means the Plan and Agreement of
Distribution dated May __, 1996 between Parent and CardioTech providing for the
Distribution.
(h) "Distribution Date" has the meaning set forth in the Distribution
Agreement.
(i) "Final Determination" shall mean the final resolution of
liability 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 or
on behalf of the taxpayer, or by comparable form under the laws of other
jurisdictions; except that a Form 870 or 870-AD or comparable form that reserves
(whether by its terms or by operation of law) the
-2-
3
right of the taxpayer to file a claim for refund and/or the right of the 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 Tax imposing jurisdiction; or (v)
by any other final disposition, including by reason of the expiration of the
applicable statute of limitations or by mutual agreement of the parties.
(j) "Post-Distribution Act" means any event or transaction (or the
execution of an agreement, letter of intent or option providing for a
transaction) in which CardioTech participates and in which any of the following
occurs:
(i) CardioTech transfers a material portion of its assets (other
than a transfer of assets in the ordinary course of business) within one year
following the Distribution Date;
(ii) CardioTech merges with another corporation within one year
following the Distribution Date;
(iii) Within two years of following the Distribution Date
CardioTech discontinues a material portion of its historic business activities
including (A) its contract research and development activities relating to the
use of CardioTech's polymer-based biomaterials in medical devices and (B) its
bulk sale of ChronoFlex pursuant to contract research and development
arrangements, supply agreements or otherwise;
(iv) Within one year following the Distribution Date CardioTech
Common Stock distributed in the Distribution is converted into (or redeemed or
exchanged for) any other stock, any security, any property or cash; and
(v) An issuance (or series of issuances) of stock in CardioTech
within 6 months of the Distribution in an amount sufficient that such issuance
would have prevented Parent from having "control" (within the meaning of Code
Section 368(c)) of CardioTech had such issuance (or issuances) occurred
immediately prior to the Distribution.
-3-
4
(k) "Post-Distribution Taxes" means any and all liability for Taxes
of the CardioTech Group or the Parent Group, as appropriate, other than for
Pre-Distribution Taxes.
(l) "Pre-Distribution Taxes" means any and all Taxes of the Parent
Group or the CardioTech Group for all periods that ended on or prior to the
Distribution Date. For purposes of computing the amount of Pre-Distribution
Taxes in the case of a Tax period that begins before and ends after the
Distribution Date, the amount of Taxes considered to have accrued with respect
to the portion of the Tax period that ended on the Distribution Date shall be
determined as follows:
(i) In the case of any ad valorem, personal property and real
property Taxes, an amount of such Tax for the entire Tax period multiplied by a
fraction the numerator of which is the number of days in the portion of the Tax
period ended on the Distribution Date and the denominator of which is the number
of days in the entire Tax period;
(ii) In the case of any Tax other than ad valorem, personal
property and real property Taxes, the amount that would be payable if the
relevant Tax period ended on the Distribution Date; and
(iii) In the case of any withholding Tax, the amount of Taxes
required to be held which relates to any payment by any member of the Parent
Group or the CardioTech Group on or before the Distribution Date.
Any credits relating to a Tax period that begins before and ends after the
Distribution Date shall be taken into account as though the relevant Tax period
ended on the Distribution Date.
(m) "Returns" means all returns, reports and information statements
(including all exhibits and schedules thereto) required to be filed with a
Taxing Authority with respect to any Taxes.
(n) "Taxes" means any income, alternative or add-on minimum tax, gross
income, gross receipts, sales, use, ad valorem, franchise, profits, license,
withholding, payroll, employment, environmental excise, severance, stamp,
transfer, recording occupation, premium, property, value added, windfall profit
tax, custom duty, or other tax of any kind whatsoever, together with any
interest and any penalty, addition to tax or additional amount imposed by any
governmental authority (a "Taxing Authority") responsible for the imposition of
any such tax (domestic or foreign).
-4-
5
2. Operative Provisions.
(a) Parent shall indemnify CardioTech against and be responsible for
all Post-Distribution Taxes attributable to any member of the Parent Group and
all Pre-Distribution Taxes other than CardioTech-Caused Taxes.
(b) CardioTech shall indemnify Parent against and shall be
responsible for all Post-Distribution Taxes attributable to any member of the
CardioTech Group and all CardioTech-Caused Taxes.
(c) With respect to the tax year of the Parent Consolidated Group
that includes the Distribution Date and the tax year of CardioTech that
commences immediately following the Distribution Date, the Parent Consolidated
Group shall claim on its federal income tax returns the benefit of (i) the
graduated tax rates of Code Section 11, (ii) the $25,000 bracket amount in Code
Section 38, (iii) the $40,000 exemption amount and the $150,000 bracket amount
in Section 55, and (iv) the $2,000,000 bracket amount in Section 59A and
CardioTech shall claim none of such benefits.
3. Returns; Refunds; Contest Provisions.
(a) Parent shall have the obligation and the sole right and full
discretion to control (i) the preparation of all Returns with respect to
Pre-Distribution Taxes (including CardioTech- Caused Taxes) and (ii) the
defense, settlement or compromise of any audit, examination, investigation suit,
action or other proceeding relating to Pre-Distribution Taxes (including
CardioTech-Caused Taxes) and shall be entitled to all refunds of
Pre-Distribution Taxes other than CardioTech-Caused Taxes paid or reimbursed by
CardioTech pursuant to this Agreement. Notwithstanding the foregoing, in the
event that Parent decides to abandon the defense of, or settle or compromise any
claim relating to, any CardioTech-Caused Taxes, Parent shall notify CardioTech
of such decision and CardioTech shall have ten days to notify Parent that it
assumes all liability with respect to the CardioTech-Caused Taxes under dispute
and wishes to assume the defense of such audit or other proceedings at its own
expense. In the event that Parent timely receives such notice from CardioTech,
it shall use all reasonable efforts to cooperate so as to facilitate
CardioTech's handling of such proceedings.
(b) Except as otherwise provided for herein, CardioTech shall have
the obligation and the sole right and full discretion to control (i) the
preparation of all Returns with respect to Post-Distribution Taxes attributable
to any member of the CardioTech Group and (ii) the defense, settlement or
compromise of
-5-
6
any audit, examination, investigation suit, action or other proceeding relating
to Post-Distribution Taxes attributable to any member of the CardioTech Group.
CardioTech shall have the right to all refunds of Post-Distribution Taxes
attributable to any member of the CardioTech Group and of CardioTech-Caused
Taxes paid (directly or indirectly) by any member of the CardioTech Group.
(c) Except as otherwise provided for herein, Parent shall have the
obligation and the sole right and full discretion to control (i) the preparation
of all Returns with respect to Post-Distribution Taxes attributable to any
member of the Parent Group and (ii) the defense, settlement or compromise of any
audit, examination, investigation suit, action or other proceeding relating to
Post-Distribution Taxes attributable to any member of the Parent Group. Parent
shall have the right to all refunds of Post-Distribution Taxes attributable to
any member of the Parent Group and of CardioTech-Caused Taxes paid (directly or
indirectly) by any member of the Parent Group.
4. Windfalls.
(a) Parent shall promptly pay to CardioTech the amount of any
incremental Tax savings generated by (i) a deduction, credit or exclusion that
(A) is actually realized by the Parent Group with respect to Pre-Distribution
Taxes and (B) relates to or is based on an item that is the basis for a similar
deduction, credit or exclusion taken on a Return with respect to
Post-Distribution Taxes of the CardioTech Group that is denied, disallowed,
forfeited, or accelerated until prior to the Distribution Date or (ii) a
reduction in the amount of any gross income or revenue that (A) is actually
realized by the Parent Group with respect to Pre-Distribution Taxes and (B)
relates to, or is based on, a similar item of gross income or revenue that the
CardioTech Group is required to include on a Return or otherwise required to
include in its computation of taxable income as a result of an audit, other
administrative proceeding or otherwise. Parent shall use reasonable best efforts
to realize any such incremental tax savings that may potentially be available.
(b) CardioTech shall promptly pay to Parent the amount of any
incremental Tax savings generated by (i) a deduction, credit or exclusion that
(A) is actually realized by the CardioTech Group with respect to its
Post-Distribution Taxes and (B) relates to or is based on an item that is the
basis for a similar deduction, credit or exclusion taken on a Return with
respect to Pre-Distribution Taxes other than CardioTech-Caused Taxes that is
denied, disallowed, forfeited, or deferred until after the Distribution Date or
(ii) a reduction in the amount of any gross income or revenue that (A) is
actually realized by the
-6-
7
CardioTech Group with respect to Post-Distribution Taxes and (B) relates to, or
is based on, a similar item of gross income or revenue that the Parent Group is
required to include on a Return or otherwise required to include in its
computation of taxable income as a result of an audit, other administrative
proceeding or otherwise. CardioTech shall use reasonable best efforts to realize
any such incremental tax savings that may potentially be available.
5. Agency.
CardioTech irrevocably designates Parent (and shall cause each member
of the CardioTech Group to irrevocably designate Parent) as its agent and
attorney in fact (and shall execute any necessary powers of attorney) for the
purpose of taking any and all actions necessary or incidental to the filing of
federal income tax returns and state unitary or combined Returns for (i) any
period during which any member of the CardioTech Group or any predecessor
qualified to file a consolidated, combined, unitary or similar Return with any
member of the Parent Group and (ii) any period ending on or before the
Distribution Date. Parent shall keep CardioTech reasonably informed of, and
shall reasonably consult with CardioTech with respect to, all actions to be
taken on behalf of any member of the CardioTech Group. Parent and CardioTech
will each furnish the other any and all information which the other may
reasonably request in order to carry out the provisions of this Agreement to
determine the amount of any Tax liability.
6. Consistent Reporting.
(a) With respect to all taxable periods ending on or prior to
December 31, 2000, CardioTech, each member of the CardioTech Group and any
future Affiliates thereof shall file federal income tax and state income tax
Returns in a manner consistent with the Returns filed (or to be filed) in
respect to Pre-Distribution Taxes and in a manner consistent with the form of
the transactions contemplated by the Distribution Agreement (the "Form")
including that the Distribution qualifies under Section 355 of the Code.
(b) To the extent there is an inconsistency or an apparent
inconsistency amongst the Returns relating to Pre-Distribution Taxes (including
after taking into account Returns to be filed after the Distribution Date)
and/or the Form, CardioTech shall file Returns with respect to Post-Distribution
Taxes in the manner directed by Parent.
-7-
8
(c) Parent and CardioTech agree to contest any proposed adjustment by
any Taxing Authority that is, in the sole judgement of Parent, inconsistent with
the provisions of this Section 6.
7. Covenants of CardioTech and Parent Relating to Actions After the
Distribution Date.
(a) CardioTech shall, and shall cause each member of the CardioTech
Group to refrain from participating in any Post-Distribution Act without the
prior written consent of Parent.
(b) CardioTech and Parent shall cooperate (and shall cause each of
their 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 Return or the conduct of any audit, dispute, proceeding, suit or action in
respect of Taxes or other Tax matters. Such cooperation shall include, without
limitation, (i) the retention and provision on demand of books, records,
documentation or other information relating to any Return until the expiration
of the applicable statute of limitation (giving effect to any extension, waiver,
or mitigation thereof) plus two years; (ii) the execution of any document that
may be necessary or reasonably helpful in connection with the filing of any
Return by any member of the Parent Group or the CardioTech Group or in
connection with any audit, examination, investigation suit, action or other
proceeding; and (iii) the use of the parties' 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.
8. CardioTech Representations. CardioTech hereby represents and warrants
to the Parent and each member of the Parent Group that the statements contained
in this Section 8 are true and correct in all material respects on the date
hereof:
(a) To the best of CardioTech's knowledge and belief, no part of its
stock being distributed in the Distribution will be received by a shareholder of
Parent in such shareholder's capacity as a creditor, employee or in any capacity
other than that of a shareholder of Parent.
(b) To the best of CardioTech's knowledge and belief, immediately
following the Distribution, no person, group of related persons, or persons who
acted in concert pursuant to a prearranged plan or arrangement will own 50% or
greater of the stock of Parent or CardioTech as a result of purchases of stock
within five years of the Distribution Date.
-8-
9
(c) CardioTech has no plan or intention to liquidate CardioTech, to
merge it with another corporation or to sell or otherwise dispose of the assets
of CardioTech subsequent to the Distribution except in the ordinary course of
business.
(d) To the best of CardioTech's knowledge and belief, no plan or
intention exists by the shareholders of Parent to sell, exchange, transfer by
gift, or otherwise dispose of any of their stock in Parent or CardioTech
subsequent to the Distribution.
(e) Following the Distribution, each of Parent and CardioTech will
operate as independent corporations except that certain administrative and other
common activities of the two corporations will be undertaken by common personnel
in accordance with the Ancillary Agreements and certain property will be
[subleased] from Parent to CardioTech in accordance with the Ancillary
Agreements. Payments made in connection with all continuing transactions
between, and services provided for, each of Parent and CardioTech will be for
fair market value based on terms and conditions arrived at by the Party's
bargaining at arm's length.
(f) CardioTech has no plan involving the issuance or transfer of
equity interests in CardioTech following the Distribution other than a general
expectation that an equity offering may occur at an undefined point in the
future.
(g) CardioTech has no plan or intention for the transfer, cessation
or other change in the business of CardioTech following the Distribution.
(h) CardioTech has not made, and is not subject to, any binding
commitment and is not otherwise obligated or committed to undertake an offering
of CardioTech stock following the Distribution, other than CardioTech's
obligation to register 245,438 shares of CardioTech stock, as adjusted, on
behalf of John Hancock Mutual Life Insurance Company ("Hancock"), pursuant to
the terms and conditions of a Letter Agreement from CardioTech and PMI to
Hancock dated May 1996.
9. Payments. All payments to be made hereunder shall be made in
immediately available funds. Unless otherwise provided herein, any payment not
made when due hereunder shall bear interest from the due date at any annual rate
equal to the prime rate (as determined by the First National Bank of Boston (or
successor organization)) plus 2%, compounded and adjusted monthly. For purposes
of this Agreement, the following payments shall be due at the following times:
(a) Payments due under Section 2 hereof shall be paid within 10 days
of the receipt of notice from the party entitled to the payment indicating the
occurrence of the later of (i) a Final Determination relating to the item or
items giving rise to the Tax
-9-
10
for which indemnification is made and (ii) actual payment of the Tax giving rise
to the claim for indemnification.
(b) In the case of any refunds of Taxes received by a party other
than the party entitled to such refunds pursuant to Section 3 hereof, the
recipient of the refund shall pay the amount of such refund to the other party
within five days of the receipt of such refund.
(c) Amounts payable pursuant to Section 4 hereof shall be paid within
five days of the later to occur of (i) a Final Determination relating to the Tax
item that gave rise to the windfall benefit and (ii) the actual receipt of the
windfall benefit.
10. Resolution of Certain Disputes. Disagreements between Parent and the
CardioTech shall be resolved as quickly as possible and if not resolved within
thirty days shall be referred to binding arbitration conducted by a mutually
agreeable accounting firm as soon as practicable. A dispute shall be deemed to
exist to the extent one party does not affirmatively agree with the position
held by the other party. The parties shall be required to use their best efforts
to resolve any dispute as quickly as possible. The costs and fees of such
arbitrator shall be divided equally except to the extent a party's position is
unreasonable (as determined by the arbitrator) in which case such party shall
bear all expenses (including without limitation such fees) allocable to such
position and the dispute relating thereto.
11. Costs and Expenses. Except as expressly set forth in this Agreement,
each party shall bear its own costs and expenses incurred pursuant to this
Agreement regardless of the beneficiary of the items or services relating to
such costs and expenses.
12. Termination and Survival. Notwithstanding anything in this Agreement
to the contrary, this Agreement shall remain in effect and its provisions shall
survive for the full period of all applicable statutes of limitation relating to
the assessment of Taxes (giving effect to any extension, waiver or mitigation
thereof) plus two years.
13. Amendments; Limitation on Waivers.
(a) Any provision of this Agreement may be amended if, and only if,
such amendment is in writing and signed by Parent and CardioTech.
(b) The provisions of this Agreement may be waived only if the waiver
is in writing and signed by the party making the
-10-
11
waiver. No delay or omission in exercising any right under this Agreement will
operate as a waiver of the right on any further occasion. No waiver of any
particular provision of the Agreement will be treated as a waiver of any other
provision, and no waiver of any rights will be deemed a continuing waiver of the
same right with respect to subsequent occurrences that give rise to it. All
rights given by this Agreement are cumulative to other rights provided for in
this Agreement and to any other rights available under applicable law.
14. Governing Law and Interpretation. This Agreement shall be governed
by, interpreted and enforced in accordance with the laws of the Commonwealth of
Massachusetts (regardless of the laws that might be applicable under principles
of conflict of law).
15. Confidentiality. Each party shall hold and shall cause its
consultants and advisors to hold in strict confidence, unless compelled to
disclose by judicial or administrative process or, in the opinion of its
counsel, by other requirements of law, all information (other than any such
information relating solely to the business or affairs of such party) concerning
the other parties hereto furnished it by such other party or its representatives
pursuant to this Agreement (except to the extent that such information can be
shown to have been (a) previously known by the party to which it was furnished,
(b) in the public domain through no fault of such party, or (c) later lawfully
acquired from other sources by the party to which it was furnished), and each
party shall not release or disclose such information to any other person, except
its auditors, attorneys, financial advisors, bankers and other consultants and
advisors who shall be advised of the provisions of this Section 15. Each party
shall be deemed to have satisfied its obligation to hold confidential
information concerning or supplied by the other party if it exercises the same
care as it takes to preserve confidentiality for its own similar information.
16. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original, but all of which
together shall constitute one and the same instrument.
17. Assignments and Third Party Benefit. This Agreement and the terms and
provisions hereof shall be binding upon and shall inure to the benefit of, the
parties and their respective successors and assigns.
18. Severability. If any term, provision, condition or covenant of this
Agreement, or the application thereof to any party or circumstance shall be held
by a court of competent
-11-
12
jurisdiction to be invalid, unenforceable or void, the remainder of this
instrument, or the application of such term, provision, condition or covenant to
persons or circumstances other than those as to whom or which it is held invalid
or unenforceable, shall not be affected thereby, and each term and provision of
this Agreement shall be valid and enforceable to the fullest extent permitted by
law.
19. Merger of Prior Agreements.
(a) This Agreement contains all of the terms and provisions and
constitutes the entire agreement between the parties with respect to the subject
matter hereof and supersedes all prior written, oral or implied understandings,
representations and agreements of the parties relating to the subject matter of
this Agreement. Without limiting the foregoing, the parties acknowledge and
agree that in the event of any conflict or inconsistency between the provisions
of this Agreement and the provisions of the Distribution Agreement, the
provisions of this Agreement shall control and to such extent shall be deemed to
supersede such conflicting provisions under the Distribution Agreement.
(b) The parties acknowledge that pursuant hereto any and all existing
tax sharing agreements or arrangements binding or benefiting CardioTech shall be
terminated as of the close of business on the Distribution Date, and that after
the Distribution Date this Agreement shall constitute the sole tax sharing
agreement among Parent and CardioTech.
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed as of the day and year first above written.
POLYMEDICA INDUSTRIES, INC.
By:
--------------------------------------
Title:
-----------------------------------
CARDIOTECH INTERNATIONAL, INC.
By:
--------------------------------------
Title:
-----------------------------------
-12-