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EXHIBIT 10.6
TAX INDEMNIFICATION AGREEMENT
This Tax Indemnification Agreement ("Agreement") is made this 8th day
of June, 1999, by and among Skechers U.S.A., Inc., a Delaware Corporation
("Skechers" or the "Corporation"), Xxxxxxx Xxxxxxxxx, Xxxxxxx Xxxxxxxxx, Xxxxx
Xxxxxxxxx, Xxxxxx Xxxxxxxxx, Xxxxxxxx Xxxxxxxxx, Xxxxxx and Xxxxx Xxxxxxxxx,
Trustees of the Xxxxxxxxx Family Trust u/d/t May 3, 1998, Xxxxx Xxxxxxxxxxxx,
Xxxxx Xxxxxxxxxxxx, Xxx Xxxxxxxxxxxx, and Xxxxxx Xxxxxxxxxxxx (each such
individual a "Shareholder," and all such individuals collectively the
"Shareholders"), such Shareholders owning all of the capital stock of the
Corporation. Skechers and the Shareholders are hereinafter referred to
individually as a "party" and collectively as the "parties".
WHEREAS, the Corporation is and has been an "S corporation" (within the
meaning of section 1361 of the Internal Revenue Code of 1986, as amended (the
"Code")) since May 29, 1992;
WHEREAS, Corporation contemplates a public offering (the "Offering") of
its stock;
WHEREAS, it is anticipated that Corporation's election to be an S
corporation will terminate as a result of revocation of such status in
accordance with Section 1361(d)(1) of the Code, upon the effective date of the
Offering; and
WHEREAS, in connection with the Offering, Corporation and Shareholders
wish to provide for certain indemnifications with respect to Corporation's prior
status as an S corporation.
NOW, THEREFORE, the parties agree as follows:
1. Tax Returns and Reporting.
(a) Consistent Reporting by Corporation. For all taxable years
ended on or before the day before Corporation's S corporation election
terminates, Corporation shall not (except as required by law), without the
unanimous consent of Shareholders (which consent shall not be unreasonably
withheld), file any amended income tax return or change any election or
accounting method with respect to Corporation, if such filing or change would
increase any federal, state, local (including but not limited to city or county)
or foreign income tax liability (including interest and penalties, if any)
(collectively "Tax Liability") of any Shareholder for any period. The limitation
of liability contained in section 2(a)(v) hereinbelow does not apply in the
event Corporation breaches the prohibition contained in this section 1(a).
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(b) Responsibility for Tax Returns. Corporation shall file all
tax returns required to be filed by it with respect to all periods for which
returns shall become due after the closing of Corporation's initial public
offering, including all returns for the short taxable year which concludes upon
the termination of Corporation's S election.
(c) Responsibility for Taxes. Each Shareholder shall file all
required tax returns reporting his/her allocable share of Corporation's taxable
income for all years prior to the termination of the S election, subject only to
the indemnities set forth in paragraph 2 hereinbelow.
(d) Allocation Election. Corporation shall terminate its S
corporation status by a revocation of such status pursuant to section 1361(d)(1)
of the Code by filing the form attached hereto and marked "Exhibit A." The
Shareholders shall consent to the revocation of the S corporation election by
filing the form, attached hereto and marked "Exhibit B"no later than one day
before the closing of the Offering (the "Termination Date"). Further,
Corporation shall elect to allocate items between its two taxable years ending
and beginning, respectively, on the date of termination and the date after the
termination of the S election, "under normal tax accounting rules," that is, the
"closing of the books method," as provided in section 1362(e)(3)(A) of the Code
by filing the form attached hereto as "Exhibit C." The Shareholders shall each
consent to the "closing of the books method" election, by filing the forms
attached hereto and marked "Exhibit D" pursuant to section 1362(e)(3)(B)of the
Code.
2. Indemnification.
(a) Indemnification of Shareholders.
(i) Indemnification for Tax Liability. Corporation
hereby agrees to indemnify and hold Shareholders harmless from, against and in
respect of any Tax Liability incurred by them resulting from a final judicial or
administrative adjustment (by reason of an amended return, claim for refund,
audit or otherwise) to Corporation's taxable income which is the result of an
increase or change in character of Corporation's income during the period it was
treated as an S corporation.
(ii) Tax Adjustment. In the event that an
indemnification payment pursuant to section 2(a)(i) exceeds the amount of the
increase in the Corporation's accumulated adjustments account (as defined in IRC
section 1368(e)(1)) resulting from the adjustment (or to the extent such payment
to Shareholders does not qualify as a distribution during the post-termination
transition period as defined in IRC section 1377(b)) such amount shall be
increased by an amount calculated pursuant to section 2(a)(iv) hereinbelow.
(iii) Fees and Costs. Corporation hereby agrees to
reimburse Shareholders for such professional fees or other costs as are
reasonably necessary to defend Shareholders in the event of an audit or review
of a Shareholder's income tax return during a
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year in which the Shareholders were reporting corporate income by virtue of the
S corporation election.
(iv) Gross Up for Additional Tax. In all events,
and to the extent not otherwise reimbursed, Corporation hereby agrees that if
any payment pursuant to this section 2(a) is deemed to be taxable income to a
Shareholder, the amount of such payment to the Shareholder shall be increased by
an amount necessary to equal the Shareholder's additional Tax Liability related
to such amount (including, without limitation any taxes on such additional
amounts) so that the net amount received and retained by a Shareholder after
payment by the Shareholder of all taxes associated with the payment is equal to
the payment otherwise required to be made.
(v) Indemnification Limited to Tax Benefit.
Notwithstanding anything to the contrary in this Agreement, the Company's
obligation to indemnify pursuant to section 2(a) of this Agreement shall be
limited to the amount of the Company's actual tax savings, if any, attributable
to the circumstances giving rise to the increase in the Tax Liability of a
Shareholder.
(b) Indemnification of Corporation.
(i) Indemnification for Failure to Qualify as an S
Corporation. Each of the shareholders, severally and jointly agrees (according
to the percentage of the outstanding shares of Skechers' common stock owned by
such shareholder for the year in question), to indemnify and hold Corporation
harmless from, against, and in respect for any U.S. federal or state income tax
liability (including interest and penalties), if any, resulting from Corporation
failing to qualify as an S corporation under Section 1361(a)(1) of the IRC (as
enacted and in effect prior to the date of termination), pursuant to a final
determination by an applicable taxing authority, for any taxable year on or
before the Termination Date as to which Corporation filed or files tax returns
claiming status as an S corporation.
(ii) Indemnification for Tax Liability. In addition
to the indemnification obligation provided in section 2(b)(i) Shareholders
hereby agree to indemnify and hold harmless Corporation against any increase in
Corporation's Tax Liability, and costs relating thereto, with respect to any tax
year to the extent such increase results in a related decrease in the Tax
Liability of Shareholders for any period prior to the termination of the
Corporation's S status.
(c) Payment. Any payment required to be made pursuant to this
Agreement shall be paid within seven days after receipt of written notice from
the indemnified person that a payment is due hereunder.
3. Waiver of Invalid Election or Termination of S Status. If the
Internal Revenue Service determines that Corporation failed validly to elect to
be an S corporation or that Corporation's status as an S corporation was
terminated inadvertently, and if Corporation wishes to obtain a ruling pursuant
to section 1362(f) of the Code, each Shareholder agrees to make any adjustments
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required pursuant to section 1362(f)(4) of the Code and approved by
Corporation's board of directors. Any such adjustments shall be subject to the
indemnification provisions of section 2(a).
4. Miscellaneous. This Agreement may be executed in several
counterparts, each of which shall be deemed an original, but all of which
counterparts collectively shall constitute an instrument representing the
Agreement between the parties hereto. This Agreement shall be governed by
California law, without regard to choice of law rules applied by California
courts. This Agreement shall be binding on and shall inure to the benefit of
successors and assigns of the parties, including all persons to whom any
Shareholder transfers stock of Corporation. Section headings shall not affect
the interpretation of this Agreement. This Agreement embodies the entire
agreement of the parties with respect to the subject matter contained herein.
The parties hereto agree to take all further actions necessary to effect the
agreements contained herein.
WHEREFORE this Agreement was executed on the date first aforesaid.
CORPORATION: Skechers U.S.A., Inc., a Delaware Corporation
By: /s/ XXXXX XXXXXXXX
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Name: Xxxxx Xxxxxxxx
Title: Executive Vice President
and Chief Financial Officer
SHAREHOLDERS:
/s/ XXXXXXX XXXXXXXXX /s/ XXXXXX AND XXXXX XXXXXXXXX
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Xxxxxxx Xxxxxxxxx Xxxxxx and Xxxxx Xxxxxxxxx,
Trustees of the Xxxxxxxxx Family Trust
u/d/t May 3, 1988
/s/ XXXXXXX XXXXXXXXX /s/ XXXXX XXXXXXXXXXXX
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Xxxxxxx Xxxxxxxxx Xxxxx Xxxxxxxxxxxx
/s/ XXXXX XXXXXXXXX /s/ XXXXX XXXXXXXXXXXX
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Xxxxx Xxxxxxxxx Xxxxx Xxxxxxxxxxxx
/s/ XXXXXX XXXXXXXXX /s/ XXX XXXXXXXXXXXX
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Xxxxxx Xxxxxxxxx Xxx Xxxxxxxxxxxx
/s/ XXXXXXXX XXXXXXXXX /s/ XXXXXX XXXXXXXXXXXX
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Xxxxxxxx Xxxxxxxxx Xxxxxx Xxxxxxxxxxxx
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EXHIBIT A
STATEMENT OF REVOCATION OF ELECTION
Internal Revenue Service Center
Xxxxxx, Xxxxxxxxxx 00000
RE: Skechers U.S.A., Inc., a Delaware corporation
EIN 00-0000000
Revocation of S Corporation Election
The S corporation election under section 1362(a) of the Internal
Revenue Code of Skechers U.S.A., Inc., a Delaware corporation, with its
principal office located at 000 Xxxxxxxxx Xxxxx Xxxxxxxxx, Xxxxxxxxx Xxxxx, XX
00000, is hereby revoked as of ______________, 1999. At the time of revocation,
the number of shareholders (issued and outstanding) of Skechers U.S.A., Inc.
stock, including nonvoting stock, is 27,814,155.
Attached are the consents to the revocation by shareholders owning more
than one-half of the issued and outstanding shares.
Skechers U.S.A., Inc., a Delaware corporation
By:____________________________
Title:_________________________
Date:__________________________
Attachment
{All revocations and consents should be mailed to the IRS certified mail return
receipt requested.}
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EXHIBIT B
SHAREHOLDERS' STATEMENT OF CONSENT TO REVOCATION OF ELECTION
We, the undersigned, being shareholders of Skechers, U.S.A., Inc., a
Delaware corporation ("Skechers"), holding all of Skechers' issued and
outstanding shares (including nonvoting stock), do hereby consent to the
revocation by Skechers of its S corporation election under section 1362(a) of
the Internal Revenue Code. The revocation is to be effective as of
______________ 1999.
Under penalties of perjury, the undersigned declare that the facts
presented in the accompanying statement are, to the best of our knowledge and
belief, true, correct, and complete.
Social Security
or Employer Date Acquired
Name and Identification Number of Per Regs. Tax Year End
Address Number Shares Owned 1.1362-6(b)(1) (Month & Day)
Xxxxxxx Xxxxxxxxx 2,781,415
Xxxxxxx Xxxxxxxxx 1,390,708
Xxxxx Xxxxxxxxx 1,390,708
Xxxxxx Xxxxxxxxx 1,390,708
Xxxxxxxx Xxxxxxxxx 1,390,708
Xxxxxx and Xxxxx Xxxxxxxxx,
Trustees of the Xxxxxxxxx Family
Trust, u/d/t 5/3/88 18,079,198
Xxxxx Xxxxxxxxxxxx 278,142
Xxxxx Xxxxxxxxxxxx 278,142
Xxx Xxxxxxxxxxxx 417,213
Xxxxxx Xxxxxxxxxxxx 417,213
__________________________________ ______________________________________
Xxxxxxx Xxxxxxxxx Xxxxxx and Xxxxx Xxxxxxxxx,
Trustees of the Xxxxxxxxx Family Trust
u/d/t May 3, 1998
__________________________________ ______________________________________
Xxxxxxx Xxxxxxxxx Xxxxx Xxxxxxxxxxxx
__________________________________ ______________________________________
Xxxxx Xxxxxxxxx Xxxxx Xxxxxxxxxxxx
__________________________________ ______________________________________
Xxxxxx Xxxxxxxxx Xxx Xxxxxxxxxxxx
__________________________________ ______________________________________
Xxxxxxxx Xxxxxxxxx Xxxxxx Xxxxxxxxxxxx
Dated:_________________, 1999
{All election and consents should be mailed to the IRS certified mail return
receipt requested.}
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EXHIBIT C
ELECTION TO CLOSE BOOKS UPON S CORPORATION TERMINATION
(Attach to Form 1120)
Skechers U.S.A., Inc., a Delaware corporation ("Skechers"), EIN
00-0000000, with the consent of all the shareholders of the short S year and all
the shareholders on the first day of the short C year (attached), elects under
section 1362(e)(3) of the Internal Revenue Code not to have the pro rata
allocation of S corporation items under section 1362(e)(2) of the Internal
Revenue Code apply to the S termination year ending _________________, 1999. The
date of Skechers' termination was _________, 1999 and the cause of termination
was an election to revoke its status as an S corporation.
Skechers U.S.A., Inc. a Delaware corporation
By:________________________________
Name:
Title:
Date:______________________________
Attachment
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EXHIBIT D
SHAREHOLDER CONSENT
RE: Skechers U.S.A., Inc., a Delaware corporation
EIN 00-0000000
SHAREHOLDER NAME: ___________________________________________
SHAREHOLDER ADDRESS: ___________________________________________
TAXPAYER IDENTIFICATION NUMBER: _________________________________
NUMBER OF SHARES: ___________________________________________
DATE OR DATES SHARES ACQUIRED: _________________________________
_________________________________
DATE SHAREHOLDER'S TAX YEAR ENDS: _________________________________
THE UNDERSIGNED HEREBY CONSENTS TO THE ELECTION OF SKECHERS U.S.A., INC., A
CALIFORNIA CORPORATION TO ALLOCATE THE TAXABLE INCOME OF THE CORPORATION FOR THE
S TERMINATION YEAR AS PROVIDED BY SECTION 1362(e)(3) OF THE INTERNAL REVENUE
CODE OF 1986, AS AMENDED.
This consent is executed by the undersigned under penalties of perjury.
Date:______________________ Signature:__________________________
Date:______________________ Signature:__________________________
Note: Each person owning a community property, tenancy in common, joint tenancy,
or tenancy by the entirety interest must sign. Consent of minor must be by legal
representative or parent if no legal representative. Consent of qualifying trust
must be the person treated as shareholder under Section 1361(b)(1) of the Code.
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