the underwriters do not exercise their over-allotment option

EX-10.19 28 f94953a5exv10w19.txt EXHIBIT 10.19 Exhibit 10.19 [KGI Letterhead] April 9, 2004 Tennenbaum Capital Partners, LLC on behalf of the TCP Members 11100 Santa Monica Blvd. Suite 210 Los Angeles, CA 90025 Ares Corporate Opportunities Fund, L.P. on behalf of the Ares Members 1999 Avenue of the Stars Suite 1900 Los Angeles, CA 90067 MIDOCEAN CELERITY INVESTMENT PARTNERS, L.P. on behalf of the MidOcean CELERITY INVESTMENT PARTNERS Members c/o MidOcean Capital Partners 320 Park Avenue - 17th Floor New York, NY 10022 Attention: Frank Schiff Behrman Capital III L.P. on behalf of the Behrman Members c/o Behrman Capital Four Embarcadero Center, Suite 3640 San Francisco, CA 94111 Attention: William Matthes Strategic Entrepreneur Fund III L.P. on behalf of the Strategic Entrepreneur Fund III Members c/o Behrman Capital Four Embarcadero Center, Suite 3640 San Francisco, CA 94111 Attention: William Matthes Gryphon Partners II, L.P. on behalf of the Gryphon Partners II Members c/o Gryphon Investors One Embarcadero Center, Suite 2750 San Francisco, CA 94111 Attention: Jeff L. Ott Gryphon Partners II-A, L.P. on behalf of the Gryphon Partners II-A Members c/o Gryphon Investors One Embarcadero Center, Suite 2750 San Francisco, CA 94111 Attention: Jeff L. Ott Re: Tax Matters Reference is hereby made to that certain Restructuring Agreement dated as of April 9, 2004 (as such agreement may be amended from time to time, the "RESTRUCTURING AGREEMENT"). Capitalized terms used herein but not otherwise defined herein have the meanings assigned to such terms in the Restructuring Agreement. (a) The parties expect that as part of the transactions contemplated by the Restructuring Agreement, the substitution of Kinetic System, Inc., ("KSI") for Kinetics Group, Inc. ("KGI") as the obligor under certain debt as described in the Restructuring Agreement (the "SUBSTITUTED DEBT") will not result in tax to the holders of the Substituted Debt because the substitution of KSI for KGI under the Substituted Debt will not constitute a significant modification of the Substituted Debt under Treasury Regulation section 1.1001-3. In addition, the parties similarly expect that the exchange of the KGI LIQUIDATION CERTIFICATE for the KSI LIQUIDATION CERTIFICATE will not result in tax to the holders of the KGI Liquidation Certificate because the value of the KSI Liquidation Certificate will not exceed that of the KGI Liquidation Certificate. The parties agree, unless not permitted under applicable law, to file tax returns consistently with such expectations. (b) In the event the parties' expectations are not sustained in this regard and a final determination is made by a court of competent jurisdiction (or via definitive agreement with the Internal Revenue Service ("IRS") and any relevant state taxing authority) to take a contrary position, KGI will indemnify the holders of the Substituted Debt and the KGI Liquidation Certificate up to the following amounts with respect to each named indemnitee below: (1) with respect to Tennenbaum Capital Partners, LLC on behalf of the TCP Members, $450,000; (2) with respect to Ares Corporate Opportunities Fund, L.P on behalf of the Ares Members, $860,000, and (3) with respect to Behrman Capital III, L.P., Strategic Entrepreneur Fund III, L.P., Gryphon Partners II, L.P., Gryphon Partners II-A, L.P., a Delaware limited partnership, MidOcean Celerity Investment Partners, LP on behalf of each of their respective members, an aggregate amount of $146,200, all on an after-tax basis (taking into account any tax imposed on the holders as a result of the payments required by this paragraph) against any interest and penalties deemed imposed on the holders by the IRS and state taxing authorities. The interest and penalties deemed imposed by the IRS and state taxing authorities in the case of a holder that is taxed as a partnership or other person or entity are (i) interest that would be imposed on a holder if (x) the holder were a taxable entity subject to federal income tax at the higher of individual or corporate Federal income tax rates and to state income or franchise tax at the rate of 9.3%, (y) the holder recognized an amount of income equal to the income that the IRS or state taxing authority determined was recognized by such holder (or in the case of a holder that is taxed as a partnership, on its direct or indirect equity members) as a result of the substitution being treated as a significant modification and / or the value of the KSI Liquidation Certificate exceeding the basis of the KGI Liquidation Certificate and (z) interest were charged at the relevant deficiency rates for the number of years which the Substituted Debt and KSI Liquidation Certificate remained outstanding after the substitution and (ii) the penalty actually imposed by the IRS on any holder (or in the case of a holder that is taxed as a partnership on any direct or indirect equity holders of the partnership) as if that penalty were imposed on all income deemed recognized by the holder. The parties agree to treat any indemnity payments as additional interest payments with respect to the Substituted Debt. (c) If the Substituted Debt and KSI Liquidation Certificate are still outstanding at the time the IRS or state taxing authorities ultimately sustain a contrary position, KGI's indemnity will be computed for the period between the time of the substitution and the time the IRS or state taxing authorities ultimately took the contrary position and KGI will further indemnify the holders each year thereafter until the Substituted Debt and KSI Liquidation Certificate are repaid for the excess of the amount that would have been payable by KGI pursuant to paragraph (b) if the IRS or state taxing authorities took the contrary position at the end of such year over amounts previously paid by KGI pursuant to this paragraph (c). The parties agree to treat any indemnity payments as additional interest payments with respect to the Substituted Debt. (d) If the parties determine that it is contrary to applicable law to file tax returns as currently anticipated, then the parties will negotiate in good faith payments by KGI that will have the same economic effect as the payments in paragraph (c) above and would not in the reasonable discretion of the holders, expose a holder that was a tax-exempt entity to a risk of unrelated business taxable income, and if they fail to determine such payments, KGI will increase the annual interest payable each year with respect to the Substituted Debt held by each holder by the excess of the aggregate amount KGI would have been required to pay each year with respect to both the Substituted Debt and the KSI Liquidation Certificate held by such holder pursuant to paragraph (b) if the holders had filed their tax returns as provided in paragraph (a) and the IRS had taken the contrary position at the end of such year over amounts previously paid by KGI pursuant to this paragraph (d). Kinetics Group, Inc. By: /s/ John Goodman ________________________ Name: Title: Agreed and accepted this April 9, 2004. TENNENBAUM CAPITAL PARTNERS, LLC By: Tennenbaum & Co., LLC Its: Managing Member By:______________________ Name: Title: Address for Notices: 11100 Santa Monica Blvd. Suite 210 Los Angeles, CA 90025 Attention: David A. Hollander Agreed and accepted this April 9, 2004. ARES CORPORATE OPPORTUNITIES FUND, L.P. By: ACOF Management, L.P. Its: General Partner By: ACOF Operating Manager, L.P. Its: General Partner By: Ares Management, Inc. Its: General Partner By: /s/ Eric Beckman _______________________ Name: Eric Beckman Title: Address for Notices: 1999 Avenue of the Stars Suite 1900 Los Angeles, CA 90067 Attention: Eric Beckman Kevin Frankel Fax: 310 ###-###-#### Agreed and accepted this April 9, 2004. Behrman Capital III, L.P. By: Behrman Brothers III, LLC Its: General Partner By: /s/ William Matthes _______________________ Name: William Matthes Title: Managing Member Address for Notices: Behrman Capital III L.P. c/o Behrman Capital Four Embarcadero Center, Suite 3640 San Francisco, CA 94111 Attention: William Matthes Facsimile: (415) 434-7310 Agreed and accepted this April 9, 2004. Strategic Entrepreneur Fund III, L.P. By: /s/ William Matthes _____________________ Name: William Matthes Title: General Partner Address for Notices: Strategic Entrepreneur Fund III, L.P. c/o Behrman Capital Four Embarcadero Center, Suite 3640 San Francisco, CA 94111 Attention: William Matthes Facsimile: (415) 434-7310 Agreed and accepted this April 9, 2004. Gryphon Partners II, L.P. By: Gryphon GenPar II, L.L.C., a Delaware limited liability company Its: General Partner By: /s/ Jeffrey L. Ott _________________________ Name: Jeffrey L. Ott Title: Member and Principal Address for Notices: Gryphon Partners II, L.P. c/o Gryphon Investors One Embarcadero Center, Suite 2750 San Francisco, CA 94111 Attention: Jeff L. Ott Fax: (415) 217-7447 Agreed and accepted this April 9, 2004. Gryphon Partners II-A, L.P., a Delaware limited partnership By: Gryphon GenPar II, L.L.C., a Delaware limited liability company Its: General Partner By: /s/ Jeffrey L. Ott ________________________ Name : Jeffrey L. Ott Title: Member and Principal Address for Notices: Gryphon Partners II-A, L.P. c/o Gryphon Investors One Embarcadero Center, Suite 2750 San Francisco, CA 94111 Attention: Jeff L. Ott Fax: (415) 217-7447 Agreed and accepted this April 9, 2004. MidOcean Celerity Investment Partners, LP By: MidOcean Celerity Holdings, LLC Its: General Partner By: /s/ Frank Schiff ----------------- Name: Frank Schiff Title: Address for Notices: MidOcean Celerity Investment Partners, L.P. c/o MidOcean Capital Partners 320 Park Avenue - 17th Floor New York, NY 10022 Attention: Frank Schiff Fax: (212) 497-1373