Tax Indemnification Agreement

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


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 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.


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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. Any attempt to assign any rights or obligations arising under this Agreement without such consent shall be void. The provisions of this Agreement shall be binding upon and inure to the benefit of, and be enforceable by, the parties hereto and their respective successors and permitted assigns.


5.6. Interpretation. The title, article and section headings contained in this Agreement are solely for the purpose of reference, are not part of the agreement of the parties, and shall not in any way affect the meaning or interpretation of this Agreement.


5.7. Severability. In the event that any one or more of the provisions of this Agreement shall be held to be illegal, invalid or unenforceable ...