Tax Indemnity And Allocation Agreement

TAX INDEMNITY AND ALLOCATION AGREEMENT


TAX INDEMNITY AND ALLOCATION AGREEMENT ("AGREEMENT") dated as of December 15, 1999, by and among Pacific USA Holdings Corp., a Texas corporation ("PACIFIC USA"), Pacific Realty Group, Inc., a Nevada corporation ("STOCKHOLDER"), Newmark Homes Corp., a Nevada corporation ("COMPANY") and Technical Olympic USA, Inc., a Delaware corporation ("PARENT").


RECITALS


A. Pacific USA owns all of the issued and outstanding stock of the Stockholder; Stockholder owns stock of the Company representing 80% or more of the issued and outstanding Shares ("STOCKHOLDER SHARES") of the Company; and the Company owns various Subsidiaries ("COMPANY SUBSIDIARIES") included in the Affiliated Group filing a consolidated Federal income tax return with the Stockholders and the Company.


B. Under a Stock Purchase Agreement (including the exhibits, schedules and Company Disclosure Letter attached thereto or referenced therein) dated as of November 24, 1999 by and among the parties to this Agreement ("ACQUISITION AGREEMENT"), 9,200,000 of the Stockholder Shares ("PURCHASED SHARES") will be acquired by the Parent ("ACQUISITION").


C. The execution and delivery of this Agreement by the parties hereto is a condition to the obligation of the parties to the Agreement to consummate the Acquisition.


NOW, THEREFORE, in consideration of the premises and of the respective covenants and agreements contained herein, the parties hereto agree as follows:


ARTICLE I


DEFINITIONS


Capitalized terms used and not otherwise defined in this Agreement shall have the meanings assigned to such terms in the Acquisition Agreement. As used in this Agreement, the following terms shall have the following respective meanings:


"ACQUISITION" is defined in Recital C. above.


"ACQUISITION AGREEMENT" is defined in Recital C. above.


"AFFILIATED GROUP" means any affiliated group within the meaning of Code 1504(a).


"AFTER-TAX BASIS" shall mean the amount sufficient to hold the recipient and any member of its Affiliated Group harmless from (i) all Taxes payable or deemed payable with respect to such payment and (ii) any other Taxes actually required to be paid with respect to the receipt or accrual of such payment, in each case after taking into account any deductions


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to which the recipient and any member of its Affiliated Group is entitled as a result of the payment of such Taxes.


"AGREEMENT" is defined in the introductory paragraph of this Agreement.


"CLAIMANT" is defined in Section 4.4(a) below.


"CODE" means the Internal Revenue Code of 1986, as amended (or any successor thereto).


"COMPANIES" means the Company and each Company Subsidiary.


"COMPANY" is defined in the introductory paragraph to this Agreement.


"COMPANY SUBSIDIARIES" is defined in Recital A. above and a "COMPANY SUBSIDIARY" means one of the Company Subsidiaries.


"FINAL DETERMINATION" with respect to an Indemnity Amount shall mean (a) a final decision with respect to the proposed adjustment by an IRS appeals officer, as evidenced by the issuance of a 90-day letter, IRS Form 870-AD or like notice, unless judicial proceedings are initiated, (b) a final non-appealable decision with respect to the proposed adjustment by a court of competent jurisdiction, or (c) the settlement of the proposed adjustment with the consent of the Indemnifying Party and the Claimant.


"INDEMNIFYING PARTY" is defined in Section 4.4(a) below.


"INDEMNITY AMOUNT" means an amount equal to one hundred percent (100%) of a claim for indemnification under this Agreement computed on an After-Tax Basis.


"INDEPENDENT PUBLIC ACCOUNTANTS" means a firm of independent nationally recognized accountants mutually selected by Parent and Pacific USA.


"IRS" means the Internal Revenue Service and any successor federal agency.


"PACIFIC USA" is defined in the introductory paragraph to this Agreement.


"PACIFIC USA GROUP" means the Affiliated Group which includes the Stockholders and the Companies.


"PARENT" is defined in the introductory paragraph to this Agreement.


"PRE-ACQUISITION TAXABLE PERIOD" means all or a portion of (i) any taxable period up to and including the Closing Date, or (ii) any taxable period with respect to which the Tax is computed by reference to Tax Items, assets, capital or operations of any of the Companies arising on or before the Closing Date.


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"POST-ACQUISITION TAXABLE PERIOD" means all or a portion of (i) any taxable period after the Closing Date or (ii) any taxable period with respect to which the Tax is computed by reference to Tax Items, assets, capital or operations of the Company or a Subsidiary arising after the Closing Date.


"PROCEEDING" is defined in Section 4.3(b) below.


"PURCHASED SHARES" is defined in Recital C. above.


"RULING" means a formal ruling, a determination letter, a change in method of accounting letter or any similar announcement issued by the IRS.


"SHARES" means all of the issued and outstanding stock of the Company.


"STOCKHOLDER" is defined in the introductory paragraph to this Agreement.


"STOCKHOLDERS" means the Stockholder and Pacific USA.


"STOCKHOLDER SHARES" is defined in Recital A. above.


"SUBSIDIARY" OR "SUBSIDIARIES" means, with respect to any other corporation, any corporation of which such corporation (either alone or through or together with any other entity), owns, directly or indirectly, sufficient stock to cause the corporations to be in the same Affiliated Group.


"TAX" OR "TAXES" means any Tax or Taxes as defined in the Acquisition Agreement other than Property Taxes.


"TAX ALLOCATION AGREEMENT" means the Tax Allocation Agreement dated April 28, 1992, by and among Pacific USA, Pacific American Homes, Inc., Lifescape Development Corporation, Pacific Southwest Bank, F.S.B. and others as amended by Amendment No. 1 dated January 27, 1998.


"TAX DISCLOSURE LETTER" means the disclosure letter delivered by or on behalf of Pacific USA or Stockholder to the Parent at or prior to execution of this Agreement.


"TAX ITEMS" is defined in Section 3.2(a) below.


"TAX LIABILITY ISSUE" is defined in Section 4.3(a) below.


"TAX RETURN" OR "TAX RETURNS" means any Federal or state income tax return, (including any schedule or attachment thereto) and any amendment thereof required to be filed with IRS in connection with any Tax.


"TREASURY REGULATION" OR "TREASURY REGULATIONS" means any regulation promulgated under the Code including any amendments or any substitute or successor provisions thereto.


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ARTICLE II


COVENANTS


2.1 PREPARATION AND FILING OF TAX RETURNS: PAYMENT OF TAXES. Stockholders (with respect to the Companies) and the Companies shall prepare and file on or before the due date therefor (taking into account properly and timely granted extensions), all Tax Returns required to be filed by the Stockholders (with respect to the Companies) and the Companies (except for any Tax Return for which an extension has been properly and timely granted) on or before the Closing Date, and shall pay, or cause the Companies to pay, all Taxes (including estimated Taxes) due at such time on such Tax Returns (or due with respect to Tax Returns for which an extension has been properly and timely granted) or which are otherwise required to be paid prior to or during such period. As to all Tax Returns prepared and filed pursuant to this Section 2.1, the Parent shall cause the Companies to execute such Tax Returns if filed after the Closing Date.


2.2. NOTIFICATION OF TAX PROCEEDINGS. Between the date hereof and the Closing Date, to the extent the Stockholders or the Companies have actual knowledge of the commencement or scheduling of any Tax audit, the assessment of any Tax, the issuance of any notice of Tax due or any bill for collection of any Tax due for Taxes, or the commencement or scheduling of any other administrative or judicial proceeding with respect to the determination, assessment or collection of any Tax of the Stockholders (with respect to the Companies) or of any of the Companies, the Stockholders shall provide prompt notice to the Parent of such matter, setting forth information (to the extent known) describing any asserted Tax liability in reasonable detail and including copies of any notice or other documentation received from the applicable Tax Authority with respect to such matter.


2.3. TAX ELECTIONS, WAIVERS AND SETTLEMENTS. The Stockholders (with respect to the Companies) and the Companies shall not take any of the following actions after the date hereof without the prior written consent of Parent, which shall not be unreasonably withheld or delayed:


(a) make, revoke or amend any Tax election which materially
affects the Tax obligation of the Companies other than as necessary to
prepare and file a Tax Return;


(b) execute any waiver of restrictions on assessment or
collection of any material Tax (other than waivers relating to
extensions); or


(c) enter into or amend any agreement or settlement with the
IRS or any state Tax Authority responsible for the administration of
any Tax which materially affects the Tax obligation of the Companies.


2.4. TERMINATION OF EXISTING TAX SHARING AGREEMENTS. All tax sharing agreements or similar arrangements with respect to or involving the Companies (including, for example, the Tax Allocation Agreement) shall be terminated with respect to the Companies after the Closing Date and, after the Closing Date, neither the Stockholders and their Affiliates, on the one hand, nor the Companies, on the other hand, shall be bound thereby or have any liability thereunder to the other party for amounts due in respect of periods after the Closing Date. Notwithstanding the foregoing,


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however, the Companies shall remain subject to the Tax Allocation Agreement for the taxable period in which the Closing Date occurs such that the Companies remain obligated and will promptly pay to the Stockholders when calculated an amount equal to the excess of 35% of their taxable income (excluding the taxable income resulting from the Section 338(h)(10) Elections) included in the Federal consolidated income Tax Return with the Stockholders for such period over the amounts paid to the Stockholders with respect to such period by the Companies prior to the Closing Date.


ARTICLE III


TAX ELECTIONS AND RETURNS


3.1 SECTION 338(H)(10) ELECTIONS. Pacific USA as the common parent of the affiliated group of corporations filing a consolidated federal income Tax Return which includes the Company and the Subsidiaries (the "SELLER GROUP") and Parent agree that they will join together in making a timely, irrevocable and effective election under section 338(h)(10) of the Code and a similar election under any applicable state income tax law (collectively, the "SECTION 338(H)(10) ELECTIONS") with respect to Parent's purchase of the Shares. To facilitate such election, within 180 days after the Closing Date, Parent shall prepare and deliver to Pacific USA for its review and approval (which approval shall not be unreasonably withheld) an Internal Revenue Service Form 8023 and any similar forms under applicable state income tax law (the "FORMS") with respect to Parent's purchase of the Shares. Parent and Pacific USA shall then cooperate to cause the Forms to be completed and executed by authorized persons for Parent and Pacific USA. Parent shall duly and timely file the Forms as prescribed by Treasury Regulation 1.338(h)(10)-1 or the corresponding provisions of applicable state income Tax law and shall provide a copy of the executed Forms and any accompanying schedules to Pacific USA when filed.


3.2 PREPARATION AND FILING OF TAX RETURNS.


(a) With respect to each Tax Return covering a taxable period
ending on or before the Closing Date that is required to be filed after
the Closing Date for, by or with respect to any of the Companies (other
than the Tax Returns described in paragraph (c) of this Section 3.2),
Stockholders shall cause such Tax Return to be prepared, shall cause to
be included in such Tax Return all items of income, gain, loss,
deduction and credit or other items (collectively "TAX ITEMS") required
to be included therein, and shall deliver the original of such Tax
Return to Parent at least 30 days prior to the due date (including
extensions) of such Tax Return. Stockholders shall pay to Parent the
amount of Tax shown on each such Tax Return (to the extent it has not
been previously paid or accrued in the financial statements contained
in the most recently filed Company Reports) not less than 5 days prior
to the due date of such Tax Return. Parent shall cause such Tax Return
to be filed timely with the appropriate Taxing Authority and to pay the
amount of Taxes shown to be due on such Tax Return. Parent shall cause
to be prepared and timely filed all Tax Returns for any taxable period
beginning after the Closing Date and shall pay all Taxes requir ...