Form of Tax Allocation And Indemnification Agreement

EXHIBIT 10.2


FORM OF

TAX ALLOCATION AND INDEMNIFICATION AGREEMENT


This TAX ALLOCATION AND INDEMNIFICATION AGREEMENT (this " Agreement" ) is dated as of , 2004, by and between PC Mall, Inc., a Delaware corporation (" PC Mall" ), and eCOST.com, Inc., a Delaware corporation (" eCOST" ) (each, individually a " Party ," and collectively, the " Parties" ).

WHEREAS, PC Mall is the common parent corporation of various directly and indirectly wholly-owned subsidiaries (the " PC Mall Consolidated Group" ) including eCOST;

WHEREAS, members of the PC Mall Consolidated Group have heretofore joined in filing consolidated federal and combined income tax returns;


WHEREAS, the Board of Directors of PC Mall has determined that it is appropriate, desirable and in the best interests of PC Mall and its businesses as well as of the holders of PC Mall Common Stock, for PC Mall: (i) to contribute or otherwise transfer to eCOST, and to cause certain of its Affiliates to contribute or otherwise transfer to eCOST, certain Assets and Liabilities associated with the eCOST Business as defined in the Master Separation and Distribution Agreement dated as of , 2004 between PC Mall and eCOST (the " Distribution Agreement" ); (ii) to cause eCOST to make an initial public offering of its Common Stock, par value $.001 per share (the " Offering" ); and (iii) following the consummation of the Offering, to distribute pro rata to the holders of the PC Mall Common Stock all of its outstanding shares of common stock of eCOST (the " eCOST Common Shares" ) as set forth in the Distribution Agreement;


WHEREAS, as a result of the Distribution (as defined in the Distribution Agreement), eCOST will cease to be a member of the PC Mall Consolidated Group; and


WHEREAS, PC Mall and eCOST desire to allocate the Tax (as defined herein) burdens and benefits of transactions which occurred on or prior to the Distribution Date (as defined herein) and to provide for certain other Tax matters, including the assignment of responsibility for the preparation and filing of Tax Returns (as defined herein), the payment of Taxes, and the prosecution and defense of any Tax controversies.


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NOW, THEREFORE, in consideration of the mutual agreements, provisions and covenants contained in this Agreement, the Parties hereby agree as follows:


ARTICLE I

DEFINITIONS

SECTION 1.1. GENERAL.

Capitalized terms used in this Agreement and not defined herein shall have the meanings that such terms have in the Distribution Agreement. As used in this Agreement, the following terms shall have the following meanings:


" Active Trade or Business" shall mean the active conduct (as defined in Section 355(b)(2) of the Code and the Treasury Regulations thereunder) by eCOST of the eCOST Business.

" Actually Realized" shall mean, for purposes of determining the timing of the realization of a Refund by a Person in respect of any payment, transaction, occurrence or event, the time at which the amount of Income Taxes paid by such Person is reduced below the amount of Income Taxes that such Person would have been required to pay but for such payment, transaction, occurrence or event.


" Affiliate" shall mean an entity with respect to which a Party possesses, directly or indirectly, the power to direct or cause the direction of the management and policies of such entity, whether through ownership of voting securities or other interests, by contract or otherwise.


" After Tax Amount" shall mean any additional amount necessary to reflect the hypothetical Tax consequences of the receipt or accrual of any payment required to be made under this Agreement (including the receipt or payment of an additional amount or amounts hereunder and the effect of the deductions available for interest paid or accrued and for Taxes such as state and local income Taxes), determined by using the highest marginal corporate Tax rate (or rates, in the case of an item that affects more than one Tax) for the relevant taxable period (or portion thereof).

" Audit" shall mean any audit, assessment of Taxes, other examination by any Governmental Authority, proceeding, or appeal of such a proceeding relating to Taxes, whether administrative or judicial, including proceedings relating to competent authority determinations.

" Board Certificate" shall have the meaning set forth in Section 5.2(e) of this Agreement.

" Code" shall mean the U.S. Internal Revenue Code of 1986, as amended, and the Treasury Regulations promulgated thereunder, including any successor legislation.

" Combined Return" shall mean any state, local or foreign Tax Return with respect to Income Taxes, filed on a consolidated, combined (including nexus combination, worldwide combination, domestic combination, line of business combination or any other form of combination) or unitary basis.


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" Consolidated Group" shall mean a group of entities that files a Consolidated Return.


" Consolidated Return" shall mean any Tax Return with respect to U.S. federal Income Taxes filed on a consolidated basis.


" Contribution" shall mean the contribution of assets by PC Mall itself directly to eCOST itself pursuant to Section 2.1 of the Distribution Agreement.


" Distribution Agreement" shall have the meaning set forth in the recitals hereto.

" Distribution Date" shall mean the close of business on the date on which the Distribution is effected.


" Distribution Taxes" shall mean any Taxes imposed on PC Mall or any Affiliate of PC Mall (other than eCOST), resulting from or in connection with the failure of the Distribution to be tax-free to PC Mall under the Code (including, without limitation, any Tax resulting from the failure of the Distribution to qualify under Section 355 or Section 368 of the Code or the application of Section 355(d) or Section 355(e) of the Code to the Distribution) or corresponding provisions of the laws of any other jurisdictions. Each Tax referred to in the immediately preceding sentence shall be determined using the highest marginal corporate rate applicable to such Tax for the relevant taxable period (or portion thereof).

" eCOST Business" shall have the meaning set forth in the Distribution Agreement.


" eCOST Capital Stock" shall mean all classes or series of capital stock of eCOST, including (i) the eCOST Common Shares; (ii) all options, warrants and other rights to acquire such capital stock; and (iii) all instruments properly treated as stock in eCOST for U.S. federal Income Tax purposes.


" eCOST Indemnitees" shall mean eCOST, its directors, officers, employees, agents and shareholders.


" eCOST Option" shall mean an option to acquire eCOST Capital Stock.


" eCOST Optionee" shall mean a person who at the time of the exercise of a Replacement Option (i) is employed by or otherwise providing services to eCOST, or (ii) is not employed by or otherwise providing services to a member of either eCOST or the PC Mall Group but who previously was employed by or otherwise provided services to eCOST and after the termination of such relationship did not become employed by or otherwise provide services to a member of the PC Mall Group.


" eCOST Separate Federal Amount" shall have the meaning set forth in Section 2.4(b) of this Agreement.


" eCOST Separate Combined Amount" shall have the meaning set forth in Section 2.4(c) of this Agreement.


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" eCOST Separate Tax Return Amount" shall have the meaning set forth in Section 2.4(a) of this Agreement.


" Effective Period" shall include all taxable periods of the PC Mall Consolidated Group that begin or end on or after the date of the Offering, provided that eCOST is included in the PC Mall Consolidated Group for a portion of such taxable period.

" Fifty-Percent or Greater Interest" shall have the meaning ascribed to such term for purposes of Sections 355(d) and 355(e) of the Code.


" Filing Party" shall have the meaning set forth in Section 8.1(a) of this Agreement.

" Final Determination" shall mean the final resolution of liability for any Tax for any taxable period, including any related interest or penalties, by or as a result of: a final and unappealable decision, judgment, decree or other order by any court of competent jurisdiction; (ii) a closing agreement or accepted offer in compromise under Section 7121 or 7122 of the Code, or comparable agreement under the laws of other jurisdictions, which resolves the entire Tax liability for any taxable period; (iii) any allowance of a refund or credit in respect of an overpayment of Tax, but only after the expiration of all periods during which such refund may be recovered by the jurisdiction imposing the Tax; or (iv) any other final disposition, including by reason of the expiration of the applicable statute of limitations.

" Foreign Taxes" shall mean any Taxes imposed by a foreign Governmental Authority.


" Governmental Authority" shall mean any federal, state, local, foreign or international court, government, department, commission, board, bureau, agency, official or other regulatory, administrative or governmental authority.

" Income Tax Return" shall mean any Tax Return with respect to Income Taxes.


" Income Taxes" shall mean any Taxes determined by or with reference to income or imposed in lieu of income Taxes, such as Taxes based on net worth or gross receipts. " Income Taxes" shall include any minimum or alternative minimum Tax.

" Indemnifying Party" shall mean either PC Mall or eCOST, as the case may be, in its capacity as the party from which indemnification may be sought as provided in this Agreement.

" Indemnitee" shall mean a PC Mall Indemnitee or eCOST Indemnitee, as the case may be.

" IRS" shall mean the U.S. Internal Revenue Service or any successor thereto, including, but not limited to, its agents, representatives, and attorneys.


" Non-Filing Party" shall mean PC Mall, if eCOST is the Filing Party, and eCOST, if PC Mall is the Filing Party.

" Officer' s Certificate" shall mean the letters executed by officers of PC Mall and eCOST provided to Morrison & Foerster LLP, in connection with the Tax Opinion.


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" Owing Party" shall have the meaning set forth in Section 3.1 of this Agreement.

" Owed Party" shall have the meaning set forth in Section 3.1 of this Agreement.


" Party" or " Parties" shall have the meanings as defined in the recitals hereto.


" PC Mall" shall have the meaning set forth in the recitals hereto.


" PC Mall Combined Return" shall mean any Combined Return that actually includes, by election or otherwise, PC Mall or one or more of its Affiliates together with eCOST or one or more of its Affiliates.

" PC Mall Consolidated Federal Return" shall mean any consolidated federal Income Tax Return or amendment thereof of the PC Mall Consolidated Group for any PC Mall Consolidated Return Period.

" PC Mall Consolidated Group" shall mean, (i) with respect to federal Income Tax as to any taxable period, PC Mall and Affiliates of PC Mall included in a consolidated federal Income Tax Return with PC Mall as the common parent, and (ii) with respect to Taxes other than federal Income Tax, as to any taxable period, PC Mall and Affiliates of PC Mall included in a Combined Return which includes PC Mall or one or more Affiliates of PC Mall.


" PC Mall Consolidated Return Period" shall mean a taxable period that ends prior to or includes the Distribution Date for which a consolidated, combined or unitary (as applicable) federal, state, local or foreign Income Tax Return is filed or required to be filed by the PC Mall Consolidated Group.


" PC Mall Consolidated Tax Liability" shall mean, with respect to any PC Mall Consolidated Return Period, the Income Tax liability of the PC Mall Consolidated Group with respect to a PC Mall Consolidated Federal Return or a PC Mall Combined Return.


" PC Mall Group" shall mean the PC Mall Consolidated Group, excluding eCOST.


" PC Mall Indemnitees" shall mean each member of the PC Mall Group, each of their respective directors, officers, employees, agents, and shareholders.

" PC Mall Option" shall mean an option to acquire stock of PC Mall.


" PC Mall Optionee" shall mean a person who at the time of the exercise of a Replacement Option (i) is employed by or otherwise providing services to a member of the PC Mall Group, or (ii) is not employed by or otherwise providing services to a member of either the PC Mall Group or eCOST but who previously was employed by or otherwise provided services to a member of the PC Mall Group and after the termination of such relationship did not become employed by or otherwise provide services to eCOST.

" Person" shall mean any natural person, corporation, business trust, joint venture, association, company, partnership or government, or any agency or political subdivision thereof.


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" Post-Distribution Period" shall mean a taxable period beginning on or after the Distribution Date.


" Proposed Acquisition Transaction" shall mean a transaction or series of transactions (or any agreement, understanding or arrangement, within the meaning of Section 355(e) of the Code and Treasury Regulation Section 1.355-7T, or any other Treasury Regulations promulgated thereunder, to enter into a transaction or series of transactions), whether such transaction is supported by eCOST management or shareholders, is a hostile acquisition, or otherwise, as a result of which eCOST would merge or consolidate with any other Person or any group of related Persons would (directly or indirectly) acquire, or have the right to acquire, from eCOST and/or one or more holders of outstanding shares of eCOST Capital Stock, a number of shares of eCOST Capital Stock that would, when combined with the number of shares of eCOST Capital Stock sold pursuant to the Offering and any other changes in ownership of eCOST Capital Stock pertinent for purposes of Section 355(e) of the Code, comprise forty percent (40%) or more of (i) the value of all outstanding shares of stock of eCOST as of the date of such transaction; or (ii) the total combined voting power of all outstanding shares of voting stock of eCOST as of the date of such transaction, or, with respect to either (i) or (ii), in the case of a series of transactions, the date of the last transaction of such series. Notwithstanding the foregoing, a Proposed Acquisition Transaction shall not include: (i) the adoption by eCOST of a shareholder rights plan; or (ii) issuances of eCOST that satisfy Safe Harbor VI (relating to acquisitions in connection with a person' s performance of services) or Safe Harbor VII (relating to acquisitions by a retirement plan of an employer) of Treasury Regulation Section 1.355-7T(d). This definition and the application hereof are intended to monitor compliance with Section 355(e) of the Code and shall be interpreted accordingly. Any clarification of, or change in, the statute or Treasury Regulations promulgated under Section 355(e) of the Code shall be incorporated in this definition and its interpretation.


" Refund" shall mean any refund of Taxes, including any reduction in Tax liabilities by means of a credit, offset or otherwise.


" Replacement Option" means (i) an option to acquire stock of PC Mall or an option to acquire stock of eCOST which option was issued pursuant to Article V of the Employee Matters Agreement or in connection with the Distribution, or (ii) an option that is issued in exchange for an option described in clause (i) or (ii) of this definition.

" Restricted Period" shall mean the period beginning on the Distribution Date and ending three years after the Distribution Date.


" Section 5.2(e) Acquisition Transaction" shall mean any transaction or series of transactions, other than the Offering, that is not a Proposed Acquisition Transaction but would be a Proposed Acquisition Transaction if the percentage reflected in the definition of Proposed Acquisition Transaction were twenty-five percent (25%) instead of forty percent (40%).

" Sole Responsibility Item" shall mean any Tax Item for which the Non-Filing Party has the entire economic liability under this Agreement.


" Spin-Off" shall mean the separation of eCOST from the PC Mall Consolidated Group by means of the Distribution.


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" Tax" or " Taxes" whether used in the form of a noun or adjective, shall mean taxes on or measured by income, franchise, gross receipts, sales, use, excise, payroll, personal property, real property, ad-valorem, value-added, leasing, leasing use or other taxes, levies, imposts, duties, charges or withholdings of any nature (including, without limitation, any liability under Treasury Regulations Section 1.1502-6 or any comparable provision of foreign, state or local law). Whenever the term " Tax" or " Taxes" is used (including, without limitation, regarding any duty to reimburse another Party for indemnified taxes or refunds or credits of taxes), it shall include penalties, fines, additions to tax and interest thereon.


" Tax Control" shall mean the definition of " control" set forth in Section 368(c) of the Code (or in any successor statute or provision), as such definition may be amended from time to time.


" Tax Counsel" shall mean a U.S. tax counsel or accountant of recognized national standing.

" Tax Attribute" shall have the meaning as defined in Section 2.4(b) of this Agreement.

" Tax-Free Status" shall mean the qualification of the Contribution and the Distribution, taken together, (a) as a reorganization described in Sections 355(a) and 368(a)(1)(D) of the Code; (b) as a transaction in which the stock distributed thereby is " qualified property" for purposes of Sections 355(d), 355(e) and 361(c) of the Code; and (c) as a transaction in which PC Mall, eCOST and the shareholders of PC Mall recognize no income or gain for U.S. federal income tax purposes pursuant to Sections 355, 361 and 1032 of the Code, other than, in the case of PC Mall and eCOST, intercompany items or excess loss accounts taken into account pursuant to the Treasury Regulations promulgated pursuant to Section 1502 of the Code.


" Tax Item" shall mean any item of income, capital gain, net operating loss, capital loss, deduction, credit or other Tax attribute relevant to the calculation of a Tax liability.


" Tax Opinion" shall mean the opinion letter to be issued by Morrison & Foerster LLP, addressing the U.S. federal Income Tax consequences of the Contribution and the Distribution under Sections 368(a)(1)(D) and 355 of the Code.


" Tax-Related Losses" shall mean (i) all federal, state and local Taxes imposed pursuant to any settlement, Final Determination, judgment or otherwise; (ii) all accounting, legal and other professional fees, and court costs incurred in connection with such Taxes; and (iii) all costs, expenses and damages associated with shareholder litigation or controversies and any amount paid by PC Mall (or any Affiliate of PC Mall) or eCOST (or any Affiliate of eCOST) in respect of the liability of shareholders, whether paid to the shareholders or to the IRS or any other Governmental Authority, in each case, resulting from failure of the Contribution and the Distribution to have Tax-Free Status.

" Tax Returns" shall mean all reports or returns (including information returns) required to be filed or that may be filed for any period with any Governmental Authority (whether domestic or foreign) in connection with any Tax or Taxes (whether domestic or foreign), and any amendments thereto.


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SECTION 1.2. REFERENCES; INTERPRETATION.


References in this Agreement to any gender include references to all genders, and references to the singular include references to the plural and vice versa. The words " include," " includes" and " including" when used in this Agreement shall be deemed to be followed by the phrase " without limitation." Unless the context otherwise requires, references in this Agreement to Articles and Sections shall be deemed references to Articles and Sections of this Agreement. Unless the context otherwise requires, the words " hereof," " hereby" and " herein" and words of similar meaning when used in this Agreement refer to this Agreement in its entirety and not to any particular Article, Section or provision of this Agreement.

ARTICLE II

PREPARATION AND FILING OF TAX RETURNS;

ALLOCATION OF TAX LIABILITIES


SECTION 2.1. PC MALL CONSOLIDATED FEDERAL RETURNS.

(a) In General . For any PC Mall Consolidated Return Period, PC Mall shall have sole and exclusive responsibility for the preparation and filing of all PC Mall Consolidated Federal Returns with the IRS. To the extent provided by law, such Tax Returns shall include the income, gains, losses, deductions and credits of eCOST.


(b) Cooperation . eCOST shall furnish PC Mall, at least sixty (60) days before the due date (including extensions) of any such PC Mall Consolidated Federal Return, with its information necessary to prepare and file such Tax Return, prepared in accordance with this Agreement, in accordance with instructions from PC Mall and in a manner consistent with prior Tax Returns, if any; eCOST shall also furnish PC Mall work papers and other such information and documentation as is reasonably requested by PC Mall with respect to eCOST.


SECTION 2.2. PC MALL COMBINED RETURNS.

(a) In General . For any PC Mall Consolidated Return Period, PC Mall shall have sole and exclusive responsibility for the preparation and filing of all PC Mall Combined Returns.

(b) Cooperation . PC Mall will timely advise eCOST of the inclusion of eCOST in any PC Mall Combined Returns and the jurisdictions in which such returns will be filed. eCOST will evidence its agreement to be included in such return on the appropriate form(s) and will take such other actions as may be appropriate, in the opinion of PC Mall, to carry out the purposes and intent of this Section 2.2. eCOST shall furnish PC Mall, at least sixty (60) days before the due date (including extensions) of any such PC Mall Combined information necessary to prepare and file such Tax Return, prepared in accordance with this Agreement, in accordance with instructions from PC Mall and in a manner consistent prior Tax Returns, if any. eCOST shall also furnish PC Mall work papers and other such information and documentation as is reasonably requested by PC Mall with respect to eCOST.


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SECTION 2.3. PC MALL TAX LIABILITY.


(a) PC Mall Consolidated Federal Return Liability . Except to the extent otherwise provided herein, for each PC Mall Consolidated Return Period, PC Mall shall be liable for and indemnify eCOST against all Tax due in respect of the PC Mall Consolidated Federal Return, subject to reimbursement from eCOST as contemplated by Sections 2.5 and 2.6 of this Agreement.


(b) PC Mall Combined Return Liability . Except to the extent otherwise provided herein, for each PC Mall Consolidated Return Period, PC Mall shall be liable for and indemnify eCOST against all Tax due in respect of any PC Mall Combined Return with respect to such period, subject to reimbursement from eCOST as contemplated by Sections 2.5 and 2.6 of this Agreement.


SECTION 2.4. eCOST SEPARATE RETURN TAX AMOUNT


(a) In General . For any taxable period ending during the Effective Period of this Agreement, the term " eCOST Separate Tax Return Amount" shall mean the aggregate amount, whether negative or positive, of (i) the eCOST Separate Federal Amount and (ii) the eCOST Separate Combined Amount, each as adjusted pursuant to this Agreement.

(b) Computation of eCOST Separate Federal Amount . For each PC Mall Consolidated Return Period that ends during the Effective Period of this Agreement, PC Mall shall compute the eCOST Separate Federal Amount for the portion of such periods in which eCOST is a member of the PC Mall Consolidated Group. " eCOST Separate Federal Amount" means, with respect to each PC Mall Consolidated Return Period, the federal Income Tax liability that would be payable by eCOST to the IRS (in which case such amount will be positive), or the federal Income Tax Refund that would be payable to eCOST (in which case such amount will be negative) if eCOST had filed a separate federal Income Tax Return for the entire period that eCOST is included in the PC Mall Consolidated Return. In the event that eCOST has a net operating loss, tax credit or other favorable Tax attribute (a " Tax Attribute" ) for federal Tax purposes for a particular PC Mall Consolidated Return Period that would eliminate the federal Tax liability of eCOST for such taxable period but would not yield a federal Tax Refund for eCOST on a separate federal Income Tax Return basis, the eCOST Separate Federal Amount shall be zero for such taxable period, and such federal Tax Attribute shall be taken into account, if at all, by eCOST in a subsequent PC Mall Consolidated Return Period on such separate return basis, as herein provided. For the sake of clarity, it is specifically intended that eCOST shall not be entitled to any recovery for the use by the PC Mall Consolidated Group of an eCOST federal Tax Attribut ...