<PAGE>
EXHIBIT 10.18
TAX INDEMNIFICATION AGREEMENT
TAX INDEMNIFICATION AGREEMENT, dated as of January 3, 2004
(the "Agreement"), among Bakers Footwear
Group, Inc., a Missouri corporation
(the "Company"), and the persons listed on
SCHEDULE A attached hereto
(individually, a "Stockholder" and,
collectively, the "Stockholders").
WHEREAS, the Company is and has been an "S corporation"
(within the meaning of section 1361(a)(1)
of the Internal Revenue Code of 1986,
as amended (the "Code")) since January 1,
1984;
WHEREAS, the Company contemplates a public offering (the
"Offering") of its stock;
WHEREAS, the execution of this Agreement by the Company and
the Stockholders is a condition to the
closing (the "Closing") of the
contemplated Offering;
WHEREAS, it is anticipated that the Company's election to be
an S corporation will terminate as a result
of revocation of such status in
accordance with section 1362(d)(1) of the
Code, the day prior to the day of the
Closing;
WHEREAS, in connection with the Offering, the Company and
Stockholders wish to provide for certain
indemnification with respect to the
Company's prior status as an S
corporation.
NOW, THEREFORE, in consideration of the covenants and
agreements hereinafter set forth and other
good and valuable considerations, the
receipt and sufficiency of which are hereby
acknowledged, and intended to be
legally bound hereby, the parties hereto
agree as follows:
ARTICLE I.
DEFINITIONS
1.1. Definitions. The following terms as used herein have the
following meanings:
"Closing Date" means the date on which the Offering closes.
"Final Determination" means the final resolution of any income
tax liability (including all related
interest and penalties) for a taxable
period. A Final Determination shall result
from the first to occur of:
(i) the expiration of the period, if any, during which the
taxpayer may file a claim for refund
following receipt from the Internal Revenue
Service (the "IRS") of a fully executed
Waiver of Restrictions on Assessment and
Collection of Deficiency in Tax and
<PAGE>
Acceptance of Overassessment on IRS Form
870 or a fully executed IRS Form 870-AD
that, in either case, determines the tax
liability of the taxpayer for the
taxable period (the "Waiver") (or any
successor form or any comparable form with
respect to any comparable agreement under
the laws of any other jurisdiction),
provided the taxpayer does not file a claim
for refund during that period;
(ii) a final decision by a court of competent jurisdiction
in respect of which all rights to appeal
have expired or have been exhausted;
(iii) the execution of a closing agreement under section
7121 of the Code that finally determines
the tax liability of the taxpayer for
the taxable period;
(iv) the acceptance by the IRS of an offer to compromise
described in Treasury regulation section
301.7122-1(e)(5) that finally
determines the tax liability of the
taxpayer for the taxable period;
(v) the expiration of the applicable statute of limitations
for the taxable period; or
(vi) any other event that the parties hereto agree is a
final determination of the liability at
issue.
"S Taxable Year" means any taxable year (or portion thereof)
of the Company during which the Company was
an S corporation.
"Tax Liability" means any federal or state income tax
liability. For purposes of this Agreement
federal income tax liability shall be
deemed to be (i) the highest applicable
individual federal income tax rate,
multiplied by (ii) a Stockholder's
allocable portion of the Company's taxable
income. For purposes of this Agreement,
state income tax liability shall be
deemed to be (i) the highest applicable
individual state income tax rate of the
applicable state, multiplied by (ii) a
Stockholder's allocable portion of the
Company's taxable income in that state. Tax
Liability shall also include any
interest and penalties.
"Taxing Authority" means the IRS or any comparable state or
foreign taxing authority.
"Termination Date" means the date on which the S corporation
status of the Company will terminate
pursuant to section 1362(d) of the Code,
which shall be January 4, 2004.
ARTICLE II.
TERMINATION OF S CORPORATION STATUS AND ALLOCATION OF INCOME
2.1. Termination of S Corporation Status. The Company and the
Stockholders shall cause the Company to
terminate its S corporation status
pursuant to section 1362(d)(1) of the Code
no later than one day before the
Closing by filing the form attached hereto
and marked as EXHIBIT 1 no later than
one day before the Closing. The
Stockholders shall each consent to the
2
<PAGE>
revocation of the S corporation election by
providing the Company with the
statement of consent, attached hereto and
marked as EXHIBIT 2, no later than one
day before the Closing.
ARTICLE III.
OBLIGATIONS
3.1. Company's Indemnification of Stockholders for Tax
Liabilities. The Company hereby agrees to
indemnify and hold each of the
Stockholders harmless from, against and in
respect of any Tax Liability incurred
by such Stockholder as a result of a Final
Determination to the Company's tax
returns that increases the Tax Liability of
the Stockholder for an S Taxable
Year in excess of amounts previously
distributed to such Stockholder. With
respect to states in which the Company has
previously filed composite returns
including a Stockholder, the foregoing
obligation shall be accomplished by the
Company, as necessary, re-filing the
composite returns and paying directly any
additional amounts owed.
3.2. Gross Up for Additional Tax. In all events and to the
extent not otherwise reimbursed, the
Company hereby agrees that if any payment
pursuant to this Article III is deemed to
be taxable income to a Stockholder,
the amount of such payment to the
Stockholder shall be increased by an amount
necessary to equal the Stockholder's
additional Tax Liability related to such
amount (including, without limitation, any
taxes on such additional amounts) so
that the net amount payment, after
reduction for all Tax Liability associated
with its receipt, is equal to the amount of
the Tax Liability in respect of
which such payment is made.
3.3.
Payment. Any payment required to be made pursuant to this
Agreement shall be paid within ten days
after receipt of written notice from the
Stockholder that a payment is due
hereunder.
ARTICLE IV.
CONTESTS/COOPERATION
4.1. Cooperation. The parties shall make available to each
other, as reasonably requested, and to any
Taxing Authority all information,
records or documents relating to any
liability for taxes covered by this
Agreement and shall preserve such
information, records and documents until the
expiration of any applicable statute of
limitations or extensions thereof. The
party requesting such information shall
reimburse the other party for all
reasonable out-of-pocket costs incurred in
producing such information.
ARTICLE V.
MISCELLANEOUS
5.1. Counterparts. This Agreement may be executed in several
counterparts, each of which shall be deemed
to be an original, but all of which
counterparts collectively shall constitute
a single instrument representing the
agreement among the parties hereto.
3
<PAGE>
5.2. Construction of Terms. Nothing herein expressed or
implied is intended, or shall be construed,
to confer upon or give any person,
firm or corporation, other than the parties
hereto and their respective
successors and permitted assigns, any
rights or remedies under or by reason of
this Agreement.
5.3. Governing Law. This Agreement and the legal relations
between the parties hereto shall be
governed by and construed in accordance with
the substantive laws of the State of
Missouri without regard to any choice of
law rules.
5.4. Amendment and Modification. This Agreement may be
amended, modified or supplemented only by a
writing executed by all the parties
hereto.
5.5. Assignment. Except by operation of law or in connection
with the sale of all or substantially all
the assets of a party, this Agreement
shall not be assignable, in whole or in
part, directly or indirectly, by the
Stockholders without the written consent of
the Company or by the Company
without written consent of the
Stockholders.
