BAKER AND McKENZIE DISCUSSES PROCEDURE TO ALLOW RELATED SUPPLIER TO PAY FSC COMMISSION IN LIEU OF TRANSFER OF EXPORT RECEIVABLES.

During the course of the Chase Trade Conference on Foreign Sales Corporations, I mentioned to you the procedure we have established to treat any excess commissions which are paid to a FSC over the safe haven amounts as being capital contributions to the FSC. Concomitantly any distributions by the FSC to the parent are treated as first constituting reimbursement for expenses incurred by the parent on behalf of the FSC and second as a dividend distribution.

You may find the attached helpful in drafting language which provides for the payment of FSC's commission in lieu of the transfer to a FSC by a related supplier of export receivable collections.

Best regards.

Sincerely,

Re: FSC Documents Re Foreign Receipt of Payment

Dear * * *

As we discussed, we have drafted various documents to cover the situation where a related supplier pays a FSC an estimated commission once every 5 days and the FSC immediately makes a payment back to the related supplier in the same amount of the commission: These documents include (i) a provision to be inserted in the Foreign Trade Commission, Sale, Lease and Services Agreement ("Supplier's Agreement"), (ii) resolutions to be passed by the FSC's board of directors and (iii) a separate agreement between the FSC and the related supplier covering these transactions.

The payment made to the related supplier by the FSC should constitute a payment for expenses and assumption of liabilities and a dividend. If the related supplier overestimates the commission, the excess should be treated as a contribution which increases the FSC's surplus when it is paid to the FSC and as a return of surplus when it is repaid by the FSC to the related supplier.

1. AMENDMENT TO SUPPLIER'S AGREEMENT

In order to avoid classification of the overpaid commission as a loan to the FSC, we suggest that the following Section 2(iv) be inserted after Section 2(iii) of the Supplier's Agreement:

(iv) If in remitting FSC's commission from a transaction to FSC's foreign bank account in a manner sufficient to satisfy the provisions of both sections 924(d) and 925(c) of the Code RELATED SUPPLIER overestimates such commission, the excess shall be a contribution by RELATED SUPPLIER to FSC which increases FSC's surplus. Such overpayment shall not create any indebtedness from FSC to RELATED SUPPLIER.

The above provision states that the contribution increases FSC's surplus because under Virgin Islands corporate law no corporate action is required to return surplus. In contrast, a reduction of capital requires consent of the shareholders. (13 V.I.C. section 224). Although a contribution only increases the capital of a Virgin Islands corporation if the directors adopt a resolution transferring the contributed funds to capital (13 V.I.C. section 100), including a statement in the Agreement that any contribution increases surplus formalizes the intent of the parties.

2. DIRECTORS' RESOLUTIONS

Since dividends must be authorized by the board of directors (13 V.I.C. section 114(a)), the FSC's board of directors should adopt the following suggested resolutions authorizing the continuous payment of dividends. These resolutions may be adopted by unanimous written consent of the directors.

RESOLVED, that the directors do hereby declare a dividend and a return of surplus to the shareholders of the corporation, said amounts to be equal to, but not to exceed in the aggregate the greatest amount allowable to be paid under Virgin Islands General Corporation Law during the fiscal year of the corporation, the exact amount of which shall be finally determined by the Treasurer or the committee of directors, and that such amounts shall be payable on a continuing basis as the corporation receives gross receipts, provided, however, such amounts shall be payable only from the principal bank account as defined by Temp. Treas. Reg. section 1.924(c)-1T(c) issued under the United States Internal Revenue Code.

FURTHER RESOLVED, that the Treasurer of the corporation, be and he is hereby authorized and directed to cause the payment of such dividends and return of surplus on a continuing basis to the shareholders of record as of the close of business on the date hereof, and to determine from time to time the amount distributable as a dividend and as a return of surplus.

FURTHER RESOLVED, that the Treasurer of the corporation, be and he is hereby authorized and directed at the end of the fiscal year to determine the amount allowable as a dividend and as a return of surplus for the preceding fiscal period, and to make any necessary adjustments to the amount actually distributed, and in the event that the amount distributed exceeds that amount which can lawfully be paid as a dividend or a return of surplus to treat any such excess on the books of the corporation as a loan receivable from the shareholder.

Note that the only Virgin Islands restriction on the payment of dividends is that a dividend cannot impair the company's capital. (13 V.I.C. section 114(a)). The capital of a company generally is the amount paid for its stock plus, as discussed above, any amount transferred to the capital by the board of directors. (13 V.I.C. section 100). Assuming that the FSC was capitalized with $1,000, which is the minimum amount required (13 V.I.C. section 1(a)(4)), treating any distribution from FSC that invades capital as a loan should generate minimal interest income.

We also recommend that another resolution be adopted by FSC's directors at the end of the year which confirms the exact amount paid as a dividend and a return of surplus under the continuous payment procedure.

3. AGREEMENT BETWEEN FSC AND RELATED SUPPLIER

Finally, we recommend that FSC and the related supplier execute a separate agreement, similar to attached Exhibit A, under which the related supplier agrees to assume all the FSC's liabilities and which expresses the parties' intention to treat all payments by the FSC to the related supplier as a payment for expenses and assumption of liabilities and as a dividend and/or a return of surplus.

Please call if you have any questions or comments concerning the above.

Best regards.

Sincerely,

FOREIGN SALES CORPORATION ("FSC"), a corporation organized and existing under and by virtue of the laws of the country of __________ with its principal offices located at________________________________, and X CORPORATION (the "RELATED SUPPLIER"), a corporation organized and existing under and by virtue of the laws of the State of ________, with its principal offices located at________________________________, agree as of the _____ day of _____, 1985, as follows:

If RELATED SUPPLIER remits FSC's commission from a transaction to FSC's foreign bank account in a manner sufficient to satisfy the provisions of both sections 924(d) and 925(c) of the Code:

(i) RELATED SUPPLIER agrees to pay on behalf of FSC all FSC's liabilities, including, but not limited to, all United States and Virgin Islands taxes owed by FSC, except as otherwise agreed between the parties.

(ii) Payments made by FSC to RELATED SUPPLIER subsequent to FSC's receipt of such commissions shall first be applied to reimburse RELATED SUPPLIER for expenses paid or incurred, or to be paid or incurred, by RELATED SUPPLIER on behalf of FSC, including any expenses paid or incurred, or to be paid or incurred, as a result of RELATED SUPPLIER's assumption of all FSC's liabilities, including any unsatisfied profit required by section 3 of the Export Related Services Agreement made as of __________________, 1986.

(iii) To the extent payments made by FSC to RELATED SUPPLIER subsequent to FSC's receipt of commissions exceed the amount of expenses paid or incurred, or to be paid or incurred, by RELATED SUPPLIER on behalf of FSC, such excess shall be treated as a dividend and/or as a return of surplus from FSC to RELATED SUPPLIER to the extent such amount paid by FSC does not exceed the amount which can lawfully be paid under Virgin Islands General Corporation Law.

IN WITNESS WHEREOF the parties hereto have caused this Agreement to be executed by their duly authorized officers.

FOREIGN SALES CORPORATION